Computer Sciences Corporation India Private Limited, CHENNAI V. ACIT, CHENNAI

ITA 1654/CHNY/2011

• Counselvise Citation: [2023] 100 COUNSELVISE.COM (IT) 6781 (ITAT-INDORE)
• Duration Of Justice: 11 year(s) 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-10-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: DB
• Next Hearing Date: 11-07-2023
• Assessment Year: 2007-2008
• Appeal Filed On: 09-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Rule of consistency; Earning of tax free income; Permanent establishment; Assessment record; Reason to believe; Revenue expenditure; Capital expenditure; Rule 8D
• Section: 92C; 143(3); 92D; 234B; 14A; 133(6); 10B; 43; 13; 22

Judgement Text

Page 1 of 47 आयकर अपीलȣय अͬधकरण, इंदौर Ûयायपीठ, इंदौर IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH, INDORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI B.M. BIYANI, ACCOUNTANT MEMBER ITA No. 1654/CHNY/2011 Assessment Year: 2007-08 Computer Sciences Corporation India Private Limited, [Formerly Covansys (India) Private Limited], Unit 13, Block 2, SDF Buildings, Madras Export Processing Zone, Tambaram, Chennai बनाम/ Vs. ACIT, Company Circle 1(3), Chennai (Assessee / Appellant) (Revenue / Respondent) PAN: AAACC1351M Assessee by Shri Neeraj Jain, Adv. Shri Abhishek Agrawal, CA Revenue by Shri P.K. Mishra, CIT DR Date of Hearing 12.07.2023 Date of Pronouncement आदेश / O R D E R Per B.M. Biyani, A.M.: Feeling aggrieved by assessment-order dated 15.09.2011 passed by ACIT, Company Circle-I(3), Chennai u/s. 143(3) read with section 92CA(3) & 144C(5) of the Income-tax Act, 1961 for Assessment-Year [“AY”] 2007-08, the assessee has filed this appeal. Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 2 of 47 2. This appeal was originally filed at Chennai Bench of ITAT on 10.10.2011 and registered as ITA No. 1654/CHNY/2011. The ITAT, Chennai Bench dismissed this appeal vide order dated 12.11.2013 for non- prosecution by assessee. Subsequently, the said order was re-called vide order dated 17.01.2014 in assessee’s M/A No. 212/MDS/2013. This way, the appeal again became live for adjudication. Thereafter, Hon’ble President, vide Order No. F.28-Cent.Jd(AT)/2020 dated 17.03.2020, held on record, transferred this appeal to ITAT, Indore Bench. This way, this appeal with same number has come up before us for hearing and adjudication. 3. Brief facts leading to present appeal are such that the assessee- company filed return of income on 30.10.2007 declaring a total income of Rs. 19,30,66,350/- for AY 2007-08. The case was selected under scrutiny and statutory notices u/s 143(2)/142(1) were issued by AO and complied by assessee. The AO found that the assessee had entered into international transactions with its Associated Enterprises (AEs) situated outside India. The AO made a reference to Transfer Pricing Officer (TPO) to determine the arm length price (ALP) of those transactions. Vide order dated 26.10.2010 passed u/s 92CA(3), the TPO reported that the transactions undertaken by assessee were not at ALP and an upward adjustment of Rs. 37,69,02,830/- was required. Then, the AO served a draft-assessment order dated 28.12.2010 upon the assessee proposing to make additions/disallowances, namely (i) upward adjustment of transfer-pricing at Rs. 37,69,02,830/- as per TPO’s order (ii) re-working of exemption u/s 10A/10B, (iii) capitalization of civil & tiling work in leasehold premise, (iv) depreciation on software, and (v) disallowance u/s 14A. With such disallowances/additions, the AO proposed to determine total income at Rs. 65,98,26,453/-. Against draft- assessment order, the assessee filed objection dated 28.01.2011 to Disputes Resolution Panel (DRP). The DRP passed order dated 08.09.2011 u/s 144C(5) of the act whereby the objections of assessee were turned down and the draft assessment order of AO was confirmed. Ultimately, the AO passed Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 3 of 47 final assessment-order dated 15.09.2011 u/s 143(3) having regard to TPO’s order u/s 92CA(3) and DRP’s order u/s 144C(5). Aggrieved by order of AO, the assessee has come in this appeal. 4. The grounds raised by assessee are as under: “1. The order of the AO passed pursuant to the order of the TPO and the directions issued by the DRP is erroneous, bad in law, prejudicial to the appellant and contrary to the facts and circumstances of the case. Grounds of objection relating to transfer pricing matters 2. The ld. AO and Hon'ble DRP Members have erred in law and facts by upholding the action of the Ld. TPO wherein the Ld. TPO has erred in law and in facts, for not providing any reasons for disregarding the assessee’s approach of determining the arm’s length price at an entity level in the Transfer Pricing order. 3. The ld. AO and Hon'ble DRP Members have erred in law and facts by rejecting the entity wide operating profit margin and by bifurcating the single transaction involving provision of software development services on a unit wise basis for computing arm’s length price. 4. The ld. AO and Hon'ble DRP Members have erred in law and in facts by not considering the factual position that the Bangalore Unit has charged same billing rate as charged by other units whose international transactions have been accepted to be at arm’s length basis. 5. The ld. AO and Hon'ble DRP Members have erred in law and in facts by not comparing the operating profit margin earned by Bangalore Unit as against operating profit margin earned by the assessee in providing services to unrelated parties in Mumbai Unit by application of international Transactional Net Margin Method (‘Internal TNMM’). 6. The ld. AO and Hon'ble DRP have erred in law and in facts, by attributing the reasons for loss incurred by Bangalore Units to the international transactions and not taking into consideration the economic and commercial reasons which were unique to the Bangalore Units. 7. The ld. AO and Hon'ble DRP have erred in law and in facts by not accepting the economic analysis undertaken by the assessee in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the assessee’s international transaction is not at arm’s length. 8. The ld. AO and Hon'ble DRP erred in law and in facts by exercising his powers under section 133(6) of the Act to obtain information which was not Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 4 of 47 available in public domain and relying on the same for comparability purposes. 9. The ld. AO and Hon'ble DRP erred in law and in facts, by accepting/ rejecting companies based on unreasonable comparability criteria. 10. The ld. AO and Hon'ble DRP erred in law and in facts, by rejecting certain comparable companies identified by the assessee for having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months). 11. The ld. AO and Hon'ble DRP have erred in law and in facts, by determining the arm’s length margin/price using only F.Y. 2006-07 data which was not available to the assessee at the time of complying with the transfer pricing documentation requirements. 12. The ld. AO and Hon'ble DRP have erred, in law and in facts, by applying the turnover ≤ Rs. 1 crore as a comparability criterion. 13. The ld. AO and Hon'ble DRP have erred, in law and in facts, by rejecting certain comparable companies identified by the assessee as having economic performance contrary to the industry behavior (e.g. companies which showed a diminishing revenue trend). 14. The ld. AO and Hon'ble DRP erred, in law and in facts, by rejecting certain comparable companies identified by the assessee using employee cost greater than 25% of the total revenues as a comparability criterion. 15. The ld. AO and Hon'ble DRP erred, in law and in facts, by rejecting certain comparable companies identified by the assessee using onsite revenues greater than 75% of the export revenues as a comparability criterion. 16. The ld. AO and Hon'ble DRP erred, in law and in facts, by not taking into consideration foreign exchange fluctuation gain/loss in computing the operating margin of the assessee as well as the comparable companies. 17. The ld. AO and Hon'ble DRP Members erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the assessee vis-à-vis the comparables. 18. The ld. AO and Hon'ble DRP erred, in law and facts, in computing the ALP without giving benefit of +/- 5% under the proviso to section 92C of the Act. 19. The ld. AO and Hon'ble DRP erred in law and facts, by not restricting the value of adjustment only to the extent of the value of international transactions undertaken by the assessee in the Bangalore units. Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 5 of 47 Grounds of objection relating to corporate tax matter: 20. In computing the deduction u/s 10A/10B of the Act. a. The ld. AO has erred in excluding expenditure incurred in foreign currency from the export turnover of Chennai Unit II, Bangalore SBU STP Unit (Units claiming deduction u/s 10A/10B), when such items were not, in the first place, included in the export turnover of the said Units. b. Without prejudice to ground (a) above, the ld. AO has erred in treating expenditure in foreign currency as expenditure incurred for providing “technical services” outside India without appreciating the fact that the assessee is engaged in provision of software development services and not technical services. c. Without prejudice to ground (a) and (b) above, the ld. AO has erred in holding that expenses incurred in foreign currency should be excluded from export turnover of units claiming deduction u/s 10A/10B, but not from total turnover of the said Units. 21. In computing the deduction u/s 10A/10B of the Act. a. The ld. AO has erred in excluding telecommunication expenditure incurred in connection with the delivery of computer software outside India from the export turnover of Chennai Unit II, and Bangalore SBU STP Unit (Units claiming deduction u/s 10A/10B), when such items were not, in the first place, included in the export turnover of the said Units. b. Without prejudice to ground (a) above, the ld. AO has erred in excluding telecommunication expenditure incurred in connection with the delivery of computer software outside India from the export turnover of Chennai Unit II and Bangalore SBU STP Unit (Units claiming deduction u/s 10A/10B) to the extent of the expenditure incurred in Indian rupees. c. Without prejudice to ground (a) and (b) above, the ld. AO has erred in holding that while telecommunication expenditure incurred in connection with the delivery of computer software outside India should be excluded from export turnover of Units claiming deduction u/s 10A/10B, but not from total turnover of the said Units. 22. The ld. AO erred in considering expenditure incurred towards civil and tilling expenditure as capital in nature as the same does not result in any enduring benefit to the company. 23. The ld. AO erred in considering expenditure incurred by the assessee toward software license fees for application/project specific software as capital expenditure. Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 6 of 47 24. The ld. AO has erred in applying Rule 8D for the subject A.Y. and erred in disallowing expenditure towards earning of such income, under section 14A, whereas, no expenditure was in fact incurred by the assessee towards earning such income. 25. The ld. AO has erred in computing interest u/s 234B of the Act on the assessed income since the addition to the returned income on account of Transfer Pricing adjustment is only a notional income and not actual earned income. 26. The appellant craves leave to add, alter, vary, omit, amend or delete one or more of the above grounds at any time before, or at the time of, hearing of the appeal.” Ground No. 1: 5. This ground is general and does not require any specific adjudication. Ground No. 2 to 19: 6. In these grounds, the assessee has challenged the transfer pricing adjustment of Rs. 37,69,02,830/- made by AO. 7. Apropos to this issue, the facts are such that the assessee-company was a wholly-owned subsidiary of “Covansys (Mauritius) Limited” while the ultimate holding company was “Covansys Corporation, USA”. The assessee was engaged in the business of providing ‘application, maintenance and development services’. The assessee basically served as an ‘offshore software development and service centre’ to its associated enterprises/related parties (AEs) located in different countries although it also provided similar services to unrelated parties located in domestic territory as well as foreign countries. During the year, the assessee undertook following ‘international transactions’ with AEs as detailed by TPO in Para No. 4 of his order: Name of the Associate Transactions Amount Benchmarking method adopted Covansys Corpn, USA Purchase of fixed assets, Export of software development and support services 30839420 44520236955 Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 7 of 47 Covansys (Singapore) Pte Ltd. Export of software development and support services 158456147 TNMM Covansys UK Ltd. Export of software development and support services 112804278 Covansys Belgium NV Export of software development and support services 25352418 Covansys Deutschland GMBH,Germany Export of software development and support services 28154191 Covansys SRI, Italy Export of software development and support services 596207 Covansys S L. Spain Export of software development and support services 11083994 Covansys Netherland B.V. Export of software development and support services 1045739 Covansys Canada, Inc Export of software development and support services 4484863 Covansys Netherland B.V. Reimbursement of travel, communication expenses etc. 8174789 On actual basis Covansys Corpn, USA Reimbursement of travel, communication expenses etc. 132223196 Covansys UK Ltd. Reimbursement of travel, communication expenses etc. 11900559 Covansys Belgium NV Reimbursement of travel, communication expenses etc. 641361 Total 4840135117 8. In Transfer Pricing Study Report (TPSR) submitted to department, the assessee benchmarked above transactions as per ‘Transactional Net Margin Method (TNMM)’ as the ‘most appropriate method’ and for application of TNMM, the assessee considered itself to be the ‘tested party’ and adopted % ratio of Operating Profit/Operating Cost (OP/OC%) as the Profit Level Indicator (PLI). The assessee computed its overall ‘entity-level’ PLI at 14.16%. Then, the assessee did a methodical search and considered 28 ‘external comparables’ and worked out mean PLI of 14.53% of those external comparables. With (-)/(+)5% tolerance-range permitted as per 2 nd Proviso to section 92C(2), the assessee claimed that the mean PLI of 14.53% of external comparables yielded the acceptable lower range of 8.80% and higher rate of 20.25% of PLI. Therefore, the assessee claimed that its own PLI of 14.16% was within safe harbour range of mean PLI of comparables at Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 8 of 47 14.53% [with (-)/(+)5% tolerance-range] and the international transactions undertaken by it must be accepted as having been done at arm’s length price (ALP). 9. During assessment-proceeding, the AO referred matter to Transfer Pricing Officer (TPO). During proceeding, the TPO accepted (i) TNMM as ‘most appropriate method’, and (ii) OP/OC% as “PLI” for working of TNMM, as adopted by assessee. But he made certain modifications in the approach of assessee. He observed that the assessee-company was having 5 different units at different locations, namely (i) Bangalore Unit, (ii) Bangalore Strategic Business Unit (SBU), (iii) Chennai-I Unit, (iv) Chennai-II Unit, and (v) Mumbai Unit. Therefore, he called for data of standalone PLI of those units to which the assessee submitted following data which is noted by TPO at Page No. 14 of his order: Unit PLI (OP/OC)% Bangalore Unit-I (-)7.95% Bangalore SBU (-)0.25% Chennai Unit-I 25.32% Chennai Unit-II 26.94% Mumbai Unit (-)4.97% The TPO rejected the ‘entity-level’ benchmarking done by assessee. Instead he made ‘unit-level’ comparison i.e. PLI of each unit was compared with the PLI of external comparables. Secondly, the assessee claimed that ‘internal comparables’ of assessee must be preferred over ‘external comparables’ but the TPO rejected. Thirdly, the TPO modified the list of ‘external comparables’. While the assessee adopted 28 external comparables, the TPO made certain inclusions/exclusions and came to finalize a set of 26 comparables. Ultimately, the TPO accepted ‘unit-level’ approach; computed mean PLI of 26 external comparables at 25.44%; and thereby recommended upward adjustment of Rs. 37,69,02,830/- for first 2 loss-making units of Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 9 of 47 Bangalore (Rs. 14,32,37,643 for Bangalore Unit-I + Rs. 23,36,65,188/- for Bangalore SBU). Brief details of the working made by TPO, in Para 21 at Page 99, is as under: Bangalore Unit-I: Total Sales 39,48,33,177 Less: Loss(-) 7.95 on cost 7.95 on cost becomes 7.95/92.05 = 8.64 on sales 3,41,13,586 Total cost 42,89,46,763 Add: Arm’s Length Profit (25.44 on cost) 10,91,24,056 Arm’s Length Sales 53,80,70,820 Actual Sales 39,48,33,177 Upward adjustment to be made to sales 14,32,37,643 Bangalore SBU: Total Sales 90,73,10,775 Less: Loss (-)0.25 on cost 0.25 on cost becomes 0.25/99.75 = 0.25 on sales 22,68,276 Total cost 90,95,79,051 Add: Arm’s Length Profit (25.44 on cost) 23,13,96,910 Arm’s Length Sales 1,14,09,75,963 Actual Sales 90,73,10,775 Upward adjustment to be made to sales 23,36,65,187 10. The matter went to DRP where the assessee filed objections against TPO’s order but the DRP did not accept and upheld TPO’s order. Finally, the AO passed assessment-order making upward adjustment of Rs. 37,69,02,830/- as recommended/upheld by TPO/DRP. 11. The assessee is still not comfortable with the upward adjustment made by AO and has come before us assailing the same by raising as many as Ground No. 2 to 19. Ld. AR has filed a detailed Written-Submission which is held on record. During extensive hearing before us running over several hours, Ld. AR pleaded following issues and refrained from pleading other issue, if any, that might have been raised in grounds or written- submission. Therefore, we are confining our adjudication on the following issues pleaded before us; other issues, if any, are treated as non- pleaded/non-pressed and do not require any adjudication from us: Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 10 of 47 (A) ‘Entity-level’ approach of assessee is wrongly rejected. (B) ‘Internal benchmarking’ is wrongly denied. (C) Certain comparable added by TPO in the list of ‘external comparables’ are liable to be excluded. (A) ‘Entity-level’ approach of assessee is wrongly rejected: 12. Ld. AR for assessee strongly supported the “entity-level” approach of assessee and opposed the “unit-level” approach adopted by TPO/AO on several counts as under: 12.1 Firstly, Ld. AR carried us to the following legal provisions of Income- tax Act, 1961 and Income-tax Rules, 1962: (i) Rule 10A(d) prescribes definition of “transaction” as under: “Transaction” includes a number of closely-linked transactions. (ii) Rule 10B(1)(e) itself prescribes for benchmarking of international transaction by comparing net profit earned by ‘the enterprise’; the said Rule reads, at the relevant time, as under: “10B.(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— (a) to (d) XXX (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 11 of 47 or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.” [Emphasis supplied] (iii) The term “Enterprise” is defined in section 92F(iii) as under: “92F. In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires,— (i)to (ii) xxx (iii) "enterprise" means a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights, or the provision of services of any kind, or in carrying out any work in pursuance of a contract, or in investment, or providing loan or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, whether such activity or business is carried on, directly or through one or more of its units or divisions or subsidiaries, or whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or places; (iv) The term “person” is defined in section 2(31) to include “a company”. Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 12 of 47 Ld. AR contended that from a conjoint reading of Rule 10A(d), Rule 10B(1)(e), section 92F(iii) and section 2(31), one can easily conclude that for application of TNMM, net profit margin entered by an ‘enterprise’ i.e. the person which in present case is the assessee-company, is required to be compared with the net profit margin earned by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction. Therefore, according to Ld. AR, the law permits ‘entity-level’ comparison. 12.2 Then, the Ld. AR submitted that in following decisions, the above legal provisions have been interpreted and ‘entity-level’ comparison has been upheld: (i) Sony Ericsson Mobile Communication India Pvt. Ltd. Vs. CIT 374 ITR 118 (Delhi HC): Relevant Paras of decision are extracted below: “80..... Rule 10A in clause (d) states that “for the purpose of this Rule and Rules 10AB and 10E, the term ‘transaction' would include a number of ‘closely linked transactions’. This Rule in positive terms declares that the legislative intent is not to deviate from the generic rule that singular includes plural. The meaning or definition of the expression ‘transaction' in clause (d) to Rule 10A read with sub-section (1) to Section 92C, therefore, does not bar or prohibit clubbing of closely connected or intertwined or continuous transactions. This is discernible also from sub-rule (2) to Rule 10B quoted above. The sub-rule refers to ‘services provided', ‘functions performed', ‘contractual terms (whether or not such terms are formal or in writing) of the transactions' which lay down explicitly or impliedly the responsibilities, risks and benefits to be divided between the respective parties to the transactions. Use of plurality by way of necessity and legislative mandate is evident in the said Rule. 81. Similarly, sub-rule (3) to Rule 10B refers to transactions being compared or comparison of the enterprises entering into such transactions likely to affect the price or cost charged etc. A reading of Rule 10C reassures and affirms that the general principle of plurality is not abandoned or discarded. 82. There is considerable tax literature and text that CUP Method, i.e. Comparable Uncontrolled Price Method, RP Method, i.e. Resale Price Method and CP Method, i.e. Cost Plus Method can be applied to a transaction or closely linked, or continuous transactions. Profits Split Method and TNM Method grouped as ‘transactional profit methods', can be equally effective and reliable when applied to closely linked or continuous transactions. Thus, it would be inappropriate to proceed with the arm's length computation methods, Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 13 of 47 with a pre-conceived suppositions on singularity as a statutory mandate. Clubbing of closely linked, which would include continuous transactions, may be permissible and not ostracized. Aggregation of closely linked transactions or segregation by the assessed should be tested by the Assessing Officer/TPO on the benchmark and the exemplar; whether such aggregation/segregation by the assessee should be interfered in terms of the four clauses stipulated in Section 92C(3) of the Act, read with the Rules. It would, among other aspects, refer to the method adopted and whether reliability and authenticity of the arm's length determination is affected or corrupted. 83. We now proceed to examine the TNM Method, whether there is prohibition in applying this method on entity to entity basis, and if not, when is it permissible to apply entity to entity comparison. The discussion would also answer the question, when is clubbing or bunching or transactions permissible in TNM Method. 89. The TNM Method has seen a transition from a disfavoured comparable method, to possibly the most appropriate Transfer Pricing method due to ease and flexibility of applying the compatibility criteria and enhanced availability of comparables. Net profit record/data is assessable and within reach. It is readily and easily available, entity-wise in the form of audited accounts. The TNM Method is a preferred transfer pricing arm's length principle for its proficiency, convenience and reliability. Ideally, in TNM Method preference should be given to internal or in-house comparables. In absence of internal comparables, the taxpayer can and would need to rely upon external comparables, i.e. comparable transactions by independent enterprises. For several reasons, database providers, it is apparent, have the requisite information and data of external comparables to enable comparability analysis of the controlled and uncontrolled transactions with necessary adjustment to obtain reliable results under TNM Method. This method also works to the benefit and advantage of the tax authorities in view of convenience and easier availability of data not only from third party providers, but on their own level, i.e. assessment records of other parties. 91. In case the tested party is engaged in single line of business, there is no bar or prohibition from applying the TNM Method on entity level basis. The focus of this method is on net profit amount in proportion to the appropriate base or the PLI. In fact, when transactions are inter-connected, combined consideration may be the most reliable means of determining the arm's length price. There are often situations where closely linked and connected transactions cannot be evaluated adequately on separate basis. Segmentation may be mandated when controlled bundled transactions cannot be adequately compared on an aggregate basis. Thus, taxpayer can aggregate the controlled transactions if the transactions meet the specified common portfolio or package parameters. For complex entities or where one of the entities is not plain vanilla distributor, it should be applied when necessary and applicable comparables on functional analysis, with or without adjustments are available. Otherwise, the TNM Method should not be adopted or applied on account of being an inappropriate method.” Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 14 of 47 (ii) CIT Vs. Birlasoft India Limited – ITA No. 4001/Del/2009 for AY 2004-05: Relevant Paras of decision are extracted below: “3. Assessing Officer has made a reference to the TPO for verification and determination of ALP in respect of international transaction entered with associate enterprises. Learned TPO did not accept the transfer pricing report submitted by the assessee in Form No. 3CEB. He has recommended the adjustment of Rs. 4,95,51,723. This has been noticed by the Learned CIT(Appeals) in paragraph No. 4.2.3 and it reads as under: STP Units Aggregate Margin of STP unit Arm’s length margin (as computed by TPO) Addition made by the TPO/A.O Noida STP Unit 1 2.11% 14.01 % 2,27,05,996 Noida STP Unit 2 17.11% 14.01% Nil Chennai STP -21.98% 14.01% 2,68,45,727 Total 4,95,51,723 4. On appeal, Learned CIT(Appeals) has reappreciated the controversy and arrived at a conclusion that arithmetic mean of profit level indicator of the comparable selected by the Assessing Officer is 14.01% whereas assessee has disclosed arithmetic mean of its international transaction with associate enterprises carried out in all the three STP units at 10.91%. This operating profit disclosed by the assessee is within the tolerable band provided in the proviso appended to sec. 92C(2) and, therefore, no adjustment is required. 10. Before adverting to the facts whether as a standalone unit for the purpose of determining the ALP relating to international transaction is right or wrong, we have a glance over the details placed on record by the learned counsel for the assessee in a tabular form at page 158 of the paper book exhibiting the transaction of each unit with related parties and unrelated parties. The first STP unit is Noida Unit. It has shown OP over TC with respect to related parties at 8.42%. In the case of unrelated parties, it has shown OP over TC at (-) 30.57%. The total result is 2.11%. Similarly at Noida-2, the operating profit is 26.17% in the case of related parties, it (-)25.82% in the case of unrelated parties and 17.11% is the overall result. At Chennai, it is (-)20.12% for related parties, (-)26.97% for unrelated parties and overall result is (-)21.98%. With respect to non STP Unit, the operating profit is 11.97% in respect of related parties and 14.79% in respect of unrelated parties. The overall result of the company is 14.33% in the case of related parties, (–)14.10% in respect of unrelated parties. The overall operating profit margin of international transaction is 10.91%. This result is within the tolerance band provided in the proviso to sec. 92C(2) of the Act and, therefore, no adjustment is required. Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 15 of 47 Learned TPO has recommended the adjustment by ignoring the result of Noida STP Unit. 2. We have noticed this working in paragraph No.3 extracted supra. 11. Learned First Appellate Authority did not accept the approach of TPO for segregating the margin earned by the assessee in its various STP units. The reasons for not concurring with the TPO are that the assessee had provided software development services, such as, software development services, software maintenance and repair services, quality testing services from its three units. It is an identical services. 12. There is no significant functional difference in the software development and maintenance services to related and unrelated values. The services rendered by the STP Unit were rendered to the same AEs of the assessee, namely, Birla Soft Inc. US and Birla Soft UK on continuing basis. 13. The terms and conditions for rendering such services by each of STP Unit was governed by one single agreement entered into between Birla Soft India and Birla Soft Inc. US. The learned TPO has assumed that functions, assets and risk undertaken by each of the STP Unit are distinct from each other and is comparable with the function, assets and risk undertaken by existing comparables. In other words, learned TPO has totally ignored the unity of the business, administrative control and unity of funds etc. The independent FAR analysis of each unit with existing comparables is practically not possible because there is a common management, interlacing of the funds etc. 14. Thus, on due consideration of the order of the Learned CIT(Appeals), we are satisfied that Learned First Appellate Authority rightly did not concur with the conclusion of the TPO for segregating the each STP Unit and considering the result of each STP Unit as a standalone for the purpose of determining the ALP relating to international transaction. 15. In assessment year 2006-07, ITAT has upheld the benchmarking of internal international transactions with unrelated parties for testing the ALP of assessee with its related parties. We have a glance over such result compiled at page 158 of the paper book, the operating profit margin with respect to unrelated transaction is minus 14.10% whereas the assessee is showing operating profit with related parties at 14.33%. The overall result shown by the assessee is 10.91%. Even if we examine this result within the right of the ITAT’s order for assessment year 2006-07, then also no adjustment is required in the result of international transaction shown by the assessee. Learned First Appellate Authority has taken into consideration all these aspects elaborately and we do not see any reason to interfere in his findings. In view of the above, ground No.1 is rejected.” (iii) DCIT Vs. Birla Soft India Ltd. - ITA No. 4713/Del/2011 for AY 2005-06: Relevant Paras of decision are extracted below: Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 16 of 47 “68. For AY 2004-05, while deciding in favour of the assessee, the Tribunal found that there was no significant functional difference in the software development and maintenance services rendered by the assessee to its related and unrelated parties. The services rendered by the STP units of the assessee were rendered to the same AEs of the assessee, i.e., Birla Soft Inc. and Birla Soft UK, on a continuing basis (the position remains the same for the year under consideration also). It was observed that there was unity of business, administrative control and funds, etc., in each of the STP units of the assessee, and that because of such commonness of management and interlacing of funds, etc., or software development services, it was not practically possible to carry out an independent FAR analysis of each unit with the existing comparables. It remains undisputed that the position, as above, remains the same for the year under consideration also. The Tribunal orders for the earlier years have not been shown to have been upset, or even stayed, on appeal. Therefore, since there continues to be unity of business and administrative control and interlacing of funds amongst the units of the assessee company, for this year also, it is not possible to carry out an independent FAR analysis of each unit with existing comparables. The assessee had provided various kinds of software related services, such as software development services, software maintenance and repair services and quality testing services, etc., from each of its STP units located in Noida and Chennai. These services were rendered to the same two AEs of the assessee. It was a single agreement qua each of the assessee’s AEs, which governed the terms and conditions thereof, as well as the consideration for the rendering of such services. The services were provided on a continuous basis from each of the STP units of the assessee company. Therefore, the assessee is correct in contending that such services are of the same or similar nature amongst all three of its STP units, inter se, and they should be combined and evaluated by adopting a combined transaction approach, rather than employing the unit-wise approach, as adopted by the TPO. 71. In view of the above, we hold that the assessee is right in contending that since the profit of each of the STP units of the assessee company cannot be evaluated separately and independently of one another, they cannot be segregated and the approach of the TPO in considering the result of each STP unit, on a standalone basis, for the purpose of determining the ALP relating to the assessee’s international transactions, was incorrect. The action of the CIT(A) in accepting this contention of the assessee is hereby upheld and confirmed. The ld. CIT (A), in our considered opinion, for the above discussion, has rightly concluded that the benchmarking of the transactions should be based on the aggregation at the entity level and not at the unit level. This finding of the ld. CIT (A) is endorsed. Accordingly, Ground No.9 is rejected.” (iv) Further, reliance is placed on following decisions wherein, according to Ld. AR, entity-level comparison is upheld for benchmarking: Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 17 of 47 - Toyota Kirloskar Motor (P) Ltd. vs. ACIT ITA No.1315/Bang/2011- Upheld by Hon'ble Karnataka High Court in 172/2013. - McCann Erickson India Pvt. Ltd. vs. Addl. CIT (ITA No.5871/Del/2011) - Avery Dennison India Pvt Ltd vs. ACIT (ITA No. 4868/Del/2014) - Demag Cranes & Components (India) P. Ltd. vs. DCIT - Cummins India Ltd. Vs. Addl CIT (ITA No.1616/PN/2011) - Skechers USA Canada Inc. (Appeal No. AP-2012-073) –Canadian International Trade Tribunal - Atul Ltd. V. ACIT (ITA No. 3118/Ahd/2010) - Thyssen Krupp Industries India Pvt. Ltd. vs. ACIT (ITA No. 7032/Mum/2011). - Panasonic India P. Ltd. vs. ITO (ITA No.1417/Del/2008) - Hindustan Unilever Ltd. V. ACIT (ITA No. 7868/Mum/2010) - Amphenol Interconnect India Pvt. Ltd. vs. DCIT (ITA No.1486/PN/2010). - Lumax Industries Ltd vs. ACIT (ITA No. 4456/Del/2012) - Corning SAS-India Office vs. DDIT (ITA No. 548/Del/2015) - DCIT vs. CLSA India Limited (ITA No. 2362/Mum/2011) - Cadbury India Ltd. Vs. ACIT (ITA No. 7408/Mum/2010) - Rehau Polymers Pvt. Ltd. vs. ACIT (ITA No.378/Pun/2017) - Viavi Solutions India P. Ltd. vs. DCIT (ITA No. 1483/Del/2016) - Yazaki India Limited vs. ACIT (ITA No. 886/Pun/2014) 12.3 Having explained the above provisions of law and judicial rulings in support of ‘entity-level’ comparison is prescribed, Ld. AR submitted that the following facts relating to present case of assessee justifies application of ‘entity-level’ approach: (i) It is submitted that the assessee has entered into one single ‘Service Agreement (SA)’ dated 01.01.2006 with all AEs and pursuant to such single SA, services were provided to all AEs, copy of SA is filed at Page No. 173/180 of Paper-Book. Referring to same, Ld. AR pointed out that the SA provides for charging of ‘uniform rate’ for service rendered by assessee irrespective of whether the assessee provided/performed service from any of the 5 units. These rates were 15 dollars per man- hour (increased to 18 dollars per man-hour from 01.01.2007) for services rendered in India/Asia Pacific Region and 50 dollars per man- hour (increased to 53 dollars per man-hour from 01.01.2007) for Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 18 of 47 services rendered in other region. These rates were agreed through a single agreement at ‘entity-level’ and it was for the assessee to provide/perform service from any of the 5 units. (ii) It is submitted that all 5 units provided identical services on a continuous basis to the very same AEs. There is no divergence in the nature of services. (iii) It is submitted that the 5 units were responsible only for provision of services but the essential functions of finance and management were centralised and there was a common management and interlacing of funds of all 5 units. (iv) It is submitted that the Bangalore-I and Bangalore SBU units picked by TPO/AO for upward adjustment have charged the same billing rate as charged by other units from those very AEs. Still the authorities have rejected sales/billing rates of Bangalore Units while accepting the sales/billing rates of other units. This is a clear contradiction and patently wrong. (v) It is submitted that the assessee is providing services to all AEs as a ‘single entity’ from 5 units and ordinarily there would have been no necessity to maintain separate books of each unit. But some of those units were eligible for exemption u/s 10A/10B and others were not eligible, therefore in order to compute exemption u/s 10A/10B, the assessee had to maintain separate books of account and compute separate profit of each unit. Only because of maintenance of separate books of account, the lower authorities have gained a mis- understanding that some of the units have not generated sufficient profitability/PLI and prompted to make adjustment under transfer pricing for those units, which is not correct. Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 19 of 47 (vi) It is submitted that the TPO/AO has matched ‘unit-level’ profitability of assessee with ‘entity-level’ profitability of external comparables; this in itself is apparently wrong. In fact, the ‘unit-wise’ comparison done by TPO/AO proceeds on an invalid assumption that the Functions performed, Assets utilised and Risks assumed (FAR) by each unit are distinct from other units but still are similar or comparable with entity-level FAR of external comparables. 12.4 Lastly, Ld. AR raised an important contention that the TPO in assessee’s own case of subsequent AY 2008-09 and 2009-10 has accepted ‘entity-level’ benchmarking done by assessee without any objection. Copy of TPO’s order F.No. C-107/TPO-I/AY. 2008-09 dated 21.10.2011 is placed at Page No. 904-906 and order F.No. C-107/TPO-I/AY 2009-10 dated 14/11/2012 for AY 2009-10 is placed at Page No. 908-909 of Paper-Book. Ld. AR submitted that the TPO/AO has accepted assessee’s claim of ‘entity- level’ comparison in all other years and the AY 2007-08 under consideration is the solitary year where the TPO/AO has rejected assessee’s claim. Relying upon the decision of Hon’ble Supreme Court in Radhasoami Satsang Vs. CIT 193 ITR 321 and Excel Industries Limited 358 ITR 295, it is submitted that the principle of consistency must be adhered to in income- tax proceedings. It is submitted that there is no change in facts or law so as to warrant deviation from the consistent view taken by authorities. Therefore, the TPO/AO is at a serious default in not accepting ‘entity-level’ benchmarking in current year. 13. Per contra, Ld. DR strongly supported the approach of TPO/AO. He submitted that each unit of assessee is a separate entity and each unit is drawing its own P&L A/c. He submitted that Transfer Pricing Regulations talk of individual transactions to be benchmarked. He submitted that the assessee made claim of ‘entity-level’ comparison before DRP also, but the DRP has over-ruled assessee’s claim with reasoning. Referring to Page 10 and 11 of DRP order, Ld. DR emphasized the reasoning given by DRP, Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 20 of 47 namely (i) DRP noted that if the billing rate of assessee is agreed at entity- level, how some of the units earned profit and some made losses; (ii) The assessee is mis-reading Rule 10B(1)(e). The Rule prescribes “profit realized by an enterprise from its international transactions” which means the ‘unit- level’ profitability has to be checked; and (iii) the international transactions done by assessee from different units are not closely-linked transactions. With these submissions, Ld. DR contended that the lower authorities have rightly made ‘unit-level’ comparison and consequential addition, which must be upheld. 14. We have considered rival contentions of both sides and perused the orders of lower authorities in the light of legal provisions and judicial rulings cited before us as above. At first, we note that the assessee and revenue are in agreement on (i) TNMM as ‘most appropriate method’, and (ii) OP/OC% as “PLI” for working of TNMM. Hence, there is no dispute to that extent. Now, the controversy is in a very narrow compass. While the assessee claims ‘entity-level’ benchmarking, the authorities claim ‘unit-level’ benchmarking. Admittedly, the transactions done by assessee are not “closely-related” but they are identical. In Sony Ericsson Mobile Communication India Pvt. Ltd. (supra) relied upon by Ld. AR, it is accepted that in case the tested party is engaged in single line of business, there is no bar or prohibition from applying the TNMM on ‘entity-level’ basis. Then, in CIT Vs. Birlasoft India Limited ITA No. 4001/Del/2009 for AY 2004-05 (supra), in Para No. 11 to 14 of order of ITAT re-produced earlier, both of the first-appellate authority as well as ITAT rejected “unit-level” comparison done by department and accepted assessee’s claim of “entity-level” comparison on the grounds that the assessee had provided ‘identical services’ from all units; there were no significant functional difference in the services; the services were rendered by various units to the same AEs; and the terms and conditions for rendering such services by all units were governed by one single agreement entered into between assessee and AEs. Same view was Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 21 of 47 again taken in the case of same assessee for AY 2005-06 Birla Soft India Ltd. - ITA No. 4713/Del/2011 (supra). The facts of present appeal before us are identical to these decisions in Birla Soft India. The assessee has established 5 units from time to time at different locations for providing identical services but the agreement with AEs for rending services was a ‘single agreement’ entered into by assessee at entity-level and not by individual units. Further, in the agreement, the assessee has agreed to provide service at ‘uniform rate’ to all AEs; thereafter it was assessee’s own decision to perform/provide service from any of the 5 units depending upon its capability/capacity/ suitability/availability to perform. The AEs are liable to pay the ‘uniform rate’; agreed in SA for the service they got done from assessee irrespective of which of the units had done. The loss or profit earned by individual units was the outcome of their own expenses, own economics of business, scale of operations, etc. of respective units. All units provided identical services on a continuous basis. The management and finance functions of assessee were common and centralized; the individual units were only concerned with providing services. Therefore, in such a situation, the uniform rate agreed by assessee with AEs is certainly a rate at entity-level which has no connection or linkage with individual units. It is also noteworthy that the TPO/AO has accepted ‘billing rate’ at arm length price in 3 units out of 5 units and it is only in 2 loss-making units of Bangalore-I and Bangalore SBU that he has not accepted the same billing rate at arm length’s price despite the fact that identical services were provided by all 5 units. It is apparent that the TPO/AO has prompted to neglect the very same rate of billing in Bangalore Unit-I and Bangalore SBU just because they were loss-making without taking into account that loss is not because of lower charging from AEs; it was because of high expenses of those units as compared to profit making units. There is also merit in the submission of assessee that the assessee had to maintain separate books and computed separate profits of all 5 units just to claim exemption qua some of the eligible units but had there been no exemption, there would not Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 22 of 47 have been any necessity to maintain separate books or even compute separate figures of each unit. At this stage, we also find that the TPO/AO has made ‘unit-wise’ comparison of assessee with ‘entity-level’ comparison of external comparables which again is faulty. If the TPO/AO is very serious in making unit-wise comparison, he must have collected unit-wise comparable external data and then made comparison, which is not so in present case. The matter does not stop here. We also find a strong merit in assessee’s submission qua the revenue’s approach in dealing assessee’s case from year to year. Ld. AR has filed copies of TPO orders for subsequent assessment- years, namely AY 2008-09 and 2009-10, wherein the TPO has accepted “entity-level” approach adopted by assessee without any objection. It is true that the ‘principle of res judicata’ is not applicable to tax proceedings but it is also true that the ‘principle of consistency’ is applicable. In several judicial rulings including the decisions of Hon’ble Supreme Court in Radhasoami Satsang Vs. CIT 193 ITR 321 and Excel Industries Limited 358 ITR 295, the assessee’s claims have been accepted on the basis of ‘principle of consistency’. Therefore, in the present case, when the authorities have accepted entity-level approach of assessee in other years, there is a gross fallacy in not accepting the same approach in current year in absence of any changed circumstance. Therefore, looking into the entire conspectus of the case, we are inclined to accept that the ‘entity-level’ approach applied by assessee deserves to be accepted. We, therefore, reverse the decision of lower-authorities and direct the AO to apply ‘entity-level’ approach as claimed by assessee. (B) Internal benchmarking with Mumbai Unit is wrongly denied: 15. Ld. AR submitted that under TNMM, there can be ‘internal benchmarking’ as well as ‘external benchmarking’ and it is judicially settled that the former should be preferred over later. Ld. AR supported this proposition with following contentions: Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 23 of 47 15.1 Firstly, he referred to the following provision of Rule 10B(1)(e) where TNMM is prescribed: “Rule 10B(1) (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base, (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;” Ld. AR submitted that clause (ii) clearly mentions “profit margin realised by the enterprise (that means, assessee) or by an un-related enterprise from comparable uncontrolled transactions”, shall be used. The term “by the enterprise” talks of ‘internal comparable’ and “by an unrelated party” talks of “external comparable”. Since ‘internal comparable’ is first coming in the language, preference has to be given to ‘internal comparable’. 15.2 Then, reference is made to the following observation of ITAT in Technimont ICB (P) Ltd. Vs. ACIT, Mumbai (2012) 24 taxmann.com 28 (ITAT, Mum) (TM): “10. Clause (i) of Rule 10B(e) stipulates that net profit margin from an international transaction with an AE is computed in relation to cost incurred or sales effected or assets employed etc. Clause (ii) material for the present purpose. It provides that the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. The ‘base’ of this provision takes one back to clause (i) which refers to cost incurred or sales effected or assets employed or to be employed. On splitting clause (ii) into two parts, it divulges that the reference is made to internal and external comparables. One part of clause (ii) refers to the ‘net profit margin realised by the enterprise... from a comparable uncontrolled transaction’ and the other part talks of ‘the net profit margin realised by an uncontrolled enterprise from a comparable uncontrolled transaction’. It transpires that whereas the first part refers to the profit margin from internal comparable uncontrolled transactions, the second part refers to profit margin front an external comparable uncontrolled transaction Thus it is discernible that what Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 24 of 47 is to be compared under the method is profit from a comparable uncontrolled transaction The word 'comparable may encompass internal comparable or external comparable There is cue in the rule itself as to preference to be given to internal comparable uncontrolled transactions vis-a-vis externally comparable uncontrolled transactions. It is because the delegated Legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and thereafter it points towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction Thus where potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have higher degree of comparability vis-a-vis comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case The reason is patent that the various factors having bearing on the quality of output, assets employed input cost etc. continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties gets neutralized when comparison is made with internal comparable Ex consequent, it follows that an internal comparable uncontrolled transaction is more noteworthy vis-a-vis its counterpart i.e. external comparable.” 15.3 It is submitted that the aforesaid observation in Technimont ICB (P) Ltd. (supra) was again re-iterated by ITAT in DCIT Vs. Birla Soft India Ltd., ITA No. 4713/Del/2011 and ultimately it was concluded with force that ‘internal comparable’ has to be preferred: “69. In ‘Technimont ICB Pvt. Ltd.’ (supra) (authored by one of us – the ld. AM, sitting as Third Member), it has been held in this regard that Rule 10B(e)(ii) of the Income-tax Rules provides that the net profit margin realized by the enterprise or by an unrelated enterprise, from a comparable uncontrolled transaction, or a number of such transactions, is computed having regard to the same base, as is referred to in Rule 10B(e)(i), with reference to cost incurred, or sales effected, or assets employed, or to be employed; that in Clause (ii) of the said Rule, reference is made to internal and external comparables; that as per this Rule, what is to be compared is profit from a comparable uncontrolled transaction; that the word ‘comparable’ may encompass internal comparable or external comparable; that the Rule provides that preference is to be given to internally comparable uncontrolled transactions vis-à-vis externally comparable uncontrolled transactions; that this is so, because the Rule refers first to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and thereafter, it talks of new profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction; that thus, where a potential comparable is available in the shape of an uncontrolled transaction Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 25 of 47 of the same assessee, it is likely to have a higher degree of comparability vis- à-vis comparables identified amongst the uncontrolled transactions of third parties; that the underlying object behind computing the ALP of an international transaction is to find out the profits which such enterprise would have earned, if the transaction had been with some third party, instead of the related party; that when data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case; that the reason for this I,s that various factors having bearing on the quality of output, assets employed, input cost, etc., continue to remain, by and large the same in the case of an internal comparable; that the effect of difference due to such inherent factors on the comparison made with the third parties gets neutralized when comparison is made with internal comparables; and that therefore, an internally comparable uncontrolled transaction is more noteworthy than an externally comparable uncontrolled transaction. 70. In ‘Destination of the World Pvt. Ltd.’ (supra), it has been held, inter alia, that the OECD Guidelines mention that net margin of the tax payer from the controlled transactions should be established with reference to the net margin which the same tax payer earns in comparable uncontrolled transactions; that where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise, may serve as a guide; that thus, these Guidelines suggest preference for internal comparables and reference has to be made to the result of independent enterprises only when the former course of action is not possible; that in the case of Birla Soft (India) Ltd., in ITA No.3839/Del/00, it has been clearly held that the assessee was justified in undertaking internal comparison on a standalone basis, by placing on record the working of operative profit margin from international transactions with AEs and transactions with uncontrolled parties, undertaken in a similar functional and economic scenario; that such an internal comparison is valid in all the methods; and that therefore, the attempt should be to determine arm’s length price of controlled transactions on comparing the same with internal uncontrolled transactions undertaken in the same or similar economic scenario.” 16. Having explained the provision of Rule 10B with the support of judicial rulings as noted above, Ld. AR contended that in the present case of assessee, “internal benchmarking” is available and the same must be accepted. To support this, Ld. AR submitted that if the “unit-level” benchmarking is treated as valid, then the ‘Mumbai Unit’ of assessee must be considered as an appropriate ‘internal comparable’ for the reason that Mumbai Unit is providing identical services pre-dominantly to ‘unrelated parties’. Ld. AR has filed a statement marked as “Annexure-I” to Written- Submission, showing analysis of PLI of all units with break-up of transactions with “related parties” and “unrelated parties”. Drawing our Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 26 of 47 attention to the working provided therein, Ld. AR pointed out that the Mumbai Unit has done 94% business with “unrelated parties” and a miniscule business of just 6% with “related parties”. Ld. AR submitted that Mumbai Unit is assessee’s internal comparable, hence it would be the best yardstick for benchmarking. Then, he submitted that the PLI of Bangalore Unit-I at (-)7.95% and Bangalore SBU at (-)0.25% is within safe harbour range of (-)/(+)5% of (-)4.97% PLI of Mumbai Unit. Therefore, the transactions undertaken by Bangalore Unit-I and Bangalore SBU must be considered at arm’s length. For the sake of completeness, Ld. AR also submitted that the Mumbai Unit of assessee satisfies all filters applied by TPO for selection as comparable, hence there is no problem on that count. Ld. AR has given a chart on Page No. 22/23 of his Written-Submission to demonstrate how all filters are satisfied; we are not re-producing the same for the sake of brevity. Thus, the Ld. AR contended that even in case of ‘unit-wise’ comparison, if the internal benchmarking is done, the assessee’s international transactions are at arm’s length. He also submitted that if the “entity-level” approach is accepted, then also the analysis of internal comparison of all units taken together given in “Annexure-I” demonstrates that the PLI of assessee as a whole entity from “related parties” is 17.09% which is better than PLI of 9.15% from “un-related parties”. 17. Ld. AR submitted that the TPO/DRP has disregarded assessee’s claim of internal comparison on an illegal understanding that external comparables would provide a better comparison than internal comparables whereas the Rule 10B(1)(e), OECD Guidelines and the judicial rulings clearly prefer ‘internal comparison’ and that is very right also because ‘internal comparison’ is better, more reliable and accurate than ‘external comparison’. Ld. AR has also relied upon the judicial ruling to this effect given in Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT 374 ITR 118 (Para 85 of order). Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 27 of 47 18. Per contra, Ld. DR drew our attention to Page No. 11-13 of DRP order and emphasized the observations made by DRP. He submitted that the DRP has mentioned that the assessee himself did not apply “internal comparable” of Mumbai Unit in TPSR, it is only when the TPO proposed to invoke “unit- level” comparison, then the assessee proposed to TPO to apply internal comparable. He submitted that DPR has very categorically mentioned, on Page No. 13, following objection against the proposal of assessee to adopt internal comparable of Mumbai Unit: “.... From the above, it can be seen that Mumbai Unit is under loss mainly due to its project expenses and not due to its employee cost. The relative project expenses in other units are very less, when compared to the Mumbai Unit. Thus, there are some peculiar features/circumstances in Mumbai Unit, which are to be studied, before Mumbai Unit can be considered as a comparable to other units. Further, it also can be seen from the above that only Mumbai Unit has relatively (of its turnover) very low employee cost, when compared to other units, indicating that difference between billing to the customers/AEs and amount paid to employees (quality of resource) is different. The assessee did not produce complete details regarding the functional comparability of Mumbai Unit, vis-à-vis other units of the assessee and also whether economic circumstances are also comparable. Whether any peculiar economic circumstance in Mumbai Unit that resulted in loss is also not clear from the facts submitted by the assessee. As the assessee did not provide complete functional comparability for internal TNMM, it is the considered opinion of the DRP that internal TNMM cannot be applied and no interference is required in the action of the AO/TRP in applying external TNMM based on sound comparability analysis.” 19. We have considered rival submissions. From analysis of Rule 10B as interpreted in the judicial rulings cited above, it is clear that ‘internal comparison’ is allowed by law and the same is preferrable also. But, as contended by Ld. DR for revenue, the DRP has given a clear-cut basis for rejecting the claim of ‘internal comparison’. Needless to mention that the claim of ‘internal comparison’ cannot be allowed merely because the law permits or merely on the basis of mathematical analysis; the assessee has to prove the functional and economic comparability. The DRP has clearly noted that the assessee has failed to do so. We do not find anything wrong in the findings of DRP which are re-produced in foregoing paragraph. Therefore, we Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 28 of 47 are not inclined to make any interference with the order of DRP. The claim of ‘internal benchmarking’ is therefore devoid of merit and dismissed. (C) Certain ‘external comparables’ have been wrongly used; they are liable to be excluded: 20. Ld. AR submitted that the assessee selected 28 comparable with 14.53% PLI in TPSR [Ld. AR pointed out that the TPO/DRP have made some type error at Page No. 3/6 of their orders in mentioning that the assessee selected 36 comparable companies with 12.04% PLI]. However, the TPO made certain exclusions/inclusions and came out with a final list of 26 companies with PLI of 25.44% on Page No. 99 of his order. The list of 26 comparables accepted by TPO is narrated by Ld. AR on Page No. 5 of his Written- Submission, the same is re-produced below for an immediate reference: S.No. Description OP/OC(%) 1. Accel Transmatic Limited (Seg.) 21.11 2. Avani Cimcon Technologies Ltd. 52.59 3. Celestial Labs Ltd. 58.35 4. Datamatics Ltd. 7.27 5. E-Zest Solutions Ltd 36.12 6. Flextronics Software Systems Ltd.(Seg) 25.31 7. Geometric Ltd. (Seg) 10.71 8. Helios & Matheson Information Technologies Ltd. 40.35 9. I-Gate Global Solutions Ltd. 7.49 10. Infosys Technologies Ltd. 40.30 11. Ishir Infotech Ltd. 30.12 12. KALS Information Systems Ltd. (Seg) 30.55 13. LGS Global Ltd. (Lanco Global Solutions Ltd.) 15.75 Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 29 of 47 14. Lucid Software Ltd. 54.85 15. Media Soft Solutions Ltd. 3.66 16. Megasoft Ltd. (Seg) 23.11 17. Mindtree Ltd. 16.90 18. Persistent Systems Ltd. 24.52 19. Quintegra Soloutions Ltd. 12.56 20. R.S.Software (India) Ltd 13.47 21. R.Systems International Ltd. (Seg) 15.07 22. Sasken Communication Technologies Ltd.(Seg) 22.16 23. SIP Technologies & Exports Ltd 13.90 24. Tata Elxsi Ltd. (Seg) 26.51 25. Thirdware Solutions Ltd. 25.12 26. Wipro Ltd. (Seg) 33.65 Average 25.44 21. Ld. AR contended that the out of the list of 26 comparables finalised by TPO, the assessee has a serious objection for 9 comparables. Ld. Representatives of both sides made their rival submissions for and against assessee’s objection. We give below our anlaysis qua those 9 comparable of dispute one by one: 21.1 Avani Cincom Technologies: (i) Ld. AR submitted that this company is functionally dis-similar. The assessee is in the business of providing outsourcing services of maintenance, development, etc. whereas this company is mainly into ‘software products’ for travel industry. Further, this company owns producs like Dxchange, Travel solution, Insurance solution, Customer application and relationship management (CARA), Content Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 30 of 47 management system, etc. The company derives revenue mainly from software products. Ld. AR relied upon several decisions where this company has been directed to be excluded from comparable on account of functional dissimilarity, most prominent being Sumtotal Systems (India) P. Ltd. Vs. ACIT, ITA No. 1710/Hyd/2011 upheld by Hon’ble High Court in ITA No. 660/2014. (ii) Ld. DR relied upon the orders of lower-authorities and submitted that this company has been rightly included as comparable company. (iii) On a careful consideration, we find that there is a substantial difference in the business of assessee and this company. While the assessee is engaged in providing software/outsourcing services, this company is a product company and catering to specific segments of customers like travel, insurance, etc. Therefore, the assessee is not comparable to this company. We, therefore, direct the TPO/AO to exclude this company from comparable list. 21.2 Celestial Bio-Labs Ltd.: (i) Ld. AR submitted that this company is functionally dis-similar to assessee. It is primarily engaged in development of software tools as products for application in specific fields of bio technology, pharmaceuticals and healthcare industry. The software tools developed by company are proprietary in nature and using patent. Thus, this company is a ‘product company’ owning ‘intangible property’. As per annual report, this company has developed a de novo drug design tool called “CELSUITE” and protected its IPR under Copyright/Patent Act. Based on its silico expertise, the company has developed a molecule to treat leucoderma and multiple cancer. The company has outlined its future plans in the field of bio-technology. The company has come out with a public issue of shares wherein it has explained business as clinical research. Ld. AR placed reliance on Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 31 of 47 several decisions where this company has been excluded from comparable due to functional dis-similarity, the most prominent decision being Tevapharm India Ltd. Vs. ACIT, ITA No. 7584/Mumbai/2021, approved by Delhi High Court in ITA No. 816/2017. (ii) Ld. DR relied upon the order of TPO/AO. (iii) We have carefully considered the submissions of both sides and find that this company has an altogether different business. Firstly, it is a product company and secondly, it is developing software for a specific segment, namely bio-technology, pharma, healthcare and clinical research. The name of company “Celestial Labs Limited” also gives some indication that the company is engaged in laboratory or bio-tech related activity. Therefore, its business is completely different from assessee’s business. Since it is not comparable with assessee, we direct the TPO/AO to exclude it from list of comparables. 21.3 Flextronics Software Systems Ltd.: (i) Ld. AR submitted that the TPO has considered the Products and Service Segments of this company for comparison purpose. But the segmental information is not available in annual report of company. Therefore, the data is not available in public domain. The TPO has relied on the information obtained u/s 133(6). But from the information available in annual report under the heading “Revenue Recognition”, it can be found that the company earns revenue from a hybrid model i.e. on sale of software development services as well as by way of royalty receivable on successful sale of products by customers of company. This model of revenue is not a regular model adopted by assessee or even by other service providers. The revenue model of company is unique and not at all comparable. Further, the company is also a software product company and derives revenue Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 32 of 47 from products as well which is evident from “Business Review” reporting in annual report for the financial year 2006-07. The company’s products called CAS (Converged Access Solution), ASN Lite and Diameter Stack have been major success. Thus, the company is a product-cum-service company and the revenue model is also unique. (ii) Ld. DR argued that even if the company is into product line, it is also a service company. He submitted that the TPO has relied upon information obtained u/s 133(6), hence his action must be upheld. (iii) On a careful consideration of submissions of both sides, we find that this company is firstly a product-cum-service company whereas the assessee is a service company only. Secondly, the revenue model of this company is also unique in as much as the company also earns by way royalty from products. Therefore, the assessee’s case cannot be compared with this company. We direct the TPO/AO to exclude this company from list of comparables. 21.4 Infosys Technolgies Ltd.: (i) Ld. AR submitted that this company is big giant having turnover of Rs. 13,149 crore whereas the turnover of assessee is just Rs. 570 crore. Therefore, the scale of operations has day-night difference. Being a giant, this company has all bargaining powers at its command which the assessee does not have. In several assessees, this company has been excluded from list of comparables on this very basis that it is a giant. Even in assessee’s own case for AY 2011-12, the ITAT Indore has excluded this company in ITA No. 179/Ind/2016. (ii) Ld. DR could not controvert Ld. AR’s submissions though he dutifully supported the orders of lower authorities. (iii) We have given our careful consideration. There can hardly be any dispute that the “Infosys” is a giant in software industry and it cannot Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 33 of 47 be compared with small players like assessee. It is also noteworthy that this company has been excluded from list of comparable in assessee’s own case by ITAT. Therefore, without mentioning anymore analysis, we are inclined to exclude this company from list of comparables and direct the TPO/AO to do so. 21.5 Ishir Infotech Ltd.: (i) Ld. AR submitted that the TPO has himself adopted “employee cost/total revenue filter greater than 25%” as one of the yardstick for selecting comparable. But this company has spent Rs. 29,35,065/- on employees against the revenue of Rs. 7,42,09,887/-; therefore the ratio comes to just 3.96%. Thus, it is apparent that this company does not pass the ‘employee cost’ filter adopted by TPO himself. Ld. AR submitted that this argument was also raised before TPO but the same was not properly considered. Ld. AR submitted that TPO has relied upon information of employee cost filter received from company u/s 133(6) as the same is not available in public domain. In this regard, Ld. AR relied upon the decision of ITAT, Bangalore in HCL EAI Services Limited Vs. DCIT, ITA No. 1348/Bang/2011 where, in Para No. 15, it was categorically observed by ITAT that this company does not satisfy employee cost filter. The ITAT also observed that while applying 25% employee cost filter, the TPO has also included the professional fees paid to third parties which is wrong. Ld. AR has placed a heavy reliance on this decision of ITAT besides several other decisions. (ii) Per contra, Ld. DR strongly supported the order of TPO/AO. (iii) We have given a careful consideration to rival submissions of both sides. We find merit in the submission of Ld. AR that the payments made to outside professional cannot be included in employee cost for the reason that the test of “employee cost filter” is applied to judge the Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 34 of 47 nature of business. If a company is paying lesser amount of salary to its own staff but paying higher amount to outside professionals, it goes out of service company and does not remain comparable with assessee. The claims of assessee is also fortified by the decision of ITAT, Bangalore. Therefore, we direct the TPO/AO to exclude this company from list of comparables. 21.6 Kals Information: (i) Ld. AR submitted that this company is functionally dis-similar. It is engaged in sale of software products in addition to provision of software research and development services. The company owns various software products such as Virtual Insure, La Vision, CMSS, Docuflo, Shine-ERP, etc. Further, the company is engaged in composite contracts i.e. training and projects. Therefore, if there is loss in one segment, it is offset by other. Ld. AR has given a very long list of rulings in which this company has been excluded from comparable. (ii) Ld. DR supported the order of TPO/AO. (iii) On a careful consideration, we find that this company is also a product company. It has developed various software products as pointed out by Ld. AR and earning revenue therefrom. Further, it is also claimed by assessee that the company is earning from composite contracts. These business activities of assessee are not controverted by Ld. DR. Therefore, we feel appropriate to exclude this company from comparable and directly accordingly to TPO/AO. 21.7 Lucid Software Ltd.: (i) Ld. AR submitted that this company is functionally dis-similar. The company is engaged in development of software products. It has amortized product development expenses of Rs. 18,66,703/- during Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 35 of 47 the year ended 31.03.2007. The company has in-house software development facility. It is a software product company and even the software services are being provided by using in-house developed softwares. Ld. AR relied upon several rulings in which the company has been excluded from the list of comparables due to functional similarity. This company has also been excluded from list of comparables by ITAT, Indore in assessee’s own case of AY 2011-12 in ITA No. 179/Ind/2016. (ii) Ld. DR relied upon the orders of lower authorities. (iii) On a careful consideration, we find sufficient difference in this company and assessee. Further, the ITAT, Indore has already excluded from the list of comparables in assessee’s own case. Ld. DR is not able to demonstrate anything to upset the view already taken by ITAT. Therefore, we are inclined to exclude this company from comparable. The TPO/AO is directly accordingly. 21.8 Tata Elxi: (i) Ld. AR submitted that this company is functionally dis-similar. It is intensively engaged in R&D activity. Further, within the software domain, the company is also engaged in hardware design services, graphic image and image processing. The TPO has stated that he has considered segmental financials pertaining to “software services” but according to Ld. AR, within the “software services” segment itself, the company is engaged in product design services (including design of hardware), innovative design engineering, etc. whereas the assessee is engaged in business of low-end software services. Therefore, this company is not comparable to assessee. Ld. AR has provided a long list of rulings where this company has been excluded from comparables. Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 36 of 47 (ii) Ld. DR relied upon the order of TPO, Page No. 97-98. (iii) We have considered rival submissions of both sides. We find that prima facie there appears a functional dis-similarity in the business of this company and assessee. Even the TPO has also accepted this by mentioning in his report “TNMM does not call for strict product comparability and it also allows some diversity in functional comparability.” Being a functionally dis-similar, this company cannot be considered as comparable to assessee. Therefore, we direct the TPO/AO to exclude this company from list of comparables. 21.9 Wipro Ltd.: (i) Ld. AR submitted that this company is also one of the giants. It operates as full-fledged risk entrepreneur. It is a leading provider of IT Services, R&D Services and BPO outsourcing services. It has a high turnover of Rs. 9,616 crore as against turnover of just Rs. 570 core of assessee. The company has spent Rs. 954.7 core on marketing and sales promotion whereas the assessee’s expenditure is Nil. Ld. AR argues that by no stretch of imagination, this company can be compared with assessee. The AR has filed a long list of rulings in which this company has been considered as non-comparable. This company has been excluded from list of comparables by ITAT, Indore in assessee’s own case of AY 2011-12 in ITA No. 179/Ind/2016. (ii) Ld. DR dutifully supported the orders of lower-authorities though he could not controvert the submissions of Ld. AR. (iii) We have considered rival submissions of both sides. On a careful consideration, we find that this company is one of big market players in software sector. The turnover of company is manifold of assessee’s turnover. The company is not comparable to assessee and such a view has already been taken by ITAT, Indore in assessee’s own case for Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 37 of 47 other year. Therefore, we are inclined to exclude this company from comparable. The TPO/AO is directly accordingly. 22. To sum up, we decide the various issues raised before us, as under: (i) The ‘entity-level’ comparison claimed by assessee is accepted. (ii) The ‘internal bench-marking’ claimed by assessee rejected. (iii) 9 external comparables are fit for exclusion. The same are directed to be excluded. The AO shall modify assessment-order in accordance with these directions/conclusions and in case of necessity, take assistance from the assessee or TPO. Ground No. 20 and 21: 23. These grounds relate to re-working of exemption u/s 10A/10B done by AO. 24. The AO has dealt this issue in Para No. 7 of assessment-order. The controversy between assessee and revenue is very short and clear-cut. The deduction u/s 10A/10B claimed by assessee is allowed in the ratio of Export-Turnover  Total Turnover. While computing deduction, the assessee has excluded the expenditure incurred in foreign currency for rendering technical services outside India and telecommunication charges for delivery of software from both numerator (i.e. Export turnover) and denominator (i.e. Total Turnover). The Ld. AO has, however, made exclusion in numerator (i.e. Export Turnover) but not in denominator, relying upon the provision of section 10A/10B and judicial interpretation taken in some of the decisions. The approach of AO has resulted in lowering down the quantum of deduction to assessee; hence the assessee is aggrieved. Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 38 of 47 25. Ld. AR for assessee submitted that the issue is finally settled by Hon’ble Supreme Court in CIT Vs. HCL Technologies (2018) 404 ITR 719 holding thus: “19. In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. 20. Even in the common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well. 21.On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover.” Ld. AR also submitted that subsequent to aforesaid decision, even the CBDT has also issued following Circular No. 4/2018 dated 14.08.2018 accepting the viewpoint decided by Hon’ble Supreme Court: “5. The issue has been examined by the Board and it is clarified that freight, telecommunication charges and insurance expenses are to be excluded both from “export turnover” and “total turnover”, while working out deduction admissible under section 10A of the Act to the extent they are attributable to the delivery of articles or things or computer software outside India. 6. Similarly, expenses incurred in foreign exchange for providing the technical services outside India are to be excluded from both “export turnover- and “total turnover-while computing deduction admissible under section 10A of the Act. Thus, all charges/expenses specified in Explanation 2(iv) to section 10A of the Act, are liable to be excluded from total turnover also for the purpose of computation of deduction u/s 10A of the Act. 7. Accordingly, henceforth, appeals may not be filed by the Department on the above settled issue, and those already filed may be withdrawn/ not pressed upon.” Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 39 of 47 26. In view of finality of controversy by Hon’ble Supreme Court as well circular issued by CBDT, this issue is decided in favour of assessee. We direct the AO to allow to re-compute the amount of deduction after excluding the impugned expenses from both elements i.e. Export Turnover as well as Total Turnover. The assessee succeeds in this ground. Ground No. 22: 27. This ground relates to the cost of Rs. 2,88,28,306/- incurred by assessee towards civil and tiling expenditure treated by AO as capital expenditure. 28. Ld. AR for assessee has submitted on Page No. 44 and 45 of his Written-Submission and also pleaded the same during hearing before us that during the year, the assessee incurred expenses towards civil and tiling on improvement of structures and renovation in the leasehold premises. Although the assessee capitalized said expenditure in books of account but claimed as revenue expenditure for income-tax purposes. Ld. AR defended assessee’s claim in Income-tax by harping on the point that the assessee has incurred expenditure in a lease-hold premise which is not owned by assessee and the work done by assessee would eventually be passed on to the lessor alongwith premises upon termination of lease, therefore the expenditure cannot be treated as incurred in capital field. Ld. AR sought to support this contention from the decision of Hon’ble Supreme Court in CIT Vs. Madras Auto Services (P) Ltd. 233 ITR 468. Ld. AR also submitted that the ITAT, Madras Bench has, in assessee’s own case of AY 2008-09 in ITA No. 1205/MDS/2013, remitted this issue to the file of AO following earlier order of AY 2004-05. 29. At that stage, the Bench invited attention of Ld. AR towards Explanation 1 to section 32(1) inserted by the Taxation Laws (Amendment and Misc. Provisions) Act, 1986, which prescribes thus: Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 40 of 47 “Explanation 1.—Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.” 30. Thus, the Bench pointed out that the decision of Hon’ble Supreme Court in Madras Auto (supra) was rendered for AY 1968-69 but subsequently, the law of section 32(1) has been amended by inserting aforesaid Explanation 1 which clearly prescribes that if any capital expenditure is incurred by the assessee on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, any building not owned by him but taken on lease or other right of occupancy, then, the assessee shall be treated as owner qua such structure or work. The necessary effect of this amendment is such that the assessee shall be entitled to the deduction of depreciation and not as revenue expenditure. After hearing, Ld. AR filed a Written-Note on 04.08.2023 acknowledged by office of ITAT through Inward No. 679 on the non-applicability of Explanation 1 to section 32(1). In the said note, Ld. AR has mentioned that the expenditure on renovation was “in the nature of repair and maintenance” and therefore the Explanation 1 does not apply. Further, the AR has prayed to allow deduction u/s 30(a)(i) on the strength of ‘repair/maintenance’ citing certain judicial rulings. 31. On a careful examination of assessment-order, we find that the AO has also, in Para No. 5.6 to 5.8 of assessment-order, invoked the aforesaid Explanation 1 to section 32(1) and disallowed deduction but allowed depreciation. In the Written-Submission filed initially by Ld. AR, on Page No. 44, it was stated that the assessee incurred “towards civil and tiling expenditure incurred on improvement of structures and had undertaken replacement ....” and the pleading of Ld. AR to allow deduction was on the basis that the said expenditure has been incurred in leasehold premise. But Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 41 of 47 in the subsequent note filed on 04.08.2023, there is a change in tone by saying that the expenditure on renovation is in the nature of repair and maintenance. We are not persuaded to take into account such changed stand taken on nature of expenditure by Ld. AR after conclusion of hearing. It is also noteworthy here that the assessee has himself capitalized expenses in books of account which itself shows that the expenditure cannot be in the nature of repair or maintenance. We find that the AO has carefully invoked the provision of Explanation 1 to section 32(1) by making a sufficient note in assessment-order. Consequently, we uphold AO’s action. The assessee fails in this ground. Ground No. 23: 32. This ground relates to the cost of Rs. 73,10,920/- incurred by assessee towards licensed software treated by AO as capital expenditure. 33. The assessee has incurred cost towards purchase of licensed software and claimed the same as revenue expenditure. The AO has, however, treated the same as capital expenditure and disallowed the claim of assessee while allowing depreciation u/s 32. 34. Ld. AR for assessee agreed that this issue stands covered against assessee by the decision of ITAT, Chennai in ITA No. 1205/Mds/2013 for AY 2008-09, copy at Page No. 823-833 of Paper-Book. We re-produce Para No. 16-18 of order for gaining an immediate understanding: “16. The last ground raised by the assessee challenges disallowance of capitalization of software expenses of Rs. 78,67,240/-. The assessee had debited software expenses of Rs. 9,86,00,000/- which included cost of purchase of licensed software amounting to Rs. 78,67,240/-. The AO found the purchase of software to be of enduring value beyond two years. By following the ITAT Delhi Special Bench decision in the case of Amway India Enterprises vs. DCIT 111 ITD 112, he ordered its capitalization. Per Assessing Officer, similar disallowance had also been made in the earlier assessment years, so, the written down value gets enhanced in view thereof. 17. In lower appellate proceedings, the assessee’s arguments have met the same fate. Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 42 of 47 18. Before us, in the course of hearing, the assessee submits that the authorities below have wrongly capitalized the impugned software expenditure. In support, it has neither filed any cogent evidence nor case law against the special bench decision in Amway India Enterprises (supra). So, the impugned capitalization cannot be interfered with on mere asking. Accordingly, we affirm the findings of the CIT(A) in capitalizing the software expenses of Rs. 78,67,240/-.” 35. Ld. AR, however, submitted that the aforesaid order of ITAT, Chennai was passed following the decision of Special Bench in Amway India Enterprises Vs. DCIT 111 ITR 112 as mentioned therein. But at that time, the ITAT, Chennai was not having benefit of the decision in Madras High Court in CIT Vs. Southern Roadways Ltd. 304 ITR 84 in favour of assessee. Ld. AR also relied upon decisions in Asahi India Safety Glass Ltd. (2011) 15 taxmann.com 382 (Delhi HC) and Oracle India Pvt. Ltd. 221 Taxman 249 (Delhi HC) to support assessee’s claim. 36. We have carefully gone through the contentions raised by Ld. AR. We find that the issue is already decided by ITAT, Chennai in assessee’s own case in ITA No. 1205/Mds/2013 (supra) for subsequent AY 2008-09, following the decision of special bench in Amway India Enterprises (supra). However, in order to test the contention advanced by Ld. AR that the decision in Amway India Enterprises (supra) was not having benefit of the decision of Madras High Court in CIT Vs. Southern Roadways Ltd. 304 ITR 84, we have carefully read the order of Amway India Enterprises (supra), in Para No. 26 it is clearly mentioned: “26....He also brought to our notice the judicial pronouncements of the Hon'ble Madras High Court the case of CIT v. Southern Roadways Ltd. 282 ITR 379 (Mad) wherein the Hon'ble Madras High Court has held that expenditure incurred on software packages was revenue expenditure and that such software enhances the efficiency of the operation and was not an aid in the manufacturing process and therefore there is no enduring benefit or acquisition of any capital asset by an assessee reference was made to the decision of the Madras High Court in the clauses of CIT v. Southern Roadways Ltd. 288 ITR 15 (Mad) laying down identical proposition.” Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 43 of 47 Further, in Para No. 22 of CIT Vs. Southern Roadways Ltd. 304 ITR 84, the Hon’ble Madras High Court has followed its earlier decision in 282 ITR 379 and 288 ITR 15: “22. That apart, this court in CIT Vs. Southern Roadys Ltd. (2006) 282 ITR 379, applying the ratio laid down by the Apex Court in the case of Alembic Chemical Works Co. Ltd. (supra), held that upgradation of computers by changing certain parts, thereby enhancing the configuration of the computers for improving their efficiency, but, without making any structural alterations is not of an enduring nature. The said view was against followed by this Court in CIT Vs. Southern Roadways Ltd. (2007) 288 ITR 15.” Therefore, the contention of Ld. AR that the Special Bench in Amway India Enterprises (supra) was not having benefit of the decisions of Madras High Court, is not valid. In fact, the Special Bench has very much considered the decisions of Hon’ble Madras High Court. 37. Ld. AR has not been able to bring on record any change in the nature of expenditure so as to not follow the decision of ITAT, Chennai in assessee’s own case for AY 2008-09 re-produced earlier. Therefore, we have no reason to deviate from the view taken therein. Respectfully following the same, we uphold AO’s action. The assessee fails in this ground. Ground No. 24: 38. This ground relates to the disallowance u/s 14A on account of expenditure incurred for earning exempt income. 39. The AO has, in Para No. 4 of assessment-order, noted that during the year, the assessee has earned exempted dividend of Rs. 4,39,50,738/- from mutual funds; this fact/figure is also evident from exemption claimed by assessee u/s 10(35) in “Income-tax Computation” sheet filed at Page No. 290 Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 44 of 47 of Paper-Book. Therefore, the AO invoked section 14A for making disallowance and Rule 8D for computing the amount of disallowance. The AO noted that the magnitude of the transactions in mutual funds clearly exhibits that the assessee has to deploy a team of professionals either in full or part to earn such high dividend income. The exercise would necessarily have an intrinsic cost which gets hidden in the overall cost of assessee. The AO also noted that he has reason to believe that the assessee has to incur a minor expenditure embedded in indirect expenditure towards maintaining investments for earning exempted dividend. Relying upon certain judicial rulings, the AO made disallowance. For computation of the quantum of disallowance, the AO relied upon Part (iii) of Rule 8D; accordingly he made disallowance of Rs. 41,34,428/- (0.50% of investment made in assets for earning exempt income). 40. Ld. AR for assessee assailed the disallowance made by AO on multiple counts, the foremost being that the Rule 8D itself was not applicable to AY 2007-08 under consideration as the Hon’ble Supreme Court has held the same to be prospectively applicable from AY 2008-09 in CIT Vs. Essar Teleholdings Ltd. 30 CTR (SC) 561. Additionally, he submitted that the assessee has earned exempted income only from mutual funds (and not shares) for which no expenditure is incurred; the directors of assessee- company only took decisions to make investment. He also pointed out that recently in a consolidated order dated 10.04.2023 in ITA No. 179/Ind/2016 and others passed by ITAT, Indore in assessee’s case for AY 2011-12 to 2013-14, vide Para No. 22 to 24, similar disallowance was dealt. In that case, the assessee himself made suo motu disallowance of Rs. 20,37,506/- representing salary of two employees but the AO enhanced disallowance. Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 45 of 47 The ITAT has remanded the issue to back to AO for re-adjudication but that decision cannot govern present year where the assessee has not made any suo motu disallowance claiming that no expenditure was incurred at all for earning exempt income. 41. Ld. DR for revenue supported the disallowance made by AO. He submitted that the assessee has earned very high magnitude of exempted income and has utilized resources for earning the same but has not made disallowance of a single penny. He submitted that the assessee’s claim that no expenditure had been incurred cannot be given any credence particularly when the quantum of exempted income is too high. 42. We have considered rival contentions of both sides and perused the record. We agree with the proposition canvassed by Ld. AR that the Rule 8D was not applicable to AY 2007-08 involved in present appeal as held by Hon’ble Supreme Court. Therefore, the disallowance computed by AO in terms of part (iii) of Rule 8D cannot stand. But, however, we find that a ‘reasonable disallowance’ is attracted u/s 14A de hors Rule 8D. It is to be noted that the assessee has earned a very high amount of exempted income and the AO has mentioned, in his words, that the assessee has incurred expenses which are embodied in various indirect expenses debited to P&L A/c. We also find that this issue has also cropped in other years in assessee’s case. As mentioned earlier, in the consolidated order for AY 2011- 12 to 2013-14, the ITAT Indore has remanded this issue back to AO. Further, on perusal of Paper-Book filed by assessee, we find that the assessee has filed a copy of order dated 03.03.2014 of ITAT, Chennai in ITA No. 1205/Mds/2013 for AY 2008-09 in assessee’s own case wherein the ITAT has upheld disallowance of Rs. 35 lakhs on ‘reasonable computation’ u/s 14A de hors Rule 8D; the relevant para of ITAT is re- produced below: Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 46 of 47 “11. We have heard both parties and gone through the case file. We make it clear that the impugned assessment year is 2008-09 with relevant accounting period 1.4.2007 to 31.3.2008. The first legal question which arises for our consideration is if at all section 14A is held applicable; whether or not the impugned disallowance can be computed under rule 8D which was notified on 24.3.2008. In this regard, we draw support from the order of the Chennai ‘tribunal’ in TVS Investments Limited vs. ITO, I.T.A.No. 1609/Mds/2012, dated 29.1.2013 to hold that rule 8D could not have been invoked for computing the disallowance from 1.4.2007 to 23.3.2008 in spite of being applicable with effect from assessment year 2008-09. That being the case, we proceed to make disallowance u/s 14A by ‘reasonable’ computation and deem it fit that lumpsum disallowance of Rs. 35 lakhs would meet the ends of justice. Accordingly, the assessee’s arguments are partly accepted.” 43. Therefore, we find that the identical issue has persisted in assessee’s own case in different years before different benches of ITAT. Hence, in the situation, we find it most appropriate to remit this issue back to the file of AO for a fresh consideration. The AO shall verify the status of identical disallowance in all years and thereafter take a fresh call. Needless to mention that the AO shall provide necessary opportunities to assessee and the assessee shall file a full note on the status of issue in all years to AO. Further, the assessee shall be at liberty to raise all contentions for current year before AO. The issue is, thus, allowed for statistical purpose. Ground No. 25: 44. This ground relates to levy of interest u/s 234B. During hearing, Ld. AR has not pleaded this ground, hence the same is taken as non-pressed and dismissed. Computer Sciences Corporation India Private Limited, Chennai ITA No.1654/Che/2011 Assessment year 2007-08 Page 47 of 47 Ground No. 26: 45. This ground is general and does not require any specific adjudication. 46. Resultantly, this appeal of assessee is partly allowed. Order pronounced in the open court on 06.10.2023. Sd/- sd/- (VIJAY PAL RAO) (B.M. BIYANI) JUDICIAL MEMBER ACCOUNTANT MEMBER Indore Ǒदनांक /Dated : 06.10.2023. CPU/Sr. PS Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY Assistant Registrar Income Tax Appellate Tribunal Indore Bench, Indore