Patni Computer Systems Ltd., Pune V. DCIT,Cir-4, Pune

ITA 1338/PUN/2010

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1737 (ITAT-PUNE)
• Duration Of Justice: 5 year(s) 6 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-06-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 16-12-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 15-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K RASTOGI
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Retrospective amendment; Corroborative evidences; Avoidance of tax; Unabsorbed depreciation
• Section: 92C; 92F; 92E; 10AA; 10B

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE . . , , ' # BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.1338/PN/2010 '% % / ASSESSMENT YEAR : 2006-07 PATNI COMPUTER SYSTEMS LTD., S.NO.1A, IRANI MARKET COMPOUND, YERAWADA, PUNE 411 006 PAN NO. AABCP6219N . / APPELLANT V/S DY.CIT, CIRCLE - 4, PUNE . / RESPONDENT . / ITA NO.1451/PN/2011 '% % / ASSESSMENT YEAR : 2007-08 PATNI COMPUTER SYSTEMS LTD., LEVEL 2, TOWER III, CYBER CITY, MAGARPATTA CITY, HADAPSAR, PUNE - 411013 PAN NO. AABCP6219N . / APPELLANT V/S ACIT, CIRCLE - 4, PUNE . / RESPONDENT . / ITA NO.2507/PN/2012 '% % / ASSESSMENT YEAR : 2008-09 IGATE COMPUTER SYSTEMS LTD. (FORMERLY KNOWN AS PATNI COMPUTER SYSTEMS LTD.,) LEVEL 2, TOWER III, CYBER CITY, MAGARPATTA CITY, HADAPSAR, PUNE - 13 PAN NO. AABCP6219N . / APPELLANT V/S ACIT, CIRCLE - 4, PUNE . / RESPONDENT 2 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 . / ITA NO.282/PN/2014 '% % / ASSESSMENT YEAR : 2009-10 IGATE COMPUTER SYSTEMS LTD. (FORMERLY KNOWN AS PATNI COMPUTER SYSTEMS LTD.,) (NOW AMALGAMATED WITH IGATE GLOBAL SOLUTIONS LTD., LEVEL 2, TOWER III, CYBER CITY, MAGARPATTA CITY, HADAPSAR, PUNE - 13 PAN NO. AABCM4573E PAN NO. AABCP6219N . / APPELLANT V/S DCIT, CIRCLE - 4, PUNE . / RESPONDENT / ASSESSEE BY : SHRI C.H. NANIWADEKAR / REVENUE BY : SHRI S.K. RASTOGI, CIT / ORDER PER R.K. PANDA, AM : ITA NO.1338/PN/2010 FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 28-10-2010 PASSED BY THE AO U/S.143(3) R.W.S. 144C(13) OF THE I.T. ACT FOR A.Y. 2006-07. I TA NO.1451/PN/2011 FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 24-10-2011 PASSED BY THE AO U/S.143(3) R.W.S.144C(13) OF THE I.T. ACT FOR A.Y. 2007-08. ITA NO.2507/PN/2012 FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 27-11-2012 PASSED BY THE AO U/S.143(3) R.W.S.144C OF THE I.T. ACT FOR A.Y. 2008-09. ITA NO.282/PN/2012 FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 20-01-2014 PASSED BY THE AO U/S.143(3) R.W .S. / DATE OF HEARING :08.03.2016 / DATE OF PRONOUNCEMENT: 06.06.2016 3 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 144C(13) OF THE I.T. ACT FOR A.Y. 2009-10. FOR THE SAKE OF CONVENIENCE THE ABOVE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. ITA NO.1338/PN/2010 (A.Y. 2006-07) : 2. IN GROUND OF APPEAL NO.1 THE ASSESSEE HAS CHALLENGED THE ORDER OF THE AO IN MAKING ADDITION OF RS.5,96,21,856/- ON ACCOUNT OF BPO ACTIVITIES FOLLOWING ADJUSTMENT MADE IN THE TP ORDER U/S.92CA(3) OF THE I.T. ACT. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A DOMESTIC COMPANY ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT BOTH OFF-SHORE AND ON SITE. IT FILED ITS RETUR N OF INCOME ON 28-11-2006 DECLARING TOTAL INCOME OF RS.6,60,98,644/-. THE SAID RETURN WAS SUBSEQUENTLY REVISED ON 29-03-2008 SHOWING A LOSS OF RS.5,33,65,552/-. THE AO MADE A REFERENCE U/S.92CA OF THE ACT TO THE TPO TO DETERMINE THE ALP WITH REFERENCE TO THE TRANSACTIONS REPORTED IN FORM 3CEB FILED BY THE ASSESSEE. THE TPO NOTED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING SOFTWARE SERVICES FOR THE NUMBER OF APPLICATIONS FOR COMPANIES AROUND THE GLOBE. THE SOFTWARE SERVICES ARE PROVIDED OFF-SHORE AND ON SITE. TH E ASSESSEE HAS OFF-SHORE DEVELOPMENT CENTRES AT SEEPZ, T HANE, PUNE, CHENNAI, NOIDA AND GANDHINAGAR. IT PROVIDES ON-SITE SERVICES BY DEPUTING ITS EMPLOYEES AT THE CLIENT LOCATIONS. IT IS SUBSIDIARIES/ASSOCIATES IN USA, UK AND GERMANY. IT HAS BRANCH OFFICES IN JAPAN, AUSTRALIA AND SWEDEN. THE TOTAL TURNOVER OF THE ASSESSEE COMPANY DURING THE PREVIOUS Y EAR IS 4 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 RS.1047.59 CRORES WHICH INCLUDES OTHER INCOME OF RS.49.76 CRORES. FROM THE DETAILS FILED BY THE ASSESSEE THE TPO N OTED THAT THE ASSESSEE HAS ENTERED INTO FOLLOWING INTERNATIONA L TRANSACTIONS DURING THE PREVIOUS YEAR : SR .NO. NATURE OF TRANSACTION AMOUNT (RS.) METHOD 1. SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE 763,77,33,322 TNMM 2. CONSULTANCY SERVICES AVAILED BY THE ASSESSEE 88,62,000 TNMM 3. RECOVERY OF EXPENSES RECEIVED 29,91,50,332 -- 4. REIMBURSEMENT OF EXPENSES PAID 6,06,70,023/ - -- 4. FROM THE DETAILS FURNISHED BY THE ASSESSEE HE FURTHER NOTED THAT THE TURNOVER OF RS.1047.59 CRORES INCLUDES SA LES TO ASSOCIATED ENTERPRISES AT RS.763.77 CRORES WHICH IS ABOUT 72.91% OF THE TOTAL SALES. HE NOTED THAT THE ASSESSEE H AS BENCHMARKED THE TRANSACTIONS BY DOING AN ANALYSIS AT THE ENTITY LEVEL AS ACCORDING TO THE ASSESSEE ALL THE TRANSAC TIONS ARE RELATING TO THE SOFTWARE ACTIVITY. THE ASSESSEE HAS APPL IED TNMM METHOD AND IT WAS SUBMITTED THAT ITS MARGINS ARE B ETTER THAN COMPARABLE COMPANIES. IT WAS STATED THAT THE OPE RATING PROFIT MARGIN OF THE ASSESSEE IS 23.95% AS AGAINST THE WEIG HTED AVERAGE MEAN AT 12.47%. IT WAS ACCORDINGLY CONCLUDED THAT ITS INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH AND ARE CONSISTENT WITH INDIAN TRANSFER PRICING REGULATIONS. 5. THE TPO EXAMINED THE VARIOUS DETAILS/DOCUMENTS AND NOTED THAT THE BENCHMARKING DONE BY THE ASSESSEE OF IT S INTERNATIONAL TRANSACTIONS PERTAINING TO BUSINESS PROCESS OUTSOURCING (IN SHORT BPO) SERVICES ARE NOT ACCEPTABLE. HE OBSERVED THAT THERE ARE SUBSTANTIAL DELAY IN REALIZATION FR OM THE ASSOCIATED ENTERPRISES TO THE ASSESSEE. HE, THEREFORE, ISSUED A 5 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 SHOW CAUSE NOTICE TO THE ASSESSEE ASKING HIM TO EXPLAIN AS TO WHY THE COMPARABLES TAKEN IN THE SHOW CAUSE NOTICE SHA LL NOT BE TAKEN FOR THE PURPOSE OF BENCHMARKING THE INTERNATION AL TRANSACTIONS PERTAINING TO BPO SERVICES AND ALP OF THE SE INTERNATIONAL TRANSACTIONS BE NOT DETERMINED FOLLOWING TNMM METHOD. THE TPO FURTHER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY ADJUSTMENT BE NOT MADE IN RESPECT OF DELAYED REALIZA TION FROM THE ASSOCIATED ENTERPRISES TAKING INTEREST AT AVERA GE SIX MONTHS LIBOR FOR F.Y. 2005-06 + 30 BASIS POINTS + 200 BA SIC POINTS AS GUARANTEE COMMISSION. 6. IT WAS SUBMITTED BY THE ASSESSEE THAT NO SEPARATE BENCHMARKING NEEDS TO BE CARRIED OUT FOR BPO ACTIVITIES A ND THE SAME SHOULD BE AGGREGATED WITH SOFTWARE DEVELOPMENT ACT IVITIES AND THE BENCHMARKING NEEDS TO BE CARRIED OUT ON AGGRE GATE BASIS. HOWEVER, THE TPO WAS NOT CONVINCED WITH THE ARGU MENTS ADVANCED BY THE ASSESSEE. HE NOTED THAT THERE IS CLEA R DIFFERENTIATION BETWEEN SOFTWARE DEVELOPMENT SERVICES AND B PO SERVICES. FURTHER, AN AMOUNT OF RS.29.46 CRORES, WHICH HAS BEEN RECEIVED BY THE ASSESSEE DURING THE YEAR FROM BPO SERVICES, IS BY NO MEANS PALTRY AMOUNT WHICH CAN BE CLUBB ED WITH THE SOFTWARE DEVELOPMENT SERVICES RECEIPTS. 7. ACCORDING TO THE TPO AS PER THE TRANSFER PRICING AS WELL AS THE OECD GUIDELINES THE TRANSACTIONAL PROFIT METHOD SH OULD IDEALLY BE APPLIED ON A TRANSACTION TO TRANSACTION BASIS B UT IN APPROPRIATE SITUATION MAY BE GROUPED OR AGGREGATED. AC CORDING TO HIM THE RELEVANT CONTROLLED TRANSACTIONS MAY BEST BE AGGREGATED IF IT IS IMPRACTICAL TO ANALYSE ALL PROFITS OF EACH 6 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 INDIVIDUAL TRANSACTIONS OR IF SUCH TRANSACTIONS ARE SO INTE R RELATED THAT THIS IS THE MOST RELIABLE MEANS OF BENCHMARKING THE OUTCOME OF THE TRANSACTION AGAINST THE ARMS LENGTH OUT COME. HE NOTED THAT IN ASSESSEES CASE 2 SEGMENTS VIZ., IT SERVICES AND BPO SERVICES ARE 2 DISTINCTLY IDENTIFIABLE SEGMENTS. THE ASSESSEE HAS BEEN MAINTAINING SEGMENTAL INFORMATION FOR THE SE 2 SEGMENTS IN ITS ANNUAL TEXT REPORTS. THE SEPARATE PROFITABILITY OF THESE 2 SEGMENTS HAS BEEN MAINTAINED BY TH E ASSESSEE AND HAS ALSO PRODUCED THE SAME WHEN ASKED TO DO SO. THE FUNCTIONS CARRIED OUT IN THESE 2 SEGMENTS ARE ALSO DIFFERENT FUNCTIONS AND ARE BY NO MEANS RELATED OR INTERLINKED TO E ACH OTHER. THE ASSESSEE ON ITS WEBSITE HAS GIVEN A DETAILED DESCRIPTION OF THE ACTIVITIES CARRIED OUT UNDER BPO SEGMEN T. THEREFORE, THE TRANSACTIONS PERTAINING TO I.T. SERVICES AN D BPO SERVICES ARE CLEARLY DEFINED IN THEIR NATURE AND SCOPE AN D CANNOT BE CONSIDERED TO BE CLOSELY INTER LINKED AS PER T HE DEFINITION GIVEN OF THE WORD TRANSACTION AT RULE 10A(D) OF THE I.T. RULES, 1962. HE ACCORDINGLY REJECTED THE CONTENTION OF THE ASSESSEE THAT THESE INTERNATIONAL TRANSACTIONS BE CONSID ERED ON AGGREGATE BASIS. 8. SO FAR AS THE ISSUE RELATING TO REJECTION OF SOME OF THE COMPARABLES SELECTED BY THE ASSESSEE, THE TPO NOTED TH AT THE ASSESSEE HAD TAKEN 11 COMPARABLES WHOSE WEIGHTED AVER AGE OF THE ARITHMETIC MEAN OF THE OPERATING MARGIN WAS 11.95%. SAME WAS CONSIDERED ON THE BASIS OF THE RESULTS FOR THE A.Y. 2004-05 AND 2005-06. THE ASSESSEE HAS ARRIVED AT THE COMPARABLES BY SEARCHING THE DATABASE AND THEN BY USIN G 7 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 CERTAIN QUALITATIVE ANALYSIS UNDERTAKEN BY ITSELF IN RESPECT OF PROVISIONS OF SOFTWARE DEVELOPMENT. THE SEARCH WAS BASED ON FAR ANALYSES. THE TPO MADE FRESH FAR ANALYSIS AND CAM E TO THE CONCLUSION THAT OUT OF THE 11 COMPARABLES 7 DO NOT QUALIFY TO BE TREATED AS COMPARABLES SINCE EITHER THEY WERE INT O DIFFERENT BUSINESS FUNCTIONS OR HAD SUBSTANTIAL TRANSACTION S WITH RELATED PARTIES. THUS, THERE WAS ONLY 4 PROPER COMPARABLES. AFTER MAKING FURTHER SEARCH ON THE PROWES S AND CAPITAL LINE DATABASES THE TPO CONFINED HIS SEARCH TO CAS ES WITH TURNOVER EXCEEDING RS. 1 CRORE WHERE DATA FOR THE F.Y. 2005-06 ARE AVAILABLE AND COMPANIES WHOSE NET WORTH IS POSITIVE ETC. IN THIS PROCESS HE CAME ACROSS 24 COMPAN IES. ON FURTHER ANALYSIS 17 WERE FOUND TO BE NON-COMPARABLE AND ONLY 7 REMAINED. TPO MADE FURTHER SEARCH ON PROWESS WITH SEGMENTAL INFORMATION, I.E., COMPARABLES ENGAGED IN BPO ACTIVITIES. THIS FURTHER SEARCH RESULTED IN 30 COMPARABLES OUT OF WHICH ON FAR ANALYSIS 23 WERE FOUND TO BE NON COMPARAB LE BECAUSE THEY HAD SUBSTANTIAL TRANSACTIONS WITH RELATED P ARTIES OR NEGATIVE NET WORTH OR ENGAGED IN DIFFERENT ACTIVITIES S UCH AS ITES OR TURNOVER BEING TOO LAW, I.E. LESS THAN RS. 1 CRORE. AFTER DOING THE SEARCHES AS ABOVE, THE TPO SELECTED 18 COMPA RABLES FOR FINAL ANALYSIS. THE ARITHMETIC MEAN OF THEIR PLI WORKED O UT TO 26.21%. ACCORDINGLY, HE ASKED THE ASSESSEE TO SHOW CAUSE AS TO WHY ARMS LENGTH PRICE OF ITS INTERNATIONAL TRANSACT IONS PERTAINING TO BPO SERVICES BE NOT DETERMINED FOLLOWING TNMM METHOD BY ADOPTING THE ABOVE ARITHMETIC MEAN. 8 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 9. AFTER CONSIDERING THE VARIOUS SUBMISSIONS MADE BY THE ASSESSEE THE TPO REJECTED THE FOLLOWING COMPARABLES : 1. ACE SOFTWARE EXPORTS LIMITED (DIFFERENT BUSINESS ACTI VITY) 2. HCL TECHNOLOGIES LTD. (RELATED PARTY TRANSACTIONS) 3. CMC LIMITED (RELATED PARTY TRANSACTIONS) 4. MPHASIS BFL LIMITED (RELATED PARTY TRANSACTIONS) 5. DATAMATICS TECHNOLOGIES LIMITED (RELATED PARTY TRANSACTIONS) 6. TATA SHARE REGISTRY LIMITED (DIFFERENT BUSINESS ACT IVITY) 7. MCS LIMITED (DIFFERENT BUSINESS ACTIVITY) 10. SO FAR AS THE OBJECTION OF THE ASSESSEE REGARDING ACCEPTABILITY OF CERTAIN COMPANIES AS COMPARABLE AS PROPOS ED IN THE SHOW CAUSE NOTICE STATING THAT THESE COMPARABLES ARE NOT ACCEPTABLE AS COMPARABLES THE TPO PARTLY ACCEPTED THE SAME CONTENTION. ACCORDINGLY THE TPO AFTER CONSIDERING THE SUBMISSION MADE BY THE ASSESSEE REJECTED THE FOLLOWING 7 COMPANIES IN THE FINAL ANALYSIS ACCEPTING THE CONTENTION O F THE ASSESSEE : 1. QUANTUM ESERVICES PVT. LTD., 2. TRICOM INDIA LTD., 3. INDUS NETWORKS LTD. 4. NUCLEUS NETSOFT AND GIS INDIA LTD. 5. WISEC GLOBAL LTD. 6. ULTRAMARINE & PIGMENTS LTD. 7. TRITON CORP LTD. 11. HE HOWEVER ACCEPTED THE FOLLOWING AS COMPARABLES AFTER REJECTING THE CONTENTION OF THE ASSESSEE : 1. MAPLE ESOLUTIONS LTD, 2. REV IT SYSTEMS PVT. LTD. 3. VISHAL INFORMATION TECHNOLOGIES LTD., 4. VISESH INFOTECHNICS LTD. 5. CALIBER POINT BUSINESS SOLUTIONS LTD. 12. FINALLY THE TPO TOOK THE FOLLOWING SET OF COMPARABLE ALONG WITH THEIR PLIS WHICH ARE AS UNDER : 9 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 SR.NO. NAME OF THE COMPANY PLI (OPERATING PROFIT/OPERATING COST) % 1 ASK ME INFO HUBS LTD. 4.67 2 C.S. SOFTWARE ENTERPRISES LTD. 20.07 3 ALLSEC TECHNOLOGIES LTD.(STANDALONE) 28.94 4 SPANCO TELESYSTEMS AND SOLUTIONS LTD. (SEGMENTAL) 21.36 5 MAPLE ESOLUTIONS LTD. 35.58 6 REV IT SYSTEMS PVT. LTD. 18.62 7 VISHAL INFORMATION TECHNOLOGIES LTD. (STANDALONE) 63.56 8 GOLDSTONE INFRATECH LTD.(SEGMENTAL) 28.97 9 VISUALSOFT TECHNOLOGIES LTD. (MERGED) (SEGMENTAL) - 57.23 10 VISESH INFOTECHNICS LTD. (SEGMENTAL) 49.69 11 CALIBER POINT BUSINESS SOLUTIONS LTD. 24.19 ARITHMETIC MEAN 21.67% 13. SINCE THE ARITHMETIC MEAN OF THE PLI WAS ARRIVED AT 21.67% AND THE OPERATING PROFIT OVER OPERATING COST IN RE SPECT OF BPO SERVICES OF THE ASSESSEE COMPANY WAS (-) 13.33%, THE TPO ASKED THE ASSESSEE TO BENCHMARK ITS ACTIVITIES PERT AINING TO BPO SERVICES. THE MARGIN OF (-)13.33% WAS ARRIVED AT B Y THE AO AFTER REJECTING THE ASSESSEES CLAIM FOR EXCLUDING DEPRECIATION BY HOLDING THAT DEPRECIATION EXPENSES ARE OPERATING EXPENSES AND PART AND PARCEL OF NORMAL BPO OPERATIONS. THE SUBMISSION OF THE ASSESSEE THAT DEPRECIA TION ON DISASTER RECOVERY UNIT IS AN EXTRAORDINARY EXPENSE W AS ALSO REJECTED BY THE TPO ON THE GROUND THAT SUCH UNIT IS IN CIDENTAL TO THE BPO ACTIVITIES OF THE ASSESSEE. HE ALSO REJECTED REVISED WORKING OF THE RESULTS OF THE BPO SERVICES WHICH WAS FURN ISHED BY THE ASSESSEE BY STATING THAT THE ORIGINAL WORKING IS O N THE BASIS OF AUDITED ACCOUNTS AND THEREFORE COULD NOT BE IGNO RED WHERE THE REVISED WORKING SHEET HAVE NEITHER BEEN AUDIT ED NOR SIGNED BY THE INDEPENDENT CHARTERED ACCOUNTANT. THE T PO ALSO 10 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 REJECTED THE ASSESSEES CLAIM FOR GRANT OF BENEFIT OF +/- 5% AS PER SECTION 92C BY HOLDING THAT ALP OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE FALLS BEYOND 5% MARGIN OF THE PRICES OF INTERNATIONAL TRANSACTIONS COMPUTED BY THE ASSESSEE. ACCORDINGLY, THE TPO MADE ADJUSTMENT OF RS.11,92,55,177/- TO THE VALUE OF INTERNATIONAL TRANSACTIONS RELATING TO BPO SERVICES. 14. THE ASSESSEE CARRIED THE MATTER TO THE DRP. AFTER CONSIDERING THE ARGUMENTS ADVANCED BY THE ASSESSEE TH E DRP HELD THAT THE TRANSACTIONS PERTAINING TO IT SERVICES AND BPO SERVICES ARE FAIRLY DISTINCT IN NATURE AND SCOPE AND CAN NOT BE CONSIDERED TO BE CLOSELY INTERLINKED AS PER THE DEFINITION G IVEN OF THE WORD TRANSACTION AT RULE 10A OF THE I.T. RULES, 19 62. THE DRP FURTHER DIRECTED THE AO TO VERIFY THE CORRECT WORK ING WHICH WAS CERTIFIED IN ITS REPORT AND SUBMITTED BY THE AO FOR TH E PURPOSE OF CALCULATING THE OPERATING INCOME, OPERATING COST AND PLI FOR THE BPO SCHEME AND REWORK OUT THE ADJUSTMENT TO THE ALP OF THE INTERNATIONAL TRANSACTIONS. 15. THE DRP REJECTED THE CONTENTION OF THE ASSESSEE TH AT THE EXPENSES PERTAINING TO THE DEPRECIATION ON DISASTER RECO VERY UNIT SHOULD BE TERMED AS EXTRAORDINARY EXPENSES AS IT IS INCIDENTAL TO THE BPO ACTIVITIES OF THE ASSESSEE. THE CONT ENTION OF THE ASSESSEE THAT DEPRECIATION SHALL BE EXCLUDED FROM THE OPERATING COST AS IT IS HIGHER DUE TO THE FACT THAT IN AS SESSEES CASE THE ACTIVITY BEING COMMENCED RECENTLY WAS ALSO REJ ECTED BY THE DRP ACCORDING TO WHICH THE COST OF DEPRECIATION DECR EASES AS THE AGE OF FIXED ASSET INCREASES. HOWEVER, AS THE A GE OF FIXED 11 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 ASSETS INCREASES OTHER COST RELATING TO FIXED ASSETS SU CH AS COST OF REPAIRS AND MAINTENANCE, COST OF TECHNICIANS, INSURANCE E TC. ALSO INCREASES. 16. THE DRP ALSO REJECTED THE CONTENTION OF THE ASSESSE E THAT ADJUSTMENT UNDER TRANSFER PRICING, IF AT ALL, IS REQUIRED TO BE COMPUTED ON THE COST ATTRIBUTABLE TO THE TURNOVER WITH ASSOCIATED ENTERPRISES AND NOT TOTAL COST. THEY ALSO RE JECTED THE PLEA OF THE ASSESSEE REGARDING GIVING BENEFIT OF ADJUSTMENT OF +/-5%, HOWEVER, THE DRP DIRECTED THE TPO TO VERIFY CERT AIN WORKINGS BASED ON WHICH THE AO PASSED THE ORDER U/S.14 3(3) R.W.S.144C AND REWORK THE TP ADJUSTMENT IN RESPECT OF B PO AT RS.5,96,21,856/-. 17. AGGRIEVED WITH SUCH ORDER OF THE AO THE ASSESSEE IS IN APPEAL BEFORE US. 18. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO MADE THE ADDITION OF RS.11,92,55,177/- WHICH CAME DOWN TO RS.5,96,21,856/- AFTER THE DIRECTIONS OF THE DRP. HE SUBMITT ED THAT SEPARATE BENCHMARKING IS DONE FOR BPO ACTIVITY FOR TH E FIRST TIME. THE BPO ACTIVITY TURNOVER OF RS.29 CRORES OUT OF T HE TOTAL TURNOVER OF RS.920 CRORES IS VERY SMALL. FURTHER THE BPO ACTIVITY IS INCIDENTAL TO MAIN SOFTWARE ACTIVITY. THE COMPAN Y HAS DONE SEPARATE SEGMENTAL REPORTING FOR SOFTWARE AND BPO ACTIVITY AS DIRECTED DURING THE ASSESSMENT PROCEEDINGS. AS REQUIRED, SEPARATE BENCHMARKING REPORT WAS ALSO SUBMITTE D DURING THE ASSESSMENT PROCEEDINGS. HE SUBMITTED THAT A S PER THE REPORT SUBMITTED BY THE COMPANY THE NET COST PLU S MARK 12 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 UP OF BROADLY COMPARABLE COMPANIES RANGE FROM -1.10% TO 19.97% WITH AN ARITHMETIC MEAN OF 11.45%. THE MARGIN OF THE COMPANY IS 2.33%. HE SUBMITTED THAT PLI BEFORE DEPRECIAT ION RANGES FROM 4.20% TO 37.51% WITH AN ARITHMETIC MEAN OF 19.87% AS AGAINST PLI OF THE ASSESSEE COMPANY AT 22.79 %. HE SUBMITTED THAT THE TPO HAS PROPOSED DIFFERENT SET OF COMPARABLES. EVEN IN RESPECT OF COMPARABLE COMPANY BY TH E TPO, THE PLI BEFORE DEPRECIATION IS 33.04% AGAINST COMPAN IES THE PLI OF THE ASSESSEE BEFORE DEPRECIATION AT 29.43%. 19. REFERRING TO THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SCHEFENACKER MOTHERSON LTD. VS. IT O AND ANOTHER REPORTED IN 123 TTJ 509 HE SUBMITTED THAT THE TRIBUNAL IN THE SAID DECISION HAS HELD THE WORKING OF PLI BE FORE DEPRECIATION IS JUSTIFIED. IN HIS ALTERNATE CONTENTION HE SUBMITTED THAT THE AMOUNT OF ADJUSTMENT SHOULD BE COMP UTED ON THE COST ATTRIBUTABLE TO THE BUSINESS WITH ASSOCIATED ENTERPRISES AND NOT ON THE TOTAL COST. REFERRING TO PA GE 67 OF THE PAPER BOOK HE DREW THE ATTENTION OF THE BENCH TO THE BREAK- UP OF THE TURNOVER WITH THE ASSOCIATED ENTERPRISE AND N ON- ASSOCIATED ENTERPRISES. HE FURTHER SUBMITTED THAT THE T PO HAS NOT GIVEN THE BENEFIT OF +/-5% AS PER THE PROVISO TO SUB -SECTION (2) OF SECTION 92C ON THE BASIS OF AMENDMENT MADE W.E.F. 01- 10-2009. HE SUBMITTED THAT VARIOUS BENCHES OF THE TRIBU NAL HAVE HELD THAT THIS ADJUSTMENT IS MANDATORY AND THE AMENDMENT IS PROSPECTIVE AND THEREFORE WILL NOT APPLY TO THE YEAR UNDER CONSIDERATION. HE FURTHER SUBMITTED THAT NO SUCH T.P. ADJUSTMENT ON BPO ACTIVITY HAS BEEN MADE IN SUBSEQU ENT 13 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 YEARS. HE ACCORDINGLY SUBMITTED THAT THE ADJUSTMENT M ADE BY THE TPO IN RESPECT OF THE BPO ACTIVITY SHOULD BE DELETED AS NO SUCH ADJUSTMENT WAS MADE IN SUBSEQUENT YEARS. 20. REFERRING TO THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF PENZZOIL QUAKER STATE INDIA LTD. VS . DCIT HE SUBMITTED THAT THE TRIBUNAL IN THE SAID DECISION H AS HELD THAT THE TRANSFER PRICING ADJUSTMENT HAS TO BE MA DE ONLY WITH RESPECT TO TRANSACTIONS WITH ASSOCIATED ENTERPRISES BASED ON ALP AND NOT WITH RESPECT TO TOTAL PURCHASES/SALES. HE SUBMITTED THAT SIMILAR VIEW HAS BEEN TAKEN BY THE PUNE B ENCH OF THE TRIBUNAL IN THE CASE OF DEMAG CRANES & COMPONENT S (INDIA) PVT. LTD. 21. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER H AND HEAVILY RELIED ON THE ORDER OF THE TPO/AO. REFERRING TO T HE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. PETRO ARALDITE LTD. REPORTED IN 145 ITD 182 HE SUBMITTED THAT THE TRIBUNAL, AFTER CONSIDERING VARIOUS DECISIONS, HAS HELD THAT WHEN PLI IS TAKEN AS OP TO SALES OR OP TO COST, OPERATING PROFIT OF THE ASSESSEE AS WELL AS COMPA RABLE CASES BECOMES RELEVANT AND THE DEPRECIATION BEING VERY MUCH INTEGRAL PART OF THE OPERATING EXPENSES OF THE MANUFACTU RING CONCERN, THE SAME CANNOT BE EXCLUDED FOR THE PURPOSE O F COMPUTING THE OPERATING PROFIT. THE TRIBUNAL FURTHER HELD THAT CLAUSE (E) (I) OF SUB RULE (1) OF RULE 10B REQUIRES THAT THE NE T PROFIT MARGIN OF THE ASSESSEE IS TO BE WORKED OUT WHILE CLA USE (E)(II) OF THE SAID RULE REQUIRES THAT NET PROFIT MARGIN OF THE COMPARABLES IS WORKED OUT. CLAUSE (E)(III) WHICH PERMITS THE 14 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 ADJUSTMENTS, CLEARLY STIPULATES THAT ANY ADJUSTMENTS O N ACCOUNT DIFFERENCES AFFECTING MATERIALLY THE PROFITABILITY IS TO BE MADE TO THE NET PROFIT MARGIN OF THE COMPARABLES AS REG ERRED TO IN CLAUSE (E)(II). ACCORDINGLY, THE TRIBUNAL HELD THAT DEPRECIATION CANNOT BE EXCLUDED FOR THE PURPOSE OF COMPUTING OPERATI NG PROFIT. HE ACCORDINGLY SUBMITTED THAT THE ORDER OF THE A O BE UPHELD. 22. THE LD. COUNSEL FOR THE ASSESSEE IN HIS REJOINDER SUBMITTED THAT THE TRIBUNAL WHILE HOLDING THAT ADJUSTMENT IS REQUIRED TO BE MADE FOR DIFFERENCE IN CAPACITY UTILIZATION, HAS HELD THAT DEPRECIATION BEING AN INTEGRAL PART OF OPERATING COST HAS TO BE TAKEN INTO ACCOUNT. HOWEVER, THIS PROPOSITIO N OVERLOOKS AN IMPORTANT POINT IN THE SENSE THAT IF ONE INCLU DES DEPRECIATION ON ALL THE ASSETS, THEN DEPRECIATION ON UNUTILIZ ED CAPACITY IS ALSO TAKEN INTO ACCOUNT AND THEN IT IS CONTRA RY TO THE PRINCIPLES LAID DOWN BY THE DIFFERENT BENCHES OF THE TRIBUNAL THAT ADJUSTMENT IS REQUIRED TO BE MADE FOR CAPA CITY UTILIZATION. THEREFORE, THE ABOVE DECISION REFERRED TO BY TH E LD. DEPARTMENTAL REPRESENTATIVE DOES NOT LAY DOWN THE CORR ECT LAW. HE SUBMITTED THAT IN ANY CASE WHEN TWO VIEWS ARE POSSIBLE, THEN THE VIEW FAVOURABLE TO THE ASSESSEE HAS TO BE CONSIDERED. HE SUBMITTED THAT THE PLI BEFORE DEPRECIATIO N AS COMPUTED ABOVE IS 33.54% FOR THE COMPARABLES AND 29.43% OF THE ASSESSEE COMPANY. THEREFORE, THE DIFFERENCE BEING LE SS THAN 5% NO ADJUSTMENT IS CALLED FOR. 15 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 23. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO/TPO/DRP AND TH E PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND T HE TPO IN THE INSTANT CASE HAS INITIALLY PROPOSED ADJUSTMENT OF RS.11,92,35,177/- ON ACCOUNT OF INTERNATIONAL TRANSACTIONS PERTAINING TO BPO SERVICES WHICH HAS COME DOWN TO RS.5,96,21,856/- AFTER THE DIRECTION OF THE DRP. WE FIND THE ASSESSEE HAS BENCHMARKED ITS BPO ACTIVITIES BY TAKING 11 COMPARABLES WHOSE WEIGHTED AVERAGE ARITHMETIC MEAN OF T HE OPERATING MARGIN WAS 11.45%. WE FIND THE TPO NOTED THAT OUT OF THE 11 COMPARABLES 7 DO NOT QUALIFY TO BE TREATED AS COMPARABLES SINCE EITHER THEY WERE INTO DIFFERENT FUNCTIONS OR HAD SUBSTANTIAL TRANSACTIONS WITH RELATED PARTIES. THE TP O THEREFORE MADE FRESH SEARCHES AND AFTER CONSIDERING THE VARIOUS OBJECTIONS OF THE ASSESSEE HAD RETAINED 7 COMPARABLES OUT OF 30 SELECTED BY HIM. THUS, IN EFFECT, THE TPO TOOK FINAL SET O F 11 COMPANIES AS COMPARABLES AND DETERMINED THE ARITHMETIC MEAN AT 21.67% AND ACCORDINGLY MADE ADJUSTMENT OF RS.11,92,55,177/- IN RESPECT OF BPO ACTIVITY WHICH HAS COME DOWN TO RS.5,96,21,856/- AFTER THE DIRECTIONS OF THE DRP. THEY HAVE FURTHER HELD THAT IN ABSENCE OF ANY JUSTIFIABLE REASO NS THE FINAL SET OF 11 COMPARABLES AS SELECTED BY THE TPO IS UPHELD. 24. NOW THE MAIN THRUST OF THE ARGUMENT OF LD. COUNSEL FO R THE ASSESSEE IS REGARDING EXCLUSION OF DEPRECIATION FOR WOR KING OF PLI. ACCORDING TO HIM IN VIEW OF THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SCHEFENACKER MOTHERS ON 16 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 LTD. (SUPRA) FOR DETERMINING THE ALP BY TNMM, PROFIT LEVEL INDICATOR OF COMPARABLE COMPANIES CAN BE TAKEN AS OPERAT ING CASH PROFITS WITHOUT TAKING INTO CONSIDERATION DEPRECIATION. 25. WE FIND MERIT IN THE ABOVE SUBMISSION OF THE LD. COUNSE L FOR THE ASSESSEE. WE FIND THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SCHEFENACKER MOTHERSON LTD. (SUPRA) WHILE DEC IDING AN IDENTICAL ISSUE HAS HELD THAT FOR DETERMINATION OF ALP UN DER TNMM ASSESSEE WAS JUSTIFIED IN TAKING PROFIT LEVEL INDICATOR O F COMPARABLE COMPANIES AS OPERATING CASH PROFITS WITHOUT TA KING INTO CONSIDERATION DEPRECIATION. EXCLUSION OF DEPRECIATION WA S JUSTIFIED TO ELIMINATE THE DIFFERENCE IN TECHNOLOGY USED, AGE O F ASSETS USED IN PRODUCTION, DIFFERENCE IN CAPACITY UTILIZATION A ND DIFFERENT DEPRECIATION POLICIES ADOPTED BY VARIOUS COMPANIES. THE RELEVANT OBSERVATION OF THE TRIBUNAL FROM PARA 19 TO 24 READ AS UNDER : REASONS FOR EXCLUSION OF DEPRECIATION : 19. IN THE PRESENT APPEAL, ALP OF TRANSACTIONS CARRIED WAS TO BE DETERMINED BY COMPARING NET PROFIT OF THE TAXPAYER (TESTED PARTY) WITH MEAN NET PROFIT OF COMPARABLES. ONLY RECEIPTS AN D EXPENDITURE, HAVING CONNECTION WITH INTERNATIONAL TRANSACTIONS, WE RE REQUIRED TO BE TAKEN INTO ACCOUNT. ANY RECEIPT OR EXPENDITURE H AVING NO BEARING ON PRICE OR MARGIN OF PROFIT COULD NOT BE TAKEN INT O CONSIDERATION. IT IS EVIDENT FROM STATUTORY PROVISIONS QUOTED ABOVE THAT IT IS NOWHERE PROVIDED THAT DEDUCTION OF DEPRECIATION IS A MUST. DE PRECIATION CAN BE TAKEN INTO ACCOUNT OR DISREGARDED IN COMPUTING PR OFIT DEPENDING UPON THE CONTEXT AND PURPOSE FOR WHICH PROFIT IS TO B E COMPUTED. THERE IS NO FORMULA WHICH WOULD BE APPLICABLE UNIVER SALLY AND IN ALL CIRCUMSTANCES. 'NET PROFIT' USED IN R. 10B CAN BE TAKE N TO MEAN COMMERCIAL PROFIT AS HELD BY THE TPO AND CONFIRMED O N APPEAL BY THE LEARNED CIT(A). BUT DEPRECIATION IN SUCH PROFIT ON C OMMERCIAL PRINCIPLES HAS TO BE THE 'ACTUAL' ~MOUNT BY WHICH THE ASSETS OF BUSINESS GOT DEPLETED BETWEEN THE TWO DATES SEPARATED BY A YEAR. IT CANNOT BE DEPRECATION UNDER TAX OR COMPANIES RULES OR AS PER POLICY OF THE COMPANY. IN THE CASE IN HAND, REVENUE AUTHORI TIES WENT WRONG IN DISREGARDING THE CONTEXT AND PURPOSE FOR WHICH THE 'NET PROFIT' WAS TO BE COMPUTED. DEPRECIATION, WHICH CAN HAVE VAR IED BASIS AND IS ALLOWED AT DIFFERENT RATES IS NOT SUCH AN EXPENDITURE WHICH MUST BE 17 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 DEDUCTED IN ALL SITUATIONS. IT HAS NO DIRECT CONNECTIO N OR BEARING ON PRICE, COST OR PROFIT MARGIN OF THE INTERNATIONAL TR ANSACTIONS. PRINCIPLES EMPHASIZED IN THE CASE OF BANGALORE CLOTHIN G (SUPRA) BY BOMBAY HIGH COURT ARE ATTRACTED HERE. OBJECT AND PU RPOSE OF THE TRANSFER PRICING TO COMPARE LIKE WITH THE LIKE, AND TO ELIMINATE DIFFERENCES, IF ANY, BY SUITABLE ADJUSTMENT IS TO BE SEE N. THEREFORE, THERE WAS JUSTIFICATION ON THE PART OF THE TAXPAYER I N PLEADING THAT PROFITS BE TAKEN WITHOUT DEDUCTION OF DEPRECIATION A S DEPRECIATION WAS LEADING TO LARGE DIFFERENCES IN MARGINS FOR VARIOU S REASONS. GUIDANCE NOTE OF ICAI ACCEPTS CASH PROFIT/SALE AS A BASE UNDER TNMM 20. THE TAXPAYER ALSO RELIED UPON PARA 22.4 OF GUIDA NCE NOTE ON TRANSFER PRICING ISSUED BY ICAI SUGGESTING CASH PROFIT/SAL ES AS ONE OF THE RATIOS TO BE APPLIED FOR COMPUTING ALP UNDER THE TNMM AS PER INDIAN REGULATIONS. SUB-TITLE (G) OF TABLE 5 UNDER PARA 22 OF GUIDANCE NOTE PROVIDES AS UNDER: '(G) SOME OF THE RATIOS THAT CAN BE USED FOR DETERMIN ING THE ALP UNDER THE METHOD ARE: (I) RATIO OF NET PROFIT BEFORE TAX TO SALES, (II) RATIO OF NET PROFIT BEFORE INTEREST AND TAX TO SALES, (III) RATIO OF CASH PROFIT TO SALES (IV) RATIO OF NET PROFIT BEFORE TAX TO SHAREHOLDERS' FUNDS (V) RATIO OF NET PROFIT BEFORE INTEREST AND TAX TO A SSETS, (VI) BERRY RATIO-RATIO OF OPERATING COST TO OPERATIN G REVENUE.' OECD GUIDELINES SUPPORT TAXPAYER'S CASE 20.1 THE TAXPAYER HAD THROUGHOUT CONTENDED THAT CASH PROFIT/SALE BE ADOPTED AS A PLI RATIO. EXCLUSION OF DEPRECIATION WAS JUSTIFIED, 'TO ELIMINATE DIFFERENCE IN TECHNOLOGY USED, AGE OF ASSETS USED IN PRODUCTION, DIFFERENCES IN CAPACITY UTILISATION AND D IFFERENT DEPRECIATION POLICIES ADOPTED BY VARIOUS COMPANIES IN AUTO COMPONENT INDUSTRY'. [SEE LETTER DT. 24TH MARCH, 200 6 BEFORE AO AND LETTER DT. 18TH DEC., 2006 BEFORE CIT(A) WHERE TAXP AYER EXPLAINED ITS CASE IN DETAIL]. 20.2 WE NEED NOT COMMENT FOR WANT OF DETAILS, WHAT E FFECT UNDER 'UTILIZATION CAPACITY HAD ON PROFITS OF TAXPAYER AND COMPARABLES. BUT OTHER CONTENTION THAT DEPRECIATION WOULD DEPEND UPO N TYPE OF TECHNOLOGY EMPLOYED, AGE AND NATURE OF MACHINERY USE D, IS QUITE WELL-FOUNDED. ABOVE, ALONG WITH SIZE OF ENTERPRISE AN D INVESTMENT IN PLANT/MACHINERY WERE IMPORTANT FACTORS TO BE TAKEN I NTO ACCOUNT FOR COMPARISON AND FOR COMPUTING PROFIT. THERE IS CONSIDER ABLE SUPPORT FOR THE CONTENTION RAISED ON BEHALF OF THE TAXPAYER IN PARA 1.22 OF THE OECD GUIDELINES ON TRANSFER PRICING WHICH IS REPRODUCE D BELOW: 18 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 '1.22 IT MAY ALSO BE RELEVANT AND USEFUL IN IDENTIFYI NG AND COMPARING THE FUNCTIONS PERFORMED TO CONSIDER THE ASSET S THAT ARE EMPLOYED OR TO BE EMPLOYED. THIS ANALYSIS SHOULD CONSID ER THE TYPE OF ASSETS USED, SUCH AS PLANT AND EQUIPMENT, THE USE OF VALUABLE INTANGIBLES, ETC., AND THE NATURE OF THE ASSE TS USED, SUCH AS THE AGE, MARKET VALUE, LOCATION, PROPERTY RIGHT PRO TECTIONS AVAILABLE, ETC.' (UNDERLINED, ITALICIZED IN PRINT, TO EMPHASISE) SUFFICIENT EVIDENCE TO SHOW MATERIAL DIFFERENCES ON ACCOUNT OF DEPRECIATION 20.3 THE CLAIM OF DEPRECIATION CAN LEAD TO GREAT DI FFERENCE IN COMPUTING PROFITS OF COMPARABLES AS DEPRECIATION IS PER MITTED DEPENDING UPON NATURE OF PLANT/MACHINERY AND YEAR O F USE. IN 5TH OR 6TH YEAR OF COMMENCEMENT, DEPRECIATION CAN BE 25 TO 30 PER CENT OF AMOUNT ALLOWED IN FIRST YEAR TO AN ENTERPRISE . IN THESE APPEALS, THE TPO HAD EXCLUDED CERTAIN COMPARABLES AF TER NOTING DIFFERENCES IN THEIR YEAR OF START OF OPERATIONS. THESE WERE BHAGWATI AUTOCAST LTD. (1982), JAY USHIN LTD. (1986), SHARDLOW INDIA LTD. (1980) ETC. THUS, AGE OF PLANT/MACHINERY AND OTHER RELATED INFORMATION IS AVAILABLE ON RECORD AND, THER EFORE, CONTENTION OF THE TAXPAYER ON DIFFERENCES IN CLAIM O F DEPRECIATION IS FULLY ESTABLISHED ON RECORD. FURTHER VAST DIFFERENCE IN DEPRECIATION IS ALSO EVIDENT FROM THE FOLLOWING TABLE 3 SHOWING COMPARISON OF PERCENTAGE OF DEPRECIATION TO THE TOTA L COST IN ACCOUNTS OF TAXPAYER AND COMPARABLES : X X X X X X X X X X 20.4 AS AGAINST RATIO OF 8.17 PER CENT OF THE TAXPAYE R, ONLY RING PLUS AQUA LTD. HAD THE CLOSEST RATIO OF 8.45 PER CENT. SUCH RATIO IN OTHER ENTERPRISES VARIED BETWEEN 2.34 PER CENT TO 5.9 9 PER CENT WHICH IS QUITE LARGE HAVING REGARD TO MEAN MARGIN WH ICH ON COST IS APPROXIMATELY 9 PER CENT ONLY. OBVIOUSLY THERE ARE DIFFERENCES BETWEEN THE MACHINERY EMPLOYED BY THE TAXPAYER AND OTHER COMPARABLE CONCERNS WHICH ARE REFLECTED IN AMOUNT A ND PERCENTAGE OF DEPRECIATION CLAIMED. HOW THIS VARIATI ON AND DIFFERENCE COULD BE IGNORED UNDER TP REGULATIONS IS N EITHER SHOWN NOR EXPLAINED. THE TAXPAYER HAS DEBITED HIGH AM OUNT/RATIO OF DEPRECIATION AS PER RULES AS IT WAS FIRST OR SECOND YE AR OF COMMENCEMENT OF ITS BUSINESS. OTHER ENTERPRISES HAVE CLAI MED DEPRECIATION AT MUCH LOWER AMOUNTS WHICH IS SEEN IN PE RCENTAGE TO TOTAL COST IN TABLE 3. AT P. 28, THE LEARNED CIT( A) DREW A TABLE OF THE DIFFERENCES IN INVESTMENT IN PLANT AND MACHINERY IN THE CASE OF THE TAXPAYER AND OTHER COMPARABLES WHICH IS AS UNDER: X X X X X X X X X X 19 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 20.5 IT IS MORE THAN 5 AND 15 TIMES OF THE TAXPAYER. SIZE OF THE ASSETS BESIDES THE AGE OF THE ASSETS OF COMPARABLES WAS LEADI NG TO DIFFERENCE IN THE PROFIT MARGINS AND IN MEAN MARGIN. ON THE CONTRARY, CLAIM OF DEPRECIATION IS EATING UP LARGE C HUNK OF PROFIT IN THE CASE OF THE TAXPAYER. HOW ABOVE DIFFERENCES WERE NOT CONSIDERED IN APPLYING FAR ANALYSIS? THE LEARNED CIT(A ) HAS NOT SAID A WORD ON 'ASSET' EMPLOYED AND 'RISKS' SUFFERED BY THE TESTED PARTY AND THE COMPARABLES. THUS, MATERIAL DIFFERENCES NEEDING SUITABLE ADJUSTMENT WERE IGNORED AND A FLAWED ANALYSIS WAS CARRIED EVEN IN APPELLATE PROCEEDINGS. 20.6 THE AO, AFTER LOOKING INTO DETAILS OF FINANCIAL RESUL TS OF COMPARABLE ENTERPRISES, EXCLUDED ALL COMPANIES EXCEPT THE THREE, ALTHOUGH TWO OF COMPANIES SELECTED, NAMELY COVENTRY C OIL-O- MATIC (HARYANA.) LTD. AND ROTO PUMPS LTD. PERCENTAGE OF DEPRECIATION TO TOTAL COST HAD DIFFERENCES OF MORE TH AN 2 PER CENT AS SHOWN ABOVE, WHICH, IN OUR OPINION, IS QUITE SUBSTANT IAL. THE LEARNED CIT(A) IS RIGHT IN HOLDING THAT WORKING OF M EAN PROFIT OF THE TPO ON THE BASIS OF THREE SELECTED COMPANIES WAS NOT CORRECT. BUT THEN THE LEARNED CIT(A) ALSO FAILED TO GIVE DUE REGARD TO THE NATURE, TYPE AND AGE OF THE MACHINERY EMPLOYED BY C OMPARABLES OR SIZE OF THE COMPANIES LEADING TO MATERIAL DIFFEREN CES. WITHOUT CONSIDERING OBVIOUS MATERIAL DIFFERENCES, THE CONTENTI ON OF THE TAXPAYER TO TAKE PROFIT WITHOUT DEPRECIATION WAS REJ ECTED. WE FEEL THIS REJECTION IS NOT SOUND IN LAW. ADVERSE INFERENCES AGAINST TAXPAYER UNJUSTIFIED 21. LEARNED CIT(A)'S OBSERVATIONS THAT TAXPAYERS' TP REPOR T SHOULD CONTAIN ANALYSIS OF DISTINCTION/DISSIMILARITIES BET WEEN TAXPAYER AND COMPARABLE ALSO GO BEYOND REQUIREMENT O F R. 10C AND PRESCRIBED FORM 3CEB. THEREFORE, HIS REFUSAL TO LO OK INTO DETAILS AND ADVERSE INFERENCE DRAWN BY HIM AGAINST THE TAXPAYER IS LEGALLY UNJUSTIFIED. THE TAXPAYER WAS TO FURNISH PAR TICULARS REQUIRED BY FORM 3CEB AND TO ANSWER QUESTIONS RAISED IN THE SAID FORM. THE PRESCRIBED FORM ONLY REQUIRES TO GIVE, 'MET HOD USED FOR DETERMINING THE ALP' AND NOTHING MORE. COMPLETED FO RM 3CEB WAS FILED. DISSIMILARITIES AND DIFFERENCES, IF ANY, ARE TO BE NOTED AND DISCUSSED DURING THE COURSE OF PROCEEDINGS BEFORE TH E TPO AND NOT IN TP REPORT. THE APPROACH ADOPTED IN THIS C ASE WAS WRONG WOULD BE MORE THAN CLEAR FROM PROVISIONS OF SUB- S. (2) OF S. 92CA REPRODUCED BELOW: '(2) WHERE A REFERENCE IS MADE UNDER SUB-SO (1), THE TPO SHALL SERVE A NOTICE ON THE ASSESSEE REQUIRING HIM TO PRODUCE OR CAUSE TO BE PRODUCED ON A DATE TO BE SPECIFIED THEREIN, AN Y EVIDENCE ON WHICH THE ASSESSEE MAY RELY IN SUPPORT OF THE COMPUTATIO N MADE BY HIM OF THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION REFERRED TO IN SUB-S. (1).' 21.1 IT IS QUITE CLEAR FROM ABOVE THAT SUPPORTING EVIDENCE IS TO BE PRODUCED BEFORE THE TPO AND THIS WAS DONE. TPO HAS NOT RAISED ANY OBJECTION ON THIS SCORE. THE LEARNED CIT(A) WAS N OT RIGHT IN DRAWING ADVERSE INFERENCE AGAINST THE TAXPAYER.' 20 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 DEPRECIATION LEADING TO MATERIAL DIFFERENCES HAS NO T BEEN CHALLENGED AT ALL 22. THE LEARNED CIT(A) HAS OBSERVED 'FRESH INVESTMENT WAS BE ING- MADE IN AUTOMOBILE ANCILLARY INDUSTRY WHICH WAS IN EX PANSION- PHASE AND, THEREFORE, THERE IS NO REQUIREMENT TO EXCL UDE DEPRECIATION IN COMPUTING PU'. WHAT EXPANSION, WHEN MADE, THE DATE AND YEAR OF EXPANSION, ITS COMPARABILITY WITH T AXPAYER'S CASE? NOTHING RELEVANT IS STATED IN THE IMPUGNED ORDERS. WE DO NOT KNOW HOW DIFFERENCES ON ACCOUNT OF DEPRECIATION COULD BE IGNORED ON THE FACTS STATED ABOVE MERELY ON GENERAL OBSERVATIONS T HAT AUTOMOBILE ANCILLARY INDUSTRY IS IN THE EXPANSION PHASE . TAXPAYER IS SEEKING ADJUSTMENT OF DIFFERENCES ON ACCOUNT OF DEPR ECIATION AND NO PLAUSIBLE REASON HAS BEEN GIVEN FOR NOT ACCEPTI NG THIS CLAIM. THERE IS NO FINDING THAT THERE ARE NO DIFFERE NCES IN CLAIM OF DEPRECIATION AND, THEREFORE, IT SHOULD HAVE BEEN EXC LUDED IN COMPUTING 'OPERATING PROFIT' AS WARRANTED BY RULES. O N THE OTHER HAND, THE DIFFERENCES AS PER THE CHART ARE ACCEPTED. THE FINDING THAT CASH PROFIT CANNOT BE CONSIDERED IS NOT LEGALLY C ORRECT. THE TAXPAYER IN ORDER TO GET ADJUSTMENT OF DIFFERENCE IN DEPRECIATION FURNISHED ARM'S LENGTH WORKING AFTER EXCLUDING DEPREC IATION AND BY TAKING ALL OTHER EXPENSES INTO CONSIDERATION AND SHO WED THAT SUCH PROFIT OF THE TAXPAYER WAS QUITE COMPARABLE TO T HE MEAN MARGIN OF OTHER COMPARABLES SIMILARLY COMPUTED. THIS DEMONSTRATIVELY SHOWED THAT DEDUCTION OF DEPRECIATION S WAS MAKING HUGE DIFFERENCE AND REQUIRED SUITABLE ADJUSTME NT. THIS CLAIM HAS NOT BEEN CHALLENGED. IT IS CLEAR THAT THE BEST WAY TO ADJ UST DIFFERENCE ON ACCOUNT OF DEPRECIATION WAS TO IGNORE DEPRECIATION, BOTH IN CASE OF THE TESTED PARTY AND THE COMPARABLES. AFTER ALL TP ADJUSTMENTS ARE TO BE MADE OF DIFFERENCES IN PRICE CHA RGED OR PAID FOR INTERNATIONAL TRANSACTION AND NOT OF DIFFERENCE IN THE CLAIM OF DEPRECIATION AS HAS BEEN DONE IN THIS CASE. SUCH ADJUSTM ENTS ALSO MATCHED THE REQUIREMENT OF THE CONTEXT (TP PRINCIPL ES). THE BASIC ISSUE INVOLVED WAS WHETHER THE COST PAID OR CHARGED FOR INTERNATIONAL TRANSACTIONS WAS AT ARM'S LENGTH OR NOT. THE FACTORS WHICH GO TO INFLUENCE PRICE, COST OR PROFIT ARE/WERE RELEVANT FOR COMPUTING PROFIT AND NOT DEPRECIATION HAVING NO DIR ECT CONNECTION WITH PRICE OR PROFIT BUT RESPONSIBLE FOR WIDE DIFFERE NCES. THE CASE OF THE REVENUE IS NOT CLEAR. IF DEPRECIATION IS NOT LEADING TO ANY DIFFERENCE, ITS EXCLUSION IS IMMATERIAL. IF IT IS LEADI NG TO DIFFERENCES, THEN DIFFERENCES ARE REQUIRED TO BE ADJUSTED, AS REQUI RED BY PROVISIONS OF IT REGULATIONS. THERE IS NO WAY TO DISLODG E THE CLAIM OF THE TAXPAYER. THE CONTEXT AND PURPOSE OF LEGISLAT ION AND FACTS OF CASE OVERWHELMINGLY APPROVE ADOPTION OF CASH PROFIT O NLY. 23. THE TAXPAYER IN BOTH THE ASSESSMENT YEARS SHOWED BEFORE T HE REVENUE AUTHORITIES THAT PROFIT SHOWN BY THE TAXPAYER SATISFIES ARM'S LENGTH REQUIREMENT ON RATIO OF CASH PROFIT TO S ALES IF UNIFORMLY APPLIED. AS THE DEDUCTION OF DEPRECIATION IS LEADING TO WIDE DIFFERENCES, THE SAME SHOULD BE EXCLUDED. THE ON LY REASON GIVEN FOR REJECTING TAXPAYER'S ANALYSIS AND FOR MAKING ADJUSTMENT IN THE TWO YEARS IS THAT USE OF RATIO OF CASH PROFIT WI THOUT DEPRECIATION IS NOT PERMITTED UNDER THE LAW. THIS VIE W IN THE LIGHT OF ABOVE DISCUSSION CANNOT BE ACCEPTED AS CORRECT AND I S DISAPPROVED. 21 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 AO DIRECTED TO EXAMINE/VERIFY TAXPAYER'S CLAIM 24. THE LEARNED CIT(A) DETERMINED ALP BY TAKING RATIO O F PROFIT/TOTAL COST (OP/TC) AND THUS MADE ADJUSTMENT IN THE TWO ASSESSMENT YEARS. THE LEARNED REPRESENTATIVE OF THE TAXPA YER HAD FURNISHED DETAILED -WORKING TO THE REVENUE AUTHORITI ES, TAKING THE BASE OF CASH PROFIT/SALE (EXCLUDING DEPRECIATION). NO COMMENTS OF REVENUE AUTHORITIES ARE AVAILABLE ON THIS CLAIM. THE TAXPAYER HAS ALSO FURNISHED SIMILAR WORKING TAKING CASH PROFIT/TC (E XCLUDING DEPRECIATION) AND HAS CLAIMED THAT IF BENEFIT OF PR OVISO TO S. 92(2) IS ALLOWED, THERE IS NO CASE FOR MAKING ANY ADJUSTMENTS IN THE TWO YEARS IS AS UNDER: X X X X X X X X X X SO, IT IS WITHIN ALP AS PER SONY INDIA (REFER P. 211 OF THE PAPER BOOK) AND DEVELOPMENT CONSULTANTS (REFER P. 500 OF TH E PAPER BOOK) THUS, ON FIGURES AND METHODOLOGY ADOPTED BY LEARNED C IT(A), WITH THE EXCLUSION OF DEPRECIATION, WE SEE THAT THERE IS NO CASE FOR MAKING ANY ADJUSTMENT. HOWEVER, IT IS NOT CLEAR FROM RECORD WHETHER ABOVE FIGURES WERE VERIFIED BY THE REVENUE A UTHORITIES. BOTH THE PARTIES AGREED THAT ABOVE FIGURES AND COMPUT ATIONS CAN BE VERIFIED BY THE AO/TPO. WE ARE ALSO OF THE VIEW T HAT IT WOULD BE APPROPRIATE TO GET ABOVE CLAIM VERIFIED BY THE AO/T PO. ACCORDINGLY, WE SET ASIDE THE IMPUGNED ORDERS OF REVEN UE AUTHORITIES INCLUDING TPO AND RESTORE THE MATTER TO T HE FILE OF THE AO TO CARRY ABOVE EXERCISE. IN CASE EITHER ON CASH PRO FIT/SALE BASIS OR ON CASH PROFIT/TOTAL COST OF COMPARABLES FINALIZED BY THE LEARNED CIT(A), IT IS FOUND THAT ARM'S LENGTH PRINCIPLES ARE SA TISFIED IN INTERNATIONAL TRANSACTIONS, NO ADJUSTMENT IS TO BE MADE . OTHERWISE, FRESH ORDERS BE PASSED IN ACCORDANCE WITH LAW IN THE LIGHT OF ABOVE DISCUSSION. WE, HOWEVER, MAKE IT CLEAR THAT MATTERS WHICH HAVE ALREADY ATTAINED FINALITY ARE NOT INTEND ED TO BE REOPENED. 26. SO FAR AS THE RELIANCE BY THE LD. DEPARTMENTAL REPRESENTATIVE ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF PETRO ARALDITE IS CONCERNED, WE FIND FORCE IN THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSE E THAT THE SAME IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CA SE. FIRST OF ALL, THE TRIBUNAL HAS NOT CONSIDERED THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SCHEFENACKER MOTHERSON LTD. (SUPRA) WHEREIN A DETAILED ORDER HAS BEEN PASSED AS THE SAME WAS NOT BROUGHT TO THE NOTICE OF T HE BENCH. 22 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 FURTHER, WE ALSO FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE TRIBUNAL WHILE HOLDING TH AT ADJUSTMENT IS REQUIRED TO BE MADE FOR DIFFERENCE IN CAPACIT Y UTILIZATION HAS HELD THAT DEPRECIATION BEING INTEGRAL PART O F OPERATING COST HAS TO BE TAKEN INTO ACCOUNT. THEREFORE , WE FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSE E THAT IF ONE INCLUDES DEPRECIATION ON ALL ASSETS THEN DEPREC IATION ON UNUTILIZED CAPACITY IS ALSO TAKEN INTO ACCOUNT AND THE N IT IS CONTRARY TO THE PRINCIPLES LAID DOWN BY THE VARIOUS BENCH ES OF THE TRIBUNAL THAT ADJUSTMENT IS REQUIRED FOR CAPACITY UTILIZATION. IN ANY CASE WHEN TWO VIEWS ARE POSSIBLE, THE V IEW WHICH IS FAVOURABLE TO THE ASSESSEE MUST BE FOLLOWED IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. VEGETABLE PRODUCTS LTD. REPORTED IN 88 ITR 192. 27. ACCORDING TO THE LD. COUNSEL FOR THE ASSESSEE THE P LI BEFORE DEPRECIATION AS COMPUTED ABOVE COMES TO 33.54% FO R THE COMPARABLES WHEREAS THE PLI FOR THE COMPANIES COMES TO 29.43% AND THEREFORE DIFFERENCE BEING LESS THAN 5% NO ADJUSTMENT IS CALLED FOR. HOWEVER, THE SAME NEEDS VERIFICAT ION. WE, THEREFORE, RESTORE THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY THE AUTHENTICITY OF THE ABOVE ARGUMENTS. 28. SO FAR AS THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT AMOUNT OF ADJUSTMENT WHICH IS CALCULATED O N THE TOTAL COST OF THE BPO IS TO BE CALCULATED ON THE COST AT TRIBUTABLE WITH ASSOCIATED ENTERPRISES AND NOT ON THE TOTAL COST IS CONCERNED, WE FIND THE MUMBAI BENCH OF THE TRIBUNAL IN THE 23 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 CASE OF PENZZOIL QUAKER STATE INDIA LTD. (SUPRA) HAS HELD T HAT TP ADJUSTMENT HAS TO BE MADE ONLY WITH RESPECT TO TRANSACTIONS WITH ASSOCIATED ENTERPRISES BASED ON ALP A ND NOT WITH RESPECT TO TOTAL PURCHASES/SALES. WE, THEREFORE, RES TORE THIS ISSUE TO THE FILE OF THE AO/TPO FOR RE-COMPUTATION OF T HE TP ADJUSTMENT IN RESPECT OF BPO ACTIVITY. GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 29. IN GROUND NO.2 THE ASSESSEE HAS CHALLENGED THE ORDE R OF THE AO IN MAKING ADDITION OF RS.1,61,93,366/- TO THE TOTAL INCOME ON ACCOUNT OF INTEREST CHARGEABLE ON DELAYED RECE IPTS FROM THE ASSOCIATED ENTERPRISES FOLLOWING ADJUSTMENT MADE IN THE TRANSFER PRICING ORDER U/S.92CA(3) OF THE I.T. ACT. 30. AFTER HEARING BOTH THE SIDES WE FIND THE TPO MADE ADJUSTMENT OF RS.1,61,93,366/- PERTAINING TO INTEREST ON EX CESS CREDIT PERIOD ALLOWED TO ASSOCIATED ENTERPRISES. WHILE DOING SO THE TPO HAD REJECTED THE SUBMISSION OF THE ASSESSEE TH AT IT WAS GENERAL BUSINESS PRACTICE IN THE SOFTWARE INDUSTRY NOT TO CHARGE INTEREST ON THE DELAYED RECEIPTS FROM THE CUSTOMERS AND ALSO CONSIDERING THE VOLUME OF BUSINESS AND REVENUE GENERATE D INTEREST IS NOT CHARGED IN ORDER TO MAINTAIN BUSINESS RELATIONSHIP. IT IS THE CASE OF THE TPO THAT INTEREST OUG HT TO HAVE BEEN CHARGED FOR DELAY BEYOND THE STIPULATED CREDIT PERIOD BECAUSE THESE AMOUNTS WOULD HAVE EARNED INTEREST AT T HE INTERNATIONAL RATES PRESCRIBED BY THE RBI IN RESPECT OF E XTERNAL COMMERCIAL BORROWINGS FOR THE ASSESSEES BUT OWING TO THE SE PAYMENTS NOT BEING RECEIVED IN TIME, THE ASSESSEE DID NOT RECEIVE THE BENEFIT OF THESE FUNDS. THE DRP ALSO REJECTED THE 24 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 OBJECTION MADE BEFORE HIM ON THE GROUND THAT THE ASSES SEE HAD RECOVERED INTEREST FROM ITS ASSOCIATED ENTERPRISES DURING A.Y. 2003-04, 2004-05 AND 2005-06. FURTHER, HAD THE ASSESS EE RECOVERED THE AMOUNTS FROM THE ASSOCIATED ENTERPRISES WITHIN TIME, THE WORKING CAPITAL OF THE ASSESSEE WOULD HAVE INCREA SED. NO JUSTIFIABLE REASON WAS SUBMITTED BEFORE THEM AS TO WHY THE ASSESSEE HAD NOT RECOVERED ANY INTEREST FROM ITS ASSOC IATED ENTERPRISES DURING THE RELEVANT A.Y. 2006-07. 31. WE FIND IDENTICAL ISSUE HAD COME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y. 2005-06. WE FIND THE TRIB UNAL HAD RESTORED THE ISSUE TO THE FILE OF THE AO WITH THE FOLLO WING OBSERVATIONS : 26. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE RECORD. THE FIRST ASPECT OF THE ISSUE IS THAT ADMITTEDLY, T HE TRANSACTION OF CHARGING INTEREST FROM AES EXCEEDING CREDIT PERIOD AMOUNTS TO INTERNATIONAL TRANSACTION UNDER SECTION 92B(1) OF T HE ACT. THE HONBLE BOMBAY HIGH COURT IN ASSESSEES OWN CASE RELATING T O ASSESSMENT YEAR 2002-03 IN INCOME TAX APPEAL NO.1148/2012 VIDE JUDGMENT DATED 28.02.2013 HAS HELD THAT IN VIEW OF THE AMEND MENT BY FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 01.04.2002 , THE SAID TRANSACTION OF CHARGING OF INTEREST FROM THE AES IS COVERED UNDER THE AMENDED PROVISIONS OF SECTION 92B(1) OF THE ACT. T HE SECOND ASPECT OF THE ISSUE ARISING BEFORE US IS WHETHER INTEREST CHARGED BY THE ASSESSEE FROM ITS AES WAS AT ARMS LENGTH PRICE. T HE ASSESSEE WAS CARRYING ON ITS BUSINESS THROUGH ITS AES AND HAD SE TTLED SOME CREDIT TERMS WITH ITS AES VIS--VIS THE PAYMENTS TO BE REC EIVED BY IT. IN THE FORM NO.3CEB, THE ASSESSEE HAD DECLARED THE TRANSAC TION OF INTEREST RECEIVED ON DELAYED PAYMENTS WITH ITS AES AS AN INT ERNATIONAL TRANSACTION, UNDER WHICH IT HAD RECEIVED RS.3.12 CR ORES. HOWEVER, DURING THE PROCEEDING BEFORE THE TPO, IT WAS NOTED THAT THERE WAS DELAY IN REALIZATION OF AMOUNT DUE FROM AES BEYOND CREDIT PERIOD IN RESPECT OF ASSOCIATE ENTITIES AS UNDER:- STATUS AES INVOICE AMOUNT TOTAL REALIZED INVOICE X NO OF DAYS DELAY WEIGHTED AVERAGE NO. OF DAYS DELAYS PATNI INC, USA 592,33,38,933 580,83,75,342 199,37,97,33,476 34 PATI UK 31,51,88,988 30,81,78,039 34,97,56,88,595 111 PATNI GMBH 708,59,602 692,33,110 878,56,93,667 124 TOTAL NO. OF WEIGHTED AVERAGE FOR AES 630,93,87,523 618,57,86,491 243,14,10,95,738 39 25 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 27. HOWEVER, IN RESPECT OF NON-AES, THE DELAY OF 2 5 DAYS AS TABULATED BY THE TPO WAS AS UNDER:- STATUS AES INVOICE AMOUNT TOTAL REALIZED INVOICE X NO OF DAYS DELAY WEIGHTED AVERAGE NO. OF DAYS DELAYS OTHER [NON-AES] 75,09,72,178 72,88,22,867 18,87,31,35,331 25 TOTAL NO. OF WEIGHTED AVERAGE FOR AES 75,09,72,178 72,88,22,867 18,87,31,35,331 25 28. THE ASSESSEE HAD APPLIED TNNM METHOD IN HOLDING THAT ITS INTERNATIONAL TRANSACTIONS WERE AT ARMS LENGTH PRI CE, WHEREAS THE TPO COMPUTED THE MARGINS ON THE BASIS OF CUP METHOD IN VIEW OF THE TRANSACTIONS OF THE ASSESSEE WITH THE AES AND A LSO WITH THE NON- AES. THEREAFTER, THE TPO APPLIED LIBOR PLUS RATES AND THE COST OF GUARANTEE COST IN ORDER TO DETERMINE THE ARMS LENG TH PRICE OF THE INTEREST OF EXCESS CREDIT PERIOD ALLOWED TO THE AES . THE CIT(A) ON THE OTHER HAND, APPLIED THE INDIAN PRIME LENDING RATES IN ORDER TO COMPUTE WHETHER THE SAID TRANSACTION WAS AT ARMS L ENGTH PRICE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BEFORE US HAS FAIRLY CONSIDERED THAT LIBOR RATES HAVE TO BE APPLI ED SINCE THE TRANSACTION BETWEEN THE ASSESSEE AND ITS AES IS AN INTERNATIONAL TRANSACTION AND THERE IS NO MERIT IN THE ORDER OF C IT(A) IN APPLYING THE INDIAN PLR RATES. 29. THE ISSUE ARISING BEFORE US IS IN RELATION TO T HE ARM'S LENGTH PRICE OF INTEREST CHARGED BY THE ASSESSEE COMPANY T O ITS AES ON THE AMOUNTS OUTSTANDING. THE MUMBAI BENCH OF TRIBUNAL IN HINDUJA GLOBAL SOLUTIONS LTD. VS. ADDL.CIT (2013) 145 ITD 3 61 (MUM) HAD HELD THAT CUP METHOD WAS THE MOST APPROPRIATE METHO D TO DETERMINE THE ARMS LENGTH RATE OF INTEREST OF THE INTERNATIO NAL TRANSACTION INVOLVING LENDING OF THE MONEY BY ASSESSEE IN FOREI GN CURRENCY TO ITS AES AND LIBOR BEING INTER-BANK RATE FIXED FOR INTER NATIONAL TRANSACTION HAD TO BE ADOPTED AS ARMS LENGTH RATE. THE MUMBAI BENCH OF TRIBUNAL FURTHER IN DCIT VS. INDIAN HOTELS CO. LTD. (SUPRA) HAS APPLIED THE SAID PRINCIPLE IN BENCHMARKING THE INTERNATIONAL TRANSACTION INVOLVING INTEREST CHARGED BY THE ASSES SEE ON OUTSTANDING LOAN FROM ITS AES. 30. FURTHER, PUNE BENCH OF TRIBUNAL IN VARROC ENGIN EERING (P) LTD. VS ACIT (SUPRA) HAD OBSERVED AS UNDER:- 15..WHILE BENCHMARKING THE INTERNATIONAL TRANSAC TIONS WHAT HAS TO BE SEEN IS THE COMPARISON BETWEEN RELATED TRANSACTI ONS I.E. WHERE THE ASSESSEE HAS ADVANCED MONEY TO ITS ASSOCIATED ENTER PRISES AND CHARGED INTEREST THEN THE SAID TRANSACTION IS TO BE COMPARE D WITH A TRANSACTION AS TO WHAT RATE THE ASSESSEE WOULD HAVE CHARGED, IF IT HAD EXTENDED THE LOAN TO THE THIRD PARTY IN FOREIGN COUNTRY. ONCE THERE IS A TRANSACTION BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISES IN FOREIGN CURRENCY, THEN THE TRANSACTION WOULD HAVE TO BE LOOKED UPON B Y APPLYING THE COMMERCIAL PRINCIPLES WITH REGARD TO THE INTERNATIO NAL TRANSACTIONS. IN THAT CASE, THE INTERNATIONAL RATES FIXED BEING LIBO R+ RATES WOULD HAVE AN APPLICATION AND THE DOMESTIC PRIME LENDING RATES WO ULD NOT BE APPLICABLE. THE ASSESSEE HAS FURTHER EXPLAINED THA T IT HAD RAISED THE LOAN FROM CITI BANK ON INTERNATIONAL RATES FOR THE PURPO SE OF INVESTMENT IN THE SHARE APPLICATION MONEY OF ITS ASSOCIATED ENTER PRISES, WHICH IN TURN WAS PARTLY CONVERTED FROM CAPITAL INTO LOAN. WHERE THE ASSESSEE HAD A COMPARABLE OF BORROWING LOAN ON INTERNATIONAL RATES AND ADVANCING TO 26 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 ITS ASSOCIATED ENTERPRISES, THEN THE SAID COMPARABL E WAS TO BE APPLIED FOR BENCHMARKING THE TRANSACTION OF ADVANCING THE L OAN ON INTEREST TO ITS ASSOCIATED ENTERPRISES. THE ASSESSEE HAD CHARGED I NTEREST RATE OF 4.75% ON THE LOAN ADVANCED TO THE ASSOCIATED ENTERPRISES. THE ASSESSEE ON THE OTHER HAND, CLAIMS THAT IT HAD BORROWED THE MONEY O N LIBOR+ RATES I.E. INTERNATIONAL RATES, WHICH WERE JAPANESE BASED LIBO R+ RATES WHICH WERE LOWER THAN THE US BASED LIBOR+ RATES. THE PLE A OF THE ASSESSEE BEFORE US WAS THAT IT HAD ADVANCED THE LOAN TO ITS ASSOCIATED ENTERPRISES ON LIBOR+ RATES I.E. 4.75%. IN THE TOTALITY OF THE FACTS AND CIRCUMSTANCES WHERE THE ASSESSEE HAS THE INTERNAL CUP OF OPERATIN G AT INTERNATIONAL RATES AVAILABLE AND SINCE THE SAID LOAN RAISED BY T HE ASSESSEE AT INTERNATIONAL RATES WAS ADVANCED TO ITS ASSOCIATED ENTERPRISES, WE FIND NO MERIT IN THE ORDER OF THE TPO IN APPLYING THE DO MESTIC LOAN RATES I.E. BPLR RATES FOR BENCHMARKING TRANSACTION OF CHARGING OF INTEREST ON THE LOANS ADVANCED TO THE ASSOCIATED ENTERPRISES BY THE ASSESSEE. WHERE THE ASSESSEE HAD MADE THE BORROWINGS ON LIBOR+ RATES AN D ADVANCED THE SAME AT LIBOR+ RATES, THEN THE SAID TRANSACTION IS AT ARM'S LENGTH PRICE AND THERE IS NO MERIT IN ANY ADJUSTMENT TO BE MADE ON THIS ACCOUNT. 16. THE CHENNAI BENCH OF THE TRIBUNAL IN M/S. SIVA INDUSTRIES & HOLDINGS LIMITED VS. ACIT, CHENNAI (2012) 26 TAXMAN N.COM 96 (CHENNAI) HAD HELD AS UNDER:- THE ASSESSEE HAD GIVEN THE LOAN TO THE ASSOCIATED ENTERPRISES IN US DOLLARS, AND ASSESSEE WAS ALSO RECEIVING INTERES T FROM THE ASSOCIATED ENTERPRISES IN INDIAN RUPEES. ONCE THE TRANSACTION BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES WAS IN FOREIGN CURRENCY AND THE TRANSACTION WAS AN INTERNA TIONAL TRANSACTIONS, THEN THE TRANSACTION WOULD HAVE TO BE LOOKED UPON THE APPLYING THE COMMERCIAL PRINCIPLES IN REGARD TO INTERNATIONAL TRANSACTIONS. IF THAT WAS SO, THEN THE DOMESTIC PR IME LENDING THE RATE WOULD HAVE NO APPLICABILITY AND THE INTERNATIO NAL RATE FIXED BEING LIBOR WOULD COME INTO PLAY. IN THE CIRCUMSTA NCES, THE VIEW THAT LIBOR RATE HAD TO BE CONSIDERED WHILE DET ERMINING THE ARM'S LENGTH PRICE INTEREST RATE IN RESPECT OF THE TRANSACTION BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES WAS TO BE UPHELD. AS IT WAS NOTICED THAT THE AVERAGE OF THE LIBOR RATE FOR 1-4-2005 TO 31-3-2006 IS 4.42 PER CENT AND THE ASSE SSEE HAD CHARGED INTEREST AT 6 PER CENT WHICH WAS HIGHER THA N THE LIBOR RATE, NO ADDITION ON THIS ACCOUNT WAS LIABLE TO BE MADE IN THE HANDS OF THE ASSESSEE. IN THE CIRCUMSTANCES, THE A DDITION MADE BY THE ASSESSING OFFICER ON THIS COUNT WAS DELETED. 17. THE MUMBAI BENCH OF THE TRIBUNAL IN DCIT VS. TE CH MAHINDRA LTD. (2011) 12 TAXMANN.COM 132 (MUM.) HELD THAT WHE RE THERE IS A CHOICE BETWEEN THE INTEREST RATE OF CURRENCY OTHER THAN THE CURRENCY IN WHICH TRANSACTION HAD TAKEN PLACE AND THE INTEREST RATE IN RESPECT OF THE CURRENCY IN WHICH TRANSACTION HAS TAKEN PLACE, THE LATTER SHOULD BE ADOPTED. WHERE THE TRANSACTION IS BETWEEN THE ASSE SSEE AND ITS ASSOCIATED ENTERPRISES IN FOREIGN CURRENCY AND THE TRANSACTION IS INTERNATIONAL TRANSACTION, THEN THE TRANSACTION WOU LD HAVE TO BE LOOKED UPON BY APPLYING COMMERCIAL PRINCIPLES IN REGARD TO INTERNATIONAL TRANSACTIONS. 18. SIMILAR PRINCIPLE HAS BEEN LAID DOWN BY THE MUM BAI BENCH OF THE TRIBUNAL IN HINDUJA GLOBAL SOLUTIONS LTD. VS. ACIT (2013) 35 TAXMANN.COM 348 (MUMBAI TRIB.). 27 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 19. IN THE ENTIRETY OF THE ABOVE FACTS AND CIRCUMST ANCES, WE HOLD THAT WHERE THE ASSESSEE HAD ENTERED INTO A TRANSACTION W ITH ITS ASSOCIATED ENTERPRISES IN FOREIGN CURRENCY, AND THE TRANSACTIO NS WERE INTERNATIONAL TRANSACTIONS, THEN THE SAME HAD TO BE LOOKED INTO B Y APPLYING COMMERCIAL PRINCIPLE IN REGARD TO INTERNATIONAL TRA NSACTIONS. IN THE FACTS OF PRESENT CASE, THE ASSESSEE HAD BORROWED THE LOAN FROM CITI BANK AND ADVANCED THE SAME ON LIBOR+ RATES TO ITS ASSOCIATED ENTERPRISES, THEN THE SAID TRANSACTION WITH ITS ASSOCIATED ENTERPRISE S IS WITHIN ARM'S LENGTH PRICE. THE TPO / AO THUS, DIRECTED TO RE-CO MPUTE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. AN OTHER ASPECT TO BE KEPT IN MIND IS THE PLEA OF THE ASSESSEE WITH REGARD TO THE INTEREST RECEIVABLE. THE ASSESSEE HAD ALSO RAISED THE ISSUE THAT THE TPO HAD ADOPTED THE INTEREST RECEIVABLE FROM ASSOCIATED ENTERPRISE COMP ANY AT RS.2,86,27,089/- INSTEAD OF RS.2,91,82,060/- WHICH IS DISCLOSED IN THE AUDIT REPORT IN FORM NO.3CEB. THE ASSESSING OFFICE R IS ALSO DIRECTED TO VERIFY THE CLAIM OF THE ASSESSEE IN THIS REGARD AND COMPUTE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. RE ASONABLE OPPORTUNITY OF BEING HEARD SHALL BE AFFORDED TO THE ASSESSEE BY TH E ASSESSING OFFICER / TRANSFER PRICING OFFICER. THE GROUNDS OF APPEAL NO S.1 AND 2 RAISED BY THE ASSESSEE ARE THUS, ALLOWED AS INDICATED ABOVE. 31. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE RATIO LAID DOWN BY THE DELHI BENCH OF TRIBUNAL IN CHEIL INDIA (P.) LTD. VS. DCIT (SUPRA). WE FIND NO MERIT IN THE SAID RELIANCE PLACED UPON BY THE LEARNED DEPARTMENTAL RE PRESENTATIVE FOR THE REVENUE WHERE IT WAS DIRECTED THAT THE INTEREST SHOULD BE COMPUTED ON THE BASIS OF SBI BASE RATE PLUS 150 BAS IS POINTS ON THE AMOUNT OUTSTANDING FROM THE DEBTORS. ON THE OTHER HAND, PUNE BENCH OF TRIBUNAL IN VARROC ENGINEERING (P) LTD. VS ACIT (SUPRA) AND OTHER BENCHES OF THE TRIBUNAL HAVE UPHELD THE APPLI CATION OF INTERNATIONAL RATES OF INTEREST TO BE APPLIED FOR B ENCHMARKING THE INTERNATIONAL TRANSACTIONS. 32. THE ASSESSEE IN THE PRESENT SET OF FACTS WAS CA RRYING ON ITS BUSINESS WITH ITS AES AND THE MAJORITY OF BUSINESS RECEIPTS WERE RECEIVABLE FROM THE AES. ONCE THE TRANSACTION BETW EEN THE ASSESSEE AND ITS AES WAS IN FOREIGN CURRENCY, THEN THE SAME PART TAKES THE NATURE OF INTERNATIONAL TRANSACTION AND THE SAID TR ANSACTIONS HAVE TO BE LOOKED UPON BY APPLYING THE COMMERCIAL PRINCIPLE S WITH REGARD TO AN INTERNATIONAL TRANSACTION. IF THAT IS SO, THEN THE DOMESTIC LENDING RATES CANNOT BE APPLIED IN ORDER TO BENCHMARK THE T RANSACTION OF THE ASSESSEE WITH ITS AES AND THE INTERNATIONAL RATES F IXED BY LIBOR WOULD COME INTO PLAY. THERE WAS SUBSTANTIAL DELAY IN RECEIPT OF PAYMENT FROM AES AND SUBSTANTIAL AMOUNT STOOD UNREC OVERED FROM THE AES BEYOND THE STIPULATED PERIODS. THE ASSESSE E INITIALLY DID NOT CHARGE INTEREST FROM THE AES AND SUBSEQUENTLY, CHAR GED INTEREST FROM AES AT AFR I.E. AMERICAN FEDERAL RATE @ 2.98%. THE AMOUNT IS IN THE CHARACTER OF LOAN OR BORROWING AFTER THE STIPUL ATED CREDIT PERIOD AND CONSEQUENTLY, SUCH RECOVERY OF DUES IN THE INTE RNATIONAL TRANSACTION WITH ITS AES IS TO BE BENCHMARKED BY AP PLYING CUP METHOD OF INTERNATIONAL BANK RATES. ACCORDINGLY, W E HOLD THAT LIBOR PLUS RATES HAVE TO BE APPLIED TO THE AMOUNTS DUE FR OM THE AES BEYOND THE PERIOD OF 25 DAYS, WHICH WAS THE WEIGHTE D AVERAGE NUMBER OF DAYS DELAY ALLOWED TO THE THIRD PARTIES. AFTER EXCLUDING THE PERIOD OF 25 DAYS, INTEREST IS TO BE CHARGED ON THE BALANCE NUMBER OF DAYS OF DELAY BY APPLYING LIBOR PLUS RATES. WE FIN D THAT THE TPO HAD APPLIED AVERAGE RATE OF LIBOR PLUS 300 BASIS PO INTS AS THE REASONABLE RATE OF INTEREST, WHICH THE ASSESSEE SHO ULD HAVE CHARGED TO ITS AES. THE TPO HAD ALSO CHARGED PLUS 200 BASI S POINTS AS GUARANTEED COMMISSION. THE CIT(A) HAS GIVEN A FIND ING THAT IN THE 28 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 ABSENCE OF ANY EXPENDITURE HAVING BEEN INCURRED BY THE ASSESSEE ON SUCH GUARANTEED COMMISSION, THERE WAS NO MERIT IN I NCLUDING THE SAME. THE REVENUE IS NOT IN APPEAL AGAINST THE SAI D FINDING OF THE CIT(A) AND IN THE TOTALITY OF THE ABOVE SAID FACTS AND CIRCUMSTANCES, WHERE IT HAS NOT BEEN ESTABLISHED THAT THE ASSESSEE HAS NOT PAID ANY COMMISSION, THERE WAS NO MERIT IN CHARGING PLUS 200 BASIS AS GUARANTEED COMMISSION. HOWEVER, WE UPHOLD THE ORDE R OF TPO IN BENCHMARKING THE TRANSACTION OF INTEREST DUE ON AMO UNTS OUTSTANDING FROM ITS AES AT LIBOR PLUS 300 BASIS POINTS. THE A SSESSING OFFICER / TPO SHALL DETERMINE THE ADJUSTMENT, IF ANY, TO BE M ADE IN THE HANDS OF ASSESSEE ON ACCOUNT OF INTEREST CHARGEABLE ON TH E AMOUNTS DUE FROM ITS AES BEYOND THE CREDIT PERIOD OF 25 DAYS AF TER ALLOWING THE BENEFIT OF INTEREST RECOVERED BY THE ASSESSEE FROM ITS AES. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE THUS, PARTLY ALLOWED. 32. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN THE IMMEDIATELY PRECEDING ASSESS MENT YEAR WE RESTORE THE ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO RECOMPUTE THE ADDITION IN THE LIGHT OF THE DIRECTION OF THE TRIBUNAL. THE ABOVE GROUND IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 33. GROUND OF APPEAL NO.3 BY THE ASSESSEE READS AS UNDER : 3. IN RESPECT OF DEDUCTION U/S 10A IN RESPECT OF VARI OUS ELIGIBLE UNDERTAKINGS OF THE COMPANY: A. IN NOT ALLOWING DEDUCTION U/S 10A IN RESPECT OF VARIO US ELIGIBLE UNITS AMOUNTING TO RS. 249,74,88,480. B. IN ASSUMING JURISDICTION TO DISALLOW THE DEDUCTION U/S 1 0A BY OBSERVING AND HOLDING THAT THE NEW UNITS/UNDERTAKI NGS HAVE BEEN FORMED BY SPLITTING UP OF A BUSINESS ALREAD Y IN EXISTENCE SINCE THE 1980S, AND THAT THE PROFITS AND GAI NS OF THE UNITS/UNDERTAKINGS SUBSEQUENTLY SETUP BY THE COMPANY ARE NOT ELIGIBLE FOR DEDUCTION U/S 10A OF T HE INCOME-TAX ACT 1961. C. IN DENYING THE DEDUCTION U/S 10A IN RESPECT OF VARIOU S ELIGIBLE UNDERTAKINGS ON THE BASIS OF THE NATURE OF BU SINESS. D. IN RE-EXAMINING THE CONDITIONS OF ELIGIBILITY OF DED UCTION U/S 10A IN RESPECT OF VARIOUS UNDERTAKINGS ESTABLISHED IN EARLIER YEARS. THE ASSESSING OFFICER OUGHT TO HAVE APPRECIATED THAT THE ELIGIBILITY CONDITIONS IN RESPEC T OF SPLITTING UP OF BUSINESS ALREADY IN EXISTENCE IS REQUIRED TO BE COMPLIED WITH IN THE YEAR OF FORMATION OF THE UNDERTAKING 29 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 E. IN RELYING ON VARIOUS OBSERVATIONS AND CONCLUSIONS RECORDED IN THE ASSESSMENT ORDER FOR A.Y. 2004-2005 AND A.Y. 2005-06 AND THEREBY NOT ALLOWING DEDUCTION U/S 10A IN RESPECT OF VARIOUS ELIGIBLE UNDERTAKINGS. 34. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE HAD CLAIMED FOR THIS ASSESSMENT YEAR DEDUCTION U/S.10A IN RESP ECT OF 11 UNITS. IDENTICAL ISSUE WAS INVOLVED IN THE ASSESSME NTS FOR THE ASSESSMENT YEAR 2004-05 AND 2005-06. FOR THE ASSESSMENT YEAR 2004-05, THE CIT(A) ALLOWED THE ASSESSE ES GROUND(S). HOWEVER, THE DEPARTMENT HAS NOT ACCEPTED T HE ORDER OF THE CIT(A) AND HAS PREFERRED AN APPEAL AGAINST THE SA ME BEFORE THE ITAT WHERE THE MATTER IS PENDING. EVEN FOR TH E ASSESSMENT YEAR 2005-06, THE AO DISALLOWED THE ASSESSE ES CLAIM OF DEDUCTION U/S.10A. DURING THE PREVIOUS YEAR RELEVA NT TO THE SAID ASSESSMENT YEAR, TWO NEW EOU UNITS HAD BEE N SET UP/STARTED BY THE ASSESSEE AT BANGALORE AND MUMBAI. T HE AO HELD THAT THESE TWO UNITS HAD BEEN FORMED BY RESTRUCTU RING OF THE ASSESSEES EXISTING BUSINESS. ACCORDINGLY HE DISALLOWE D THE ASSESSEES CLAIM. 35. BEFORE DRP THE ASSESSEE SUBMITTED THAT THE GROUNDS RAISED BY THE ASSESSEE IN THIS MATTER HAVE ALREADY BEEN NOTED. ON FURTHER ELABORATION THE ASSESSEE ARGUED THAT THE AS SESSING OFFICER FAILED TO GIVE DUE WEIGHTAGE TO THE DATA SUBMITTED IN RESPECT OF 5 COMPANIES WHICH ARE THE MAJOR PLAYERS IN TH E BUSINESS. THESE 5 HAD BEEN INCLUDED EVEN IN THE 38 COMPA NIES FOR TRANSFER PRICING STUDY. MOREOVER, THE ASSESSING OFFICER SHOULD HAVE APPRECIATED THAT IN TRANSFER PRICING ANALYSIS THE PURPOSE OF SELECTING COMPARABLES IS DIFFERENT. THE SAME CAN NOT 30 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 BE FORMED THE BASIS FOR INVOKING THE PROVISIONS OF SECTION 10A(7). TO DO SO, EXISTENCE OF ARRANGEMENT BETWEEN THE ASSESSEE AND THE OTHER PERSONS BY WHICH BUSINESS IS T RANSACTED BETWEEN THEM AND WHICH PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WILL HAVE TO BE ESTABLISHED. 'THE ASSES SING OFFICER HAS NOT PROVED THE ORDINARY PROFITS IN SUCH TYPE O F BUSINESS AND OF SUCH VOLUMINOUS FACTS OBTAINED IN OUR CASE '. IT HAS ALSO BEEN STATED THAT IT NEEDS TO BE APPRECIATED T HAT 4 OF ITS UNITS BEING 10A UNDERTAKINGS HAD EVEN SUFFERED LOSSES DUR ING THIS YEAR. VARIOUS DECISIONS WERE ALSO RELIED UPON. HOWEV ER, THE DRP WAS ALSO NOT CONVINCED WITH THE ARGUMENTS ADVA NCED BY THE ASSESSEE AND UPHELD THE ACTION OF THE AO. 36. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO/TPO/DRP AND THE P APER BOOK FILED ON BEHALF OF THE ASSESSEE. WE FIND IDENTICAL ISSUE HAD COME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN THE PRECEDING ASSESSMENT YEAR AND THE TRIBUNAL AT PARA NO S. 12 TO 18 HAS OBSERVED AS UNDER : 12. THE ISSUE RAISED BY THE REVENUE VIDE ITS GROUN DS OF APPEAL IS AGAINST THE STAND OF CIT(A) IN HOLDING THE ASSESSEE TO BE ELIGIBLE FOR THE CLAIM OF DEDUCTION UNDER SECTION 10A OF THE ACT IN RESPECT OF 13 UNITS, OUT OF WHICH TWO NEW UNITS WERE ESTABLISHED DURING THE YEAR UNDER CONSIDERATION. AS FAR AS GROUNDS OF APPEAL N O.2 AND 3 RAISED BY THE REVENUE ARE IN RELATION TO THE THREE UNITS I .E. CHINCHWAD, AKURDI AND MILLENNIUM BUSINESS PARK, WE FIND THAT T HE TRIBUNAL IN ITA NOS.476/PN/2008 AND 1087/PN/2008, RELATING TO ASSES SMENT YEAR 2004-05 VIDE ORDER DATED 12.06.2012 HAD VIDE PARA 1 0 CONSIDERED THE ISSUE OF DEDUCTION UNDER SECTION 10A OF THE ACT IN RESPECT OF THREE UNDERTAKINGS LOCATED AT CHINCHWAD, AKURDI AND MILLE NNIUM BUSINESS PARK. THE ASSESSING OFFICER HAD DENIED THE SAID DE DUCTION UNDER SECTION 10A OF THE ACT BY TREATING THE AFORESAID UN ITS AS MERE EXPANSION OF THE EXISTING UNITS ON THE BASIS OF APP ROVAL LETTERS RECEIVED FROM SOFTWARE TECHNOLOGY PARK OF INDIA (ST PI). THE TRIBUNAL IN TURN, RELYING ON THE RATIO LAID DOWN BY THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2 002-03 AND 2003-04, HELD AS UNDER:- 31 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 12. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS. WE FIND THAT THE ISSUE STANDS FULLY COVERED IN FAVOUR OF THE ASSESSE E AND AGAINST THE REVENUE BY THE DECISION OF OUR CO-ORDINATE BENCH IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2002-03 AND 2003-04. FOR T HE SAKE OF BREVITY, WE EXTRACT THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL HEREINBELOW: 34 IN THIS APPEAL OF THE REVENUE, GROUND NO. 1 REL ATES TO THE ACTION OF THE COMMISSIONER OF INCOME-TAX (APPEALS) IN HOLDING THAT THE THREE UNITS AT CHINCHWAD, AKRUTI AND MILLE NNIUM BUSINESS PARK WERE NEW UNITS AND NOT EXPANSION OF T HE EXISTING UNITS AND, THEREFORE, THE PERIOD OF ELIGIBILITY OF DEDUCTION UNDER SECTION 10A OF THE ACT IS LIABLE TO BE CONSIDERED F ROM THE YEAR OF SETTING UP OF SUCH UNITS AND NOT FROM THE POINT OF TIME WHEN THE ORIGINAL UNIT WERE SET UP. 35. BRIEFLY STATED THE FACTS ARE THAT DURING THE CO URSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER HELD THAT THE THREE SECTION 10A ELIGIBLE UNITS AT CHINCHWAD, AKRUTI AND MILLENNIUM BUSINESS PARK WERE NOT NEW UNITS BUT ONLY EXPANSION OF THE EXISTING UNITS. AS PER THE ASSESSING OFFICER, CHINC HWAD UNIT WAS AN EXPANSION OF SOFTWARE AND CONVERSION UNIT; AKRUT I UNIT WAS CONSIDERED AS EXPANSION OF SIGMA UNIT AND MILLENNIU M BUSINESS PARK UNIT WAS CONSIDERED AS EXPANSION OF TTC UNIT. THE ASSESSING OFFICER TREATED THE AFORESAID UNITS AS ME RE EXPANSIONS OF THE EXISTING UNITS ON THE BASIS OF THE APPROVAL LETTERS RECEIVED FROM THE SOFTWARE TECHNOLOGY PARK OF INDIA (IN SHOR T STPI). ACCORDINGLY, THE ASSESSING OFFICER NOTED THAT THE P ROFITABILITY OF THE AFORESAID THREE UNITS WAS LIABLE TO BE COMBINED WITH THAT OF THE CORRESPONDING OLD UNITS. SIMILARLY, THE ASSESSI NG OFFICER ALSO CONCLUDED THAT THE ELIGIBLE PERIOD FOR DEDUCTION UN DER SECTION 10A OF THE ACT WITH RESPECT TO THE SAID THREE UNITS WOULD ALSO BE RECKONED FROM THE FIRST YEAR OF THE ELIGIBILITY OF THE CORRESPONDING OLD UNITS. AGGRIEVED WITH THE AFORESA ID STAND OF THE ASSESSING OFFICER, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS). 36. IN APPEAL, ASSESSEE CONTENDED THAT THE ACTION O F THE ASSESSING OFFICER WAS BAD IN LAW AND ON FACTS. IT WAS POINTED OUT THAT ALL THE THREE UNDERTAKINGS HAVE BEEN ESTABLISHED IN SOFTWAR E TECHNOLOGY PARK AND ARE REGISTERED WITH THE STPI; I T WAS ASSERTED THAT ALL THE THREE UNITS SATISFIED THE PRE SCRIBED CONDITIONS UNDER SECTION 10A(2) OF THE ACT. IN RESP ECT OF ALL THE THREE UNITS, IT WAS SUBMITTED THAT THEY WERE SEPARA TE AND DISTINCT FROM THE EXISTING UNDERTAKINGS. IT WAS POINTED OUT THAT THE NEW 6 UNITS ARE LOCATED AT LOCATIONS DIFFERENT FROM THEIR CORRESPONDING OLD UNITS; THAT THERE ARE SUBSTANTIAL INVESTMENTS I N LAND, BUILDING AND MACHINERY IN ALL THE THREE UNITS AS DISTINCT FR OM THE OLD UNITS. IT WAS ALSO SUBMITTED THAT THERE ARE SEPARATE PERMI SSION FOR CUSTOM BONDED WAREHOUSES AND ALSO SEPARATE SHOP & ESTABLISHMENT LICENSES FOR THE THREE UNITS. THE COM MISSIONER OF INCOME-TAX (APPEALS) HAS SINCE CONSIDERED THE SUBMI SSIONS OF THE ASSESSEE. AS PER THE COMMISSIONER OF INCOME-TAX (APPEALS), THE ASSESSEE FULFILLED ALL THE CONDITIONS PRESCRIBE D UNDER SECTION 10A(2) OF THE ACT. ACCORDING TO HIM, MERELY BECAUSE THE APPROVAL LETTER RECEIVED FROM STPI STATED THE SETTING UP OF THE THREE UNITS AS AN EXPANSION OF THE CORRESPONDING UNITS, CANNOT BE FATAL TO THE PLEA SET UP BY THE ASSESSEE THAT THE THREE UNITS IN QUESTION ARE INDEPENDENT AND DISTINCT UNITS LIABLE FOR AN INDEPE NDENT CLAIM OF DEDUCTION UNDER SECTION 10A, SINCE ALL THE PRESCRIB ED CONDITIONS HAVE BEEN FULFILLED. THE FOLLOWING DISCUSSION OF TH E 32 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 COMMISSIONER OF INCOME-TAX (APPEALS) IN PARA 3.2 OF THE ORDER IS WORTHY OF NOTICE: 3.2 (C) SECTION 10A(2) REQUIRES THE APPELLANT TO F ULFILL THREE CONDITIONS. THE CONDITIONS CONTAINED UNDER SUB-CLAU SE (I) & (IA) OF SECTION 10A(2) ARE POSITIVE RELATING TO MANUFACT URING OR PRODUCTION OF ARTICLE OR THING AND SUB-CLAUSE (II) & (III) OF SECTION 10A(2) SAY THAT SUCH UNDERTAKING IS NOT FORMED BY S PLITTING UP OR RECONSTRUCTION OF A BUSINESS ALREADY IN EXISTENCE O R IT IS NOT FORMED BY THE TRANSFER TO A NEW BUSINESS OR MACHINE RY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. AS IS CLEAR FROM T HE DETAILS SUBMITTED BY THE APPELLANT, THE THREE UNITS WHICH A RE SUBJECT MATTER OF APPEAL, ARE NOT FORMED BY THE TRANSFER OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. IN FACT ALL THE THREE UNITS ARE HAVING THEIR OWN PLANT AND MACHINERY HAVING SUB STANTIAL INVESTMENT AND SUBSTANTIAL TURNOVER AND ARE LOCATED IN DIFFERENT PREMISES, AS IS CLEAR FROM THE MATERIAL ON RECORD. THE ONLY POINT TO BE SEEN IN THE PRESENT CASE IS WHETHER THE THREE UNITS CAN BE SAID TO BE FORMED BY SPLITTING UP OR RECONSTRUCTION OF BUSINESS ALREADY IN EXISTENCE AND IN THIS REGARD RESPECTFULL Y FOLLOWING THE RATIO DECIDENDI OF HONBLE SUPREME COURT DECISION I N THE CASE OF TEXTILE MACHINERY CORPORATION LTD V CIT QUOTED SUPR A, I AM OF THE CONSIDERED VIEW THAT IT CANNOT BE SAID THAT THE THREE UNITS ARE FORMED BY THE SPLITTING UP OR RECONSTRUCTION OF BUS INESS ALREADY IN EXISTENCE. IT MAY ALSO BE MENTIONED THAT THE HON BLE SUPREME COURT HELD THAT BENEFIT OF SECTION 15C SHALL BE APP LICABLE EVEN IN CASE OF EXPANSION OF BUSINESS AND THE RELEVANT PORT ION OF DECISION OF HONBLE SUPREME COURT IN THE CASE OF TE XTILE MACHINERY CORPORATION AS CONTAINED IN PAGE 203 & 20 4 IN 107 ITR IS REPRODUCED AS UNDER: THERE IS GREAT SCOPE OF EXPANSION OF TRADE & INDUS TRY. THE FACT THAT AN ASSESSEE BY ESTABLISHMENT OF NEW INDUSTRIAL UNDERTAKING EXPANDS HIS EXISTING BUSINES S, WHICH HE CERTAINLY DOES, WOULD NOT, ON THAT SCORE, DEPRIVE HIM OF THE BENEFIT U/S 15C. EVERY NEW CREATION IN BUSINESS IS SOME KIND OF EXPANSION AND ADVANCEMENT. THE TRUE TEST IS NOT WHETHER THE NEW INDUSTRIAL UNDERTAKING CONNOTES EXPANSION OF THE EXISTING BUSI NESS OF THE ASSESSEE BUT WHETHER IT IS ALL THE SAME A NE AND IDENTIFIABLE UNDERTAKING SEPARATE AND DISTINCT FROM THE EXISTING BUSINESS. SINCE THE PROVISIONS OF LAW AS CONTAINED IN SECTION 15C(2)(I) AND 10A(2)(II) & (III) ARE IN EFFECT AND IN SUBSTANCE IN PARI MATERIA AS REGARDS THE POINT IN ISSUE INVOLVED IN THIS APPEAL, I AM OF THE CONSIDERED VIEW THAT THE RATIO OF HONB LE SUPREME COURT DECISION IN CASE OF TEXTILE MACHINERY CORPORA TION LTD. QUOTED SUPRA WHICH HAS BEEN FOLLOWED WITH RESPECT I N SEVERAL DECISIONS, APPLIES TO THE LAW AS CONTAINED IN SECTI ON 10A(2)(II) AND (III) OF THE INCOME-TAX ACT, 1961. IN VIEW OF THE FOREGOING DISCUSSION, TAKING INTO AC COUNT THE SUBMISSION OF THE APPELLANT AND MATERIAL ON REC ORD, IT IS HELD THAT THE THREE UNITS AT CHINCHWAD, AKRUTI AND MILLE NNIUM BUSINESS PARK FULFILL THE CONDITION LAID DOWN U/S 1 0A(2) OF THE INCOMETAX ACT, 1961 AND, THEREFORE, THE AOS CONCLU SION TO THE CONTRARY IN THIS REGARD, ARE HELD TO BE UNJUSTIFIED ON FACTS AND NOT IN ACCORDANCE WITH LAW. 33 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 37. BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTAT IVE HAS PRIMARILY REITERATED THE STAND OF THE ASSESSING OFF ICER IN SUPPORT OF THE CASE OF THE REVENUE. AS PER THE LEARNED DEPA RTMENTAL REPRESENTATIVE, THE APPROVAL FOR SETTING UP OF THE THREE UNITS CLEARLY BRING OUT THE FACT THAT THE NEW UNITS ARE M ERE EXPANSION OF THE EXISTING UNITS AND THEY CANNOT BE TREATED AS INDEPENDENT UNITS. IN THIS MANNER, THE ORDER OF THE COMMISSIONE R OF INCOME- TAX (APPEALS) IS SOUGHT TO BE ASSAILED. 38. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE HAS VEHEMENTLY POINTED OUT THAT THE COMMISSIONER OF INC OME-TAX (APPEALS) HAS FACTUALLY APPRECIATED THAT ALL THE TH REE UNITS ARE PHYSICALLY LOCATED AT DIFFERENT LOCATIONS AND THAT THEY ARE INDEPENDENT WITH SUBSTANTIAL INVESTMENTS. IT HAS AL SO BEEN POINTED OUT THAT MERELY BECAUSE THE GOVERNMENT APPR OVAL REFERS TO THE NEW UNITS AS AN EXPANSION OF THE EXISTING UN ITS CANNOT BE CONSTRUED AS NON-FULFILLMENT OF THE CONDITIONS PRES CRIBED 7 UNDER SECTION 10A(2) OF THE ACT. IT IS POINTED OUT THAT IT IS NOT A CASE OF EXPANSION OF AN EXISTING UNIT, BUT CERTAINL Y A CASE OF EXPANSION OF THE BUSINESS OF THE COMPANY AND THE SA ME CANNOT LEAD TO DENIAL OF DEDUCTION UNDER SECTION 10A, ESPE CIALLY WHEN THE THREE UNITS OTHERWISE FULFILL THE CONDITIONS PR ESCRIBED UNDER SECTION 10A OF THE ACT. THE LEARNED COUNSEL HAS ALS O REFERRED TO THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF JAYANT AGRO ORGANICS LTD AKHANDANAD, MUMBAI V JT.CI T IN ITA NO 5439/MUM/01 DATED 3.3.2006 WHEREIN SIMILAR ARGUMENT SET UP BY THE REVENUE WAS NOT FOUND COGENT TO DENY THE CLA IM OF DEDUCTION UNDER SECTION 10A OF THE ACT. 39. IN THE ABOVE BACKGROUND, WE HAVE CAREFULLY CONS IDERED THE RIVAL SUBMISSIONS. NOTABLY, THE ASSESSEE IS A COMPA NY ENGAGED IN THE BUSINESS OF DEVELOPMENT AND EXPORT OF COMPUTER SOFTWARE. IT HAS BEEN EXPLAINED BEFORE THE LOWER AUTHORITIES THA T THE BUSINESS OF THE ASSESSEE IS ON AN INCREASING SCALE. IT HAS E XPANDED ITS BUSINESS BY ESTABLISHING NEW UNDERTAKINGS AT DIFFER ENT LOCATIONS. IT IS EXPLAINED THAT THE TURNOVER OF THE COMPANY HA S SUBSTANTIALLY INCREASED OVER A PERIOD OF TIME WITH THE INCREASE I N THE NUMBER OF EMPLOYEES, ETC. AS ALSO NUMBER OF LOCATIONS AT W HICH IT OPERATES THROUGH DIFFERENT UNITS. IN THIS CONTEXT, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD TREATED THREE U NITS, NAMELY, CHINCHWAD UNIT, AKRUTI UNIT AND MILLENNIUM BUSINESS PARK UNIT AS SEPARATE INDEPENDENT UNITS FOR THE PURPOSES OF D EDUCTION UNDER SECTION 10A OF THE ACT. THE ASSESSING OFFICER NOTED THAT APPROVAL RECEIVED FROM STPL FOR CHINCHWAD UNIT REFL ECTED IT AS AN EXPANSION OF SOFTWARE CONVERSION UNIT. SIMILARLY , APPROVAL FOR AKRUTI UNIT AND MILLENNIUM BUSINESS PARK UNIT REFLE CTED THEM AS EXPANSIONS OF SIGMA UNIT AND TTC UNIT RESPECTIVELY. ON THIS SINGULAR BASIS, THE ASSESSING OFFICER TREATED THE T HREE UNITS AS MERE EXPANSIONS AND NOT INDEPENDENT UNITS. AS A RES ULT THEREOF, THE ELIGIBILITY PERIOD FOR CLAIM OF DEDUCTION UNDER SECTION 10A WAS ALSO RECKONED FROM THE FIRST YEAR OF THE ELIGIB ILITY OF THE CORRESPONDING OLD UNITS. THE COMMISSIONER OF INCOME -TAX (APPEALS) HAS, HOWEVER, APPRECIATED THE PLEA OF THE ASSESSEE AND HAS HELD THAT THE THREE UNITS FULFILLED THE CONDITI ONS LAID DOWN UNDER SECTION 10A(2) OF THE ACT AND ARE ACCORDINGLY ELIGIBLE FOR THE CLAIM OF BENEFITS UNDER SECTION 10A INDEPENDENT OF THE OLD UNITS. 34 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 40. SECTION 10A OF THE ACT PROVIDES FOR A DEDUCTION IN RESPECT OF PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM EXPORT OF COMPUTER SOFTWARE, ETC. FOR A PERIOD OF 10 CONSECUT IVE ASSESSMENT YEARS, SUBJECT OF-COURSE TO FULFILLMENT OF THE CONDITIONS SPECIFIED BY SUB-SECTION (2) OF SECTION 10A OF THE ACT. THE CONDITIONS PRESCRIBED IN SUB-SECTION (2) OF SEC TION 10 HAVE BEEN NOTICED BY THE COMMISSIONER OF INCOME-TAX (APP EALS), NAMELY, THAT THE UNDERTAKING HAS TO BEGIN MANUFACTU RE OR PRODUCE COMPUTER SOFTWARE DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON OR AFTER THE FIRS T DAY OF APRIL, 1994 IN ANY SOFTWARE TECHNOLOGY PARK; AND TH AT THE UNDERTAKING IS NOT FORMED BY SPLITTING UP OR RECONS TRUCTION OF THE BUSINESS ALREADY IN EXISTENCE; AND, THAT THE UN DERTAKING IS NOT FORMED BY TRANSFER TO A NEW BUSINESS OF MACHINE RY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. WE HAVE CAREFULLY PERUSED THE RELEVANT CONDITIONS AND FIND THAT THE COMMISSIONER OF INCOME- TAX (APPEALS) HAS RIGHTLY CONCLUDED THAT ALL THE TH REE ASPECTS ARE FULFILLED BY THE THREE UNITS IN QUESTION. THE COMMI SSIONER OF INCOME-TAX (APPEALS) HAS DISCUSSED THE PHYSICAL LOC ATION OF EACH UNIT, THE INVESTMENT IN FIXED ASSETS OF EACH UNIT A S WELL AS THE TURNOVER OF EACH UNIT AND ON SUCH FACTUAL ANALYSIS, IT HAS BEEN CONCLUDED THAT THE THREE UNITS ARE SEPARATE AND DIS TINCT FROM THE EXISTING UNITS REFERRED BY THE ASSESSING OFFICER. O N THESE FACTUAL ASPECTS, WE FIND THAT THERE IS NO COGENT MATERIAL B ROUGHT OUT BY THE REVENUE TO NEGATE THE FINDINGS OF THE COMMISSIO NER OF INCOME-TAX (APPEALS). 41. THE ONLY PLEA OF THE REVENUE IS THAT IN THE APP ROVALS GRANTED BY THE STPI, THE THREE UNITS HAVE BEEN REFERRED TO AS AN EXPANSION OF THE CORRESPONDING OLD UNITS. THE MOOT QUESTION IS AS TO WHETHER SUCH A PLEA OF THE REVENUE IS POTENT TO EFFECT THE ASSESSEES ENTITLEMENT FOR DEDUCTION UNDER SECTION 10A OF THE ACT. SIMILAR PLEA OF THE REVENUE IN THE CONTEXT OF SECTION 10B OF THE ACT WAS A SUBJECT MATTER OF CONSIDERATION BY OU R CO-ORDINATE BENCH IN THE CASE OF JAYANT AGRO ORGANICS LTD. AKHA NDANAD, (SUPRA) WHEREIN FOLLOWING DISCUSSION IS WORTHY OF N OTICE: 8. REVENUE HAS VEHEMENTLY CONTENDED THAT THERE IS NO INDEPENDENT GOVERNMENT APPROVAL OF THE NEW UNIT AND ALL THAT THE GOVERNMENT HAS PERMITTED IS ENHANCEMENT IN CAPA CITY OF THE EXISTING UNIT. AS EVIDENT FROM THE LAND ALLOTMENT L ETTER DATED 19TH JULY, 1995 ISSUED BY THE GUJARAT INDUSTRIAL DE VELOPMENT CORP. LTD. IT IS CLEAR THAT THE LAND ALLOTTED FOR T HE NEW UNIT IS PLOT #624/1 AND 2, AND 625 TO 627 WHEREAS THE EXISTING PL ANT WAS IN PLOT 3 602. THE PRODUCTION OF 12 HYDROXY STEARIC AC ID IS AUTHORIZED BY THE LETTER DT 27TH JANUARY 1995 WHICH STATES THAT THE GOVERNMENT HAS TAKEN NOTE OF ASSESSEES WISH TO MANUFACTURE HYDROXY STEARIC ACID ALSO BY WAY OF FOR WARD INTEGRATION AND AMENDED THE LETTER OF PERMISSION TO INCLUDE 12 HYDROXY STEARIC ACID OF 12,000 MT IN THE VERY NEXT SENTENCE. IT IS OBSERVED THAT GOVT ALSO APPROVES OF YOUR 8 REQUEST FOR THE IMPORT OF ADDITIONAL CAPITAL GOODS WORTH RS 550 LAK HS FOR THE PROJECT. THAT CLEARLY DEMONSTRATES THAT THE PRODUC TION OF HYDROXY STEARIC ACID OF 12,000 MT WAS VIEWED BY THE GOVERNMENT AS AN INDEPENDENT PROJECT. IT WAS NOT A CASE FOR PURCHASE OF ADDITION CAPITAL GOODS FOR THE EXISTING PROJECT. THE ASSESSEE IS IRRESPECTIVE OF THE NUMBER OF UNITS, IS ONE OF ARTIFICIAL JURIDICAL PERSON. THEREFORE, A COMBINED PERMISSION, WHICH INVOLVES SETTING UP FOR DIFFERENT UNITS, IS QUITE I N ORDER. THE FACT OF AMENDMENT OF EARLIER PERMISSION OR OF GRANT OF S EPARATE 35 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 PERMISSIONS, IS NOT REALLY RELEVANT. WHAT IS REALLY TO BE EXAMINED IS WHETHER THE UNITS ARE INDEPENDENT OF UNIT AND WH ETHER THE UNITS ARE COVERED BY THE PERMISSION OR NOT. IN OUR HUMBLE UNDERSTANDING IT MEETS BOTH THE TESTS. WE HAVE ALSO NOTED THAT IT IS NOT AN STATUTORY REQUIREMENT THAT THERE HAS TO B E SEPARATE PERMISSION FOR EACH UNIT AND THEREFORE JUST BECAUSE THE PERMISSION IS GRANTED BY THE GOVERNMENT BY WAY OF A MENDING THE ORIGINAL PERMISSION LETTER DOES NOT AFFECT THE ELIGIBILITY FOR DEDUCTION U/S 10B IN ANY MANNER. 42. FROM THE AFORESAID, IT IS QUITE CLEAR THAT THE MANNER IN WHICH THE APPROVAL HAS BEEN GRANTED IS NOT RELEVANT TO EX AMINE THE ASSESSEES CASE FOR CLAIM OF DEDUCTION UNDER SECTIO N 10A OF THE ACT WITH RESPECT TO THE THREE UNITS. WHAT IS REALLY TO BE EXAMINED IS AS TO WHETHER THE THREE UNITS ARE INDEPENDENT UN ITS AND THAT THEY FULFILL THE CONDITIONS PRESCRIBED UNDER SECTIO N 10A(2) OF THE ACT. THERE IS NO PROHIBITION THAT AN EXPANSION IN T HE SAME LINE OF BUSINESS ACHIEVED BY SETTING UP A NEW INDEPENDENT U NIT WOULD LEAD TO DENIAL OF DEDUCTION UNDER SECTION 10A OF TH E ACT. IN THIS BACKGROUND, IN THE EARLIER PART OF THIS ORDER WE HA VE ALREADY NOTED WITH APPROVAL THE FACTUAL FINDINGS OF THE COM MISSIONER OF INCOME-TAX (APPEALS) THAT THE THREE UNITS ARE SEPAR ATE AND INDEPENDENT PRODUCTION UNITS AND THE SAME CANNOT BE TREATED AS MERE EXPANSIONS OF THE EXISTING UNDERTAKINGS. THERE FORE, THE MERE FACT THAT THE REQUISITE PERMISSIONS FROM STPI REFER THEM AS EXPANSIONS OF THE EXISTING UNITS, WOULD NOT DIS-ENT ITLE THE ASSESSEE FROM THE CLAIM OF DEDUCTION UNDER SECTION 10A OF THE ACT. IN THIS VIEW OF THE MATTER, WE FIND NO ERROR I N THE APPROACH OF THE COMMISSIONER OF INCOME-TAX (APPEALS) IN HAVI NG ALLOWED THE CLAIM OF ASSESSEE FOR THE BENEFITS UNDER SECTIO N 10A OF THE ACT ON THE THREE UNITS TREATING THE SAME AS INDEPEN DENT UNITS. THUS, GROUND NOS 1 & 2 OF THE APPEAL OF THE REVENUE ARE DISMISSED. 13. THERE BEING NO CHANGE IN THE FACTS AND CIRCUMST ANCES OF THE CASE, ON THE ABOVE PARITY OF REASONING, WE FIND NO ERROR IN THE APPROACH OF THE COMMISSIONER OF INCOME-TAX (APPEALS) IN HAVING ALLO WED THE CLAIM OF ASSESSEE FOR THE BENEFITS UNDER SECTION 10A OF THE ACT ON THE THREE UNITS TREATING THE SAME AS INDEPENDENT UNITS. THUS, GROUN D NOS 1 TO 4 OF THE APPEAL OF THE REVENUE ARE DISMISSED. 13. FURTHER THE HONBLE BOMBAY HIGH COURT IN INCOME TAX APPEAL (L) NO.1820/2012 VIDE JUDGMENT DATED 28.02.2013 HAD DISMISSED THE APPEAL OF THE REVENUE AGAINST THE ORDER OF TRIBUNAL , IN TURN FOLLOWING THE RATIO LAID DOWN BY THE HONBLE HIGH COURT IN IN COME TAX APPEAL NO.1148/2012 RELATING TO ASSESSMENT YEAR 2002-03, J UDGMENT DATED 28.02.2013. 14. THE ISSUE ARISING IN THE GROUNDS OF APPEAL NO.2 AND 3 IS IDENTICAL TO THE ISSUE BEFORE THE TRIBUNAL IN ASSES SEES OWN CASE IN THE EARLIER YEARS AND SINCE THERE IS NO CHANGE IN F ACTUAL ASPECTS, WE UPHOLD THE ORDER OF CIT(A) IN ALLOWING THE CLAIM OF DEDUCTION UNDER SECTION 10A OF THE ACT IN RESPECT OF THREE UNITS I. E. CHINCHWAD, AKURDI AND MILLENNIUM BUSINESS PARK AS THE SAME WERE INDEP ENDENT UNITS. THE GROUNDS OF APPEAL NO.2 AND 3 RAISED BY THE REVE NUE IN THIS REGARD ARE DISMISSED. 15. THE REVENUE VIDE GROUND OF APPEAL NO.6 IS AGGRI EVED BY THE ORDER OF CIT(A) IN HOLDING THE ASSESSEE ELIGIBLE FO R DEDUCTION UNDER SECTION 10A OF THE ACT IN RESPECT OF 8 OLD UNDERTAK INGS. 36 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 16. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE A SSESSEE POINTED OUT THAT THE TRIBUNAL IN ASSESSMENT YEARS 2 002-03 AND 2003- 04 AND ALSO IN ASSESSMENT YEAR 2004-05 HAD ALLOWED THE CLAIM OF ASSESSEE IN RESPECT OF BALANCE SAID UNITS, WHICH WE RE ESTABLISHED UP TO ASSESSMENT YEAR 2004-05. 17. FOLLOWING THE SAME PARITY OF REASONING, WE FIND NO MERIT IN THE GROUND OF APPEAL NO.6 RAISED BY THE REVENUE IN RELA TION TO THE ELIGIBILITY OF DEDUCTION UNDER SECTION 10A OF THE A CT VIS--VIS INDEPENDENT UNITS ESTABLISHED IN EARLIER YEARS BY T HE ASSESSEE. THE GROUND OF APPEAL NO.6 RAISED BY THE REVENUE IS THUS , DISMISSED. 18. NOW, COMING TO THE GROUNDS OF APPEAL NO.4 AND 5 RAISED BY THE REVENUE IN RESPECT OF TWO NEW UNITS ESTABLISHED AT BANGALORE AND SPZ 47 ESTABLISHED AT MUMBAI. THE CONTENTION OF TH E ASSESSEE BEFORE US WAS THAT THE SAID UNITS HAVE BEEN ESTABLI SHED BY THE ASSESSEE AS A SEPARATE UNDERTAKING WHERE THE ACTIVI TY CARRIED ON BY THE ASSESSEE IS IN RELATION TO THE DIFFERENT PROJEC TS. THE PROFITS OF THE SAID UNITS BEING SEPARATE, INDEPENDENT UNDERTAKINGS WERE CLAIMED TO BE ELIGIBLE FOR EXEMPTION UNDER SECTION 10A OF THE ACT. THE CASE OF THE ASSESSEE BEFORE US IS THAT FRESH STPI APPROVAL WAS TAKEN BY THE ASSESSEE, COPY OF WHICH IS PLACED AT PAGES 135 TO 1 39 OF THE PAPER BOOK AND REGISTRATION UNDER CUSTOM BONDING AND SHOP ACT WAS ALSO DONE. SIMILARLY, IN RESPECT OF SPZ 47 UNIT, THE AS SESSEE OBTAINED THE STPI APPROVAL AND ALSO THE REGISTRATION UNDER CUSTO M BONDING AND SHOP ACT. THE EMPLOYEES WORKING UNDER EACH OF THE UNITS WERE SEPARATE. IT WAS ADMITTED BY THE LEARNED AUTHORIZE D REPRESENTATIVE FOR THE ASSESSEE THAT THOUGH SOME OF OLD EMPLOYEES WERE TRANSFERRED TO THE NEW UNIT ESTABLISHED BY THE ASSESSEE, BUT TH E PERCENTAGE OF TRANSFERRED EMPLOYEES VIS--VIS TOTAL EMPLOYEES WAS WITHIN CRITERIA LAID DOWN BY THE CBDT. SECTION 10A(2)(III) OF THE ACT PROHIBITS FORMATION OF NEW UNITS BY WAY OF TRANSFER OF PREVIO USLY USED PLANT & MACHINERY TO THE NEW UNIT. HOWEVER, THE EXPLANATOR Y MEMORANDUM TO THE SAID SECTION DOES NOT EXPRESS ADDITIONAL OBJ ECTIVE OF EMPLOYMENT GENERATION. THERE IS NO LEGAL REQUIREME NT OF HAVING CERTAIN PERCENTAGE OF NEW EMPLOYEES IN THE NEW UNIT IN SECTION 10A OF THE ACT. HOWEVER, CBDT HAS CLARIFIED VIDE CIRCULAR NO.14/2014, DATED 08.10.2014 THAT TRANSFER OR RE-DEPLOYMENT OF TECHNICAL MANPOWER FROM THE EXISTING UNITS TO THE NEW UNITS L OCATED AT SEZ IN THE FIRST YEAR OF COMMENCEMENT OF BUSINESS, SHALL N OT CONSTRUE AS TO SPLITTING UP OR RE-CONSTRUCTION OF THE EXISTING BUS INESS, PROVIDED THE NUMBER OF TECHNICAL MANPOWER SO TRANSFERRED AT THE END OF THE FINANCIAL YEAR DOES NOT EXCEED 50% OF THE TOTAL TEC HNICAL MANPOWER ACTUALLY ENGAGED IN THE DEVELOPMENT OF SOFTWARE OR IT ENABLED PROJECTS IN THE NEW UNIT. AS PER DETAILS FURNISHED BY THE ASSESSEE IN THE NEW UNIT AT BANGALORE, THE NEW EMPLOYEES EMPLOY ED WERE 289 AND THE TRANSFERRED EMPLOYEES WERE 112 I.E. TOTAL E MPLOYEES 401 PERCENTAGE AND PERCENTAGE OF TRANSFERRED EMPLOYEES TO THE TOTAL EMPLOYEES WAS 27.93%. IN RESPECT OF UNIT AT SPZ 47 , THE NEW EMPLOYEES TOTALED TO 65 ALONG WITH TRANSFERRED EMPL OYEES OF 6, RESULTING IN TOTAL EMPLOYEES OF 71 PERCENTAGE AND T HE PERCENTAGE OF TRANSFERRED EMPLOYEES TO THE TOTAL EMPLOYEES WAS 8. 45%. HENCE FOR BOTH THE UNITS EVEN IF WE CONSIDER THE TRANSFERRED EMPLOYEES, BUT THE SAME IS WITHIN THE PARAMETERS LAID DOWN BY THE CBDT VIDE CIRCULAR DATED 08.10.2014 AND HENCE TRANSFER OF OLD EMPLOYEE S TO THE NEW UNITS CANNOT BE CONSTRUED AS SPLITTING UP OR RE-CON STRUCTION OF EXISTING BUSINESS. ANOTHER OBJECTION RAISED BY THE ASSESSIN G OFFICER IN RESPECT OF UNIT AT SPZ 47 WAS THAT IT WAS A SYSTEM HUB. HOWEVER, THE PLEA OF THE ASSESSEE BEFORE US AND THE CIT(A) WAS T HAT IT WAS ENGAGED IN PROVIDING REMOTE INFRASTRUCTURE MANAGEME NT THROUGH 37 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 TECHNOLOGY SOFTWARE AND EQUIPMENT AND WITH THE SAID SOFTWARE, THE ASSESSEE COULD DIRECTLY ACCESS FROM INDIA THE SOFTW ARE AND SYSTEMS AT CLIENTS LOCATION AND CARRIED OUT NECESSARY DE-BU GGING, PATCH-WORK AND ALSO PROVIDING SOFTWARE SUPPORT. THE UNIT WAS ENGAGED IN THE DEVELOPMENT AND MAINTENANCE OF THE SYSTEM SOFTWARE. THE CONCLUSION OF THE CIT(A) WAS THAT THE SYSTEM WAS EN GAGED IN DIFFERENT LINE OF SOFTWARE BUSINESS AND WAS NOT A SYSTEM HUB OR SERVER UNIT PROVIDING SUPPORT TO THE BUSINESS OPERATIONS BY OTH ER UNITS. THE SAID FINDING OF THE CIT(A) HAS NOT BEEN CONTROVERTED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE AND IN VIEW THEREOF, WE FIND NO MERIT IN THE OBSERVATIONS OF THE ASSESSING OFFICER IN THIS REGARD. FURTHER, THE ASSESSEE HAD ALSO FURNISHED O N RECORD THE INVESTMENT MADE IN PLANT & MACHINERY IN BOTH THE UN DERTAKINGS WHERE BOTH THE UNITS HAVE COMPLIED WITH THE CONDITIONS PR ESCRIBED UNDER SECTION 10A OF THE ACT AND ARE INDEPENDENT AND SEPA RATE UNDERTAKINGS WORKING FROM DIFFERENT LOCATIONS WITH NEW PLANT & MACHINERY, HAVING ADEQUATE SKILLED STAFF TO CARRY O UT ITS OPERATIONS AND ARE INDEPENDENTLY VIABLE UNDERTAKINGS EARNING P ROFITS / LOSSES, WHICH ARE ATTRIBUTABLE TO THE BUSINESS CARRIED ON B Y THE ASSESSEE IN THE SEPARATE UNITS. THE SAID UNITS ARE ELIGIBLE FO R CLAIM OF DEDUCTION UNDER SECTION 10A OF THE ACT SINCE THE SAME WERE NO T FORMED BY SPLITTING UP OR RECONSTRUCTION OF BUSINESS ALREADY IN EXISTENCE. FURTHER, THE TRIBUNAL IN ASSESSEES OWN CASE FROM A SSESSMENT YEAR 2002-03 ONWARDS HAS BEEN GRANTING THE DEDUCTION UND ER SECTION 10A OF THE ACT TO EACH OF THE UNITS ESTABLISHED BY THE ASSESSEE FROM YEAR TO YEAR HOLDING THE SAME TO BE A SEPARATE UNIT. FO LLOWING THE SAME LINE OF REASONING, WE UPHOLD THE ORDER OF CIT(A) IN HOLDING THE ASSESSEE TO BE ELIGIBLE FOR THE DEDUCTION UNDER SEC TION 10A OF THE ACT IN RESPECT OF ITS BANGALORE UNIT AND THE UNIT AT SP Z 47, MUMBAI. THE GROUNDS OF APPEAL NO.4 AND 5 RAISED BY THE REVENUE ARE THUS, DISMISSED. 37. SINCE IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT NO NEW UNDERTAKINGS WERE SET UP BY THE ASSESSEE IN THE CURRENT YEAR AND DEDUCTION WAS ALLOWED IN RESPECT OF UNDERTAKINGS ESTABLISHED UPTO A.Y. 2005-06, THEREFORE, WE RESTORE THIS ISSUE TO THE FILE OF THE AO WHO SHALL VERIFY THE RECORDS AND IN CASE NO NEW UNDERTAKINGS ARE SET UP DU RING THE IMPUGNED ASSESSMENT YEAR, THEN FOLLOWING THE ORDER OF THE TRIBUNAL ALLOW DEDUCTION U/S.10A IN RESPECT OF VARIOUS ELIGIBLE UNDERTAKINGS OF THE COMPANY. NEEDLESS TO SAY, THE AO SH ALL GIVE DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GR OUND OF APPEAL NO.3 BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 38 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 38. GROUNDS OF APPEAL NO.4 BY THE ASSESSEE READS AS UNDER : 4. IN RESPECT OF INVOKING PROVISIONS OF SECTION 10A(7) READ WITH SECTION 80IA(10) ON PROTECTIVE BASIS: A. IN DRAWING CONCLUSION OF EARNING MORE THAN AVERAGE P ROFITS ON THE BASIS OF COMPARABLES USED IN TRANSFER PRICING ANALYS IS HAVING DIFFERENT PURPOSE B. IN HOLDING THAT PROFIT OF RS. 69,23,94,757 IS MORE TH AN ORDINARY PROFIT AND HENCE NOT ELIGIBLE FOR DEDUCTION U/S 10A, WITHOUT ESTABLISHING THE ORDINARY PROFITS IN THE BUSINESS OF THE COMPANY C. IN NOT ESTABLISHING ANY ARRANGEMENT BETWEEN THE ASSESSEE AND OTHER PERSONS SO AS TO PRODUCE TO THE ASSESSEE MORE THAN ORDINARY PROFITS D. IN HOLDING THAT THE CLOSE BUSINESS CONNECTION BETWEEN T HE GROUP COMPANIES HAS ENABLED THE ASSESSEE COMPANY TO SHOW MORE THAN ORDINARY PROFITS IN RESPECT OF 10A UNITS/ E. IN RESTRICTING DEDUCTION U/S 10A AT RS. 180,50,93,723 AS AGAINST CLAIM OF THE COMPANY AT RS. 249,74,88,480. 39. FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO IN THE DR AFT ASSESSMENT ORDER DID NOT ALLOW THE DEDUCTION U/S.10A IN RESPECT OF VARIOUS ELIGIBLE UNDERTAKINGS OF THE COMPANY. HOWEVER, ON PROTECTIVE BASIS, HE PROPOSED TO INVOKE THE PROVISIONS OF SECTION 10A(2) R.W.S. 80IA(10). AS PER THE PRES ENT REVIEW REPORT SUBMITTED BY THE ASSESSEE THE AVERAGE P ROFIT MARGIN OF THE SELECTED COMPARABLE COMPANIES WAS 14.52% AS AGAINST THE PROFIT MARGIN OF 23.95% OF THE ASSESSEE. THE A O ADOPTED THE PROFIT LEVEL OF 14.52% AS ORDINARY PROFIT LEVEL AND THE ASSESSEES PROFIT OVER AND ABOVE THE 14.52% MARGIN O F RS.69,23,94,757/ WAS PROPOSED TO BE TREATED AS MORE THA N ORDINARY PROFIT AND SALES NOT ENTITLED TO DEDUCTION U/S.10A . CONSEQUENTLY, THE AO DETERMINED THE ORDINARY PROFIT WHICH MIGHT BE EXPECTED IN RESPECT OF BUSINESS OF THE 10A UNIT S AT RS.180,50,93,723/- AS AGAINST THE CLAIM OF RS. 249,74,88,480/- 39 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 IN THE RETURN OF INCOME. THE DRP ALSO UPHELD THE ACTION O F THE AO. 40. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AO DENIED DEDUCTION U/S.10A IN CASE OF ALL, INVOKED EXCEPT BPO UNDERTAKING, HOWEVER ON PROTECTIVE BASIS. HE INVOKED THE PROVISIONS OF SECTION 10A(7) R.W.S. 80IA(40. HE SUBMITTED T HAT ALL THE 3 ASSOCIATED ENTERPRISES ARE FOREIGN COMPANIES WHO LLY OWNED SUBSIDIARIES IN USA, UK AND GERMANY. BEING FOREIGN COMPANIES THEY ARE NOT ASSESSED TO INCOME TAX IN INDIA . THEY ARE MAINLY MARKETING ARMS. HE SUBMITTED THAT NO ARRAN GEMENT WAS PROVED BY THE TPO WHICH PRODUCED EXCESS PROFIT. H E SUBMITTED THAT THE DRP IN ASSESSEES OWN CASE FOR A.Y. 2 010-11 AND 2011-12 HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSES SEE. EVEN THE VARIOUS BENCHES OF THE TRIBUNAL HAVE ALSO DECIDE D THE ISSUE IN FAVOUR OF THE ASSESSEE, THEREFORE, THE GROUNDS RA ISED BY THE ASSESSEE SHOULD BE ALLOWED. HE RELIED ON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. HONEYWELL AUTOMATION INDIA LTD. VS. DCIT VIDE ITA NO.18/PN/2011 ORD ER DATED 21-02-2015 FOR A.Y. 2006-07. 41. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HA ND HEAVILY RELIED ON THE ORDER OF THE AO. 42. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AUTHORITIES BELOW AN D THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO G ONE THROUGH THE VARIOUS DECISIONS CITED BEFORE US. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE DRP 40 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN ITS OWN CASE FOR A.YRS. 2010-11 AND 2011-12 WHICH READS AS UNDER : 5.6 FINDINGS : THIS ISSUE HAS BEEN ADJUDICATED BY THE DRP IN ASSESSEES OWN CASE FOR A.Y. 2010-11. IT HAS BEEN HELD BY THE DRP IN A .Y. 2010-11 THAT THE NECESSARY PRE-CONDITION FOR INVOKING SECTION 10A( 7) AND 10AA(9) ARE NOT SATISFIED. CONSIDERING THAT THERE IS N O CHANGE IN THE FACTUAL POSITION DURING THE RELEVANT YEAR, THIS I SSUE IS AGAIN DECIDED IN FAVOUR OF THE ASSESSEE. 43. WE FURTHER FIND THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. HONEYWELL AUTOMATION INDIA PVT. HAS HELD AS UNDER : 22. BEFORE WE PROCEED FURTHER, IT WOULD BE APPROPR IATE TO EXAMINE THE SCOPE AND INTENT OF THE PROVISIONS OF SECTI ON 10A(7) R.W.S. 80-IA(10) OF THE ACT. IN THIS CONTEXT, A REFER ENCE HAS BEEN MADE TO THE CBDT CIRCULAR NO.308 DATED 29.06.2008 W HEREIN THE REASONS FOR INTRODUCTION OF SUB-SECTION (7) TO SECTION 1 0A OF THE ACT HAS BEEN EXPLAINED. IN-PARTICULAR, REFERENCE HAS BEEN MADE TO THE FOLLOWING CONTENTS OF THE CIRCULAR :- THE PROVISIONS OF SUB-SECTION (8) AND SUB-SECTION (9) OF SECTION 80-I WILL ALSO APPLY IN RELATION TO THE INDUSTRIAL UN DERTAKING REFERRED TO IN THE NEW SECTION 10A AS THEY APPLY IN R ELATION TO AN INDUSTRIAL UNDERTAKING REFERRED TO UNDER SECTION 80-I . UNDER THE APPLIED SUB-SECTION (8) OF SECTION 80-I, IT IS PROVIDED THAT WHERE AN ASSESSEE HAS SEVERAL UNITS, SOME IN THE FREE TRADE ZONE AND SOME OUTSIDE, THE PROFITS OF THE UNIT IN THE FREE TRADE ZO NE WILL BE COMPUTED AFTER TAKING THE COST OF THE GOODS TRANSFERRE D TO OR FROM THE UNIT ON THE BASIS OF THE MARKET VALUE OF SUCH GOOD S. THE APPLIED SUB-SECTION (9) OF SECTION 80-I EMPOWERS THE IN COME-TAX OFFICER TO DETERMINE THE REASONABLE PROFITS THAT COUL D BE ATTRIBUTED TO THE QUALIFYING UNDERTAKING IN THE FRE E TRADE ZONE IN CASES WHERE, OWING TO THE CLOSE CONNECTION BETWEEN THE ASSESSEE AND ANY OTHER PERSONS OR FOR ANY OTHER REASON, THE COU RSE OF THE BUSINESS IS SO ARRANGED THAT THE INDUSTRIAL UNDERTAKING SET UP IN THE FREE TRADE ZONE DERIVES MORE THAN ORDINARY PROFI TS WHICH MAY BE EXPECTED TO ARISE IN THAT BUSINESS. THIS PROVISION H AS BEEN MADE WITH A VIEW TO AVOIDING ABUSE OF THE NEW TAX CO NCESSIONS BY MANIPULATION OF PROFITS BETWEEN ASSOCIATE CONCERNS OR D IFFERENT UNITS OF THE SAME CONCERN. [UNDERLINED FOR EMPHASIS BY US] 41 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 23. QUITE CLEARLY, THE PROVISIONS OF SECTION 10A(7) OF THE ACT INTEND TO PLUG ABUSE OF TAX CONCESSION BY MANIPULATION OF PRO FITS BETWEEN ASSOCIATED CONCERNS OR BETWEEN DIFFERENT UNITS OF THE SA ME CONCERN. THE OBJECTIVE OF THE AFORESAID PROVISION IS T HAT THE TAX CONCESSIONS ARE NOT ABUSED BY MANIPULATION OF PROFITS. I N OUR CONSIDERED OPINION, THE AFORESAID EXPLANATION IN THE CBDT CIRCULAR (SUPRA) SIGNIFIES THE LEGISLATIVE INTENT AND I T IS ALSO MANIFESTED IN THE LANGUAGE OF SECTION 10A(7) R.W.S. 80 -IA(10) OF THE ACT. WE SAY SO FOR THE REASON THAT THE PHRASEOLOGY OF SECTION 80-IA(10) OF THE ACT ITSELF SUGGESTS THAT THE PROFITS AN D GAINS OF AN ELIGIBLE BUSINESS CANNOT BE TINKERED WITH BY THE ASSESSING OFFICER MERELY BECAUSE THEY ARE MORE THAN THE ORDINARY PROFI TS OR THAT THEY ARE QUITE HIGH. THE EXISTENCE OF SUBSTANTIAL OR M ORE THAN ORDINARY PROFITS BY ITSELF DOES NOT SUFFICIENTLY EMPOWE R THE ASSESSING OFFICER TO DISREGARD THEM AND DETERMINE THE PR OFITS WHICH HE MAY CONSIDER TO BE REASONABLY DEEMED TO HAVE BEEN DERIVED THEREFROM. THE PRESENCE OF THE EXPRESSION TH E COURSE OF BUSINESS IS SO ARRANGED . THAT THE BUSINESS TRANSACTED PRODUCES TO THE ASSESSEE MORE THAN ORDIN ARY PROFITS IS SIGNIFICANT AND ITS UNDERSTANDING HAS TO BE P REFACED BY THE LEGISLATIVE OBJECTIVE OF PLUGGING ABUSE OF THE TA X CONCESSIONS GRANTED U/S 10A OF THE ACT BY MANIPULATION OF PROFI TS BETWEEN ASSOCIATED PARTIES. IN OTHER WORDS, THE IMPORT OF THE E XPRESSION SO ARRANGED HAS TO BE READ IN CONJUNCTION WITH THE LEGISLATIVE INTENT THAT THERE SHOULD NOT BE ANY ABUSE OF TAX CONC ESSION BY MANIPULATION OF PROFITS. THEREFORE, SECTION 10A(7) R. W.S. 80- IA(10) OF THE ACT CAN BE INVOKED ONLY WHERE IT IS SHO WN THAT THE COURSE OF BUSINESS IS SO ARRANGED WHICH REFLECTS AN ABUSE OF TAX CONCESSION WHEREBY THE BUSINESS TRANSACTED BETWEEN TWO EN TITIES IS SO ARRANGED, WHICH PRODUCES TO THE ASSESSEE MORE THAN T HE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH ELIGIBLE BUSINESS. THE EMPHASIS IS TO ESCHEW THOSE MORE THAN THE O RDINARY PROFITS WHICH ARE AS A RESULT OF A BUSINESS BETWEEN TWO CLOSELY CONNECTED CONCERNS HAVING BEEN ARRANGED WITH THE INT ENT OF ABUSE OF THE TAX CONCESSION. OSTENSIBLY, IN THE PRESENT CASE, T HE REVENUE WOULD HAVE TO JUSTIFY THAT THE COURSE OF BUSINESS BETWEE N ASSESSEE AND THE ASSOCIATED ENTERPRISES HAS BEEN SO ARRANGED WHI CH PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS W HICH MIGHT BE EXPECTED TO ARISE IN SUCH ELIGIBLE BUSINESS WI TH THE INTENTION OF ABUSING THE TAX CONCESSION GRANTED IN SECT ION 10A OF THE ACT. THE MERE EXISTENCE OF (I) A CLOSE CONNECTION BETWEEN THE ASSESSEE AND THE OTHER PERSON; AND, (II) MORE THAN ORDIN ARY PROFITS IS NOT SUFFICIENT TO JUSTIFY INVOKING OF SECTION 80-IA( 10) OF THE ACT IN THE ABSENCE OF THERE BEING ANY MATERIAL TO SAY TH AT THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED TO ABUSE THE TAX CONCESSIONS GRANTED U/S 10A OF THE ACT BY MANIPULATING PROFITS BETWEEN ASSOCIATED PERSONS. OSTENSIBLY, THE SAME IS REQUIRE D TO BE DEMONSTRATED ON THE BASIS OF A COGENT MATERIAL AND EVI DENCE. IN OTHER WORDS, THE PRESENCE OF THE EXPRESSION SO ARRANGED HAS TO BE UNDERSTOOD IN THE CONTEXT OF THE ABUSE OF TAX CONC ESSION WHICH IS SOUGHT TO BE PLUGGED BY THE PROVISIONS OF SECTION 10A (7) R.W.S. 80-IA(10) OF THE ACT. 42 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 24. ON THIS ASPECT, THE LD. CIT-DR HAD VEHEMENTLY ARG UED, BASED ON THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT I N THE CASE OF BANK OF INDIA LTD. (SUPRA) THAT THE MEANING OF THE W ORD ARRANGED IN SECTION 80-IA(10) OF THE ACT HAS TO BE UNDERSTOOD T O MEAN AN AGREEMENT OR AN UNDERSTANDING BETWEEN THE PARTIES CON CERNED. THE RELEVANT PORTION OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT HAS BEEN REPRODUCED IN THE EARLIER PART OF THI S ORDER, ACCORDING TO WHICH, IT IS SAID THAT THE TERM ARRANGEM ENT IN PLAIN LANGUAGE MEANS ANY AGREEMENT OR UNDERSTANDING BETWEEN THE PARTIES CONCERNED. ON THIS BASIS, THE LD. CIT-DR SUBMIT TED THAT UNDENIABLY THERE IS AN AGREEMENT BETWEEN THE ASSESSEE AN D THE ASSOCIATED ENTERPRISES WHEREBY THE SERVICES HAVE BEEN PR OVIDED BY THE ASSESSEE TO THEM AND THEREFORE THE SAME IS TO BE UNDERSTOOD AS AN ARRANGEMENT WITHIN THE MEANING OF SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT. ALONG WITH THE A FORESAID, IT HAS ALSO BEEN EMPHASIZED, ON THE BASIS OF THE LANGUAGE OF SECTION 80- IA(10) OF THE ACT THAT, THE ASSESSING OFFICER IS NOT RE QUIRED TO BE PROVE THAT THERE IS AN ARRANGEMENT FOR PRODUCING MO RE THAN ORDINARY PROFITS. WHEREAS, AS PER THE LD. CIT-DR, SECTI ON PROVIDES THAT ARRANGEMENT LEADING TO PRODUCTION OF MORE THAN ORDINARY PROFIT WILL SATISFY THE NECESSARY CONDITION OF SECTION 80-IA(10) OF THE ACT. THUS, ACCORDING TO THE LD. CIT-DR, IN THE I NSTANT CASE THERE IS AN ARRANGEMENT AND IT HAS LEAD TO PRODUCTION OF MO RE THAN THE ORDINARY PROFITS. ACCORDING TO THE LD. CIT-DR, THE M EANING OF THE WORDS SO ARRANGED IN SECTION 80-IA(10) OF THE ACT ON LY SEEKS TO ENSURE THAT THERE WAS AN AGREEMENT BETWEEN THE ASSESSEE AND ASSOCIATED ENTERPRISE. 25. WE HAVE CAREFULLY EXAMINED THE AFORESAID CONTENT IONS OF THE LD. CITDR. IN OUR CONSIDERED OPINION, THE IMPORT OF THE EXPRESSION ARRANGED IN SECTION 80-IA(10) OF THE ACT IS NOT TO BE UNDERSTOOD IN ITS PLAIN LANGUAGE BUT THE SAME HAS TO BE UNDERSTOO D IN THE CONTEXT IN WHICH IT IS PLACED IN THE SECTION. NOTAB LY, SECTION 80- IA(10) OF THE ACT RESTRICTS THE PLAIN MEANING OF THE TERM ARRANGED BECAUSE IT IS PLACED BETWEEN THE WORDS . .THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE B USINESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MORE TH AN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH ELIGIBLE BUSINESS . THEREFORE, IT WOULD NECESSARILY MEAN THAT THE ARRANGEMENT REFERRED TO IS AN ARRANGEMENT OF THE C OURSE OF BUSINESS WHICH PRODUCES TO THE ASSESSEE MORE THAN THE ORDI NARY PROFITS WITH THE INTENT OF ABUSING THE TAX CONCESSION. THUS, THE WORD ARRANGED IN THE SECTION DOES NOT ENVISAGE A SIMP LE ARRANGEMENT, BUT A ARRANGEMENT OF THE COURSE OF BUSI NESS TRANSACTED WHICH PRODUCES TO THE ASSESSEE MORE THAN ORDI NARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH A BU SINESS WITH THE INTENT OF ABUSING THE TAX CONCESSIONS. THEREFORE, THE MEANING OF THE WORDS SO ARRANGED HAVE TO BE UNDERSTOOD IN T HE CONTEXT IN WHICH THEY ARE PLACED IN SECTION 80-IA(10) OF THE AC T. A MERE AGREEMENT BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERP RISES FOR TRANSACTING BUSINESS IS NOT ENOUGH TO INVOKE SECTION 80-IA(10) OF THE ACT. 43 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 26. IN-FACT, EVEN THE HONBLE BOMBAY HIGH COURT IN THE CASE OF BANK OF INDIA LTD. (SUPRA) HAS ALSO APPRECIATED THE CO NTEXTUAL MEANING OF THE EXPRESSION ARRANGEMENT. THE ISSUE BEF ORE THE HONBLE BOMBAY HIGH COURT WAS WITH REGARD TO THE SCHE ME OF RE- CONSTRUCTION OR ARRANGEMENT CONTAINED IN SECTION 391 (1) OF THE COMPANIES ACT, 1956. IN THE CONTEXT OF SECTION 391(1 ) OF THE COMPANIES ACT, 1956, THE HONBLE HIGH COURT WAS DEALI NG WITH THE MEANING OF THE WORD ARRANGEMENT. AFTER HAVING EXP LAINED THE MEANING OF THE TERM ARRANGEMENT IN PLAIN LANGUAGE, WHICH WE HAVE REFERRED EARLIER, THE HONBLE HIGH COURT WENT ON TO SAY AS UNDER IN THE CONTEXT OF THE WORD ARRANGEMENT QUA SECTION 391(1) OF THE COMPANIES ACT, 1956 :- SECTION 391(1), HOWEVER, IN ANY OPINION SOMEWHAT RE STRICTS THIS OTHERWISE UNLIMITED IMPORT OF THE TERM ARRANGEMENT IN SO FAR AS THE SAID SECTION APPLIES ONLY TO AN AGREEMENT OR UNDER STANDING BETWEEN THE COMPANY AND ITS CREDITORS OR ANY CLASS OF T HEM, OR BETWEEN THE COMPANY AND ITS MEMBERS OR ANY CLASS OF THE M, OR BETWEEN THE COMPANY AND ITS MEMBERS OR ANY CLASS OF THE M, WHICH WOULD NECESSARILY MEAN THAT IT MUST BE AN AGREEM ENT OR UNDERSTANDING WHICH AFFECTS THEIR RIGHTS [UNDERLINED FOR EMPHASIS BY US] 27. THE AFORESAID CLEARLY POINTS OUT THAT THE HONBLE HIGH COURT IMPARTED MEANING TO THE WORD ARRANGEMENT IN THE C ONTEXT OF SECTION 391(1) OF THE COMPANIES ACT, 1956 TO MEAN THA T IT MUST BE AN AGREEMENT OR UNDERSTANDING WHICH AFFECTS THE RIGHT S BETWEEN THE COMPANY AND ITS CREDITORS OR ANY CLASS OF THEM AND BETWEEN THE COMPANY AND ITS MEMBERS OR ANY CLASS OF THEM. BY TH E SAME ANALOGY IN THE PRESENT CONTEXT, WE HAVE TO UNDERSTAND THE MEANING OF THE EXPRESSION AS ARRANGED IN SECTION 10 A(7) R.W.S. 80-IA(10) OF THE ACT TO MEAN A SITUATION WHEREBY THE COURSE OF BUSINESS HAS BEEN SO ARRANGED THAT THE BUSINESS TRANSACTED PRODUCES TO THE ASSESSEE MORE THAT THE ORDINARY PROFITS W ITH AN INTENT TO ABUSE THE TAX CONCESSIONS GRANTED IN SECTION 1 0A OF THE ACT. MOREOVER, IF ONE IS TO UNDERSTAND THE IMPORT OF THE EXPRESSION SO ARRANGED IN SECTION 80-IA(10) OF THE ACT AS CANVA SSED BY THE LD. CIT-DR, IT WOULD MEAN THAT FOR THE PURPOSES OF FU LFILLMENT OF THE CONDITIONS PRESCRIBED IN SECTION 10A(7) R.W.S. 80-I A(10) OF THE ACT, EXISTENCE OF MERE CLOSE CONNECTION AND MORE THAN THE ORDINARY PROFITS WOULD SUFFICE. IN OTHER WORDS, AS PER THE REVENUE, THE EXISTENCE OF CLOSE CONNECTION AND HIGH PROFITS WOU LD LEAD TO A PRESUMPTION THAT THERE IS AN ARRANGEMENT WITHIN THE MEANING OF SECTION 80- IA(10) OF THE ACT. THE AFORESAID PLEA, IN OUR VIEW, NOT ONLY BELIES THE LANGUAGE OF SECTION 80-IA(10) BUT ALSO THE LEGISLATIVE INTENT WHICH SEEKS TO CURTAIL THE ABUSE OF TAX CONCESSION BY MANIPULATION OF PROFITS BETWEEN ASSOCIATED CONCERNS . THEREFORE, AN ARRANGEMENT WHICH IS REFERRED TO IN SEC TION 10A(7) R.W.S. 80-IA(10) OF THE ACT HAS TO BE ONE WHICH IS PRE FACED BY AN INTENTION TO ABUSE THE TAX CONCESSIONS, AS PER THE INTE NDMENT OF THE LEGISLATURE. THEREFORE, EXISTENCE OF A MERE AGREE MENT TO DO BUSINESS IS NOT ENOUGH TO FULFILL THE REQUIREMENT OF SEC TION 10A(7) R.W.S. 80-IA(10) OF THE ACT IN THE CONTEXT OF THE WO RDS THE COURSE 44 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 OF BUSINESS BETWEEN THEM IS SO ARRANGED. 28. AT THIS STAGE, WE MAY ALSO ADDRESS THE ARGUMENT OF T HE LD. CIT- DR THAT THE BURDEN CAST ON THE ASSESSING OFFICER IN SECTI ON 10A(7) R.W.S. 80-IA(10) OF THE ACT IS MUCH LIGHTER AND EVEN A PRIMA-FACIE SATISFACTION OF AN EXISTENCE OF TAX AVOIDANCE IS SUFFICI ENT. IN THIS CONTEXT, WE MAY REFER TO THE DECISION OF THE BANGALO RE BENCH OF THE TRIBUNAL IN THE CASE OF DIGITAL EQUIPMENT INDIA LTD. (SUPRA), WHEREIN SIMILAR ARGUMENT FROM THE SIDE OF THE REVENUE HAS BEEN ADDRESSED. THE BANGALORE BENCH OF THE TRIBUNAL WAS DEA LING WITH INVOKING OF SECTION 10A(6) R.W.S. 80-I(9) OF THE ACT FOR ASSESSMENT YEAR 1995-96, WHICH ARE PARI-MATERIA TO SECTION 10A (7) R.W.S. 80- IA(10) OF THE ACT INVOKED BY THE REVENUE BEFORE US. THE FOLLOWING DISCUSSION IS RELEVANT :- THE REQUIREMENTS UNDER THE SECTION ARE : (A) THERE MUST BE A CLOSE CONNECTION BETWEEN THE APPE LLANT AND OTHER PERSON. (B) THE COURSE OF BUSINESS BETWEEN THEM SHOULD BE SO ARRA NGED THAT IT PRODUCES TO THE APPELLANT MORE THAN THE ORDI NARY PROFITS FROM SUCH BUSINESS. TO SATISFY THE ABOVE TEST THE AO HAS TO ADDUCE EVIDENCE AND REASONS COGENTLY AND THE SAME IS OPEN TO VERIFICATION BY THE APPELLATE AUTHORITIES. THE PRIMARY RULE OF EV IDENCE IS THAT 'WHAT IS APPARENT IS REAL' UNLESS PROVED OTHERWISE BY TH E PERSON ALLEGING IT OTHERWISE. THE MANNER OF SATISFACTION OUTL INED IN THE SECTION SHOULD BE BASED ON EVIDENCE AND NOT ON SURMISE OR SUSPICION. THE QUESTION IS NOT WHETHER THE ONUS IS LIGHT OR HEAVY BUT WHETHER THE AO HAS DISCUSSED OBJECTIVELY THE CONDIT IONS MENTIONED IN THE SECTION TO DISTURB THE RESULTS DECLARE D BY THE APPELLANT. IN THIS CASE, THE AO HAS FAILED TO ADDUCE ANY EVIDENCE OR REASON TO SATISFY THE INVOKING OF S. 80-1(9). FIRST OF A LL, A MERE SUBSTANTIAL PROFIT DOES NOT GIVE RISE TO ANY VALID VIEW THAT THERE COULD BE ANY ARRANGEMENT. IT IS A CASE OF JOINT VENTU RE LISTED INDIAN COMPANY, WHERE ALL ARRANGEMENTS ARE OPEN FOR SCRUTINY AND ACCEPTANCE NOT ONLY BY DIGITAL GROUP WORLDWIDE BUT ALSO FROM JOINT VENTURE PARTNERS AND SHAREHOLDERS. DIGITAL GROUP OVERSE AS WILL NOT PAY UNDUE SUM, WHICH IT CANNOT RECOUP ENTIRELY TO EX CLUSION OF OTHERS. HENCE NOTHING CAN BE ARRANGED TO THE EXCLUSIV E BENEFIT OF OVERSEAS PARTNER. ONE CANNOT PRESUME THE EXISTENCE OF C LOSE CONNECTION OR POSSIBILITY OF AN ARRANGEMENT FOR EARNI NG MORE THAN ORDINARY PROFITS. IN THIS CASE THE PROFITS EARNED IS COM PARABLE WITH THE PROFITS EARNED BY OTHER COMPANIES IN THE SAME INDU STRY. HENCE THERE IS NO CASE FOR FURTHER VERIFICATION. THE AO HA S COMPARED THE PROFIT OF SOFTWARE UNIT WITH THAT OF HARDWARE UNIT. THUS THE FOUNDATION ITSELF IS ON WRONG PREMISE. THERE CANNOT BE COMPARISON BETWEEN AN ORANGE AND AN APPLE. IT IS KNOW N FACT THAT PROFITABILITY OF SOFTWARE UNITS IS ALWAYS HIGHER THAN H ARDWARE UNIT. THE TEST WHETHER THE APPELLANT HAS EARNED MORE THAN O RDINARY PROFITS, IN THIS CASE, THE ANSWER IS OBVIOUS NO, EVEN AS F OUND BY THE AO. WHEN THE PROFITS EARNED ARE REASONABLE AND NOT EX CESSIVE, THERE IS NO REASON TO SUSTAIN THE ADDITION FURTHER THER E IS NO EVIDENCE OF EXISTENCE OF ANY ARRANGEMENT AS CONTEMPLA TED UNDER S. 80-1(9). 45 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 29. QUITE CLEARLY, AS PER THE TRIBUNAL THE QUESTION IS NOT WHETHER THE ONUS IS LIGHT OR HEAVY BUT WHETHER THE ASSESSING OFFI CER HAS DISCUSSED OBJECTIVELY THE CONDITIONS MENTIONED IN THE SE CTION TO DISTURB THE RESULTS DECLARED BY THE APPELLANT. 30. NOW, THE CASE OF THE ASSESSING OFFICER IS THAT THE PR OFITS DERIVED BY THE ASSESSEE FROM THE ELIGIBLE BUSINESS ARE MOR E THAN THE ORDINARY PROFITS AND THEREFORE HE IS EMPOWERED TO ARRIVE AT WHAT COULD BE A REASONABLE PROFIT FROM SUCH ELIGIBLE BUSINESS AND SUCH PROFIT BE TAKEN AS REASONABLY DEEMED TO HAVE BEEN DERIVED FROM THE ELIGIBLE BUSINESS FOR THE PURPOSES OF COMPUTING THE DEDUCTION U/S 10A OF THE ACT. WE FIND THAT IN THE E NTIRE ASSESSMENT ORDER, THERE IS NO MATERIAL OR ANY EVIDENCE W HICH HAS BEEN BROUGHT OUT TO SAY THAT THE COURSE OF BUSINESS BETW EEN ASSESSEE AND THE ASSOCIATED ENTERPRISES HAS BEEN SO ARRANGED THAT THE BUSINESS TRANSACTED HAS PRODUCED TO THE ASSESSEE MORE T HAN THE ORDINARY PROFITS. 31. NO DOUBT, THERE IS A CLOSE CONNECTION BETWEEN ASSESSE E AND THE ASSOCIATED ENTERPRISES AND TO THAT EXTENT SECTION 10A(7) R.W.S. 80- IA(10) OF THE ACT HAS BEEN RIGHTLY EXAMINED BY THE I NCOME-TAX AUTHORITIES. THE SECOND ASPECT THAT THE COURSE OF BUSINE SS WAS SO ARRANGED SO AS TO RESULT IN MORE THAN ORDINARY PROFITS IS NOT AT ALL FORTHCOMING FROM THE ORDER OF THE ASSESSING OFFICER. TH ERE IS NO MATERIAL OR EVIDENCE REFERRED TO IN THE ASSESSMENT ORD ER TO INDICATE THAT THE COURSE OF BUSINESS HAS BEEN SO ARRANGE D SO AS TO INFLATE PROFITS WITH THE INTENT TO ABUSE TAX CONCESSION U/S 10A OF THE ACT. AT THIS POINT, WE MAY MAKE A REFERENCE TO T HE STAND OF THE ASSESSING OFFICER THAT THE OPERATING PROFIT MARGINS OF T HE ASSESSEE ARE SUBSTANTIALLY HIGHER THAN THE AVERAGE OPERATING M ARGIN OF THE COMPARABLES SELECTED BY THE ASSESSEE IN ITS TRANSFER PRICIN G STUDY. THIS HAS FORMED THE BASIS FOR THE ASSESSING OFFICER TO SAY T HAT ASSESSEE HAS EARNED MORE THAN ORDINARY PROFITS WHICH MIGH T BE EXPECTED TO ARISE IN SUCH A BUSINESS. BE THAT AS IT MAY , THE AFORESAID IS NOT ENOUGH TO SAY THAT THE COURSE OF BUSINE SS HAS BEEN SO ARRANGED TO RESULT IN MORE THAN ORDINARY PROFITS. H OWEVER, FROM THE SIDE OF THE REVENUE, IT WAS POINTED OUT THAT THE TRANSFER PRICING COMPARABILITY ANALYSIS ITSELF SUGGESTS THAT THE P ROFIT MARGINS OF THE ASSESSEE ARE MORE THAN THE ORDINARILY ACC EPTED MARGIN IN THIS LINE OF BUSINESS. THE MOOT QUESTION IS AS T O WHETHER THE SAME CAN BE CONSIDERED AS A MATERIAL TO INDICATE THAT THE COURSE OF BUSINESS BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES HAS BEEN SO ARRANGED, SO AS TO RESULT IN MOR E THAN THE ORDINARY PROFITS WITHIN THE MEANING OF SECTION 10A(7 ) R.W.S. 80- IA(10) OF THE ACT. IN THIS CONTEXT, WE MAY REFER TO THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF VIS UAL GRAPHICS COMPUTING SERVICES INDIA (P) LTD. VS. ACIT, 148 TTJ 6 21 (CHENNAI), WHEREIN FOLLOWING DISCUSSION IS RELEVANT :- WE HEARD BOTH SIDES IN DETAIL AND CONSIDERED THE ISSUE. AS FAR AS THE PRESENT CASE IS CONCERNED, THE TRANSFER PRICING OF FICER HAS MADE A CATEGORICAL FINDING THAT THE OPERATING PROFI T REPORTED BY THE ASSESSEE IS HIGHER THAN THE PROFIT WORKED OUT ON THE BASIS OF ARM'S LENGTH PRICE. THE TRANSFER PRICING OFFICER, THE REFORE, 46 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 CONCLUDED THAT NO TRANSFER PRICING ADJUSTMENT IS CALLE D FOR IN THE PRESENT CASE. THE ASSESSING OFFICER HAS MADE THE REFERENCE TO THE TRANSFER PRICING OFFICER UNDER SECTION 92CA. THE REFE RENCE IS MADE FOR THE PURPOSE OF COMPUTING INCOME ARISING FRO M AN INTERNATIONAL TRANSACTION WITH REGARD TO THE ARM'S LE NGTH PRICE AS PROVIDED IN SECTION 92. THEREFORE, IT IS TO BE SEEN T HAT THE SCOPE AND EXTENT OF REFERENCE MADE BY THE ASSESSING OFFICER TO THE TRANSFER PRICING OFFICER IS CONFINED TO THE SINGULAR P URPOSE STATED IN SECTION 92. SECTIONS 92A, 92B, 92C, 92CB, 92D, 92E AND SECTION 92F ARE ALL PRECISELY DEFINING AND FACILITATING PROV ISIONS ULTIMATELY FOR THE PURPOSE OF COMPUTING THE INCOME AS STATED IN SECTION 92. ALL THE ABOVE STATED SECTIONS PROVIDED IN CHAPTER X OF THE INCOME- TAX ACT, 1961 BELONG TO A SEPARATE CODE AS SUCH, ENA CTED FOR THE PURPOSE OF COMPUTING INCOME FROM INTERNATIONAL TRANSA CTIONS HAVING REGARD TO THE ARM'S LENGTH PRICE SO AS TO CONF IRM THAT THERE IS NO AVOIDANCE OF TAX BY AN ASSESSEE. THEREFORE, WHERE IN A CASE, THE TRANSFER PRICING OFFICER SUGGESTS THAT THE OPERATIN G PROFIT DECLARED BY AN ASSESSEE IS COMPATIBLE TO THE ARM'S LENGTH PRICE NORMS AND NO ADJUSTMENT IS NECESSARY, THE OPERATION OF A LL THOSE PROVISIONS COME TO AN END. IF THE, ASSESSING OFFICER HAS TO MAKE ANY OTHER ADJUSTMENT TOWARDS COMPUTING DEDUCTION AVAI LABLE UNDER SECTION 10A, THE COMPUTATION HAS TO BE MADE IN THE CONTEXT OF SECTION 10A(7) READ WITH SECTION 80-IA(10). IT IS CLEAR THAT IN A CASE OF TRANSFER PRICING ASSESSMEN T, IT HAS GOT TWO SEGMENTS. THE FIRST SEGMENT CONSISTS OF RULES AND PROCE DURES FOR COMPUTING THE INCOME OTHER THAN THE INCOME ARISI NG OUT OF INTERNATIONAL TRANSACTIONS WITH ASSOCIATE ENTERPRISE. TH E SECOND SEGMENT CONSISTS OF RULES AND PROCEDURES IN CONNECTION WI TH COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTION S WITH ASSOCIATE ENTERPRISES ON THE BASIS OF THE ARM'S LENGTH PR ICE. THE SECOND SEGMENT RELATING TO COMPUTATION OF THE ARM'S LE NGTH PRICE, IS A SET OF RULES FOR THE PURPOSES OF TRANSFER PRICING MA TTERS AND THOSE PROCEDURES AND RULES CAN BE USED ONLY FOR THE PUR POSE SERVING THE OBJECT OF SECTION 92. WHEN THE TRANSFER PR ICING OFFICER STATES THAT THERE IS NO NEED OF TRANSFER PRICING ADJUSTM ENT, THE MATTER SHOULD END THERE AND ANY OTHER ADJUSTMENT THAT THE ASSESSING OFFICER WOULD LIKE TO MAKE WITH REFERENCE TO THE FIRST SEGMENT MUST BE MADE INDEPENDENT OF THE ORDER OF THE TRANSFER PRICING OFFICE UNDER SECTION 92CA. TO STATE IN SIMPLE TERMS, THE TRANSFER PRICING REGIME I S DIFFERENT FROM REGULAR COMPUTATION OF INCOME. SECTION 10A BEL ONGS TO THAT PART OF REGULAR COMPUTATION OF INCOME AND IT SHOULD BE COMPUTED INDEPENDENT OF TRANSFER PRICING REGULATIONS AND TRANSF ER PRICING ORDERS. IT IS NOT THEREFORE, PERMISSIBLE FOR THE ASSESSING OFFICER TO WORK OUT SECTION 10A DEDUCTION ON THE BASIS OF ARM'S LE NGTH PRICE PROFIT GENERATED OUT OF THE ORDER OF THE TRANSFER PR ICING OFFICER. IN FACT THESE ISSUES HAVE ALREADY BEEN CONSIDERED IN VAR IOUS ORDERS OF THE TRIBUNAL. THE INCOME-TAX APPELLATE TRI BUNAL, CHENNAI 'A' BENCH IN THE CASE OF TWEEZERMAN (INDIA) P. LTD. V. ADDL. CIT [2010] 4 ITR (TRIB) 130 (CHENNAI) (133 TT J 308) HAS CONSIDERED THE MATTER IN DETAIL AND HELD THAT THE RE DUCTION OF 47 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 ELIGIBLE PROFITS OF AN ASSESSEE AS DONE BY THE ASSESSING OF FICER BY INVOKING THE PROVISIONS OF SECTION 80-IA(10) READ WITH SECTION 10B(7), IN THE CONTEXT OF THE TRANSFER PRICING OFFIC ER'S ORDER IS UNSUSTAINABLE. THE TRIBUNAL HAS HELD THAT THE ASSESSING OF FICER WAS NOT JUSTIFIED TO INVOKE THE PROVISIONS OF SECTION 80 -IA(10) READ WITH SECTION 10B(7) SO AS TO REDUCE THE ELIGIBLE PROFITS ON THE BASIS OF THE ARM'S LENGTH PRICE COMPUTED BY THE TRANSFE R PRICING OFFICER WITHOUT SHOWING HOW HE DETERMINED THAT THE A SSESSEE HAD SHOWN MORE THAN 'ORDINARY PROFITS'. AS RIGHTLY ARGUED BY LEARNED SENIOR COUNSEL THE ARM'S L ENGTH PRICE IS DETERMINED ON THE BASIS OF THE MOST APPROPRIATE METH OD. THE MOST APPROPRIATE METHOD IS CHOSEN EITHER ON PROFIT BASI S METHOD OR PRICE BASIS METHOD. IN THE LATTER EASE, PROFITS ARE NOT AT ALL CONSIDERED. IN THAT METHOD, PROFIT IS ONLY A DERIVATI VE OF PRICES. WHEN PROFITS ITSELF IS NOT WORKED OUT, HOW IS IT JUSTIF IED TO ADOPT THE ARM'S LENGTH PRICE PROFITS TO DETERMINE WHAT IS 'O RDINARY PROFITS' FOR THE PURPOSE OF SECTION 10A(7)? IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD THA T THE ASSESSING OFFICER HAS ERRED IN REDUCING RS.4,48,50,795 FR OM THE ELIGIBLE PROFITS OF THE ASSESSEE UNDER SECTION 10A. THE S AID ADJUSTMENT MADE BY THE ASSESSING AUTHORITY IN COMPUTING THE DEDUCTION UNDER SECTION 10A IS ACCORDINGLY, DELETED. 32. IN OUR CONSIDERED OPINION, THE RESULT OF THE TRAN SFER PRICING ASSESSMENT CAN AT BEST BE TAKEN AS AN INDICATOR FOR THE A SSESSING OFFICER TO INVESTIGATE AS TO WHETHER OR NOT THERE EXI STS ANY ARRANGEMENT WHICH HAS RESULTED IN MORE THAN ORDINARY PROFITS QUA THE REQUIREMENTS OF SECTION 10A(7) R.W.S. 80-IA(10) O F THE ACT. EVEN IF IT IS ACCEPTED THAT THE DIFFERENCE BETWEEN T HE OPERATING MARGINS OF THE ASSESSEE AND THE COMPARABLES SHOW EXISTENCE OF MORE THAN THE ORDINARY PROFITS IN THE HANDS OF THE ASSE SSEE, SO HOWEVER, IT WAS STILL IMPERATIVE FOR THE ASSESSING OFFICE R TO ESTABLISH ON THE BASIS OF SUBSTANTIVE EVIDENCE AND CORROB ORATIVE MATERIAL THAT QUA SECTION 10A R.W.S. 80-IA(10) OF THE ACT, THE COURSE OF BUSINESS BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES IS SO ARRANGED THAT THE BUSINESS TRANSACTED BET WEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PRO FITS WITH THE INTENT OF ABUSING TAX CONCESSION. QUITE CLEARLY, I N THE ENTIRE ASSESSMENT ORDER, THERE IS NO WHISPER OF ANY MATERIAL OR EVIDENCE IN THIS REGARD. IN-FACT, THE APPROACH OF THE ASSESSING O FFICER IS QUITE MISDIRECTED AS THE FOLLOWING DISCUSSION IN HIS ORDE R SHOWS :- ACCORDINGLY, THE SECTION ONLY ENCUMBERS THE A.O. TO EXAMINE IF THE PROFITS DERIVED FROM THE ELIGIBLE BUSI NESS BY THE ASSESSEE IS MORE THAN THE ORDINARY PROFITS, THEN THE A.O. HAS TO ARRIVE AS TO WHAT COULD BE THE REASONABLE PROFI T FROM THE SUCH ELIGIBLE BUSINESS AND SUCH PROFIT HAS TO BE THEN TAKEN AS REASONABLY DEEMED TO HAVE BEEN DERIVED FROM THE ELIGIBLE BUSINESS FOR THE PURPOSES OF COMPUTING DEDUCTIO N UNDER THE SECTION. 48 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 33. THE AFORESAID DISCUSSION IN THE ASSESSMENT ORDER REVEAL S THAT AS PER THE ASSESSING OFFICER, THE EXISTENCE OF CLOSE CONNE CTION AND MORE THAN ORDINARY PROFITS IS ENOUGH TO ASSUME AN ARRAN GEMENT AS CONTEMPLATED U/S 80- IA(10) OF THE ACT. THE AFORES AID UNDERSTANDING, IN OUR VIEW, IS DIRECTLY CONTRARY TO T HE JUDGEMENT OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF H .P. GLOBAL SOFT LTD. (SUPRA) AND OUR DISCUSSION IN THE EARLIER PART OF THIS ORDER. 34. IN VIEW OF THE AFORESAID, WE CONCLUDE BY HOLDING THAT IN THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT PROVED THAT ANY ARRANGEMENT HAD BEEN ARRIVED BETWEEN THE PARTIES WHI CH RESULTED IN HIGHER PROFITS. CONSEQUENTLY, THE RE-WORKING OF T HE PROFITS BY ASSESSING OFFICER BY INVOKING SECTION 10A R.W.S. 80-IA(10 ) OF THE ACT IS NOT JUSTIFIED. THE ACTION OF THE ASSESSING OFFICE R TO RESTRICT THE DEDUCTION U/S 10A OF THE ACT TO RS.7,74,60,281/- AS AGAINST THE CLAIM OF RS.36,35,09,382/- IS HEREBY SET-ASIDE. THUS, ASSE SSEE SUCCEEDS ON THIS ASPECT. 44. IN VIEW OF THE ABOVE, WE RESTORE THE ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY THE RECORDS AND IF UNDER IDE NTICAL CIRCUMSTANCES THE DRP HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN ITS OWN CASE FOR A.YRS. 2010-11 AND 2011-12 THEN TO DECIDE THE ISSUE IN THE LIGHT OF THE DIRECTION OF THE DRP . GROUNDS RAISED BY THE ASSESSEE ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 45. GROUND OF APPEAL NO.5 BY THE ASSESSEE READS AS UNDER : NOT SETTING OFF OF LOSSES OF 10A UNDERTAKINGS AGAINST OT HER INCOME. A. IN HOLDING THAT LOSSES OF NEW UNITS, IF ELIGIBLE U/S.10 A, SHALL NOT BE ADJUSTED AGAINST TAXABLE PROFITS OF THE ASSESSEE, AND I NSTEAD SHALL BE CARRIED FORWARD TO BE SET OFF AGAINST THE FUT URE PROFITS OF SUCH ELIGIBLE UNITS. B. IN RESPECT OF 10A UNITS OF THE COMPANY ENGAGED IN BPO BUSINESS, VIZ, NDA-58, IN NOT ALLOWING SET OFF OF LOSS O F RS.1,56,51,973/- BY HOLDING THAT THE LOSSES FROM UNITS, THE INCOME OF WHICH IS CLAIMED EXEMPT CANNOT BE SET OFF A GAINST THE TAXABLE INCOME OF THE ASSESSEE. 49 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 46. THE LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET SUBM ITTED THAT THE ISSUE STANDS DECIDED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN ASSESSEES OWN C ASE WHICH HAS BEEN FOLLOWED BY THE TRIBUNAL IN A.Y. 2005-06. NO SLP WAS ALSO FILED BY THE REVENUE BEFORE THE HONBLE SUPR EME COURT. 47. AFTER HEARING BOTH THE SIDES, WE FIND THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2005-06 AT PARA 19 AND 20 OF THE ORDER HAS OBSERVED AS UNDER : 19. NOW, COMING TO THE GROUNDS OF APPEAL NO.7 AND 8 RAISED BY THE REVENUE. THE ISSUE IS WITH REGARD TO THE SET O FF OF LOSSES OF UNITS ELIGIBLE FOR DEDUCTION UNDER SECTION 10A OF THE ACT AGAINST BUSINESS INCOME OF THE UNDERTAKING. THE SAID ISSUE IS SQUAR ELY COVERED BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE RELATI NG TO ASSESSMENT YEAR 2004-05, WHICH IN TURN HAD FOLLOWED THE EARLIE R ORDER OF THE TRIBUNAL IN ASSESSMENT YEAR 2002-03 OBSERVING AS UN DER:- 14. IN GROUND NO. 5, THE DISPUTE RELATES TO THE AC TION OF THE ASSESSING OFFICER IN ADDING BACK LOSSES SUFFERED BY THE SECTI ON 10A ELIGIBLE UNITS WHILE COMPUTING INCOME OF THE ASSESSEE UNDER THE NO RMAL PROVISIONS OF THE ACT. SIMILAR ISSUE HAS BEEN CONSIDERED BY OUR C O-ORDINATE BENCH IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2002-03 AN D 2003-04 (SUPRA), WHEREIN THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS BEEN SET ASIDE WITH DIRECTIONS TO THE ASSESSING OFF ICER TO ALLOW SET-OFF OF THE LOSSES OF THE SECTION 10A ELIGIBLE UNITS AGAINS T THE NORMAL BUSINESS INCOME OF THE ASSESSEE WHILE 9 COMPUTING INCOME AS PER NORMAL PROVISIONS OF THE ACT. THE RELEVANT FINDINGS OF THE TRIBUNAL AS CONTAINED IN PARAS 3 TO 5 OF ITS ORDER ARE REPRODUCED HEREINB ELOW FOR THE SAKE OF BREVITY: '3. IN THE FIRST GROUND, DISPUTE RELATES TO THE ACT ION OF THE ASSESSING OFFICER IN ADDING BACK LOSSES SUFFERED BY THE SECTION 10A ELIGIBLE UNITS WHILE COMPUTING INCOME OF THE AS SESSEE UNDER THE NORMAL PROVISIONS OF THE ACT. 4. IN THIS CONNECTION, IT WAS A COMMON POINT BETWEE N THE PARTIES THAT SIMILAR ISSUE HAS BEEN ADJUDICATED BY THE PUNE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR 2001-02 VIDE ITA NO 274/PN/2005 DAT ED 29.5.2009 IN FAVOUR OF THE ASSESSEE. APART THEREFRO M, IT HAS BEEN POINTED OUT BY THE LEARNED REPRESENTATIVE FOR THE A SSESSEE THAT THE ISSUE HAS ALSO BEEN DEALT WITH BY THE HONBLE J URISDICTIONAL HIGH COURT IN THE CASE OF HINDUSTAN UNILEVER LTD V DCIT 38 DTR 91 (BOM.) AFFIRMING THE STAND OF THE ASSESSEE. 5. IN THE ABOVE BACKGROUND, WE FIND AMPLE MERIT IN THE GROUND OF APPEAL RAISED BY THE ASSESSEE. THE ASSESSING OFFICE R, WHILE COMPUTING THE INCOME DID NOT ALLOW THE CLAIM FOR TH E LOSS 50 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 SUFFERED IN THE UNITS WHICH WERE OTHERWISE ELIGIBLE FOR BENEFITS OF SECTION 10A OF THE ACT. THE ASSESSING OFFICER PROCE EDED ON THE ASSUMPTION THAT SECTION 10A PROVIDED FOR AN EXEMPTI ON FROM TAXATION AND, THEREFORE, THE LOSS OF SUCH AN ENTITY COULD NOT BE SET OFF AGAINST THE NORMAL BUSINESS INCOME OF THE ASSES SEE. THE HONBLE HIGH COURT IN THE CASE OF HINDUSTAN UNILEVE R LTD. (SUPRA) WAS EXAMINING A SIMILAR PROPOSITION, THOUGH IN THE CONTEXT OF SECTION 10B OF THE ACT. THE PROVISIONS OF SECTION 1 0B OF THE ACT ARE PARI MATERIA TO THOSE OF SECTION 10A WHICH IS T HE SUBJECT MATTER OF CONTROVERSY BEFORE US. IT HAS BEEN NOTED THAT SUBSEQUENT TO THE AMENDMENT WITH EFFECT FROM 1.4.20 01, THE PROVISION PROVIDES FOR A DEDUCTION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF AR TICLES OR THING OR COMPUTER SOFTWARE DULY ESTABLISHED IN FREE TRADE ZONES, ETC. CONSEQUENTLY, IT HAS TO BE UNDERSTOOD THAT THE PROVISION, AS APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERAT ION, IS NOT IN THE NATURE OF AN EXEMPTION. THEREFORE, THE ASSESSEE WAS ENTITLED TO SET-OFF OF LOSSES SUSTAINED BY THE 10A ELIGIBLE UNITS AGAINST THE NORMAL BUSINESS INCOME. IN THIS VIEW OF THE MATTER, WE THEREFORE FIND NO REASON TO UPHOLD THE ORDERS OF THE AUTHORIT IES BELOW ON THE IMPUGNED ASPECT. AS A RESULT, WE SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) AND DIRECT THE ASSESSING OFFICER TO ALLOW SET-OFF OF THE LOSSES OF THE SECTI ON 10A ELIGIBLE UNITS AGAINST THE NORMAL BUSINESS INCOME OF THE ASS ESSEE WHILE COMPUTING INCOME AS PER NORMAL PROVISIONS OF THE AC T. AS A RESULT THEREOF, GROUND OF APPEAL NO .1 RAISED BY TH E ASSESSEE STANDS ALLOWED. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO FILED A C OPY OF THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN ASSESSEES OWN CAS E (SUPRA) FOR THE ASSESSMENT YEAR 2001-02 WHEREIN THE CLAIM OF THE AS SESSEE RELATING TO THE SET OFF OF THE LOSSES AGAINST THE OTHER BUSINES S PROFITS WAS APPROVED BY THE HONBLE HIGH COURT. IN VIEW OF THIS, WE ACCO RDINGLY AFFIRM THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) A ND THUS DISMISS THE GROUND OF APPEAL OF THE REVENUE. 20. WE FURTHER FIND THAT THE REVENUE IN AN APPEAL F ILED BEFORE THE HONBLE BOMBAY HIGH COURT IN INCOME TAX APPEAL NO.1 148/2012 RELATING TO ASSESSMENT YEAR 2002-03 HAD RAISED THE ISSUE VIDE GROUND OF APPEAL A & B IN RESPECT OF SET OFF OF LOSSES AGA INST THE BUSINESS PROFITS INCLUDING THE SPECIFIC PROVISIONS OF SECTIO N 10A(6) OF THE ACT AND ALSO TAKING NOTE OF THE PROVISIONS OF SECTION 1 0A(8) OF THE ACT. THE HONBLE BOMBAY HIGH COURT VIDE JUDGMENT DATED 2 8.02.2013 HELD THAT BOTH THE ISSUES WERE COVERED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE IN LINE WITH THE RATIO LAID DOWN BY IT IN ASSESSEES OWN CASE IN INCOME TAX APPEAL NO.2177/20 12 RENDERED ON 01.07.2011. THE HONBLE BOMBAY HIGH COURT HAD A LSO IN THE APPEAL FILED BY THE REVENUE RELATING TO ASSESSMENT YEAR 2004-05 IN INCOME TAX APPEAL (L) NO.1820/2012 VIDE JUDGMENT DA TED 28.02.2013 HAD DISMISSED THE SIMILAR ISSUE RAISED B Y THE REVENUE. FOLLOWING THE SAME PARITY OF REASONING, WE FIND NO MERIT IN THE GROUNDS OF APPEAL NO.7 AND 8 RAISED BY THE REVENUE AND SAME ARE DISMISSED. 48. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL AND IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE THIS GROUND BY THE ASSESSEE IS ALLOWED. 51 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 49. GROUND NO. 6 WAS NOT PRESSED BY THE LD. COUNSEL FOR THE ASSESSEE FOR WHICH THE LD. DEPARTMENTAL REPRESENTATIVE HAS NO OBJECTION. ACCORDINGLY, THIS GROUND BY THE ASSESSEE IS DISMISSED AS NOT PRESSED. 50. GROUND OF APPEAL NO.7 BY THE ASSESSEE READS AS UNDER : 7. IN RESPECT OF COMPUTATION OF TAX LIABILITY - WHI LE COMPUTING THE DEMAND AT RS.126,18,27,467. A. IN GRANTING CREDIT FOR TDS ONLY FOR RS.55,54,583/- A S AGAINST CLAIM OF RS.57,85,136/-. B. IN CHARGING INTEREST U/S.234C AT RS.5,21,682/- WHERE IN FACT NO INTEREST IS PAYABLE U/S.234C AS PER THE RETURN OF INCOM E FILED BY THE ASSESSEE. 51. THE LD. COUNSEL FOR THE ASSESSEE DID NOT PRESS GROU ND OF APPEAL NO.7(B) FOR WHICH THE LD. DEPARTMENTAL REPRESENTATIV E HAS NO OBJECTION. ACCORDINGLY, THE SAME IS DISMISSED AS NOT PRESSED. 52. SO FAR AS GROUND OF APPEAL NO.7(A) IS CONCERNED, IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT A DIRE CTION MAY BE GIVEN TO THE AO TO VERIFY THE TDS CERTIFICATES AN D GRANT CREDIT AFTER PROPER VERIFICATION. 53. AFTER HEARING BOTH THE SIDES, WE RESTORE THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY THE CLAIM OF TDS AND GIVE CREDIT AFTER PROPER VERIFICATION. SO FAR AS CHARGING OF INTER EST UNDER SECTION 234C IS CONCERNED, THE AO SHALL ALSO VERIFY SINCE ACCORDING TO THE ASSESSEE NO INTEREST IS PAYABLE U/S.234 C OF THE I.T. ACT, 1961. 52 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 54. GROUND OF APPEAL NO.7 BY THE ASSESSEE IS ACCORDINGLY PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.1451/PN/2011 (A.Y. 2007-08) : 55. GROUND OF APPEAL NO.1 BY THE ASSESSEE READS AS UNDER : 1. IN MAKING ADDITION OF RS.1,56,13,322/- TO THE TO TAL INCOME ON ACCOUNT OF INTEREST CHARGEABLE ON DELAYED RECEIPT S FROM THE ASSOCIATED ENTERPRISES FOLLOWING ADJUSTMENT OF RS.2,57,7 6,711/- MADE IN THE TRANSFER PRICING ORDER U/S.92CA(3) OF THE INCOME TAX ACT. THE LEARNED TRANSFER PRICING ASSESSING OFFICER ERR ED : A. IN CONCLUDING THAT THE SUM OF RS.2,57,76,711/- IS T O BE THE ARMS LENGTH COMPENSATION RECEIVABLE BY THE ASSESSEE ON A CCOUNT OF INTEREST CHARGEABLE ON THE AMOUNTS DUE FROM THE ASSO CIATE ENTITIES BEYOND THE CREDIT PERIOD STIPULATED UNDER TH E CONTRACT. B. IN MAKING ADJUSTMENTS WITHOUT APPLYING ANY SPECIFIE D METHOD. C. IN CONCLUDING THAT DELAYED RECOVERIES FROM AES IS AN INTERNATIONAL TRANSACTION REQUIRING ADJUSTMENT UNDER TRANSFER PRICING. 56. AFTER HEARING BOTH THE SIDES WE FIND THE ABOVE GROUND IS IDENTICAL TO GROUND OF APPEAL NO.2 IN ITA NO.1338/PN/2010. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUND RAISED BY THE ASSESSEE HAS BEEN RESTORED TO THE FILE OF THE AO WITH CE RTAIN DIRECTIONS. FOLLOWING THE SAME REASONING THE ABOVE GROUND S BY THE ASSESSEE ARE ALSO RESTORED TO THE FILE OF THE AO WITH A DIRECTION TO DECIDE THE ISSUE AFRESH IN THE LIGHT OF THE DIRE CTIONS GIVEN IN ITA NO.1338/PN/2010 FOR A.Y. 2006-07. THE ABOV E GROUNDS ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 53 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 57. GROUND OF APPEAL NO.2 BY THE ASSESSEE READS AS UNDER : 2. IN RESPECT OF DEDUCTION U/S.10A IN RESPECT OF VARIO US ELIGIBLE UNDERTAKINGS OF THE COMPANY : A. IN NOT ALLOWING DEDUCTION U/S.10A IN RESPECT OF VA RIOUS ELIGIBLE UNITS AMOUNTING TO RS.324,43,57,607/-. B. IN ASSUMING JURISDICTION TO DISALLOW THE DEDUCTION U /S.10A BY OBSERVING AND HOLDING THAT THE NEW UNITS/UNDERTAK INGS HAVE BEEN FORMED BY SPLITTING UP OF A BUSINESS ALREADY IN EX ISTENCE SINCE THE 1980S, AND THAT THE PROFITS AND GAINS OF THE UNITS/UNDERTAKINGS SUBSEQUENTLY SET UP BY THE COMPANY AR E NOT ELIGIBLE FOR DEDUCTION U/S.10A OF THE INCOME TAX ACT , 1961. C. IN DENYING THE DEDUCTION U/S.10A IN RESPECT OF VAR IOUS ELIGIBLE UNDERTAKINGS ON THE BASIS OF THE NATURE OF BU SINESS. D. IN RE-EXAMINING THE CONDITIONS OF ELIGIBILITY OF DEDUCTION U/S.10A IN RESPECT OF VARIOUS UNDERTAKINGS ESTABLISHED IN EARLIER YEARS. THE ASSESSING OFFICER OUGHT TO HAVE APPRECIATED THAT THE ELIGIBILITY CONDITIONS IN RESPECT OF SPLITTING UP OF BUSINESS ALREADY IN EXISTENCE IS REQUIRED TO BE COMPLIED WITHIN THE YE AR OF FORMATION OF THE UNDERTAKING. E. IN RELYING ON VARIOUS OBSERVATIONS AND CONCLUSIONS RECORDED IN THE ASSESSMENT ORDER FOR EARLIER YEARS AND T HEREBY NOT ALLOWING DEDUCTION U/S.10A IN RESPECT OF VARIOUS ELIGI BLE UNDERTAKINGS. 58. AFTER HEARING BOTH THE SIDES WE FIND THERE ARE TOTAL 1 4 ELIGIBLE UNDERTAKINGS IN THE CURRENT YEAR. THERE IS NO DISP UTE ABOUT ONE BPO UNDERTAKING. THUS OUT OF THE REMAINING 13 UNDERTAKINGS 2 UNDERTAKINGS WERE ESTABLISHED IN A.Y. 2005- 06 AND 10 UNDERTAKINGS WERE ESTABLISHED UPTO A.Y. 2004-05. THEREFORE, THE ISSUE OF DEDUCTION U/S.10A IN RESPECT OF TH E 12 UNDERTAKINGS, IS COVERED BY THE DECISION OF THE ORDER OF THE TRIBUNAL VIDE ITA NO.2540/PN/2012 AND 342/PN/2013 FOR A.Y . 2005-06 IN ASSESSEES OWN CASE VIDE ORDER DATED 27-05 -2015 WHICH HAS ALREADY BEEN REPRODUCED IN THE PRECEDING PARAGRAPHS. THUS, THERE IS ONLY ONE UNDERTAKING ESTABLIS HED IN THE CURRENT YEAR AT AIROLI. FROM THE VARIOUS DETAILS FURNISHED BY 54 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 THE ASSESSEE IN THE PAPER BOOK WE FIND THE NEW TECHNICA L PERSONNEL ENGAGED IN THE NEW UNITS ARE AS UNDER : A IROLI TECHNICAL PERSONNEL ADMIN. PERSONNEL TOTAL NEW EMPLOYEES 432 16 448 TRANSFERRED EMPLOYEE S 227 7 234 TOTAL AS AT 31 - 03 - 2005 659 23 682 TRANSFERRED EMPLOYEES 227 TOTAL EMPLOYEES 659 % OF TRANSFERRED TO TOTAL 14.45% 59. FROM THE ABOVE IT IS CLEAR THAT THE NUMBER OF TECHN ICAL MANPOWER TRANSFERRED TO NEW UNIT AT THE END OF THE FINA NCIAL YEAR DOES NOT EXCEED 50% OF THE TOTAL TECHNICAL MANPOWE R ACTUALLY ENGAGED IN DEVELOPMENT OF SOFTWARE OR IT ENABLED PRODUCTS IN NEW UNIT. THUS, THE EMPLOYEE CONDITION IS SAT ISFIED AS PER THE CBDT CIRCULAR NO.14/2004 DATED 08-10-2014. THE RELEVANT CLAUSE (3) OF THE SAID CIRCULAR READS AS UNDER : 3. THE MATTER HAS BEEN RE-EXAMINED BY THE BOARD. I N SUPERSESSION OF THE CIRCULAR NO.12/2014 DATED 18 TH JULY, 2014, IT HAS NOW BEEN DECIDED THAT THE TRANSFER OR RE-DEPLOYME NT OF TECHNICAL MANPOWER FROM EXISTING UNITS(S) TO A NEW UNI T LOCATED IN SEZ, IN THE FIRST YEAR OF COMMENCEMENT OF BUSINESS, SHAL L NOT BE CONSTRUED AS SPLITTING UP OR RECONSTRUCTION OF AN EXISTI NG BUSINESS, PROVIDED THE NUMBER OF TECHNICAL MANPOWER SO TRANSFER RED AS AT THE END OF THE FINANCIAL YEAR DOES NOT EXCEED 50 PER CENT OF THE TOTAL TECHNICAL MANPOWER ACTUALLY ENGAGED IN DEVELO PMENT OF SOFTWARE OR IT ENABLED PRODUCTS IN THE NEW UNIT. 60. WE THEREFORE HOLD THAT DENIAL OF 10A DEDUCTION IN RESP ECT OF VARIOUS UNDERTAKINGS IS NOT JUSTIFIED. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESSEE ON THIS ISSUE ARE ALLOWED. 61. GROUND OF APPEAL NO.3 BY THE ASSESSEE READS AS UNDER : 3. IN RESPECT OF INVOKING PROVISIONS OF SECTION 10A(7) READ WITH SECTION 80IA(10) ON PROTECTIVE BASIS. 55 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 A. IN DRAWING CONCLUSION OF EARNING MORE THAN AVERAG E PROFITS ON THE BASIS OF COMPARABLES USED IN TRANSFER PRICING ANA LYSIS HAVING DIFFERENT PURPOSE. B. IN HOLDING THAT PROFIT OF RS.121,53,71,070/- IN R ESPECT OF SOFTWARE BUSINESS AND RS.4,19,55,283 IN RESPECT OF BPO BU SINESS IS MORE THAN ORDINARY PROFIT AND HENCE NOT ELIGIBLE FO R DEDUCTION U/S.10A, WITHOUT ESTABLISHING THE ORDINARY PROFITS IN T HE BUSINESS OF THE COMPANY. C. IN NOT ESTABLISHING ANY ARRANGEMENT BETWEEN THE ASSE SSEE AND OTHER PERSONS SO AS TO PRODUCE THE ASSESSEE MORE THAN ORDINARY PROFITS. D. IN HOLDING THAT THE CLOSE BUSINESS CONNECTION BETWEE N THE GROUP COMPANIES HAS ENABLED THE ASSESSEE COMPANY TO SHOW M ORE THAN ORDINARY PROFITS IN RESPECT OF 10A UNITS. E. IN RESTRICTING DEDUCTION U/S.10A AT RS.206,48,90,98 8/- (VIZ. RS.202,89,86,537/- IN RESPECT OF SOFTWARE BUSINESS AND RS.3,59,04,451/- IN RESPECT OF BPO BUSINESS), AS AGAINST CLAIM OF THE COMPANY AT RS.332,22,17,341/-. 62. AFTER HEARING BOTH THE SIDES WE FIND THE ABOVE GROUND IS IDENTICAL TO GROUND OF APPEAL NO.4 IN ITA NO.1338/PN/2010. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUND RAISED BY THE ASSESSEE HAS BEEN ALLOWED WITH CERTAIN DIRECTIONS TO THE AO TO VERIFY. FOLLOWING THE SAME REASONINGS THIS GROUND BY THE ASSESSEE IS ALLOWED. 63. GROUND OF APPEAL NO.4 BY THE ASSESSEE READS AS UNDER : 4. NOT SETTING OFF OF LOSSES OF 10A UNDERTAKINGS AGAINST OTHER INCOME BY HOLDING THAT LOSSES OF NEW UNITS, IF ELIGIBLE U/S.10A, SHALL NOT BE ADJUSTED AGAINST TAXABLE PROFITS OF THE ASSESSEE, A ND INSTEAD SHALL BE CARRIED FORWARD TO BE SET OFF AGAINST THE FUT URE PROFITS OF SUCH ELIGIBLE UNITS. 64. AFTER HEARING BOTH THE SIDES WE FIND THE ABOVE GROUND IS IDENTICAL TO GROUND OF APPEAL NO. 5 IN ITA NO.1338/PN/2010. WE HAVE ALREADY DECIDED THE ISSUE AND THE 56 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 GROUND RAISED BY THE ASSESSEE HAS BEEN ALLOWED. FOLLOWING THE SAME REASONINGS THIS GROUND BY THE ASSESSEE IS ALLOWED. 65. GROUND OF APPEAL NO.5 BY THE ASSESSEE READS AS UNDER : 5. IN SETTING OFF OF BROUGHT FORWARD LOSS OF NDA (BPO ) UNIT BEFORE ALLOWING DEDUCTION U/S.10A IN RESPECT OF PROFI TS OF THE SAID UNIT FOR THE CURRENT YEAR AND THEREBY RESTRICTING TH E DEDUCTION U/S.10A TO RS. NIL AS AGAINST CLAIM OF THE COMPANY AT RS.7,78,59,734/-. 66. FACTS, IN BRIEF, ARE THAT THE ASSESSEE COMPANY HAD SH OWN LOSS OF RS.7,78,59,734/- IN RESPECT OF ITS BPO ACTIVITIES CARRIE D OUT IN NDA58 UNIT. IT WAS CLAIMED THAT THE ABOVE AMOUN T SHOULD BE ADJUSTED AGAINST PROFIT/INCOME OF THE ASSESSEE INCLUDING PROFIT FROM NON 10A UNDERTAKING. VARIOUS DECISIONS WERE ALSO RELIED UPON. IT WAS FURTHER ARGUED THAT THE T RIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2001-02 HAS ALLOWED ADJUS TMENT OF LOSS INCURRED IN 10A UNIT AGAINST PROFITS OF NON 10A UNIT. THE AO OBSERVED THAT THE DEPARTMENT HAS NOT ACCEPTE D THE ORDER OF THE ITAT IN ASSESSEES OWN CASE FOR A.Y. 2001-0 2 AND AN APPEAL HAS BEEN FILED BEFORE HONBLE BOMBAY HIGH COURT WHICH IS PENDING. HE ACCORDINGLY DISALLOWED THE ASSESSEES CLAIM FOR THIS ASSESSMENT YEAR AS WELL. REFERRING TO PROVISIO NS OF SECTION 10A THE AO HOWEVER NOTED THAT BY ALLOWING SET OFF OF LOSSES OF SUCH UNITS WE MAY END UP SUBSIDIZING THE ASSESS EES TAXABLE PROFIT OF THE YEAR ALSO MAY BE FROM OTHER BUSINESS . ACCORDING TO HIM, AFTER ADJUSTMENT, THERE MAY BE NO LOSS TO BE CARRIED FORWARD TO THE NEXT YEAR AND SET OFF, WHEN THE 1 0A UNIT BECOMES PROFIT MAKING UNIT EXEMPT. THE AO ACCORDINGLY D ENIED THE ADJUSTMENT OF THE IMPUGNED LOSSES AGAINST THE TAXAB LE 57 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 PROFIT OF THE ASSESSEE AND INSTEAD ALLOWED THE SAME TO B E CARRIED FORWARD. 67. THE DRP UPHELD THE ACTION OF THE AO ON THE GROUND T HAT THE MATTER IS PENDING BEFORE HONBLE BOMBAY HIGH COURT. 68. AGGRIEVED WITH SUCH ORDER OF THE AO THE ASSESSEE IS IN APPEAL BEFORE US. 69. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE BPO UNDERTAKING AT NDA-58 IS HELD, ELIGIBLE FOR DEDUCTION U/S 10A . THIS IS THE FIFTH YEAR OF THE UNDERTAKING. THE UNDERTAKING H AD SUFFERED LOSSES IN EARLIER YEARS. AS PER PUNE ITAT ORDER IN ASSESSEES OWN CASE, THE LOSSES OF 10A UNDERTAKING AR E REQUIRED TO BE SET-OFF AGAINST OTHER INCOME IN THE SAME Y EAR. THE APPEALS FOR EARLIER YEARS ARE PENDING BEFORE ITAT PUN E BENCH PUNE. THE CIT(A) HAS ALSO UPHELD THE STAND OF THE COMPANY IN ASSESSMENT YEAR 2004-2005. THUS, THE LOSSES SUFFERED IN EARLIER YEARS ARE REQUIRED TO BE SET-OFF AGAINST OTHER INCOME IN THE SAME YEAR AND BALANCE, IF ANY, IS REQUIRED TO BE CARRIED FORWARD. SIMILARLY, THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF HINDUSTAN UNILEVER LIMITED (38 DTR 91) HAS HELD THAT IN CASE OF LOSS OF AN ELIGIBLE UNIT U/S 10B THE SAME SH OULD BE SET-OFF AGAINST NORMAL BUSINESS INCOME. IN VIEW OF THIS, PRESENTLY THE AMOUNT OF BROUGHT FORWARD LOSS, IF ANY, OF B PO UNDERTAKING IS NOT CERTAIN. 70. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED TH AT AS PER THE PROVISIONS OF CLAUSE (II) OF SUB-SECTION 6 OF SECT ION 10A AND THE OPENING PORTION OF SUB-SECTION 6, LOSS OF ELIGIBLE 58 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 UNDERTAKING ENTITLED TO DEDUCTION U/S.10A IS ALLOWED TO BE CARRIED FORWARD FROM A.Y. 2001-2002 AND IS ALLOWED TO BE SE T-OFF IN THE YEAR IMMEDIATELY SUCCEEDING THE LAST OF THE RELEVAN T ASSESSMENT YEAR OR OF ANY PREVIOUS YEAR RELEVANT TO AN Y SUBSEQUENT ASSESSMENT YEAR. THUS, THE LOSS ALLOWED TO BE CARRIED FORWARD IS REQUIRED TO BE SET-OFF AFTER THE END OF THE RELEVANT ASSESSMENT YEAR. RELEVANT ASSESSMENT YEAR IS D EFINED AS PER CLAUSE (V) OF EXPLANATION 2 AS UNDER- 'RELEVANT ASSESSMENT YEARS' MEANS ANY ASSESSMENT YEARS FALLIN G WITHIN A PERIOD OF TEN CONSECUTIVE ASSESSMENT YEARS, REFE RRED TO IN THIS SECTION. ' 71. HE SUBMITTED THAT IN THE ASSESSEES CASE RELEVANT ASSESSMENT YEAR WILL BE A.Y. 2011-2012 AS NO DEDUCTION U /S 10A IS PERMISSIBLE FROM A.Y. 2012-2013. THUS, THIS LOSS IS REQUIRED TO BE SET-OFF AFTER A.Y. 2011-2012 AND NOT BEFOR E THAT. PROFITS AND GAINS OF THE BUSINESS OF THE UNDERTAKING ARE COMPUTED AS PER THE NORMAL PROVISIONS OF INCOME FROM BUSINESS/PROFESSION AS PER THE PROVISIONS OF SECTION 28 TO 44 AND DEDUCTION IS ALLOWED U/S 10A WITH REFERENCE TO SUCH PROFITS. THE BUSINESS LOSS IS ALLOWED TO BE CARRIED FORWARD AND SE T-OFF AS PER THE PROVISIONS OF SECTION 72. THE PROVISIONS OF SECTION 72 ALLOWING SET-OFF OF BROUGHT FORWARD BUSINESS LOSS ARE FALLING IN CHAPTER VI AND DEDUCTION U/S 10B IS ALLOWED UNDER CHAP TER III I.E. INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME. 72. HE SUBMITTED THAT INCOME FROM BUSINESS IS COMPUTED AND DEDUCTION U/S 10A IS GRANTED IN RESPECT OF SUCH ELIGIBLE PR OFITS AT THIS STAGE ONLY AND THE BALANCE PROFIT, IF ANY, ONLY FOR M PART 59 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 OF INCOME AND THEREAFTER PROVISIONS OF SECTION 72 WILL HAVE T O BE GIVEN EFFECT TO. IN SECTION 10A IT IS NOT PROVIDED THAT INC OME FROM BUSINESS COMPUTED AT THIS STAGE IS REQUIRED TO BE R EDUCED BY BROUGHT FORWARD LOSSES AND THE BALANCE IS ONLY ENTIT LED TO DEDUCTION U/S 10A. INFACT, CONSIDERING THE SCHEME OF SECT ION, DEDUCTION U/S 10A IS ALLOWED ON YEAR TO YEAR BASIS IN RE SPECT OF PROFITS OF THE YEAR AS PER THE FORMULA PROVIDED IN SUB-SEC TION 4. AS PER SUB-SECTION 4 THE PROFITS ELIGIBLE FOR DEDUCTION U/S 10A ARE IN PROPORTION OF THE EXPORT TURNOVER TO THE TOTAL T URNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING. ALL THE AMOUN TS REQUIRED IN THIS FORMULA ARE OF THAT YEAR ONLY. HE FURTHER SUBMITTED THAT EVENTHOUGH AS PER THE PROVISIONS OF SECT ION 32(2) BROUGHT FORWARD UNABSORBED DEPRECIATION BECOMES DEPRECIATION OF CURRENT YEAR IT IS FOR LIMITED PURPOSE ONLY. IT WILL BE APPRECIATED THAT BROUGHT FORWARD BUSINESS LOSS GETS PRIORITY FOR SET-OFF BEFORE BROUGHT FORWARD UNABSORBED DEPRECIATION FOR SET-OFF IN SUBSEQUENT YEAR. THIS IS PROVIDED IN SUB-SECTION 2 OF SECTION 72 WHICH READS AS UNDER 'WHERE ANY ALLOWANCE OR PART THEREOF IS, UNDER SUB-SEC TION (2) OF SECTION 32 OR SUB-SECTION (4) OF SECTION 35, TO BE CARR IED FORWARD, EFFECT SHALL FIRST BE GIVEN TO THE PROVISIONS OF THIS SEC TION. ' HE ACCORDINGLY SUBMITTED THAT, IN SHORT, BOTH BROUGHT FOR WARD DEPRECIATION AND BUSINESS LOSS ARE NOT REQUIRED TO BE SE T-OFF AS LONG AS THE UNDERTAKING ELIGIBLE FOR DEDUCTION U/S 10A AND THE ENTIRE PROFITS OF THE UNDERTAKING ARE ALLOWED WHILE COMPUTIN G DEDUCTION U/S 10A. 60 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 73. FOR THE ABOVE PROPOSITION HE RELIED ON THE FOLLOWING C ASE LAWS: 1. CHANGEPOND TECHNOLOGIES (P) LTD. V. ACIT - 119 TT J 18/22 SOT 220 /6 DTR 344 - CHENNAI ITAT 2. KPIT CUMMINS INFOSYSTEMS (BANGALORE) (P) LTD. V. ACI T - 120 TTJ 956 / 26 SOT 529 / 15 DTR 385 - BANGALORE ITAT 74. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE AO, 75. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOT H THE SIDES, PERUSED THE ORDERS OF THE AO AND DRP AND TH E PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDER ED THE VARIOUS DECISIONS CITED BEFORE US. FROM THE FACTS OF T HE CASE, WE FIND THE ASSESSEE COMPANY HAD SHOWN LOSS OF RS.7,78,59,734/- IN RESPECT OF ITS BPO ACTIVITIES CARRIED OUT IN NDA 58 UNIT. IT WAS CLAIMED THAT THE ABOVE AMOUNT SHOU LD BE ADJUSTED AGAINST PROFIT/INCOME OF THE ASSESSEE INCLUDING PR OFIT FROM NON 10A UNDERTAKING. WE FIND THE AO REJECTED THE C LAIM OF THE ASSESSEE IN THE DRAFT ASSESSMENT ORDER AND WHEN THE ASSESSEE APPROACHED THE DRP, THE DRP VIDE PARA 8.1.1 OF THE ORDER HAS REJECTED THE OBJECTION OF THE ASSESSEE BY O BSERVING AS UNDER : THE PANEL IS OF THE VIEW AS THIS VERY MATTER IS PEND ING BEFORE BOMBAY HIGH COURT, IT WOULD ONLY BE REASONABLE AND I N THE INTEREST OF REVENUE THAT THE CLAIM OF SET OFF FOR TH E PRESENT ASST. YEAR TOO IS DENIED. ACCORDINGLY, THE PANEL CONFIRMS THE ACTION PROPOSED IN THIS MATTER IN THE DRAFT ASSESSMENT ORDER AN D REJECTS THE ASSESSEES OBJECTIONS. 61 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 76. NOTHING CONTRARY WAS BROUGHT TO OUR NOTICE AS TO WHETHER THE HONBLE HIGH COURT HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE OR NOT. SINCE IN THE PRECEDING YEARS THE MAT TER HAS BEEN DECIDED AGAINST THE ASSESSEE AND ASSESSEE IS IN AP PEAL BEFORE THE HONBLE HIGH COURT, THEREFORE, IN VIEW OF JUDICIAL PRECEDENTS THE ORDER OF THE AO ON THIS ISSUE IS UPHELD A ND THE GROUND RAISED BY THE ASSESSEE IS DISMISSED. ITA NO.2507/PN/2012 (A.Y. 2008-09) : 77. GROUND OF APPEAL NO.1 BY THE ASSESSEE READS AS UNDER : 1. IN MAKING ADDITION OF RS.3,31,98,668/- TO THE TO TAL INCOME ON ACCOUNT OF INTEREST CHARGEABLE ON DELAYED RECEIPT S FROM THE ASSOCIATED ENTERPRISES FOLLOWING ADJUSTMENT OF RS.5,20,1 1,247/- PROPOSED IN THE TRANSFER PRICING ORDER U/S.92CA(3) OF THE INCOME TAX ACT. THE LEARNED TRANSFER PRICING ASSESSING OFFICER ERRED : A. IN CONCLUDING THAT THE SUM OF RS.5,20,11,247/- IS T O BE THE ARMS LENGTH COMPENSATION RECEIVABLE BY THE ASSESSEE ON A CCOUNT OF INTEREST CHARGEABLE ON THE AMOUNTS DUE FROM THE ASSO CIATE ENTITIES BEYOND THE CREDIT PERIOD STIPULATED UNDER TH E CONTRACT. B. IN NOT APPRECIATING THE FACTS OBTAINED IN THE CASE OF PROPOSING ADJUSTMENT WITHOUT APPLYING ANY SPECIFIED ME THOD. 78. AFTER HEARING BOTH THE SIDES WE FIND THE ABOVE GROUND IS IDENTICAL TO GROUND OF APPEAL NO.2 IN ITA NO.1338/PN/2010. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUND RAISED BY THE ASSESSEE HAS BEEN RESTORED TO THE FILE OF THE AO WITH CE RTAIN DIRECTIONS. FOLLOWING THE SAME REASONING THIS ISSUE BY THE ASSESSEE IS ALSO RESTORED TO THE FILE OF THE AO WITH A DIRE CTION TO DECIDE THE ISSUE IN THE LIGHT OF THE DIRECTIONS GIVEN IN ITA NO.1338/PN/2010 FOR A.Y. 2006-07. THE ABOVE GROUNDS ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 62 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 79. GROUND OF APPEAL NO.2 BY THE ASSESSEE READS AS UNDER : IN RESPECT OF DEDUCTION U/S.10A IN RESPECT OF VARIOUS ELIGIBLE UNDERTAKINGS OF THE COMPANY : A. IN NOT ALLOWING DEDUCTION U/S.10A IN RESPECT OF VA RIOUS ELIGIBLE UNITS AMOUNTING TO RS.286,19,14,217/-. B. IN ASSUMING JURISDICTION TO ALLOW THE DEDUCTION U/S. 10A BY OBSERVING AND HOLDING THAT THE NEW UNITS/UNDERTAKINGS HAVE BEEN FORMED BY SPLITTING UP OF A BUSINESS ALREADY IN EXISTEN CE SINCE THE 1980S, AND THAT THE PROFITS AND GAINS OF THE UNITS/UND ERTAKINGS SUBSEQUENTLY SETUP BY THE COMPANY ARE NOT ELIGIBLE FOR DEDUCTION U/S.10A OF THE INCOME TAX ACT, 1961. C. IN DENYING THE DEDUCTION U/S.10A IN RESPECT OF VAR IOUS ELIGIBLE UNDERTAKINGS ON THE BASIS OF THE NATURE OF BU SINESS. D. IN RE-EXAMINING THE CONDITIONS OF ELIGIBILITY OF DEDUCTION U/S.10A IN RESPECT OF VARIOUS UNDERTAKINGS ESTABLISHED IN EARLIER YEARS. THE ASSESSING OFFICER OUGHT TO HAVE APPRECIATED THAT THE ELIGIBILITY CONDITIONS IN RESPECT OF SPLITTING UP OF BUSINESS ALREADY IN EXISTENCE IS REQUIRED TO BE COMPLIED WITH IN THE Y EAR OF FORMATION OF THE UNDERTAKING. E. IN RELYING ON VARIOUS OBSERVATIONS AND CONCLUSIONS RECORDED IN THE ASSESSMENT ORDER FOR EARLIER YEARS AND T HEREBY NOT ALLOWING DEDUCTION U/S.10A IN RESPECT OF VARIOUS ELIGI BLE UNDERTAKINGS. F. IN HOLDING AND CONCLUDING THAT NEW UNIT AT GURGA ON IS NOT EXCEPTION TO THE STAND TAKEN BY THE DEPARTMENT AND I S CLEARLY FORMED BY THE SPLITTING UP AND THE RECONSTRUCTION OF THE EXISTING BUSINESS AS PROVIDED IN SECTION 10A(2)(II) OF THE ACT O N THE BASIS THAT SOME OF THE EMPLOYEES HAVE BEEN TRANSFERRED TO TH IS UNIT AND NEW UNIT IS ALSO CARRYING ON THE SAME BUSINESS OF SOFTWARE DEVELOPMENT/ IT ENABLED SERVICES. 80. AFTER HEARING BOTH THE SIDES, WE FIND THERE ARE TOTAL 14 ELIGIBLE UNDERTAKINGS IN THE CURRENT YEAR. THERE IS NO DIS PUTE ABOUT ONE BPO UNDERTAKING. THUS, OUT OF THE REMAINING 1 3 UNDERTAKINGS 2 UNDERTAKINGS WERE ESTABLISHED IN A.Y. 2005- 06 WHICH IS COVERED BY THE DECISION OF THE ITAT VIDE ITA NO.342/PN/2013 ORDER DATED 27-05-2013 FOR A.Y. 2005-06. ONE UNDERTAKING WAS ESTABLISHED IN A.Y. 2007-08 AND WE H AVE ALREADY DECIDED THE ISSUE VIDE ITA NO.1451/PN/2011 IN TH E 63 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 PRECEDING PARAGRAPHS. 9 UNDERTAKINGS WERE ESTABLISHED UP TO A.Y. 2004-05 AND THE SAME HAS ALREADY BEEN DECIDED IN FAV OUR OF THE ASSESSEE. THUS, WE FIND ONLY ONE NEW UNDERTAKING W AS ESTABLISHED IN THE CURRENT YEAR AT GURGAON. FROM THE D ETAILS SUBMITTED BY THE ASSESSEE IN THE PAPER BOOK, WE FIND THE NEW TECHNICAL PERSONNEL ENGAGED IN THE NEW UNIT ARE AS UNDER : TECHNICAL PERSONNEL ADMIN. PERSONNEL TOTAL NEW EMPLOYEES 40 2 42 TRANSFERRED EMPLOYEES 18 - 18 TOTAL EMPLOYEES AS ON 31-03-2005 58 - 60 % OF TRANSFERRED TO TOTAL 31.03% 81. FROM THE ABOVE, IT IS CLEAR THAT THE NUMBER OF TECH NICAL MANPOWER PERSONNEL TRANSFERRED TO THE NEW UNIT AT THE END OF THE FINANCIAL YEAR DOES NOT EXCEED 50% OF THE TOTAL TECH NICAL MANPOWER ACTUALLY ENGAGED IN DEVELOPMENT OF SOFTWARE OF IT ENABLED PRODUCTS IN NEW UNIT. SINCE THE ASSESSEE SATISFIES THE CONDITION AS PER CBDT CIRCULAR NO.14/2004 DATED 08-10-20 14 WHICH HAS ALREADY BEEN REPRODUCED IN THE PRECEDING PARAGRAPHS AT PARA 59 OF THIS ORDER, THEREFORE, WE ARE OF THE CONSIDERED OPINION THAT DENIAL OF 10A DEDUCTION IN RESPECT OF VARIOUS UNDERTAKINGS IS NOT JUSTIFIED. THIS GROUND BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 82. GROUND OF APPEAL NO.3 BY THE ASSESSEE READS AS UNDER : A. IN DRAWING CONCLUSION OF EARNING MORE THAN AVERAGE P ROFITS ON THE BASIS OF COMPARABLES USED IN TRANSFER PRICING ANALYS IS HAVING DIFFERENT PURPOSE B. IN HOLDING THAT PROFIT OF RS. 77,50,20,565/- IN RESPE CT OF SOFTWARE BUSINESS ON PROTECTIVE BASIS AND RS.22,02,53,102/ - IN RESPECT OF BPO BUSINESS (INCLUDING RS.14,64,442/- ON PR OTECTIVE 64 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 BASIS) ARE MORE THAN ORDINARY PROFIT AND HENCE NOT E LIGIBLE FOR DEDUCTION U/S. 10A, WITHOUT ESTABLISHING THE ORDINARY PROFITS IN THE BUSINESS OF THE COMPANY C. IN NOT ESTABLISHING ANY ARRANGEMENT BETWEEN THE ASSESSEE AND OTHER PERSONS SO AS TO PRODUCE TO THE ASSESSEE MORE THAN ORDINARY PROFITS D. IN HOLDING THAT THE CLOSE BUSINESS CONNECTION BETWEEN T HE GROUP COMPANIES HAS ENABLED THE ASSESSEE COMPANY TO SHOW MORE THAN ORDINARY PROFITS IN RESPECT OF 10A UNITS. E. IN RESTRICTING DEDUCTION U/S 10A AT RS. 244,66,30,423/ - (VIZ. RS.236,45,12,581/- IN RESPECT OF SOFTWARE BUSINESS AND RS.8,21,17,842/- IN RESPECT OF BPO BUSINESS), AS AGAINST CLAIM OF THE COMPANY AT RS.316,42,85,161/-. 83. AFTER HEARING BOTH THE SIDES WE FIND THE ABOVE GROUND IS IDENTICAL TO GROUND OF APPEAL NO.4 IN ITA NO.1338/PN/2010. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUND RAISED BY THE ASSESSEE HAS BEEN ALLOWED WITH CERTAIN DIRECTIONS TO THE AO TO VERIFY. FOLLOWING THE SAME REASONINGS THIS GROUND BY THE ASSESSEE IS ALLOWED. 84. GROUND OF APPEAL NO.4 BY THE ASSESSEE READS AS UNDER : 4. NOT SETTING OFF OF LOSSES OF 10A UNDERTAKINGS AGAINST OTHER INCOME BY HOLDING THAT LOSSES OF NEW UNITS, IF ELIGIBLE U/S.10A, SHALL NOT BE ADJUSTED AGAINST TAXABLE PROFITS OF THE ASSESSEE, A ND INSTEAD SHALL BE ADJUSTED AGAINST THE PROFITS OF ELIGIBLE UNDE RTAKINGS UNDER SECTION 10A. 85. AFTER HEARING BOTH THE SIDES, WE FIND THE ABOVE GROUN D IS IDENTICAL TO GROUND OF APPEAL NO.4 IN ITA NO.1451/PN/2011 FOR A.Y. 2007-08. WE HAVE ALREADY DECIDED THE ISSUE IN THE PRECEDING PARAGRAPHS AND THE GROUND RAISED BY THE ASS ESSEE HAS BEEN DISMISSED. FOLLOWING THE SAME REASONING THE ABO VE GROUND BY THE ASSESSEE IS DISMISSED. 65 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 86. GROUND OF APPEAL NO.6 BEING GENERAL IN NATURE IS DISMISSED. ITA NO.282/PN/2014 (A.Y. 2009-10) : 87. GROUND OF APPEAL NO.1 BY THE ASSESSEE READS AS UNDER : 1. IN MAKING ADDITION OF RS.3,14,81,509/- TO THE TO TAL INCOME, ON ACCOUNT OF INTEREST CHARGEABLE ON DELAYED RECEIPT S FROM THE ASSOCIATED ENTERPRISES FOLLOWING ADJUSTMENT MADE IN THE TRANSFER PRICING ORDER U/S.92CA(3) OF THE INCOME TAX ACT. TH E LEARNED TRANSFER PRICING ASSESSING OFFICER ERRED : A. IN CONCLUDING THAT THE SUM OF RS.3,14,81,509/- IS T O BE THE ARMS LENGTH COMPENSATION RECEIVABLE BY THE ASSESSEE ON A CCOUNT OF INTEREST CHARGEABLE ON THE AMOUNTS DUE FROM THE ASSO CIATE ENTITIES BEYOND THE CREDIT PERIOD STIPULATED UNDER TH E CONTRACT. B. IN NOT APPRECIATING THE FACTS OBTAINED IN THE CASE OF PROPOSING ADJUSTMENT WITHOUT APPLYING ANY SPECIFIED ME THOD. C. IN NOT APPRECIATING THAT ON THE BASIS OF CUP METH OD, NO INTEREST IS RECOVERABLE FROM AES SINCE NO INTEREST IS CHARGED/RECOVERED ON DELAYED RECOVERIES FROM NON-AES ALSO. D. WITHOUT PREJUDICE TO THE ASSESSEES CONTENTION THAT N O ADJUSTMENT IS REQUIRED ON ACCOUNT OF DELAYED RECOVER IES FROM AES, IN ADDING 3 BASIS POINTS AND 2 BASIS POINTS TOWARDS GUARA NTEE COST TO THE AVERAGE LIBOR RATE FOR THE PURPOSE OF COMPUTI NG THE ADJUSTMENT ON ACCOUNT OF DELAYED RECOVERIES FROM AES. 88. AFTER HEARING BOTH THE SIDES WE FIND THE ABOVE GROUND IS IDENTICAL TO GROUND OF APPEAL NO.2 IN ITA NO.1338/PN/2010. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUND RAISED BY THE ASSESSEE HAS BEEN RESTORED TO THE FILE OF THE AO WITH CE RTAIN DIRECTIONS. FOLLOWING THE SAME REASONING THESE GROUNDS BY THE ASSESSEE ARE ALSO RESTORED TO THE FILE OF THE AO WITH A D IRECTION TO DECIDE THE ISSUE IN THE LIGHT OF THE DIRECTIONS GIVEN IN I TA NO.1338/PN/2010 FOR A.Y. 2006-07. THE ABOVE GROUNDS ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 66 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 89. GROUNDS OF APPEAL NO.2 AND 3 BY THE ASSESSEE READS AS UNDER : IN RESPECT OF DEDUCTION U/S.10A/10AA IN RESPECT OF VA RIOUS ELIGIBLE UNDERTAKINGS OF THE COMPANY : A. IN NOT ALLOWING DEDUCTION U/S.10A/10AA IN RESPECT OF VARIOUS ELIGIBLE UNITS AMOUNTING TO RS.314,92,25,203/- B. IN ASSUMING JURISDICTION TO DISALLOW THE DEDUCTION U/S.10A/10AA BY OBSERVING AND HOLDING THAT THE NEW UNITS/UNDERTAKINGS HAVE BEEN FORMED BY SPLITTING UP OF A BUSINESS ALREADY IN EXISTENCE SINCE THE 1980S, AND THAT THE PRO FITS AND GAINS OF THE UNITS/UNDERTAKINGS SUBSEQUENTLY SETUP BY THE COM PANY ARE NOT ELIGIBLE FOR DEDUCTION U/S.10A/10AA OF THE INCOM E TAX ACT, 1961. C. IN DENYING THE DEDUCTION U/S.10A/10AA IN RESPECT O F VARIOUS ELIGIBLE UNDERTAKINGS ON THE BASIS OF THE NATU RE OF BUSINESS ETC. D. IN RE-EXAMINING THE CONDITIONS OF ELIGIBILITY OF DEDUCTION U/S.10A IN RESPECT OF VARIOUS UNDERTAKINGS ESTABLISHED IN EARLIER YEARS. THE ASSESSING OFFICER OUGHT TO HAVE APPRECIATED THAT THE ELIGIBILITY CONDITIONS IN RESPECT OF SPLITTING UP OF BUSINESS ALREADY IN EXISTENCE IS REQUIRED TO BE COMPLIED WITH IN THE Y EAR OF FORMATION OF THE UNDERTAKING. E. IN RELYING ON VARIOUS OBSERVATIONS AND CONCLUSIONS RECORDED IN THE ASSESSMENT ORDER FOR EARLIER YEARS AND T HEREBY NOT ALLOWING DEDUCTION U/S.10A/10AA IN RESPECT OF VARIOUS ELIGIBLE UNDERTAKINGS. F. IN HOLDING AND CONCLUDING THAT NEW UNIT AT NOIDA SEZ IS NOT EXCEPTION TO THE STAND TAKEN BY THE DEPARTMENT AND I S CLEARLY FORMED BY THE SPLITTING UP AND THE RECONSTRUCTION OF THE EXISTING BUSINESS AS PROVIDED IN SECTION 10AA(4)(II) OF THE ACT O N THE BASIS THAT SOME OF THE EMPLOYEES HAVE BEEN TRANSFERRED TO TH IS UNIT AND NEW UNIT IS ALSO CARRYING ON THE SAME BUSINESS OF SOFTWARE DEVELOPMENT/IT ENABLED SERVICES. 3. IN HOLDING THAT THE UNIT AT TTC BPO IS FORMED BY SPLITTING UP AND RECONSTRUCTION OF THE EXISTING BPO BUSINESS OF TH E ASSESSEE WHICH IS BEING CARRIED ON AT NDS 58 UNIT AND THEREBY INCLUDING THE PROFITS OF THE TCC BPO BUSINESS IN THE PROFITS OF THE ND A 58 UNIT FOR THE PURPOSE OF ALLOWING DEDUCTION U/S.10A AND NOT CONSIDERING THE NEW UNIT AT TTC BPO AS A SEPARATE AND INDEPENDENT UNDERTAKING FOR THE PURPOSE OF SECTION 10A. 90. AFTER HEARING BOTH THE SIDES, WE FIND THERE ARE 16 ELIG IBLE UNDERTAKINGS IN THE CURRENT YEAR. THERE IS NO DISPUTE A BOUT 67 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 ONE BPO UNDERTAKING. THUS, OUT OF THE REMAINING 15 UNDERTAKINGS, 2 UNDERTAKINGS WERE ESTABLISHED IN A.Y. 2005- 06 AND THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ITA NO.342/PN/2013. ONE UNDERTAKING WAS ESTABLISHED IN A.Y. 2007-08 AND STANDS COVERED IN FAVOUR OF THE ASSESSEE BY OUR DECISION IN ITA NO.1451/PN/2011 FOR A.Y. 2007-08 WHICH HAS BEEN DECIDED IN THE PRECEDING PARAGRAPHS. 9 UNDERTAKINGS WERE ESTABLISH ED UPTO A.Y. 2004-05 AND THE ISSUE STANDS DECIDED IN FAVOUR OF THE ASSESSEE. THE UNDERTAKING AT GURGAON ESTABLISHED IN A.Y. 2008-09 HAS ALREADY BEEN ALLOWED WHILE DECIDING THE ASSESS EES APPEAL FOR A.Y. 2008-09 IN THE PRECEDING PARAGRAPHS. THU S, ONLY 2 NEW UNDERTAKINGS WERE ESTABLISHED IN THE CURRENT YEAR AT TTC BPO AND NOIDA SEZ BOTH OF WHICH ARE 10AA UNITS. TTC BPO, EVEN THOUGH HELD AS ELIGIBLE FOR DEDUCTION U/S.10A IS TREATED AS PART OF BPO UNDERTAKING AT NDS 58. FRO M THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE WE FIND THE TEC HNICAL PERSONNEL ENGAGED IN THE NEW UNITS ARE AS UNDER : NOIDA SEZ TECHNICAL PERSONNEL ADMIN. PERSONNEL TOTAL NEW EMPLOYEES 357 17 374 TRANSFERRED EMPLOYEES 304 0 304 TOTAL AS AT 31 - 03 - 2005 661 17 678 TOTAL EMPLOYEES 304 TRANSFERRED EMPLOYEES 661 % OF TRANSFERRED TO TOTAL 45.99% TCC BPO TECHNICAL PERSONNEL ADMIN. PERSONNEL TOTAL NEW EMPLOYEES 12 0 12 TRANSFERRED EMPLOYEES 4 0 4 TOTAL AS AT 31 - 03 - 2005 16 0 16 68 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 TOTAL EMPLOYEES 4 TRANSFERRED EMPLOYEES 16 % OF TRANSFERRED TO TOTAL 25.00% 91. FROM THE ABOVE, IT IS CLEAR THAT NUMBER OF TECHNICAL MANPOWER TRANSFERRED TO NEW UNIT AT THE END OF THE FINAN CIAL YEAR DOES NOT EXCEED 50% OF THE TOTAL TECHNICAL MANPOWE R ACTUALLY ENGAGED IN DEVELOPMENT OF SOFTWARE OR IT ENABLED PRODUCTS IN NEW UNITS. THEREFORE, THE ASSESSEE SATISFIES T HE EMPLOYEE CONDITION AS PER CBDT CIRCULAR NO.14/2004 DATED 08-10-2014 WHICH HAS ALREADY BEEN REPRODUCED IN THE PRECEDING PARAGRAPHS. UNDER THESE CIRCUMSTANCES WE HO LD THAT THE DENIAL OF 10A DEDUCTION IN RESPECT OF VARIOUS UNDERTAK INGS IS NOT JUSTIFIED. GROUNDS RAISED BY THE ASSESSEE ARE ACCO RDINGLY ALLOWED. 92. GROUND OF APPEAL NO.4 BY THE ASSESSEE READS AS UNDER : NOT SETTING OFF OF LOSSES OF 10A UNDERTAKINGS AGAINST O THER INCOME BY HOLDING THAT LOSSES OF UNITS, IF ELIGIBLE U/S.10A, SHA LL NOT BE ADJUSTED AGAINST TAXABLE PROFITS OF THE ASSESSEE AS PER TH E PROVISIONS OF SECTION 10A(6) AND INSTEAD SHALL BE ADJUSTE D AGAINST THE PROFITS OF ELIGIBLE UNDERTAKINGS UNDER SECTION 10A . 93. AFTER HEARING BOTH THE SIDES, WE FIND THE ABOVE GROUN D IS IDENTICAL TO GROUND OF APPEAL NO.5 IN ITA NO.1338/PN/2010 FO R A.Y. 2006-07. WE HAVE ALREADY DECIDED THE ISSUE AND ALLOW ED THE GROUND RAISED BY THE ASSESSEE. FOLLOWING THE SAME REASONIN THIS GROUND BY THE ASSESSEE IS ALLOWED. 94. GROUND OF APPEAL NO.5 BY THE ASSESSEE READS AS UNDER : IN RESPECT OF INVOKING PROVISIONS OF SECTION 10A(7)/10 AA(9) READ WITH SECTION 80IA(10) : 69 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 A. IN DRAWING CONCLUSION OF EARNING MORE THAN AVERAG E PROFITS ON THE BASIS OF COMPARABLES USED IN TRANSFER PRICING ANA LYSIS HAVING DIFFERENT PURPOSE, WITHOUT ESTABLISHING THE OR DINARY PROFITS IN THIS BUSINESS. B. IN HOLDING THAT PROFIT OF RS.50,77,52,091/- IN RE SPECT OF SOFTWARE BUSINESS ON PROTECTIVE BASIS AND RS.18,70,35,470 /- IN RESPECT OF BPO BUSINESS (VIZ.,TOTAL RS.69,47,87,561/-) ARE MORE THAN ORDINARY PROFIT AND HENCE NOT ELIGIBLE FOR DED UCTION U/S.10A. C. IN NOT APPRECIATING THAT THE PROFIT MARGIN OF TH E ASSESSEE IS COMPARABLE WITH THE AVERAGE PROFITS OF THE TOP SOFTWA RE COMPANIES. D. IN NOT ESTABLISHING ANY ARRANGEMENT BETWEEN THE ASSE SSEE AND OTHER PERSONS SO AS TO PRODUCE TO THE ASSESSEE MORE THA N ORDINARY PROFITS. E. IN HOLDING THAT THE CLOSE BUSINESS CONNECTION BETWEE N THE GROUP COMPANIES HAS ENABLED THE ASSESSEE COMPANY TO SHOW M ORE THAN ORDINARY PROFITS IN RESPECT OF 10A UNITS. F. IN RESTRICTING DEDUCTION U/S.10A AT RS.264,75,68,92 9/- (VIZ. RS.264,14,73,112/- IN RESPECT OF SOFTWARE BUSINESS AND RS.60,95,817/- IN RESPECT OF BPO BUSINESS), AS AGAINST CLA IM OF THE COMPANY AT RS.334,23,56,490/-. G. WITHOUT PREJUDICE TO THE ASSESSEES CONTENTION THAT NO ADJUSTMENT IS REQUIRED U/S.10A(7)/10AA(9) R.W.S.80IA(10 ), WHILE COMPUTING THE EXCESS PROFITS IN RESPECT OF BPO BUSINESS, IN CONSIDERING THE ENTIRE COST OF THE BPO BUSINESS, INSTEAD OF PROPORTIONATE COST RELATABLE TO THE BUSINESS WITH AES. 95. AFTER HEARING BOTH THE SIDES, WE FIND THE ABOVE GROUN D IS IDENTICAL TO GROUND OF APPEAL NO.4 IN ITA NO.1338/PN/2010 FO R A.Y. 2006-07. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUND RAISED BY THE ASSESSEE HAS BEEN ALLOWED. FOLLOWING THE SAME REASONING THIS GROUND BY THE ASSESSEE IS ALLOWED. 96. GROUND OF APPEAL NO.6 BY THE ASSESSEE READS AS UNDER : 6. IN NOT ALLOWING DEDUCTION FOR ESOP COST OF RS.20, 19,042/- CHARGED TO THE PROFIT AND LOSS ACCOUNT BY OBSERVING TH AT IT IS NOTHING BUT A NOTIONAL ENTRY AND NO COST IS ACTUALLY INCURRED BY THE COMPANY. 70 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 97. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE D URING THE YEAR HAS INCURRED EXPENDITURE OF RS.20,19,042/- IN RES PECT OF ESOP COMPENSATION. THE AO ASKED THE ASSESSEE TO JU STIFY THE CLAIM OF ALLOWABILITY OF ESOP. IT WAS SUBMITTED THAT ESOP IS JUST ANOTHER FORM OF EMPLOYEE COMPENSATION AND ACCEPT ED BUSINESS PRACTICE. THE ISSUE OF SHARES UNDER ESOP INCLUDIN G THE TERMS AND CONDITIONS ARE GOVERNED BY SEBI GUIDELINES . FURTHER, THE ACCOUNTING OF THE SAME IS ALSO GOVERNED BY GUIDANCE NOTE ISSUED BY THE INSTITUTE OF CHARTERED ACCO UNTANTS OF INDIA, I.E. GUIDANCE NOTE ON ACCOUNTING FOR EMPLOYEE SHAR E BASED PAYMENTS. THUS THE AMOUNT CHARGED TO THE PROFIT AND LOSS ACCOUNT REPRESENTING THE COST OR EXPENDITURE ON E MPLOYEE COMPENSATION BY WAY OF ESOP IS DETERMINABLE AND SCIENTIFICALL Y COMPUTED. HENCE, THE SAME IS ALLOWABLE AS DEDUCTION WHILE COMPUTING THE TOTAL INCOME. THE ASSESSEE ALSO RELIED ON THE DECISION OF THE BANGALORE SPECIAL BENCH OF THE TRIBUNAL IN TH E CASE OF BIOCON LIMITED. 98. HOWEVER, THE AO WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE. AFTER CONSIDERING ALL THE FACTS, ARGUMENTS AND EVIDENCES PUTFORTH BY THE ASSESSEE THE AO HELD THAT SUCH ESOP COST CHARGES TO THE PROFIT AND LOSS ACC OUNT IS NOTHING BUT A NOTIONAL ENTRY AND NO COST IS ACTUALLY INCU RRED BY THE COMPANY. HE ACCORDINGLY DISALLOWED THE CLAIM OF DEDUCT ION OF RS.20,19,042/- 99. THE ASSESSEE APPROACHED THE DRP, HOWEVER, THE DR P WAS ALSO NOT SATISFIED WITH THE ARGUMENTS ADVANCED BY THE AS SESSEE AND UPHELD THE ACTION OF THE AO. SUBSEQUENTLY, THE AO IN THE 71 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 ORDER PASSED U/S.143(3) R.W.S.144C DISALLOWED THE ABOVE AMOUNT. 100. AGGRIEVED WITH SUCH ORDER OF THE AO THE ASSESSEE IS IN APPEAL BEFORE US. 101. THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO THE D ECISION OF THE BANGALORE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. (SUPRA) SUBMITTED THAT THE ISSUE STANDS DECID ED IN FAVOUR OF THE ASSESSEE. HE SUBMITTED THAT FOLLOWING THE ABO VE DECISION THE DRP IN SUBSEQUENT ASSESSMENT YEARS HAS ALLO WED SUCH CLAIM OF THE ASSESSEE. HE ACCORDINGLY SUBMITTED THA T THE CLAIM OF DEDUCTION ON ACCOUNT OF ESOP SHOULD BE ALLOWED. 102. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE AO. 103. AFTER HEARING BOTH THE SIDES, WE FIND FROM THE DOCUME NTS FILED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE DRP IN SUBSEQUENT YEARS, FOLLOWING THE DECISION OF THE BANGALORE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. (SUPRA), HAS ALLOWED THE CLAIM OF ESOP COST. UNDER THESE CIRCUMSTANCES, WE DEEM IT PROPER TO RESTORE THE ISSUE T O THE FILE OF THE AO WITH A DIRECTION TO VERIFY THE RECORDS OF THE SUBSEQUENT YEARS. IN CASE THE SAME HAS BEEN ALLOWED E ITHER BY THE DRP OR BY THE AO, THEN THE CLAIM OF ESOP COST HAS T O BE ALLOWED BY HIM. NEEDLESS TO SAY THE AO SHALL GIVE DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE WHILE DECIDING THE ISSUE. WE HOLD AND DIRECT ACCORDINGLY. THIS GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 72 ITA NOS.1338/PN/10, 1451/PN/11, 2507/PN/12 AND 282/PN/14 104. GROUND OF APPEAL NO.7 BY THE ASSESSEE BEING GENER AL IN NATURE IS DISMISSED. 105. IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE FOR THE ABOVE YEARS ARE PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 06-06-2016. SD/- SD/- ( VIKAS AWASTHY ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE ; DATED : 06 TH JUNE, 2016. ( )'+ , / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. THE PR. CIT - II, PUNE 4. 5. 6. THE CIT-II, PUNE $ ''(, (, / DR, ITAT, B PUNE; - / GUARD FILE. / BY ORDER , // TRUE COPY // // TRUE COPY // // $ ' //TRUE C /0 ' ( / SR. PRIVATE SECRETARY (, / ITAT, PUNE