M/s. I Gate Global Solutions Ltd., Bangalore V. The Assistant Commissioner of Income Tax, Bangalore

ITA 1239/BANG/2010

• Counselvise Citation: 123921114 RSA 2010
• Duration Of Justice: 4 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 16-07-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 15-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Transfer pricing; Double taxation relief; Opportunity of being heard; Principle of natural justice; International transaction; Earning of tax free income; Period of limitation; Services rendered outside India; Question of law; Wholly owned subsidiary; Time period of passing order; Unabsorbed depreciation
• Section: 143(3); 234B; 14A; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER A ND SHRI JASON P BOAZ, ACCOUNTANT MEMBER IT (TP) A NO. 1239 / BANG/20 10 (ASSESSMENT YEAR: 20 0 6 - 07 ) M/S.IGATE GLOBAL SOLUTIONS LTD., NO.158 - 192(P) & 165(P) - 170(P), EPIP PHASE - II, WHITEFIELD, BANGALORE - 560066. APPELLANT PAN: AABCM4573E VS. ASST. COMMISSIONER OF INCOME - TAX, CIRCLE 11(4), BANGALORE. RESPONDENT APPELLANT BY: SHRI PADAMCHAND KHINCHA, CA. RESPONDENT B Y: SHRI G.SUDHAKAR RAO, CIT(DR). DATE OF HEARING : 16/07/2015. DATE OF PRONOUNCEMENT: 30 /07/2015. O R D E R PER SMT. P. MADHAVI DEVI, JM: THIS APPEAL BY THE ASSESSEE IS AGAINST THE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (AO) U/S 143(3) R.W.S.144C OF THE INCOME - TAX ACT, 1961 [ THE ACT ] DATED 17/09/2010. 2. THE ASSESSEE HAS RAISED AS MANY AS 16 GROUNDS OF APPEAL WHICH ARE AS UNDER: IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 2 O F 24 GROUNDS RELATING TO NATURAL JUSTICE 1. THE LOWER AUTHORITIES HAVE ERRED IN PA SSING THE ORDER: A. WITHOUT CONSIDERING ALL THE SUBMISSIONS AND/OR WITHOUT APPRECIATING PROPERLY THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE LAW APPLICABLE; B. AT THE FAG END OF THE LIMITATION PERIOD; AND C. WITHOUT AFFORD ING A PROPER OPPORTUNITY OF BEING HEARD TO THE APPELLANT. 2 GROUNDS RELATING TO PROCEDURE THE LOWER AUTHORITIES HAVE ERRED IN: A MAKING A REFERENCE FOR THE DETERMINATION OF THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS TO THE TPO WITHOUT DEMONSTRATING WHY IT WAS NECESSARY AND EXPEDIENT TO DO SO; B PASSING THE ORDER WITHOUT DEMONSTRATING THAT THE APPELLANT HAD ANY MOTIVE OF TAX EVASION. C MAKING TP ADJUSTMENT WITHOUT APPRECIATING THAT THE METHOD ADOPTED, THE ASS OCIATED ENTERPRISES AND THE NATURE OF TRANSACTIONS WERE SAME AS IN THE EARLIER YEARS, WHICH WERE ACCEPTED BY THE TAX AUTHORITIES. 3. WITHOUT PREJUDICE, THE DISPUTE RESOLUTION PANEL, NOT BEING AN INCOME TAX AUTHORITY HAS ERRED IN PASSING THE ORDER AND IN THE MANNER PASSED BY TEM. 4. THE MEMBERS OF DISPUTE RESOLUTION PANEL ALSO BEING JURISDICTIONAL COMMISSIONER/ DIRECTORS OF INCOME TAX OF THE APPELLANT, THE CONSTITUTION OF THE DISPUTE RESOLUTION PANEL ITSELF I S BAD IN LAW AND HENCE THE ORDER PASSED BY THE PANEL IS ALSO BAD IN LAW. 5 GROUNDS RELATING TO CHARGE OF INCOME TAX THE LOWER INCOME TAX AUTHORITIES HAVE ERRED IN NOT APPRECIATING THAT: A THERE IS NO AMENDMENT TO THE DEFINITION OF THE TERM 'INCOME' TO INCLUDE AMOUNTS COMPUTED UNDER CHAPTER X; B THE CHARGING OR COMPUTATION PROVISION RELATING TO INCOME UNDER THE HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION DO NOT REFER TO ANY OR INCLUDE THE AMOUNTS COMPUTED UNDER CHAPTER X . IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 3 O F 24 C THERE IS NO PROVISION IN CHAPTER X INDICATING THAT IT WOULD OVERRIDE THE COMPUTATION PROVISIONS OF BUSINESS INCOME OR THE NORMAL UNDERSTANDING OF THE TERM 'INCOME'. 6 GROUNDS ON REJECTION OF TP ANALYSIS OF THE APPELLANT THE LOWER INCOME TAX AUTHORITIES HAVE ERRED IN: A REJECTING THE COMPARABLE TRANSACTIONS SELECTED BY THE APPELLANT ON UNJUSTIFIABLE GROUNDS; AND B REJECTING THE TRANSFER PRICING ANALYSIS UNDERTAKEN BY T HE APPELLANT ON UNJUSTIFIABLE GROUNDS 7. GROUNDS RELATING TO TP ANALYSIS OF THE TPO: THE LOWER AUTHORITIES HAVE ERRED IN: A DOING FRESH TRANSFER PRICING ANALYSIS DESPITE ABSENCE OF ANY DEFECTS IN THE TRANSFER PRICING ANALYSIS SUBM ITTED BY THE APPELLANT; B DETERMINING THE ARM'S LENGTH PRICE WITHOUT CONSIDERING ANY COMPARABLES; C ADOPTING A FLAWED METHODOLOGY IN THE PROCESS OF COMPUTING ARM'S LENGTH PRICE OF INTEREST RECEIVED; D DETERMINING AN EXCESSIVE AR M'S LENGTH INTEREST RATE BASED ON CORPORATE BOND RATES WHICH WAS INAPPROPRIATE IN THE FACTS AND CIRCUMSTANCES OF THE CASE; E BENCHMARKING THE INTEREST AGAINST RATES OF FY 2005 - 06 EVEN THOUGH THE LOANS WERE GIVEN IN EARLIER YE ARS; AND F NOT APPRECIATING THE BUSINESS, COMMERCIAL AND ECONOMIC REALITIES. 8. GROUND ON BENEFIT OF 5% RANGE ASSUMING WITHOUT ADMITTING THAT THE ADJUSTMENT IS TO BE MADE, THE LOWER INCOME TAX AUTHORITIES HAVE ERRED IN NOT ALLOWING THE BENEFIT OF THE +/ - 5% RANGE MENTIONED IN THE PROVISO TO SECTION 92C(2). IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 4 O F 24 9. GROUNDS RELATING TO ADDITION U /S 14A THE LOWER AUTHORITIES HAVE ERRED IN A MAKING DISALLOWANCE UNDER SECTION 14A OF THE ACT; B COMPUTING THE DISALLOWANCE UNDER 14A BY INVOKING RULE 8D OF THE IT RULES; C INVOKING RULE 8D WITHOUT DEMONSTRATING THE INCORRECTNESS OF THE AMOUNT OFFERED TO BE DISALLOWED BY THE ASSESSEE; D NOT APPRECIATING THAT THE ACTIVITY OF I NVESTMENT DOES NOT ENTIRELY GENERATE TAX FREE INCOME; 10 GROUNDS RELATING COMPUTATION OF DEDUCTION U/S 10A THE LOWER AUTHORITIES HAVE HAS ERRED IN A EXCLUDING 50% OF TRAVEL AND EMPLOYEE EXPENSES FROM EXPORT TURNOVER ON THE GROUND THAT THESE EXPENSES ARE ATTRIBUTABLE TO SOFTWARE DEVELOPMENT SERVICES WHICH ARE IN THE NATURE OF TECHNICAL SERVICES RENDERED TO CLIENTS OUTSIDE INDIA B NOT APPRECIATING THAT THE APPELLANT, AT ALL TIMES DURING THE RELEVANT PREVIOU S YEAR, WAS ENGAGED IN DESIGN AND DEVELOPMENT OF COMPUTER SOFTWARE AND NOT IN RENDERING OF TECHNICAL SERVICES; C NOT APPRECIATING THAT, UNDER SIMILAR FACTS AND CIRCUMSTANCES OF THE ASSESSEE'S CASE, THE BANGALORE BENC H OF THE IT AT HAS HELD THAT DESIGN AND DEVELOPMENT OF COMPUTER SOFTWARE CANNOT BE REGARDED AS RENDERING OF TECHNICAL SERVICE; AND D NOT APPRECIATING THAT, UNDER SIMILAR FACTS AND CIRCUMSTANCES OF THE CASE, THE BANGALORE BEN CH OF THE IT AT AS WELL AS OTHER TRIBUNALS HAVE HELD THAT IF SOME EXPENSES, FOR ANY REASON ARE EXCLUDED IN ARRIVING AT THE 'EXPORT TURNOVER' THE SAME SHOULD ALSO BE REDUCED FROM 'TOTAL TURNOVER' IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 5 O F 24 11 THE LOWER AUTHORITIES HAVE ERRED IN A EXCLUDING THE TELECOMMUNICATION CHARGES FROM EXPORT TURNOVER IN THE PROCESS OF COMPUTATION OF DEDUCTION UNDER SECTION IDA; AND B NOT APPRECIATING THAT TELECOMMUNICATION CHARGES WERE INCURRED IN INDIAN CURRENCY AND NO T IN FOREIGN CURRENCY AND HENCE THE SAME CANNOT BE REDUCED FROM EXPORT TURNOVER. 12. THE LOWER INCOME TAX AUTHORITIES HAVE E RRED IN NOT APPRECIATING THAT IF FOR ANY 13 THE LOWER AUTHORITIES HAVE ERRED IN A CALCULATING DEDUCTION UNDER SECTION 10A IN RESPECT OF PROFITS OF STP UNITS AFTER SETTING OFF THE LOSS OF STP UNITS AT NOIDA AND KORA M ANGALA , BANGALORE; B N OT ALLOWING THE BUSINESS LOSS OF STP UNITS AT NOIDA AND KORAMANGALA , BANGALORE TO BE SET OFF AND / OR CARRIED FORWARD IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER VI OF THE INCOME TAX ACT, 1961; C NOT APPRECIATING THAT THE DEDUCTION U/S IDA IS TO ALLOWED AT THE STAGE OF COMPUTING THE INCOME OF THE ELIGIBLE UNDERTAKING, UNINFLUENCED BY THE CURRENT YEAR/BROUGHT FORWARD BUSINESS LOSSES AND UNABSORBED DEPRECIATION ALLOWANCE OF OTHER UNI TS; D NOT APPRECIATING THAT DEDUCTION U/S 10A IS TO BE COMPUTED IN RESPECT OF BUSI NESS PROFITS OF ELIGIBLE UNDERTAKING WITHOUT SETTING OFF LOSSES OF OTHER UNITS. 14 GROUNDS RELATING TO DEDUCTION U/S 10A FOR VOLUNTAR Y TP AD JUST MENT A THE LOWER AU THORITIES HAVE ERRED IN NOT GRANTING DEDUCTION UNDER SECTION 10 A ON A SUM OF R S. 318,667/ - OFFERED VOLUNTARILY BY THE APPELLANT AS INCOME FROM UNDER AN ADJUSTMENT TITLED 'TRANSFER PRICING ADJUSTMENT'. IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 6 O F 24 B ON THE FACTS AND CIRCUMSTANCES OF THE CASE DEDUCTION UNDER SECTION 10A IS TO BE GRANTED IN RESPECT OF SUCH INCOME. 15 OTHER GROUNDS THE LEARNED AO HAS ERRED IN LEVYING A SUM OF RS 800,624/ - AS INTEREST UNDER SECTION 234B AND RS. 703,340/ - AS INTEREST UNDER SECTION 234D. ON THE FACTS AND IN THE CIRCUMSTAN CES OF THE CASE, INTEREST UNDER SECTION 234B AND 234D IS NOT LEVIABLE. 16 IN VIEW OF THE ABOVE AND OTHER GROUNDS TO BE ADDUCED AT THE TIME OF HEARING, THE APPELLANT PRAYS: A T HAT THE ORDER PASSED BY THE ASSESSING OFFICER BE QUASH ED; OR IN THE ALTERNATIVE; B THE DEFICIENCIES / SHORTCOMINGS IN THE PROCESS AS DETAILED UNDER THE VARIOUS SEGMENTS ABOVE BE MADE GOOD/RECTIFIED. C T HE ADJUSTMENTS MADE BY THE TPO/AO AND CONFIRMED BY THE DISPUTE RESOLUTION PANEL VARYIN G THE REPORTED VALUE OF THE INTERNATIONAL TRANSACTION BE DELETED; D DISALLOWANCE U/S 14A BE DELETED; E FOREIGN CURRENCY EXPENSES AND TELECOMMUNICATION EXPENSES NOT TO BE EXCLUDED FROM THE EXPORT TURNOVER; F DED UCTION U/S 10A TO BE GRANTED BEFORE SET OFF OF LOSSES OF OTHER UNITS; G EXPENSES IF ANY EXCLUDED FROM EXPORT TURNOVER ALSO BE EXCLUDED FROM TOTAL TURNOVER; H D EDUCTION U/S 10A TO BE GRANTED ON TP ADJUSTMENT MADE BY THE APPELLANT VOLUNTAR ILY; AND I INTEREST LEVIED UNDER SECTION 234B AND 234D BE DELETED. THE APPELLANT SUBMITS THAT EACH OF THE ABOVE IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 7 O F 24 GROUNDS/ SUB - GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMIT, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIME BEFORE OR AT, THE TIME OF HEARING, OF THE APPEAL, SO AS TO ENABLE THE INCOME - TAX APPELLATE TRIBUNAL TO DECIDE THE APPEAL ACCORDING TO LAW. THE APPELLANT PRAYS ACCORDINGLY. WE FIND THAT GROUND S OF APPEAL NO .1 AND 16 ARE GENER AL IN NATURE AND THEREFORE NEED NO ADJUDICATION. 3. AS REGARDS THE GROUNDS OF APPEAL NO.2 TO 5 ARE CON CERNED, WE FIND THAT THEY ARE COVERED AGAINST THE ASSESSEE BY THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF AZTEC SOFTWARE AND TECHNOLOGY VS. ACIT (2007) 294 ITR 32 (BANG). THEREFORE, THESE GROUNDS ARE ACCORDINGLY REJECTED. 4. COM ING TO GROUNDS NO.6 & 7 WHICH ARE AGAINST DETERMINATION OF ARMS LENGTH PRICE (ALP) AS REGARDS THE RATE OF INTEREST CHARGED BY THE ASSESSEE ON LOANS ADVANCED BY IT TO ITS ASSOCIATED ENTERPRISES (AES) AT GERMANY AND USA, BRIEF FACTS OF THE CASE ARE AS UNDER : THE ASSESSEE IS A SOFTWARE DEVELOPMENT COMPANY AND IS A SUBSIDIARY OF IGATE INC. USA. DURING THE RELEVANT FINANCIAL YEAR, ASSESSEE HAD ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS AE S WHICH INCLUDED LOAN TAKEN BY THE ASSESSEE FRO M ITS SUBSIDIARY AE, USA ON WHICH INTEREST AT THE RATE OF 4% PER ANNUM IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 8 O F 24 WAS PAID BY THE ASSESSEE AND THE ASSESSEE HAD ALSO ADVANCED LOANS TO ITS SUBSIDIARIES (I) SYMPHONI INTERACTIVE LLC, USA AT THE RATE OF 5 .50% AND (II) MASCOT GMBH, GERMANY, AT THE RATE OF 1 .50%. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT, T HE MATTER WAS REFERRED TO THE TPO FOR DETERMINATION OF THE ALP OF INTERNATIONAL TRANSACTIONS. THE TPO ACCEPTED THE INTEREST PAID BY THE ASSESSEE AT 4% PER ANNUM ON ECB LOAN TO ITS AE A T USA TO BE AT ALP. HOWEVER, AS REGARDS THE INTEREST CHARGED BY THE ASSESSEE ON THE LOANS ADVANCED/PAID TO ITS AES, TPO HELD THAT THE SAME WAS NOT AT ARMS LENGTH. HE HELD THAT THE ASSESSEE SHOULD HAVE CHARGED INTEREST AT THE RATE OF 14% WHICH IS EARNED ON BBB GRADE IN INDIA . HE ACCORDINGLY BROUGHT THE DIFFERENCE OF INTEREST TO TAX AS SHORTFALL IN ALP ADJUSTMENT U/S 92CA OF THE ACT. IN CONSONANCE WITH THE TPO S FINDING, AO PASSED THE DRAFT ASSESSMENT ORDER AGAINST WHICH THE ASSESSEE PREFERRED ITS OBJEC TIONS BEFORE THE DRP. THE DRP, HOWEVER, CONFIRMED THE TP ADJUSTMENT SUGGESTED BY THE TPO AND CONS EQUENT TO THE DIRECTIONS OF THE DRP, FINAL ASSESSMENT ORDER WAS PASSED BY THE AO . AGAINST THIS FINAL ASSESSMENT ORDER THE ASSESSEE IS IN APPEAL BEFORE US. 4. 1 THE LEARNED COUNSEL FOR THE ASSESSEE, WHILE REITERATING THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW, HAS DRAWN OUR ATTENTION TO THE AGREEMENT OF THE ASSESSEE WITH ITS SUBSIDIARIES WHICH ARE PLACED AT PAGES 5 TO 9 OF THE PAPER BOOK TO DEMONSTRATE THE RATE OF INTEREST CHARGED AS PER THE AGREEMENT TO IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 9 O F 24 BE AT 1.5% AND 5.50% PER ANNUM RESPECTIVELY. HE HAS ALSO DRAWN OUR ATTENTION TO THE ASSESSEE S SUBMISSIONS BEFORE THE CIT(A) TO DEMONSTRATE THIS FACT. HE HAS DRAWN OUR ATTENTION TO PAGE 11 OF THE PAPER BOOK WHICH REFLECTS THE RATE OF INTEREST PREVALENT IN GERMANY DURING THE MONTH OF JULY 2003 TO BE 1.22%. HE SUBMITTED THAT , EVEN GOING BY THAT RATE OF INTEREST, RATE OF INTEREST CHARGED BY THE ASSESSEE IS MORE AND THEREFORE INTEREST C HARGED BY THE ASSESSEE WAS AT ARM S LENGTH. AS REGARDS INTEREST RECEIVED ON THE LOAN ADVANCED TO ITS SUBSIDIARY IN USA IS CONCERNED, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE ITSELF HAD PAID INTEREST AT THE RATE OF 4% AS PER LIBOR + 200 BASIS POINTS AND THE SAME HAS BEEN ACCEPTED BY THE TPO TO BE AT ARM S LENGTH PRICE AND THEREFORE THE SAME ACTS AS A BENCH MARK FOR THE LOAN ADVANCED BY THE ASSESSEE ALSO AND IN FACT, THE ASSESSEE HAS CHARGED INTEREST @ 5.50% WHICH IS MORE THAN WHAT TH E ASSESSEE HAS PAID ON A LOAN TAKEN BY IT AND THEREFORE THE SAME IS ALSO AT ARM S LENGTH. THEREFORE, THERE WAS NO OCCASION FOR MAKING AN ADDITION ON ACCOUNT OF ARM S LENGTH ADJUSTMENT. IN SUPPORT OF THIS CONTENTION, THE LEARNED COUNSEL FOR THE ASSESSEE H AS PLACED RELIANCE UPON THE FOLLOWING DECISIONS: I. TTK PRESTIGE LTD. VS. ACIT (ITA NO.1257/2011 DATED 11/4/2014 AND II. TATA AUTOCOMP SYSTEMS LTD. VS. ACIT (ITA 7354/MUM/2011 DATED 30/4/2012) IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 10 O F 24 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDER S OF THE AUTHORITIES BELOW. 4.2 HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THERE ARE TWO LOANS ADVANCED BY THE ASSESSEE TO ITS SUBSIDIARIES (I) SYMPHONI INTERACTIVE LLC, USA AND (II) MASCOT GMBH, GERMANY. AS POINTED BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE ASSESSEE HAS RECEIVED A LOAN FROM ITS AES IN USA ON WHICH THE ASSESSEE HAS PAID INTEREST AT THE RATE OF 4% I.E. LIBOR + 200 BASIS POINTS AND THE SAME HAS BEEN ACCEPTED BY THE TPO TO BE AT ARM S LENGTH. WE ARE IN AGREEMENT WITH THE CONTENTIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCUMSTANCES RELATING TO INTEREST RECEIVED BY THE ASSESSEE AND THE INTEREST PAID BY THE ASSESSEE ARE SIMILAR, THE DECISION TAKEN BY THE TPO WITH REGARD T O INTEREST PAID BY THE ASSESSEE TO ITS AE AT USA TO BE AT ARMS LENGTH SHOULD ACT AS A BENCH MARK FOR THE INTEREST RECEIVED FROM RELATED PARTY IN USA. THEREFORE, WE ARE OF THE OPINION THAT NO ALP ADJUSTMENT IS TO BE MADE TO THE INTEREST RECEIVED FROM THE SUBSIDIARY IN USA. 4.3 AS REGARDS INTEREST RECEIVED FROM SUBSIDIARY AT GERMANY IS CONCERNED, WE FIND THAT INTEREST PAID IS IN ACCORDANCE WITH THE AGREEMENT BETWEEN BOTH PARTIES FOR BUSINESS CONSIDERATIONS AND AS RIGHTLY POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, INTEREST RATE PREVAILING IN GERMANY DURING THE RELEVANT PERIOD WAS LESS THAN THE INTEREST CHARGED BY THE ASSESSEE. THIS TRIBUNAL, IN IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 11 O F 24 THE CASE OF TTK PRESTIGE LTD. (CITED SUPRA) WAS SEIZED OF A SIMILAR ISSUE AND THE TRIBUNAL, AFT ER CONSIDERING THE ISSUE AT LENGTH, HAS FOLLOWED THE DECISION OF TRIBUNAL AT MUMBAI IN THE CASE OF TATA AUTOCOMP SYSTEMS LTD ., (CITED SUPRA) AND IN PARA 37 TO 38, THE TRIBUNAL HAS HELD AS UNDER: 37. ON THE QUANTUM OF INTEREST PERCENTAGE THAT HAS TO BE ADDED, WE FIND THE MUMBAI BENCH OF THE ITAT IN THE CASE OF TATA AUTOCOMP SYSTEMS LTD. (SUPRA) HELD AS FOLLOWS: 18. ON THE ISSUE AS TO WHAT IS QUANTUM OF ADDITION THAT HAS TO BE MADE, WE WILL PROCEED TO EXAMINE THE ISSUE ON THE BASIS THAT CUP IS THE MOST APPROPRIATE METHOD FOR DETERMINING ALP IN THE PRESENT CASE. IT HAS BEEN THE ARGUMENT ON BEHALF OF THE ASSESSEE THAT THE TPO HAS ADOPTED THE INTEREST RATE CHARGED BY A DOMESTIC BANK AS COMPARABLE RATE IGNORING THE FACT THAT THE ASSESSEE IS NOT IN THE BUSINE SS OF GRANTING LOANS. IT HAS FURTHER BEEN SUBMITTED THAT IN A SITUATION WHERE AN INTERNATIONAL LOAN WAS GRANTED TO AN AE, A EURIBOR BASED INTEREST RATE WOULD HAVE BEEN THE MOST APPROPRIATE COMPARABLE UNCONTROLLED RATE. THE WORKING OF THE EURIBOR RATE AT 4. 15% HAS ALREADY BEEN SET OUT IN THE EARLIER PART OF THIS ORDER AND IS NOT BEING REPEATED. THE CONTENTION OF THE ASSESSEE IN THIS REGARD FINDS SUPPORT FROM THE FOLLOWING RULINGS OF THE TRIBUNAL VVF LTD. VS. DCIT (SUPRA), M/S. SIVA INDUSTRIES & HOLDINGS LTD. VS. ACIT (SUPRA), DCIT VS. TECH MAHINDRA LTD. (SUPRA) AND M/S. FOUR SOFT LTD. VS. DCIT (SUPRA). THE MUMBAI TRIBUNAL IN THE CASE OF TECH MAHINDRA (SUPRA) HELD THAT THE ARM S LENGTH PRICE IN CASE OF INTEREST ON EXTENDED CREDIT PERIOD GRANTED TO AN ASSOCIATE D ENTERPRISE SHALL BE DETERMINED ON THE BASIS OF USD LIBOR AND NOT ON ANY OTHER CURRENCY DENOMINATED LOAN RATE. THE MUMBAI BENCH OF THE INCOME - TAX APPELLATE TRIBUNAL (THE TRIBUNAL) IN CASE OF TECH MAHINDRA LIMITED (THE TAXPAYER) FOR ASSESSMENT YEAR (AY) 20 04 - 05, HELD THAT THE ARM S LENGTH PRICE IN CASE OF INTEREST ON EXTENDED CREDIT PERIOD ALLOWED TO AN ASSOCIATED ENTERPRISE (AE) BASED IN USA SHALL BE DETERMINED ON THE BASIS OF USD LONDON INTER BANK OFFER RATE (LIBOR) INSTEAD IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 12 O F 24 OF APPLYING THE RATE OF INTERES T PERTAINING TO EURO DENOMINATED LOAN CHARGED TO AE BASED IN GERMANY SINCE THE AE WAS BASED IN USA. THE FACTS OF THE CASE WERE THAT THE ASSESSEE IN THAT CASE WAS A JOINT VENTURE BETWEEN MAHINDRA & MAHINDRA LIMITED (INDIAN COMPANY) AND BRITISH TELECOMMUNICA TIONS (UK COMPANY), WAS ENGAGED IN RENDERING OF SOFTWARE SERVICES RELATING TO TELECOMMUNICATION, INTERNET TECHNOLOGY AND ENGINEERING ETC. DURING THE PREVIOUS YEAR , THE TAXPAYER HAD EXTENDED CREDIT BEYOND THE STIPULATED CREDIT PERIOD TO ITS AE BASED IN USA WITHOUT CHARGING ANY INTEREST ON SUCH EXTENDED CREDIT PERIOD. DURING THE ASSESSMENT PROCEEDINGS, THE TRANSFER PRICING OFFICER (TPO) REJECTED TAXPAYER S ARGUMENTS AND DETERMINED THE ARM S LENGTH INTEREST FOR SUCH EXTENDED CREDIT PERIOD TO US AE AT THE RATE OF 10 PERCENT PER ANNUM. THE TPO DETERMINED THIS RATE BASED ON THE RATE OF INTEREST CHARGED BY THE TAXPAYER ON EURO DENOMINATED LOAN GRANTED TO ITS GERMAN AE. THE RESULTANT TRANSFER PRICING ADJUSTMENT AMOUNTED TO INR 1.87 CRORES. THE ASSESSING OFFICER (AO ) ADOPTED THE ADJUSTMENTS MADE BY THE TPO. AGGRIEVED BY THE DECISION OF THE AO, THE TAXPAYER FILED OBJECTIONS BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS) [CIT(A)]. THE CIT(A) CONFIRMED THE TRANSFER PRICING ADJUSTMENT, HOWEVER, RESTRICTED THE SAME TO 2 PERCENT BASED ON THE USD LIBOR RATE PLUS 80 BASIS POINT MARK - UP. AGGRIEVED BY THE ORDER OF THE CIT(A), THAT AO FILED AN APPEAL BEFORE THE TRIBUNAL. THE TRIBUNAL HAD THAT THE TPO MADE AN ERROR IN SELECTING THE TRANSACTION OF CHARGING OF INTEREST TO GERMAN A E ON LOAN GRANTED AT THE RATE OF 10 PERCENT PER ANNUM AS INTERNAL COMPARABLE. FOLLOWING THE POSITION SETTLED IN CASE SKODA AUTO INDIA AND RULE 10B(1)(A) OF THE INCOME - TAX RULES, 1962, TO BE AN INTERNAL COMPARABLE UNDER THE COMPARABLE UNCONTROLLED PRICE (CU P) METHOD, THE TRANSACTION NEEDS TO OCCUR BETWEEN THE TAXPAYER AND AN INDEPENDENT PARTY. EVEN ASSUMING THAT THE ADJUSTMENT FOR EXTENDED CREDIT WAS NECESSARY, USD LIBOR IS MORE APPROPRIATE BASIS THAN THE RATE OF INTEREST ON EURO DENOMINATED LOAN CONSIDERING THE FACT THAT THE AE IS BASED IN USA AND COMMERCIAL PRINCIPLES AND PRACTICES RELATED TO USD DENOMINATED EXTENDED CREDIT. THE TRIBUNAL HAS ALSO MADE A CRUCIAL POINT THAT THE ARM S LENGTH INTEREST RATE SHOULD BE TAKEN FROM THE COUNTRY OF THE BORROWER/DEBTOR , I.E. THE RATE OF INTEREST TO BE USED FOR BENCHMARKING SHALL BE IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 13 O F 24 THE RATE OF INTEREST IN RESPECT OF THE CURRENCY IN WHICH THE UNDERLYING TRANSACTION HAS TAKEN PLACE IN CONSIDERATION OF ECONOMIC AND COMMERCIAL FACTORS AROUND THE SPECIFIC CURRENCY DENOMINATE D INTEREST RATE. THE AFORESAID RULING WAS FOLLOWED BY THE CHENNAI BENCH OF ITAT IN THE CASE OF M/S. SIVA INDUSTRIES & HOLDINGS LTD. (SUPRA), WHEREIN THE TRIBUNAL HELD AS FOLLOWS: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. A PERUSAL OF THE ORDER OF THE TP O CLEARLY SHOWS THAT THE ASSESSEE HAD RAISED THE FUNDS BY WAY OF ISSUANCE OF 0% OPTIONAL CONVERTIBLE PREFERENTIAL SHARES. THUS IT IS NOTICED THAT THE FUNDS RAISED BY THE ASSESSEE COMPANY FOR GIVING THE LOAN TO INDIA TELECOM HOLDINGS LTD., MAURITIUS, WHICH IS ITS ASSOCIATED ENTERPRISES AND WHICH IS THE SUBSIDIARY COMPANY, IS OUT OF THE FUNDS OF THE ASSESSEE COMPANY. IT IS NOT BORROWED FUNDS. THE ASSESSEE HAS GIVEN THE LOAN TO THE ASSOCIATED ENTERPRISES IN US DOLLARS. THE ASSESSEE IS ALSO RECEIVING INTEREST F ROM THE ASSOCIATED ENTERPRISES IN INDIAN RUPEES. ONCE THE TRANSACTION BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES IS IN FOREIGN CURRENCY AND THE TRANSACTION IS AN INTERNATIONAL TRANSACTION, THEN THE TRANSACTION WOULD HAVE TO BE LOOKED UPON BY APPLY ING THE COMMERCIAL PRINCIPLES IN REGARD TO INTERNATIONAL TRANSACTION. IF THIS IS SO, THEN THE DOMESTIC PRIME LENDING RATE WOULD HAVE NO APPLICABILITY AND THE INTERNATIONAL RATE FIXED BEING LIBOR WOULD COME INTO PLAY. IN THE CIRCUMSTANCES, WE ARE OF THE VIE W THAT IT LIBOR RATE WHICH HAS TO BE CONSIDERED WHILE DETERMINING THE ARM S LENGTH INTEREST RATE IN RESPECT OF THE TRANSACTION BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES. AS IT IS NOTICED THAT THE AVERAGE OF THE LIBOR RATE FOR 1.4.2005 TO 3 1.3.20 06 IS 4.42% AND THE ASSESSEE HAS CHARGED INTEREST AT 6% WHICH IS HIGHER THAN THE LIBOR RATE, WE ARE OF THE VIEW THAT NO ADDITION ON THIS COUNT IS LIABLE TO BE MADE IN THE HANDS OF THE ASSESSEE. IN THE CIRCUMSTANCES, THE ADDITION AS MADE BY THE ASSESSING OF FICER ON THIS COUNT IS DELETED. 19. IN THE PRESENT CASE THE AE IS A GERMAN COMPANY. EUROBIOR RATES ARE BASED ON THE AVERAGE IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 14 O F 24 INTEREST RATES AT WHICH A PANEL OF MORE THAN 50 EUROPEAN BANKS BORROW FUNDS FROM ONE ANOTHER. THERE ARE DIFFERENT MATURITIES, RAN GING FROM ONE WEEK TO ONE YEAR. THESE RATES ARE CONSIDERED TO BE THE MOST IMPORTANT RATE IN THE EUROBIOR MONEY MARKET. THE INTEREST RATES DO PROVIDE THE BASIS FOR THE PRICE AND INTEREST RATES OF ALL KINDS OF FINANCIAL PRODUCTS LIKE INTEREST RATE SWAPS, INT EREST RATE FUTURES, SAVING ACCOUNT AND MORTGAGES. WE FIND THAT THE RBI IN RESPECT OF EXPORT CREDIT TO EXPORTERS AT INTERNATIONALLY COMPETITIVE RATES UNDER THE SCHEME OF PRE - SHIPMENT CREDIT IN FOREIGN CURRENCY (PCFC) AND REDISCOUNTING OF EXPORT BILLS ABROAD (EBR), HAS PERMITTED BANKS TO FIX THE RATES OF INTEREST WITH REFERENCE TO RULING LIBOR, EURO LIBOR OR EURIBOR, WHEREVER APPLICABLE AND THERETO APPROPRIATE PERCENTAGE RANGING FROM 1% TO 2%. THE REFERENCE TO THE SAID CIRCULAR IS AT PAGE - 80 OF THE ASSESSEE S PAPER BOOK. IN OUR VIEW THE CLAIM OF THE ASSESSEE TO ADOPT EURIBOR RATE AS STATED BEFORE THE TPO IS REASONABLE AND ITA NOS.130 & 131, & 1257/B/11 & 475/B/12 PAGE 32 OF 54 DESERVES TO BE ACCEPTED. FOLLOWING THE RULING OF THE TRIBUNAL IN THE AFORESAID CASE S, WE ARE OF THE VIEW THAT THE CLAIM MADE BY THE ASSESSEE IN THIS REGARD HAS TO BE ACCEPTED. THE AO IS DIRECTED TO WORK OUT THE TP ADJUSTMENT ACCORDINGLY. GR.NO.1 TO 4 ARE THUS PARTLY ALLOWED. 38. FOLLOWING THE AFORESAID DECISION OF THE MUMBAI ITAT WE D IRECT THE AO TO WORK OUT THE TP ADJUSTMENT AS DIRECTED IN THE TRIBUNAL S ORDER REFERRED TO ABOVE. GR.NO.2A IS THUS PARTLY ALLOWED TO THE EXTENT INDICATED ABOVE. WE FIND THAT AS IN THE CASE OF TATA AUTOCOMP SYSTEMS LTD.(CITED SUPRA) , IN THE CASE BEFORE US IS ALSO , A TRANSACTION OF LOAN IS BETWEEN INDIAN COMPANY AND ITS GERMAN AE AND THE FACTS AND CIRCUMSTANCES ARE ALSO SIMILAR. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE CO - ORDINATE BENCH ON THE SIMILAR POINT, WE HOLD THAT INTEREST CHARGED BY THE ASSESSEE ON ITS SUBSIDIAR Y AT GERMANY IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 15 O F 24 AND USA IS AT ARM S LENGTH AND NEEDS NO ADJUSTMENT U/S 92CA OF THE ACT. ACCORDINGLY, GROUNDS NO.6 & 7 ARE ALLOWED. 5. AS REGARDS GROUND NO.8, WE FIND THAT IT IS RELATING TO THE BENEFIT OF + OR - 5 TO BE GIVEN TO THE ALP U/S 92C(2) OF THE ACT. AS THIS ISSUE IS NOW COVERED BY THE I NSERTION OF SUB - SEC.(2A) TO THE SAID PROVISION, WE DIRECT THE AO/TPO TO CONSIDER THE ISSUE IN ACCORDANCE WITH THE I NSERTED PROVISION. ACCORDINGLY, GROUND NO.8 IS D ISMISSED. 6 . GROUND NO.9 AGAINST THE DISALLOWANCE U/S 14A OF THE ACT. DURING THE ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE - COMPANY HAS RECEIVED DIVIDEND INCOME TO THE EXTENT OF RS.1,43,95,933/ - AND THAT THE ASSESSEE HAS NOT MADE ANY DIS ALLOWANCE U/S 14A OF THE ACT. IN VIEW OF THE SAME, THE AO APPLIED THE PROVISIONS OF RULE 8D OF THE IT RULES AND BROUGHT TO TAX THE EXPENDITURE AT THE RATE OF 0.5% OF THE AVERAGE INVESTMENT WHICH WORKED OUT TO RS.10,68,985/ - . AGGRIEVED, ASSESSEE IS IN APP EAL BEFORE US. 6 .1 THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE IN RELATION TO EARNING OF THE DIVIDEND INCOME AND ALSO THAT THE AO HAS NOT FOUND FAULT WITH THE BOOKS OF ACCOUNT OF THE ASSESSEE. H E FURTHER SUBMITTED THAT THE PROVISIONS OF RULE 8D HA S TO BE GIVEN EFFECT W.E.F. ASSESSMENT YEAR 2008 - 09 AND THEREFORE THE SAME CANNOT BE APPLIED TO THE IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 16 O F 24 ASSESSMENT YEAR BEFORE US. HE FURTHER DREW OUR ATTENTION TO THE ASSESSEE S SUBMISSION BEFORE THE AO WH EREIN THE ASSESSEE HAS STATED THAT THE DIVIDEND INCOME EARNED FROM MUTUAL FUNDS WAS CLAIMED TO BE EXEMPT U/S 10(34) OF THE ACT AND DIVIDEND INCOME FROM WHOLLY OWNED SUBSIDIARY HAS BEEN CLAIMED AS EXEMPT AS PER DTAA BETWEEN INDIA AND MALAYSIA AND THEREFORE THE ASSESSEE HAS NOT DISALLOWED EXPENSES INCURRED ON EARNING OF THIS EXEMPT INCOME. IT WAS FURTHER SUBMITTED THAT IN THE ASSESSMENT ORDER FOR THE RELEVANT PREVIOUS YEAR, 25% OF SALARIES OF INVESTMENT DEPARTMENT OFFICIALS INCURRED ON EARNING THE EXEMPT INC OME AND EMPLOYEES HANDLING MALAYSIA FINANCE & ACCOUNTS AND INDIA INVESTMENTS HAVE BEEN DISALLOWED BASED ON CIT (A) S ORDER FOR ASSESSMENT YEARS 2002 - 03 AND 2003 - 04 AND THE DETAILS OF SIMILAR EXPENSES INCURRED FOR THE RELEVANT FINANCIAL YEAR WERE ALSO GIVEN. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IF AT ALL THERE IS ANY DISALLOWANCE TO BE MADE, IT HAS TO BE MADE OF THIS EXPENDITURE ONLY. 6 .2 THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORIT IES BELOW AND SUBMITTED THAT THOUGH THE PROVISIONS OF RULE 8D HAVE COME INTO EFFECT SUBSEQUENTLY, IT CAN BE TAKEN AS A GUIDANCE FOR MAKING DISALLOWANCE U/S 14A. HE SUBMITTED THAT IT IS FOR THIS REASON THAT THE AO HAS APPLIED THE PROVISIONS OF RULE 8D TO M AKE DISALLOWANCE. HE SUBMITTED THAT U/S 14A, EXPENDITURE INCURRED FOR EARNING OF IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 17 O F 24 EXEMPT INCOME IS TO BE DISALLOWED BY THE ASSESSEE ITSELF BUT SINCE THE ASSESSEE HAS FAILED TO DO SO, THE AO HAS APPLIED THE PROVISIONS OF RULE 8D. 6 .3 HAVING REGARD T O THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE HAS EARNED EXEMPT INCOME FOR WHICH IT HAS NOT MADE ANY DISALLOWANCE OF EXPENSES U/S 14A. ADMITTEDLY, THE CIT(A), FOR THE ASSESSMENT YEARS 2002 - 03 AND 2003 - 04 HAS DIRECTED DISALL OWANCE TO BE MADE OF 25% OF THE SALARY OF INVESTMENT DEPARTMENT OFFICIALS. ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, THE REVENUE HAS NOT FILED ANY APPEALS BEFORE THE TRIBUNAL AGAINST THE ORDERS OF THE CIT(A) FOR THE ASSESSMENT YEAR 2002 - 03 AND 2 003 - 04 AND THEREFORE THE SAID ORDERS HAVE BECOME FINAL. IN OUR OPINION, SINCE THE ISSUE HAD ARISEN IN THE EARLIER ASSESSMENT YEAR AND THE CIT(A) HAD DIRECTED THAT THE DISALLOWANCE @ 25% OF THE SALARIES INVESTMENT DEPARTMENT, IS TO BE MADE U/S 14A, THE SAM E APPROACH IS TO BE ADOPTED FOR THE RELEVANT ASSESSMENT YEAR ALSO AND THE AO IS DIRECTED TO RESTRICT THE DISALLOWANCE TO 25% OF THE SALARIES OF INVESTMENT DEPARTMENT OFFICIALS AS WELL AS THE EMPLOYEES HANDLING MALAYSIA FINANCE AND ACCOUNTS INVESTMENTS. IT IS ORDERED ACCORDINGLY. THIS GROUND OF APPEAL IS PARTLY ALLOWED. 7 . AS REGARDS GROUNDS OF APPEAL NO.10 TO 12, WE FIND THAT IT IS WITH REGARD TO EXCLUSION OF TRAVEL AND EMPLOYEE EXPENSES AND TELECOMMUNICATION CHARGES FROM EXPORT TURNOVER FOR THE PURPOSE OF IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 18 O F 24 COMPUTATION OF DEDUCTION U/S 10A. WITH REGARD TO THE TRAVELLING EXPENSES OF EMPLOYEES, THE AO OBSERVED THAT THIS CONSISTS OF EXPENSES INCURRED BY THE ASSESSEE TO THE EXTENT OF RS.239,42,27,972/ - IN RESPECT OF SERVICES RENDERED BY ITS EMPLOYEES OUTSIDE INDIA FOR DELIVERY OF SOFTWARE DEVELOPMENT SERVICES. AO HAS TREATED THE SAME AS EXPENSES INCURRED FOR DEVELOPMENT OF SOFTWARE OUTSIDE INDIA WHICH IS A TECHNICAL SERVICE IN NATURE. HE, THEREFORE, TREATED 50% OF THE SAME AS EXPENSES INCURRED IN FO REIGN EXCHANGE TOWARDS RENDERING TECHNICAL SERVICE OUTSIDE INDIA AND HE EXCLUDED THE SAME FROM EXPORT TURNOVER. AS REGARDS THE ALTERNATIVE PRAYER OF THE ASSESSEE THAT IF THE SAME IS EXCLUDED FROM EXPORT TURNOVER THEN IT SHOULD BE EXCLUDED FROM TOTAL TURNO VER ALSO , THE AO DID NOT ACCEPT THE SAME. SIMILARLY, THE AO HAD OBSERVED THAT THE ASSESSEE HAD INCURRED FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLE OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA. HE OBSERVED THAT THE EXPENDITURE IS OF A SUM OF RS.9,99,75,776/ - . HE, THEREFORE, REDUCED THE SAME AND TREATED 80% OF THE TOTAL TELECOMMUNICATION CHARGES AS ATTRIBUTABLE TO THE DELIVERY OF SOFTWARE OUTSIDE INDIA IN RESPECT OF 10A UNIT. HE, ACCORDINGLY, REDUCED THE SAME F ROM EXPORT TURNOVER ONLY. AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE US. 7 .1 THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE WAS INTO RENDERING SOFTWARE DEVELOPMENT SERVICES TO ITS IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 19 O F 24 AE S AND THE EXPENDITURE INCURRED ON THE EMPLOYEES WAS ONLY TO DELIVER THE COMPUTER SOFTWARE DEVELOPED BY THE ASSESSEE IN THE PREMISES OF THE CLIENTS AND IT IS NOT TECHNICAL SERVICE RENDERED OUTSIDE INDIA AS HELD BY THE AO. IN SUPPORT OF HIS CONTENTION THAT SUCH EXPENSES CANNOT BE TREATED AS EXPENSES TOWARDS RENDERING OF TECHNICAL SERVICE OUTSIDE INDIA IN THE CASE OF SOFTWA RE DEVELOPMENT SERVICES COMPANY, T HE LEARNED COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE UPON THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. MPHASIS IN ITA 1075/2008 DATED 1/8/2014, COPY OF WHICH IS FILED BEFORE US. 7 .2 ON GOING THROUGH THE SAID DECISION, WE FIND THAT THE HON BLE HIGH COURT HAS FORMULATED THE FOLLOWING QUESTION OF LAW ON THIS ISSUE: WHETHER THE TRIBUNAL WAS CORRECT IN REVERSING THE FINDING RECO RDED BY THE AO THAT THE FOREIGN CURRENCY FOR PROVIDING SOFTWARE DEVELOPMENT SERVICES OUTSIDE INDIA SHOULD BE EXCLUDED FROM THE EXPORT TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 10B OF THE ACT, WHICH WAS CONFIRMED BY THE APPELLATE COMMISSIONER ? AT PARA 2 OF THE JUDGMENT OF THE HON BLE HIGH COURT, THE HIGH COURT HAS REPRODUCED ITS DECISION IN ITA 776/2007 DATED 13/06/2014 IN THE CASE OF CIT VS. MOTOR INDUSTRIES CO. LTD., WHEREIN, AFTER CONSIDERING THE RELEVANT PROVISIONS, THE HON BLE HIGH COUR T HAS HELD THAT : BEFORE A COMPUTER SOFTWARE IS EXPORTED, THE SOFTWARE ENGINEERS OF THE ASSESSEE WOULD HAVE INITIAL DISCUSSION WITH REGARD TO THE REQUIREMENTS, SPECIFICATIONS ETC. THEREAFTER IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 20 O F 24 COMPUTER SOFTWARE IS MANUFACTURED AND THEN IT IS TRANSMITTED FR OM INDIA TO A PLACE OUTSIDE INDIA. THE SOFTWARE ENGINEERS DEPUTED ABROAD WHO AMONG OTHER THINGS HAVE TO DO TESTING, INSTALLATION AND MONITORING OF SOFTWARE SUPPLIED TO THE CLIENT. THOUGH THE SAID SERVICES ARE TECHNICAL IN NATURE IT DOES NOT FALL WITHIN CLA USE (II) OF SUBSECTION (1) OF SECTION 80HHE OF THE ACT OF PROVIDING TECHNICAL SERVICES OUTSIDE INDIA IN CONNECTION WITH THE DEVELOPMENT OR PRODUCTION OF COMPUTER SOFTWARE. IT FALLS UNDER SUB - CLAUSE (1) OF SUB - SECTION (1) OF SECTION 80 HHE OF THE ACT. THERE FORE, THE SAID EXPENDITURE CANNOT BE EXCLUDED IN COMPUTING EXPORT TURN OVER. WE FIND THAT THOUGH THE DECISION IN THE CASE OF MOTOR INDUSTRIES CO. LTD. (CITED SUPRA) WAS IN RELATION TO THE PROVISIONS OF SECTION 80HHC, THE HON BLE JURISDICTIONAL HIGH COURT , IN THE CASE OF MPHASIS HAS APPLIED THE SAME FOR HOLDING THAT THE EXPENDITURE INCURRED FOR PROVIDING SOFTWARE DEVELOPMENT SERVICES OUTSIDE INDIA SHOULD NOT BE EXCLUDED FROM THE EXPORT TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 10B OF THE ACT . THEREFORE, RESPECTFULLY FOLLOWING THE SAME, WE HOLD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IN FOREIGN CURRENCY ON ITS EMPLOYEES FOR RENDERING SERVICES IN CONNECTION WITH DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA SHOULD NOT BE EXCLUDED FROM THE EXPORT TURNOVER FOR THE PURPOSE OF DEDUCTION U/S 10A OF THE ACT. HOWEVER, AS REGARDS TELECOMMUNICATION EXPENSES, WE FIND THAT IT IS IN CONNECTION WITH DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA AND THEREFORE NOT TO BE EXCLUDED FROM THE EXPORT TURNOVER. HOWEVER, FOLLOWING THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF TATA ELXSI (349 ITR 9 8) , WE DIRECT THAT THE SAME SHOULD ALSO BE EXCLUDED IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 21 O F 24 FROM THE TOTAL TURNOVER FOR THE PURPOSES OF COMPUTATION OF DEDUCTION U/S 10A OF THE ACT. THE ASSESSEE S GROUND OF APPEAL NO.10 IS ALLOWED AND GROUND NO.11 IS REJECTED AND GROUND NO.12 IS TREATED AS ALLOWED. 8 . AS REGARDS GROUND OF APPEAL NO.13 IS CONCERNED, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD 5 UNITS WHICH ARE ELIGIB LE FOR DEDUCTION U/S 10A OF THE ACT AND OUT OF THE SAME, THREE UNITS HAD PROFITS AGAINST WHICH ASSESSEE HAD CLAIMED DEDUCTION U/S 10A OF THE ACT. WITH REGARD TO THE UNITS AT NOIDA AND BANGALORE, THE ASSESSEE HAD LOSS AND THEREFORE NO CLAIM WAS MADE BY THE ASSESSEE. IN SO FAR AS NOIDA UNIT AND BANGALORE UNIT S ARE CONCERNED, THE ASSESSEE WAS NOT ELIGIBLE FOR THE CLAIM OF DEDUCTION SINCE IT HAD INCURRED LOSS. AO, HOWEVER, SET OFF LOSS OF THESE TWO UNITS AGAINST THE PROFITS OF THE ELIGIBLE UNIT AND COMPUTED DEDUCTION U/S 10A ACCORDINGLY, AGAINST WHICH THE ASSESSEE IS IN APPEAL BEFORE US. 8 .1 THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT DEDUCTION U/S 10A HAS TO BE COMPUTED ON A STAND ALONE BASIS AND THE LOSS OF THE ELIGIBLE UNITS CANNOT BE SET OFF AGAINST PROFITS OF ELIGIBLE UNITS. IN SUPPORT OF HIS CONTENTION, HE PLACED RELIANCE UPON THE FOLLOWING DECISIONS: I. IGATE GLOBAL SOLUTIONS LTD. VS. ACIT (2008) 24 SOT 3(BANG.) AND II. CIT VS. CANARA WORKSHOPS PVT. LTD. (161 ITR 320)(SC) IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 22 O F 24 7.2 THE LEARNED DEP ARTMENTAL REPRESENTATIVE, HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 8 .2 ON GOING THROUGH THE MATERIAL ON RECORD AND AFTER CONSIDERING THE RIVAL CONTENTIONS, WE FIND THAT THE HON BLE SUPREME COURT IN THE CASE OF CANARA WORKSHOPS PVT. LTD., (CITED SUPRA) WAS CONSIDERING THE CASE OF AN ASSESSEE CLAIMING DEDUCTION U/S 80E OF THE ACT AND THE HON BLE SUPREME COURT HELD THAT THE OBJECT IN ENACTING SEC.80E IS PROPERLY SERVED ONLY BY CONVEYING THE APPLICATION OF THE PROVISION OF THAT SECTION TO TH E PROFITS AND GAINS OF A SINGLE INDUSTRY AND IT WAS NEVER INTENDED THAT THE MERIT EARNED BY SUCH INDUSTRY SHOULD BE LOSS OR DIMINISHED BECAUSE OF A LOSS SUFFERED BY SOME OTHER INDUSTRY AND IT MAKES NO DIFFERENCE THAT THE OTHER INDUSTRY IS ALSO PRIORITY IND USTRY. THE CO - EXISTENCE OF TWO INDUSTRIES IN COMMON OWNERSHIP WAS NOT INTENDED BY PARLIAMENT TO RESULT IN THE MISFORTUNE OF ONE BEING VISITED ON THE OTHER. THE LEGISLATIVE INTENTION WAS TO GIVE TO THE MERITORIOUS ITS FULL REWARD. TO CONSTRUE SECTION 80E T O MEAN THAT YOU MUST DETERMINE THE NET RESULT OF ALL THE PRIORITY INDUSTRIES AND THEN APPLY THE BENEFIT OF THE DEDUCTION TO THE FIGURE SO OBTAINED WILL BE, IN OUR OPINION, TO UNDERMINE THE OBJECT OF THE SECTION. IN OUR OPINION, EACH INDUSTRY MUST BE CONS IDERED ON ITS OWN WORKING ONLY WHEN ADJUDGING ITS TITLE TO THE DEDUCTION UNDER SECTION 80E. IT CANNOT BE ALLOWED TO SUFFER BECAUSE IT KEEPS COMPANY WITH SOME OTHER INDUSTRY IN THE HANDS OF THE ASSESSEE . SIMILARLY, THE TRIBUNAL IN THE CASE OF IGATE GLOBAL SOLUTIONS LTD .,(CITED SUPRA) HAD APPLIED THE JUDGMENT OF THE HON BLE SUPREME COURT TO HOLD THAT DEDUCTION U/S 10A SHOULD BE CONSIDERED UNIT - WISE AND NOT ENTERPRISE - WISE. RESPECTFULLY FOLLOWING THE SAME, WE ALLOW THE GROUND OF THE ASSESSEE. IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 23 O F 24 9 . GR OUND NO.14 IS AGAINST THE DISALLOWANCE OF DEDUCTION U/S 10A OF A SUM OF RS.3,80,667/ - OFFERED VOLUNTARILY BY THE ASSESSEE AS INCOME FROM BUSINESS UNDER AN ADJUSTMENT TITLED TRANSFER PRICING ADJUSTMENT . IT IS THE CASE OF THE ASSESSEE THAT THE ASSESSEE HA S SUO - MOTU MADE TP ADJUSTMENT AND THEREFORE DEDUCTION U/S 10A SHOULD BE GIVEN ON SUCH AMOUNT ALSO . AO , H OWEVER, DISALLOWED THE SAME. WHILE THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND ALSO RELIED U PON THE DECISION RENDERED BY THE JURISDICTIONAL HIGH COURT IN ITA NO.452/2008 DATED 17/06/2014 IN THE CASE OF M/S.IGATE GLOBAL SOLUTIONS LTD. 9.1 THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW . 9 .2 HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE HON BLE JURISDICTIONAL HIGH COURT IN THE ASSESSEE S OWN CASE HAS HELD THAT THE PROVISO TO SECTION 92(4) APPLIES ONLY TO A CASE WHERE ALP WAS DETERMINED BY TH E ASSESSING AUTHORITY AND NOT TO THE ALP DETERMINED BY THE ASSESSEE. THEREFORE, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 10 . GROUND S OF APPEAL NO.15 IS AGAINST LEVY OF INTEREST U/S 234B AND 234C OF THE ACT. WE FIND THAT THE RELIEF SOUGHT IN THESE GROUNDS IS CONSEQUENTIAL IN NATURE. THEREFORE, THE AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF, IF ANY, TO THE ASSESSEE. IT(TP)A NO.1239/BANG/2010 M/S.IGATE GLOBAL SOLUTIONS LTD., PAGE 24 O F 24 11 . IN THE RESULT, THE ASSESSEE S APPEAL IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 30 TH JULY, 2015. S D/ - S D/ - (JASON P BOAZ) (SMT. P.MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER E KSRINIVASULU , SR.PS COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORD ER ASSISTANT REGISTRAR INCOME - TAX APPELLATE T RIBUNAL BANGALORE