American Express (India) Pvt. Ltd, New Delhi V. DCIT, New Delhi

ITA 1700/DEL/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97094 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 4 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 18-08-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 15-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M B REDDY
• Assessee Lawyers: SANDEEP S KARH AIL S
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 260A; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2, NEW DELHI) BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER ITA NO.1700/DEL./2010 (ASSESSMENT YEAR: 2004-05) AMERICAN EXPRESS (INDIA) PRIVATE LIMITED, VS. DCIT, CIRCLE 1 (1), FIRST FLOOR, MERCANTILE HOUSE, NEW DELHI. 15, KASTURBA GANDHI MARG, NEW DELHI 110 001. ( PAN : AAACA8163F) ITA NO.1832/DEL./2010 (ASSESSMENT YEAR: 2004-05) DCIT, CIRCLE 1 (1), VS. AMERICAN EXPRESS (INDIA) P RIVATE LIMITED, NEW DELHI. FIRST FLOOR, MERCANTILE HOUSE, 15, KASTURBA GANDHI MARG, NEW DELHI 110 001. ( PAN : AAACA8163F) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI NAGESWAR RAO & SANDEEP S. KARH AIL, ADVOCATES REVENUE BY : SHRI M.B. REDDY, CIT DR O R D E R PER GEORGE GEORGE K., JUDICIAL MEMBER : THESE ARE CROSS APPEALS DIRECTED AGAINST THE COMMI SSIONER OF INCOME- TAX (APPEALS) ORDER DATED 22.02.2010. THE RELEVANT ASSESSMENT YEAR IS 2004-05. ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 2 2. IN ASSESSEES APPEAL (ITA NO.1700/DEL/2010), SEV ERAL GROUNDS ARE RAISED WITH REFERENCE TO TRANSFER PRICING ADJUSTMEN T. HOWEVER, IN THE COURSE OF HEARING, LD. AR CONFINED HIS ARGUMENTS TO INCLUS ION OF THREE COMPANIES AND EXCLUSION OF ONE COMPANY FROM THE COMPARABLE LI ST. THE DETAILS OF WHICH WE SHALL TAKE UP FOR CONSIDERATION IN THE SUB SEQUENT PART OF THIS ORDER. 3. WITH REFERENCE TO THE CORPORATE TAX ISSUE, THE A SSESSEE HAS RAISED FOLLOWING EFFECTIVE GROUNDS :- 4.1. THAT THE LEARNED CIT(A) HAS ERRED ON FACTS A ND IN LAW IN TAXING THE SUM OF RS.4,594,589 BEING INTEREST ON SH ORT-TERM DEPOSITS AND RS. 7'109,196 BEING INTEREST ON INCOME TAX REFUND AS 'INCOME FROM OTHER SOURCES' AND IN 'DENYING DEDU CTION UNDER SECTION 10B/10A OF THE ACT. 4.2. THAT THE LEARNED CIT(A) HAS ERRED ON FACTS AN D IN LAW IN NOT ACCEPTING THAT INTEREST ON SHORT-TERM DEPOSITS AND INTEREST ON INCOME TAX REFUND IS INCOME DERIVED FROM THE BUS INESS OF THE UNDERTAKING AND ACCORDINGLY ELIGIBLE FOR DEDUCTION UNDER SECTION 10B/10A OF THE ACT. 4.3. THAT THE LEARNED CIT(A) HAS ERRED ON FACTS AN D IN LAW IN NOT NETTING OFF THE INTEREST INCOME AGAINST THE INT EREST EXPENSE. IN REVENUES APPEAL (ITA NO.1832/DEL/2010), THE FOL LOWING GROUNDS ARE TAKEN :- 1) ON RELIEF OF RS.15,87,61,266/- ON ACCOUNT OF A RM'S LENGTH PRICE : ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 3 A) WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE C ASE THE LD. CIT(A) WAS RIGHT IN REJECTING THE COMPARABLES O N THE GROUND OF RELATED PARTY TRANSACTIONS? B) WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE C ASE THE LD. CIT(A) WAS RIGHT IN TREATING THE FOREIGN EXCHAN GE AND MISCELLANEOUS INCOME AS OPERATING INCOME? C) WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CA SE THE LD. CIT(A) WAS RIGHT IN ADMITTING THE ADDITIONAL EV IDENCE WITHOUT PROVIDING AN OPPORTUNITY TO THE TPO TO EXAM INE IT UNDER RULE 46A (3) OF THE I.T. RULES? . 2) WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CA SE THE LD. CIT(A) WAS RIGHT IN HOLDING THAT AEGSC (STP) UN IT WAS ELIGIBLE FOR EXEMPTION U/S 10A OF THE ACT WHICH IN THE OPINION OF AO WAS FORMED BY SPLITTING-UP/EXPANSION OF EXISTING BUSINESS FCE (EOU) WHICH WAS ALREADY ENJOYING THE BENEFIT U/ S 10B OF THE I.T. ACT. 4. WE FIRST TAKE UP FOR ADJUDICATION THE ASSESSEES APPEAL. ITA NO.1700/DEL./2010 (ASSESSEES APPEAL) 4.1 GROUND NOS.1 TO 3 AND ITS SUB-GROUNDS RELATE TO THE TRANSFER PRICING ISSUE. HOWEVER, THESE GROUNDS NEED NOT BE GIVEN MU CH IMPORTANCE BECAUSE, AS MENTIONED EARLIER, THE AR IN THE COURSE OF HEARI NG HAS CONFINED HIS SUBMISSIONS TO INCLUDE IN THE LIST OF COMPARABLES T HE FOLLOWING THREE COMPANIES :- (I) WEAL INFOTECH LIMITED (II) F I SOFEX LIMITED (III) TULSYAN TECHNOLOGIES LIMITED ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 4 THE LD. AR HAD ALSO REQUESTED FOR EXCLUSION OF DATA MATICS TECHNOLOGIES LIMITED FROM THE LIST OF COMPARABLES. 4.2 BRIEF FACTS IN RELATION TO THE TP ADJUSTMENT AR E AS FOLLOWS. 4.3 THE ASSESSEE IS A PRIVATE LIMITED COMPANY. IT IS A WHOLLY OWNED SUBSIDIARY OF AMERICA EXPRESS INTERNATIONAL INC., U SA. IT IS ENGAGED IN PROVIDED IT ENABLED SERVICES TO ITS GROUP COMPANIES I.E. TRANSACTION PROCESSING, DATA MANAGEMENT, INFORMATION ANALYSIS A ND CONTROL. FOR THE WORK WHICH ASSESSEE UNDERTAKES WITH ITS ASSOCIATED ENTERPRISES, ASSESSEE WAS REMUNERATED AT COST PLUS METHOD. DURING THE RE LEVANT PERIOD, THE ASSESSEE HAS UNDERTAKEN THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES :- S.NO. INTERNATIONAL TRANSACTION METHOD VALUE (IN RS .) 1. EXPORT OF BUSINESS PROCESSING AND SUPPORT TNMM 3,14,44,46,093 2. CHARGES FOR CDN/CPU TNMM 20,10,14,142 3. CHARGES FOR GLOBAL MAX SOFTWARE TNMM 54,09,681 4. TRAVEL AGENCY SERVICES TNMM 13,68,47,592 5. CORPORATE CREDIT CARDS TNMM 5,72,926 6. SECONDMENT OF PERSONNEL TNMM 2,95,21,902 7. RELOCATION OF EXPENSES TNMM 62,70,773 8. REIMBURSEMENT OF EXPENSES TNMM 14,73,929 9. INTEREST ON FIXED DEPOSITS CUP 35,54,589 10. MISCELLANEOUE FINANCIAL CHARGES CUP 81,622 11. INTEREST ON SHORT TERM LOAN (INCLUDING VEHICLE LOAN) RECEIVED CUP 1,12,11,364 12. INTEREST ON TERM LOAN RECEIVED CUP 3,60,97,590 13. INTEREST ON BANK OVERDRAFT CUP 1,44,330 ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 5 4.4 IN THE TRANSFER PRICING STUDY, THE ASSESSEE HAD DIVIDED THE ABOVE INTERNATIONAL TRANSACTION INTO TWO CATEGORIES I.E. CATEGORY-I WHICH INCLUDES TRANSACTIONS FROM 1 TO 8 OF THE TABLE ABOV E; AND CATEGORY-II WITH REFERENCE TO TRANSACTIONS FROM SL. NOS.9 TO 13. WI TH REFERENCE TO CATEGORY-II TRANSACTIONS, THERE WAS NO TRANSFER PRICING ADJUSTM ENT AND THE ARMS LENGTH PRICE OF THESE TRANSACTIONS WAS ACCEPTED. IN BENCH MARKING CATEGORY-I TRANSACTIONS, THE ASSESSEE ADOPTED APPROACH OF AGGR EGATION OF INTERNATIONAL TRANSACTIONS FROM 1 TO 8 AND CONCLUDED THAT TRANSAC TIONAL NET MARGIN METHOD (TNMM) IS MOST APPROPRIATE METHOD TO BENCHMA RK THESE INTERNATIONAL TRANSACTIONS. IN TNMM, THE ASSESSEE HAS COMPARED ITS OPERATING MARGIN UPON OPERATING COST (OP/TC) FOR TH E YEAR UNDER CONSIDERATION. THE ASSESSEE IN ITS TRANSFER PRICIN G STUDY HAD TAKEN 16 COMPARABLE COMPANIES AND ARRIVED AT THEIR MARGIN AT 14.62% AND ASSESSEES MARGIN WAS CALCULATED AT 11%. THUS, THE ASSESSEE S OUGHT TO JUSTIFY ITS ARMS LENGTH PRICE WITH REGARD TO INTERNATIONAL TRANSACTI ONS IT HAD UNDERTAKEN WITH ITS ASSOCIATED ENTERPRISES IN CATEGORY-I TRANSACTIO NS. THE LIST OF COMPARABLE COMPANIES TAKEN BY THE ASSESSEE ARE AS FOLLOWS :- SL.NO. NAME OF THE COMPANY (I) ACE SOFTWARE EXPORTS LIMITED (II) C S SOFTWARE ENTERPRISE LIMITED ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 6 (III) DATAMATICS TECHNOLOGIES LIMITED (IV) F I SOFEX LIMITED (V) HINDUJA T M T LIMITED (VI) M C S LIMITED (VII) MAX HEALTHSCRIBE LIMITED (VIII) NUCLEUS NETSOFT & GIS INDIA LIMITED (IX) TATA SERVICES LIMITED (X) SUPRAWIN TECHNOLOGIES LIMITED (XI) TULSYAN TECHNOLOGIES LIMITED (XII) WEAL INFOTECH LIMITED (XIII) CARBORUNDUM UNIVERSAL LIMITED (XIV) MUKAND ENGINEERS LIMITED (XV) TRICORN INDIA LIMITED (XVI) ULTRAMARINE & PIGENTS LIMITED THE TPO, HOWEVER, REJECTED THE TRANSFER PRICING STU DY OF THE ASSESSEE. THE TPO WAS OF THE VIEW THAT MULTIPLE YEAR DATA IS NOT TO BE TAKEN. THE TPO HELD THAT SINGLE YEAR DATA ONLY NEEDS TO BE CONSIDE RED. FURTHER, THE TPO EXCLUDED MAX HEALTHSCRIBE LIMITED AND WEAL INFOTECH LIMITED FROM THE LIST OF COMPARABLES ON ACCOUNT OF INSUFFICIENT DATA FOR THE CURRENT YEAR. THE TPO ALSO EXCLUDED F I SOFEX LIMITED AND TULSYAN TEC HNOLOGIES LIMITED FROM THE LIST OF COMPARABLES ON ACCOUNT OF HIS REAS ONING THAT THESE WERE START-UP COMPANIES HAVING TURNOVER OF LESS THAN RS. 1 CRORE. THE TPO ALSO REJECTED THE ASSESSEES PLEA THAT DATAMATICS TECHNO LOGIES LIMITED AND ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 7 HINDUJA TMT LIMITED ARE TO BE EXCLUDED FROM THE COM PARABLE LIST OF COMPANIES ON ACCOUNT OF HIGH RELATED PARTY TRANSACT IONS. THE FINAL LIST OF COMPARABLES INCLUDED BY THE TPO ARE AS FOLLOWS :- SL.NO. NAME OF THE COMPANY (I) ACE SOFTWARE EXPORTS LIMITED (II) C S SOFTWARE ENTERPRISE LIMITED (III) DATAMATICS TECHNOLOGIES LIMITED (IV) HINDUJA T M T LIMITED (V) M C S LIMITED (VI) NUCLEUS NETSOFT & GIS INDIA LIMITED (VII) TATA SERVICES LIMITED (VIII) SUPRAWIN TECHNOLOGIES LIMITED (IX) CARBORUNDUM UNIVERSAL LIMITED (X) MUKAND ENGINEERS LIMITED (XI) TRICORN INDIA LIMITED (XII) ULTRAMARINE & PIGENTS LIMITED 4.5 THE TPO ARRIVED AT THE ADJUSTED OPERATING PROFI TS OF THE COMPARABLES AT 23.90% AND MADE ARMS LENGTH PRICE ADJUSTMENT OF RS.36,89,34,440/-. THE CALCULATION MADE BY THE TPO IN ARRIVING AT THE ABOVE TRANSFER PRICING ADJUSTMENT READS AS FOLLOWS :- TOTAL COST OF PROVISION OF SERVICES BY THE ASSESSE E : RS. 2,83,56,58,219/- (AS PER APPENDIX F OF TP REPORT) MARGIN @ 23.90% OF THE ABOVE: RS. 67,77,22,3 14/- ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 8 OPERATING MARGIN CALCULATED BY ASSESSEE RS. 3 0,87,87,874/- (AS PER APPENDIX F OF TP REPORT) DIFFERENCE RS. 36,89,34,440/- BOOK VALUE OF INTERNATIONAL TRANSACTION OF EXPORT OF BUSINESS PROCESSING AND SUPPORT RS.3,1 4,44,46,093/- ADD: DIFFERENCE AS ABOVE RS. 36,89,34,440/- ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION OF EXPORT OF BUSINESS PROCESSING AND SUPPORT RS. 3, 51,33,80,533/- 9. THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRAN SACTIONS ENTERED INTO BY THE ASSESSEE REGARDING EXPORT OF BUSINESS PROCESSING AN D SUPPORT TO ITS AES IS DETERMINED AT RS.3,51,33,80,533/- IN PLACE OF RS.3, 14,44.46,093/-. SINCE THE PRICE CHARGED BY THE ASSESSEE VARIES BY MORE THAN 5% FROM THE ARM'S LENGTH PRICE, AN ADJUSTMENT OF RS.36,89.34,440/- IS TO BE MADE TO TH E INCOME OF THE ASSESSEE, BEING THE DIFFERENCE BETWEEN THE ARM'S LENGTH PRICE AND T HE PRICE CHARGED BY THE ASSESSEE FROM ITS AES FOR RENDERING SERVICES TO THE M. I.E. THE ASSESSING OFFICER SHALL ENHANCE THE INCOME OF THE ASSESSEE BY AN AMOU NT OF RS.36.89,34,440/- WHILE COMPUTING ITS TOTAL INCOME. NO EXEMPTION U/S. L0B S HALL BE ADMISSIBLE ON SUCH ADJUSTMENT IN ACCORDANCE WITH PROVISO OF SUB-SECTIO N (4) OF SECTION 92C. 5. AGGRIEVED, THE ASSESSEE FILED AN APPEAL BEFORE T HE FIRST APPELLATE AUTHORITY. THE CIT (A) PARTLY ALLOWED THE APPEAL O F THE ASSESSEE. 6. AGAINST THE ORDER OF THE CIT (A), THE ASSESSEE I S IN APPEAL REQUESTING FOR INCLUSION OF THREE COMPANIES, WHICH ARE MENTION ED AT PRECEDING PARA 4.1, AND EXCLUSION OF DATAMATICS TECHNOLOGIES LIMITED. 7. LD. AR REITERATED THE SUBMISSIONS MORE OR LESS S UBMITTED BEFORE THE INCOME-TAX AUTHORITIES BELOW. THE LD. DR SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 9 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE SHALL CONSIDERED THE ISSUES RAISED IN T HE COURSE OF ARGUMENTS AS UNDER:- INCLUSION OF WEAL INFOTECH LIMITED 8.1 THIS COMPANY WAS SELECTED AS A COMPARABLE BY TH E ASSESSEE. HOWEVER, THE TPO HAD EXCLUDED THE SAME FROM THE LIS T OF COMPARABLES ON THE GROUND THAT CURRENT YEARS DATA IS NOT AVAILABL E. BEFORE THE CIT (A), THE ASSESSEE HAD SUBMITTED THE FINANCIAL INFORMATION OF THE COMPANY AND REQUESTED FOR ACCEPTING THE SAME AS A COMPARABLE. THE CIT (A) VIDE ORDER DATED 22.02.2010 EVEN WHILE ACCEPTING THAT THE COMP ANY IS FUNCTIONALLY COMPARABLE, UPHELD THE DELETION OF THE SAME ON THE GROUND THAT FINANCIAL INFORMATION CANNOT BE CONSIDERED NOW AT THIS STAGE AS THE SAME WAS NEVER SUBMITTED AT THE TIME OF TP DOCUMENTATION. BEFORE US, THE ASSESSEE PLEADS FOR INCLUSION OF WEAL INFOTECH LIMITED AND RELIANCE WAS PLACED ON THE ORDER OF DELHI TRIBUNAL IN THE CASE OF ACIT VS. CONVERGY S INDIA SERVICES (P) LTD. IN ITA NO.4291/DEL/2009 ORDER DATED 28.11.2014. TH E TRIBUNAL IN THE CASE OF CONVERGYS INDIA SERVICES (P) LTD. (SUPRA) HAS OP INED THAT THOUGH THE COMPANY IS EXCLUDED BY THE TPO, FOR THE REASON THAT THERE IS NO FINANCIAL DATA IS AVAILABLE AT THE TIME OF TP STUDY, THE SAME CAN BE INCLUDED IN THE COMPARABLE LIST, DURING THE APPELLATE STAGE WHEN FI NANCIAL DETAILS ARE MADE ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 10 AVAILABLE. THE RELEVANT FINDING OF THE TRIBUNAL ON AN IDENTICAL ISSUE READS AS FOLLOWS :- 7. THE SECOND GROUND TAKEN BY THE DEPARTMENT IS AG AINST THE INCLUSION OF WEAL INFOTECH LTD. BY THE LD. CIT(A) I N THE LIST OF COMPARABLES. ON THIS SCORE, WE FIND THAT THE ASSESS EE INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES, BUT, DUE TO THE ABSENCE OF THE RELEVANT ANNUAL ACCOUNTS, THE WORKING OF OP/TC OF THIS COMPA NY WAS NOT CALCULATED. ACCORDINGLY, THIS CASE WAS INCLUDED IN THE LIST OF COMPARABLES WITH THE REMARKS NA AGAINST THE COLUMN OP/TC MARG IN. THE ASSESSEE SUBMITTED THE DATA IN RESPECT OF THIS COMPANY BEFOR E THE LD. CIT(A), WHICH CAME IN PUBLIC DOMAIN LATER ON. SUCH DATA WAS CONSI DERED BY THE LD. CIT(A) FOR THE PURPOSES OF CALCULATION OF ARITHMETI C MEAN OF THE COMPARABLE COMPANIES. ON THIS SCORE, WE FIND THAT T HE REVENUE IS AGGRIEVED AGAINST THE ACCEPTANCE OF ADDITIONAL EVID ENCE IN RESPECT OF THIS COMPANY IN VIOLATION OF RULE 46A. 8. THERE ARE TWO ASPECTS OF THIS ISSUE. FIRST IS TH E QUESTION OF THE VERY INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLE S AND THE SECOND IS ABOUT THE CALCULATION OF ITS PROFIT MARGIN. AS REGA RDS THE FIRST ISSUE, WE DO NOT FIND ANY REASON TO DISTURB THE VIEW OF THE LD. CIT(A) BECAUSE THE ASSESSEE INCLUDED IT IN THE LIST OF COMPARABLES IN ITS TRANSFER PRICING STUDY. THE VERY COMPARABILITY OF THIS COMPANY WAS NOT DISP UTED BY THE TPO. IN THAT VIEW OF THE MATTER, THE LD. CIT(A) CANNOT BE F AULTED WITH FOR DIRECTING TO INCLUDE THE DATA OF A COMPANY IN THE LIST OF COM PARABLES, WHICH WAS ORIGINALLY INCLUDED BY THE ASSESSEE AND NOT OBJECTE D TO BY THE TPO. AS REGARDS THE SECOND ASPECT OF THE COMPUTATION OF THE PROFIT MARGIN OF THIS COMPANY, WE FIND THAT THE LD. CIT(A) ACCEPTED THE D ATA FURNISHED BY THE ASSESSEE OF THIS COMPANY AND PROCEEDED TO INCLUDE T HE SAME IN THE LIST OF COMPARABLES WITHOUT AFFORDING ANY OPPORTUNITY TO TH E TPO FOR EXAMINING THE SAME. WE, THEREFORE, FIND THAT THERE IS VIOLATI ON OF RULE 46A TO THIS EXTENT. ACCORDINGLY, WE SET ASIDE THE IMPUGNED ORDE R ON THIS SCORE AND SEND THE MATTER BACK TO THE AO/TPO FOR VERIFYING TH E CORRECTNESS OF THE CALCULATION OF OP/TC OF THIS COMPANY FOR THE PURPOS ES OF CALCULATING ARITHMETIC MEAN OF PLI OF THE COMPARABLE COMPANIES. 8.2 IN VIEW OF THE ABOVE CONCLUSION OF THE TRIBUNAL ON AN IDENTICAL ISSUE, WE DEEM IT APPROPRIATE TO RESTORE THE ISSUE TO THE FILE OF THE AO/TPO TO ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 11 CONSIDER WHETHER WEAL INFOTECH LIMITED IS TO BE INC LUDED IN THE COMPARABLE LIST AND IF COMPARABLE WHAT IS THE ARITHMETIC MEAN. IT IS ORDERED ACCORDINGLY. INCLUSION OF F I SOFEX LIMITED & TULSYAN TECHNOLOGIES LIMITED 9. THE ASSESSEE HAS SELECTED THESE COMPANIES AS COM PARABLES. HOWEVER, THE SAME WAS REJECTED BY THE TPO BY APPLYING LESS T HAN RS.1 CRORE TURNOVER FILTER. TWO REASONS WERE CITED FOR SUCH AN APPROAC H, NAMELY, STARTING UP YEAR AND FINANCIAL DATA MAY NOT BE RELIABLE AS THE SHAREHOLDERS AND THE EMPLOYEES MAY BE THE SAME. BEFORE THE CIT (A), THE ASSESSEE SUBMITTED THAT THESE TWO COMPANIES WERE NOT IN THE START-UP P HASE AND WERE IN EXISTENCE SINCE FY 1998-99 AND FY 2000-01. FURTHER , THESE COMPANIES ARE LISTED OR PART OF LISTED GROUP AND, THEREFORE, THER E IS CLEAR DISTINCTION BETWEEN PROFITS AND SALARIES. HOWEVER, THE CIT (A) REJECTE D THE CONTENTIONS RAISED BY THE ASSESSEE AND UPHELD THE DELETION OF THIS COMPAN Y BY THE TPO. THE RELEVANT FINDING OF THE CIT (A) IN REJECTING / EXCL UDING THIS COMPANY FROM THE LIST OF COMPARABLES READS AS FOLLOWS : 11.4 I HAVE CAREFULLY EXAMINED THE ARGUMENTS OF BO TH THE APPELLANT AND THE TPO REGARDING COMPARABILITY OF CO MPANIES WITH TURNOVER LESS THAN RS.1 CRORE. IN THIS REGARD, I AGREE WITH THE FINDINGS OF THE TPO THAT SUCH COMPANIES SHOULD BE REJECTED AS THESE COMPANIES ARE GENERALLY IN THE SET-UP PHAS E OF BUSINESS AND ARE ALSO NOT BIG ENOUGH TO ESTABLISH D ISTINCTION IN PROFITS AND SALARIES OF THE KEY MANAGERIAL PERSONNE L THEREBY SIGNIFICANTLY REDUCING THE RELIABILITY OF THE FINAN CIAL DATA. THE ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 12 SALE BASKET IS NARROW WHEREAS THE FIXED COST AND ES TABLISHMENT COST OF NEWLY ESTABLISHED COMPANIES ARE LARGE. THEREFORE THE TPO ACTION IS CORRECT IN REJECTING CO MPANIES HAVING SALES TURNOVER LESS THAN RS. 1 CRORE. 9.1 BEFORE US, THE LD. AR RELIED ON THE JUDGMENT OF TECHBOOKS INTERNATIONAL PVT. LTD. VS. DCIT IN ITA NO.240/DEL/ 2015 ORDER DATED 06.07.2015. THE TRIBUNAL IN THE CASE OF TECHBOOKS INTERNATIONAL PVT. LTD. (SUPRA) HELD AS UNDER :- 12.2.2. HAVING HEARD BOTH THE SIDES ON THIS ISSUE, WE FIND THAT THE TPO HAS ACCEPTED THE FUNCTIONAL COMPARABILITY OF THIS C OMPANY ON SEGMENTAL LEVEL. THE LD. DR WAS ALSO FAIR ENOUGH TO CANDIDLY ACCEPT THE FUNCTIONAL SIMILARITY OF THE RELEVANT SEGMENT OF THIS COMPANY. IN SUCH CIRCUMSTANCES, THE QUESTION ARISES AS TO WHETHER THE RELEVANT SEGM ENT OF THIS COMPANY CAN BE EXCLUDED FROM THE LIST OF COMPARABLES MERELY ON THE GROUND THAT THE REVENUE FROM THIS SEGMENT IS ONLY RS.83 LACS? IN OU R CONSIDERED OPINION, THE QUANTUM OF TURNOVER CAN BE NO REASON FOR THE EX CLUSION OF A COMPANY WHICH IS OTHERWISE COMPARABLE. WE HAVE NOTICED ABOV E THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE O F CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) P. LTD (SUPRA) IN WHICH IT HAS BEEN HELD THAT HIGH TURNOVER OR HIGH PROFIT CAN BE NO REASON TO EL IMINATE AN OTHERWISE COMPARABLE COMPANY. THE SAME APPLIES WITH FULL FORC E IN THE CONVERSE MANNER AS WELL TO A LOW TURNOVER/LOW PROFIT COMPANY . WE, THEREFORE, HOLD THAT A COMPANY CANNOT BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE GROUND OF ITS LOW TURNOVER. IN PRINCIPLE, WE DIRECT THE INCLUSION OF THE RELEVANT SEGMENT OF THIS COMPANY IN THE LIST OF COM PARABLES. THE TPO IS DIRECTED TO INCLUDE THE OPERATING PROFIT/OPERATING COSTS OF THE ITES SEGMENT OF THIS COMPANY IN THE LIST OF COMPARABLES, AFTER DUE VERIFICATION OF THE NECESSARY FIGURES FOR DETERMINATION OF THE O PERATING PROFIT MARGIN ETC. 9.2 EVEN THOUGH THE ASSESSEE IN ITS TP STUDY HAS IN CLUDED THE TURNOVER FILTER OF LESS THAN RS.1 CRORE, THE ASSESSEE HAS GI VEN REASONS FOR INCLUSION OF THESE TWO COMPANIES IN THE LIST OF COMPARABLES, PRI MARILY FOR THE REASON THAT ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 13 THESE ARE NOT START-UP COMPANIES AND FUNCTIONAL DAT A FOR THESE COMPANIES ARE RELIABLE. THE TRIBUNAL IN THE CASE OF TECHBOOK INT ERNATIONAL PVT. LTD. (SUPRA) HAS HELD THAT LOW TURNOVER PER SE CANNOT BE REASON TO EXCLUDE A COMPANY FROM THE COMPARABLE TEST. IN VIEW OF THE R EASONS GIVEN IN THE AFORESAID ORDER OF TRIBUNAL IN CASE OF TECHBOOK INT ERNATIONAL PVT. LTD., WE HOLD THAT THE CIT (A) IS NOT JUSTIFIED IN EXCLUDING F I SOFEX LIMITED AND TULSYAN TECHNOLOGIES LIMITED FROM THE LIST OF COMPA RABLES PURELY ON ACCOUNT OF ITS LOW TURNOVER. THE ISSUE NEEDS TO BE EXAMINED BY THE AO/ TPO WHETHER THESE TWO COMPANIES ARE OTHERWISE FUNCT IONALLY SIMILAR TO THAT OF THE ASSESSEE IRRESPECTIVE OF HAVING LOW TURNOVER . EXCLSUON OF DATAMATICS TECHNOLOGIES LIMITED AND HINDUJA TMT LIMITED 10. DATAMATICS TECHNOLOGIES LIMITED AND HINDUJA TMT LIMITED WERE SELECTED AS COMPARABLE BY THE ASSESSEE AND THE SAME WERE ALSO SELECTED BY THE TPO. BEFORE THE CIT (A), THE ASSESSEE HAS CHAL LENGED THE INCLUSION OF BOTH THE COMPANIES ON THE GROUND THAT THESE COMPANI ES WERE HAVING SIGNIFICANT RELATED PARTY TRANSACTIONS OF MORE THAN 25% DURING THE RELEVANT FINANCIAL YEAR. THE ASSESSEE HAS ALSO SUBMITTED DE TAILS REGARDING RELATED PARTY COMPUTATION IN BOTH THE COMPANIES. THE CIT ( A), AFTER CONSIDERING THE ASSESSEES SUBMISSION, DELETED HINDUJA TMT LIMI TED ON THE GROUND OF SIGNIFICANT PERCENTAGE OF RELATED PARTY TRANSACTION S. THE CIT (A) HOWEVER ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 14 DID NOT CONSIDER THE ASSESSEES SUBMISSION REGARDIN G EXCLUSION OF DATAMATICS TECHNOLOGIES LIMITED. THE ASSESSEE FOR EXCLUSION OF DATAMATICS TECHNOLOGIES LIMITED AND HINDUJA TMT LIMITED IS REL YING ON THE FOLLOWING CASE LAWS :- (I) NOKIA INDIA (P) LTD. VS. DCIT ITA NO.242/DEL/ 2010 & 178/DEL/2010; AND (II) ACIT VS. CONVERGYS INDIA SERVICE (P) LTD. IT A NO.4291/DEL/2009. THE ASSESSEE HAS GIVEN THE WORKING OF RELATED PARTY TRANSACTIONS OF DATAMATICS TECHNOLOGIES LIMITED, WHICH IS AT 39% (P AGE 49 OF THE PAPER BOOK SUBMITTED BY THE ASSESSEE). THIS ASPECT HAS N OT BEEN CONSIDERED BY THE CIT (A). THE TRIBUNAL IN THE CASE OF NOKIA INDIA ( P) LTD. (SUPRA) HAS HELD AS FOLLOWS :- 16. WE FIND THAT THIS SUBMISSION HAS TWO COMPONENT S, VIZ., THE COMPOSITION OF NUMERATOR AND DENOMINATOR AND THE PE RCENTAGE OF SUCH NUMERATOR TO THE DENOMINATOR. WE AGREE IN PRINCIPLE THAT IF ANY COMPANY THOUGH FUNCTIONALLY COMPARABLE, BUT, HAS MORE THAN A SPECIFIC PERCENTAGE OF THE RPTS, THEN, THE SAME SHOULD BE IGNORED BY TR EATING IT AS A CONTROLLED TRANSACTION. HOWEVER, THE PERCENTAGE OF RPTS TO MAKE A COMPANY AS INELIGIBLE FOR COMPARISON, IN OUR CONSID ERED OPINION, SHOULD BE TAKEN AS MORE THAN 25% AND NOT 15% AS SUGGESTED ON BEHALF OF THE ASSESSEE. THE VIEW ADOPTING MORE THAN 25% RPTS MAKI NG A COMPANY INCOMPARABLE HAS BEEN TAKEN BY VARIOUS BENCHES OF T RIBUNAL INCLUDING AGLIENT TECHNOLOGIES INTERNATIONAL P. LTD. VS. ACIT (2013) 36 CCH 187 DEL TRIB; STREAM INTERNATIONAL SERVICES PVT. LTD. V S. ADIT (IT) (2013) 152 TTJ (MUMBAI) 553 ; AND ACTIS ADVISERS PVT.LTD. VS. DCIT (2012) 20 ITR (TRIB) 138 (DELHI). WE, THEREFORE, HOLD THAT A COMPANY CAN BE CONSIDERED AS INCOMPARABLE IF ITS RPTS EXCEED 25%. ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 15 10.1 IN VIEW OF THE HIGH SIGNIFICANT RELATED PARTY TRANSACTIONS WHICH HAS NOT BEEN EXAMINED EITHER BY THE AO/TPO OR CIT (A) IN TH E INSTANT CASE, WE DEEM IT APPROPRIATE TO RESTORE THE ISSUE TO THE FIL E OF AO/TPO FOR DE NOVO CONSIDERATION. IT IS ORDERED ACCORDINGLY. CORPORATE TAX ISSUES (GROUND NOS.4.1 TO 4.3) INTEREST INCOME EARNED ON SHORT TERM DEPOSITE WHETH ER BUSINESS INCOME OR INCOME FROM OTHER SOURCES 11. THE ASSESSEE HAS MADE SHORT TERM DEPOSIT OUT OF SURPLUS FUNDS. IT WAS CLAIMED BY THE ASSESSEE THAT THESE SURPLUS FUNDS AR E NOTHING BUT BUSINESS FUNDS TEMPORARILY AVAILABLE OUT OF WORKING CAPITAL OF THE BUSIENSS. THE ASSESSEE LIQUIDATES/WITHDRAWS FUNDS FROM THE SHORT TERM DEPOSITS TO DISCHARGE SHORT TERM LIABILITIES/MEET WORKING CAPIT AL REQUIREMENTS AS AND WHEN REQUIRED. ACCORDINGLY, IT WAS SUBMITTED THAT THE INTEREST IS EARNED ON SHORT TERM FUNDS TEMPORARILY AVAILABLE OUT OF SURPL US WORKING CAPITAL. HOWEVER, THE AO HELD THAT THE INTEREST INCOME EARNE D ON SUCH SHORT TERM DEPOSIT CANNOT BE SAID TO BE PROFITS OF BUSINESS UN DERTAKING AND THUS, NOT ELIGIBLE FOR THE DEDUCTION U/S 10A/10B OF THE ACT. 11.1 ON FURTHER APPEAL, THE CIT (A) UPHELD THE FIND INGS OF THE AO. THE RELEVANT FINDING OF THE CIT (A) READS AS FOLLOWS :- ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 16 19.3 PERUSAL OF SECTION 10A REVEALS THAT THE EXEMP TION WITH REGARD TO THE PROFIT AND GAIN DERIVED BY ANY UNDERT AKING FROM THE EXPORT ARTICLES OR THINGS OR COMPUTER SOFTWARE ETC FOR A PERIOD OF 10 CONSECUTIVE ASSESSMENT YEARS.. THE INTEREST INCOME BY NO MEANS CAN BE CONSIDERED A S THE PROFITS AND GAIN DERIVED FROM AN UNDERTAKING. T HIS IS STRETCHING THE ARGUMENTS TOO FAR. THE INTENTION OF THE LEGISLATURE IS TO GRANT DEDUCTION TO THE FIRST DEGR EE OF INCOME AND NOT TO THE SECOND DEGREE INCOME GENERATED OUT O F FIRST DEGREE INCOME. THIS HAS BEEN HELD IN A RECENT JUDGM ENT (M/S LIBERTY INDIA VS COMMISSIONER OF INCOME TAX ON 31ST AUGUST, 2009)(SC) WHEREIN THE DEDUCTION WITH REGARD TO SECT ION 80I HAS BEEN GIVEN ONLY TO THE DIRECT PROFIT AND GAINS FROM THE UNDERTAKING/ EXPORTS. IN ALL THESE SECTIONS THE WORDINGS ARE EXACTLY THE SAME AS THAT OF SECTION 10A THAT IS PROFIT 'DERIVED' FROM T HE UNDERTAKING. THE LEGISLATURE HAS NOT USED THE WORD PROFITS PERTAINING TO THE MANUFACTURE AND PRODUCTION OF ART ICLE OR THINGS. THE WORD 'DERIVED' IS NARROWER IN CONNOTATI ON AND CANNOT BE EQUATED WITH 'PERTAINING TO'. SUCH SECOND DEGREE INCOME WOULD CONSTITUTE INDEPENDENT SOURCE OF INCOM E BEYOND THE FIRST DEGREE NEXUS BETWEEN PROFIT AND THE INDUS TRIAL UNDERTAKING. THEREFORE THE INTEREST INCOME FROM OTHER SOURCES DO ESN'T QUALIFY FOR DEDUCTION. THEREFORE THIS GROUND IS REJ ECTED. 11.2 BEFORE US, THE LD. AR SUBMITTED THAT INTEREST INCOME EARNED ON SHORT TERM DEPOSIT IS ELIGIBLE FOR DEDUCTION U/S 10A/10B OF THE ACT. FOR THE ABOVE PROPOSITION, THE LD. AR RELIED ON ASSESSEES OWN CA SE IN ITA NO.1016/DEL/2001 FOR AY 2002-03. IT WAS FURTHER SU BMITTED THAT THE ISSUE ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 17 IN QUESTION IS SQUARELY COVERED BY THE FOLLOWING JU DGMENTS/ORDERS OF THE HONBLE HIGH COURT AND THE TRIBUNAL :- (I) CIT VS. MOTOROLA INDIA ELECTRONICS (P) LTD. I TA NO.428 AND 447 OF 2007 (KARNATAKA HIGH COURT); (II) CIT VS. HRITNIK EXPORTS PVT. LTD. ITA NO.219 AND 239 OF 2014 (DELHI HIGH COURT); AND (III) MERCER CONSULTING (INDIA0 PRIVATE LIMITED VS. DCIT ITA NO.966/DEL/2014 (DELHI ITAT). 11.3 IT WAS ALSO SUBMITTED IN THIS CONTEXT THAT THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF HRITNIK EX PORTS DELIVERED ON NOVEMBER 2014 REFERS TO AND RELIES UPON DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF MOTOROLA INDIA ELECTRONIC S (P) LTD. AND DEALS WITH THE ISSUES OF ENTITLEMENT OF INTEREST FROM SURPLUS FUNDS UNDER SECTION 10A/10B OF THE ACT. 11.4 ON THE OTHER HAND, THE LD. DR RELIED ON THE JU DGMENT OF HONBLE SUPREME COURT IN THE CASE OF M/S. LIBERTY INDIA LTD . VS. CIT (THE JUDGMENT RELIED UPON BY THE LD. CIT (A)) AND ALSO IN THE JUD GMENT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF MARUBENI I NDIA PRIVATE LIMITED VS. DIRECTOR OF INCOME-TAX REPORTED IN 354 ITR 638. ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 18 11.5 AFTER HEARING THE RIVAL SUBMISSIONS, WE NOTICE THAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002-03, THE MATTER HAS BE EN DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE. IT HAS BEEN BR OUGHT TO OUR NOTICE THAT THIS ORDER OF THE TRIBUNAL IS SUBJECT MATTER OF APPEAL T O THE HONBLE JURISDICTIONAL HIGH COURT U/S 260A OF THE ACT. IT WAS SUBMITTED T HAT APPEAL BEFORE THE HONBLE HIGH COURT IS PENDING ADJUDICATION. FOR TH E SAKE OF CONSISTENCY, WE DECIDE THE MATTER IN FAVOUR OF THE ASSESSEE BY H OLDING THAT INTEREST ON SURPLUS BUSINESS FUNDS KEPT WITH SHORT TERM DEPOSIT S IS TO BE TREATED AS INCOME FROM BUSINESS ENTITLED TO THE BENEFIT OF D EDUCTION U/S 10A/10B OF THE ACT. IT IS ORDERED ACCORDINGLY. GROUND NOS.4.1 TO 4.3 INTEREST INCOME EARNED FROM INCOME TAX REFUND WHETHER BUSINESS INCOME OR INCOME FROM O THER SOURCES 12. THE ASSESSEE DID NOT PRESS THIS PART OF THE GRO UND IN VIEW OF THE TRIBUNALS ORDER IN ASSESSEES OWN CASE FOR ASSESSM ENT YEAR 2002-03 BEING ITA NOS.1338/DEL/2009 & 1512/DEL/2009 AND FOR ASSES SMENT YEAR 2003-04 BEING ITA NOS.4240/DEL/2009 & 4295/DEL/2009. DEPARTMENTS APPEAL (ITA NO.1832/DEL./2010) 13. IN DEPARTMENTS APPEAL, THE TRANSFER PRICING IS SUES RAISED ARE TWO FOLD, NAMELY, WHETHER THE CIT (A) IS JUSTIFIED IN EXCLUDI NG HINDUJA TMT LIMITED ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 19 FROM THE LIST OF COMPARABLE COMPANIES AND WHETHER T HE FOREIGN EXCHANGE INCOME AND MISC. INCOME ARE OPERATING INCOME. EXCLUSION OF HINDUJA TMT LIMITED 13.1 THIS COMPANY WAS SELECTED AS A COMPARABLE BY T HE ASSESSEE AND SAME WAS ACCEPTED BY THE TPO. BEFORE THE CIT (A), ASSES SEE CHALLENGED THE INCLUSION OF THIS COMPANY IN COMPARABLE LIST FOR TH E REASON THAT IT WAS HAVING HIGH RELATED PARTY TRANSACTIONS EXCEEDING 25% DURIN G THE RELEVANT ASSESSMENT YEAR. THE CIT (A) VIDE PARA 11.5 OF THE IMPUGNED ORDER EXCLUDED THE ABOVE SAID COMPANY FROM THE LIST OF CO MPARABLES. THE RELEVANT FINDING OF THE CIT (A) READS AS FOLLOWS :- BASED ON THE ABOVE CALCULATIONS, IT IS CLEAR THAT T HE COMPANY HAS SIGNIFICANT PERCENTAGE OF RELATED PARTY TRANSACTIONS (TOTAL VALUE OF RELATED PARTY TRANSACT IONS/ TOTAL OPERATING EXPENSE IS CLOSE TO 68%) HENCE, I HOLD TH AT HINDUJA TMT IS NOT TO BE USED AS A COMPARABLE COMPANY ON AC COUNT OF SIGNIFICANT RELATED PARTY TRANSACTIONS. 13.2 THE REVENUE, BEING AGGRIEVED, IS IN APPEAL BEF ORE US. 13.3 HAVING HEARD RIVAL SUBMISSIONS, WE NOTICE THAT THIS COMPANY IS HAVING HIGH RELATED PARTY TRANSACTIONS TO THE EXTENT OF 68 %. THIS CATEGORICAL FINDING OF THE CIT(A) HAS NOT BEEN CHALLENGED BY THE REVENU E IN ITS GROUNDS THE VARIOUS ORDERS OF THE TRIBUNAL HAVE HELD THAT THE C OMPANIES HAVING RELATED ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 20 PARTY TRANSACTIONS IN EXCESS OF 25% ARE TO BE EXCLU DED FROM THE COMPARABLE LIST. FOLLOWING THE ORDERS OF THE TRIBUNAL WHICH H AVE HELD SO, I.E., NOKIA INDIA (P) LTD. VS. DCIT (SUPRA) AND ACIT VS. CONVER GYS INDIA SERVICE (P) LTD. (SUPRA), WE HOLD THAT THE CIT (A) IS JUSTIFIED IN EXCLUDING THE SAME FROM THE LIST OF COMPARABLES. WHETHER FOREIGN EXCHANGE INCOME AND MISC. INCOME ARE OPERATING INCOME 14. THE TPO HAS NOT CONSIDERED CERTAIN ITEMS AS OPE RATING. THE ASSESSEE BEFORE THE CIT (A) SUBMITTED THAT FOREIGN EXCHANGE INCOME AND MISC. INCOME ARE OPERATING INCOME AND ARE NOT TO BE EXCLU DED WHILE CALCULATING THE MARGIN OF THE ASSESSEE AS WELL AS OF THE COMPAR ABLES. THE CIT (A) HELD THAT THE FOREIGN EXCHANGE INCOME AND THE MISC. INCO ME ARE OPERATING IN NATURE. THE RELEVANT FINDING OF THE CIT (A) READS AS FOLLOWS :- 14.1 WHILE COMPUTING THE ARM'S LENGTH ADJUSTMENT I N THE TRANSFER PRICING ORDER, THE TPO HAS NOT CONSIDERED OTHER OPERATING ITEMS OF INCOME (NAMELY FOREIGN EXCHANGE INCOME AND MISCELLANEOUS INCOME). I HAVE REVIEWED THE COMPUTATION OF ITS OPERATING MA RGIN PROVIDED BY THE APPELLANT. IN THIS REGARD, I AM OF THE VIEW THAT THE SAME SHOULD BE CONSIDERED AS OPERATING ITEMS OF INCOME AND HENCE, ANY DIFFERENCE, IF ANY, SHOULD BE ADJUST ED TO THE OPERATING REVENUES OF THE APPELLANT AND NOT TO THE SALES TURNOVER. THE ABOVE VIEW HAS ALSO BEEN SUPPORTED BY HON'BLE DELHI TRIBUNAL IN THE CASE OF SONY INDIA. 14.1 THE REVENUE, BEING AGGRIEVED, IS IN APPEAL BEF ORE US. ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 21 14.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. WE NOTICE THAT THE TRIBUNAL IN THE FOLLOWI NG JUDGMENTS HAVE HELD THAT FOREIGN EXCHANGE INCOME AND MISC. INCOME ARE O PERATING INCOME :- (I) TECHBOOKS INTERNATIONAL PVT. LTD. VS. ACIT IT A NO.722/DEL/2014 (AY 2009-10) (PAGE 10 15, PARA 4. 1 4.9 AT PARA 4.6 & 4.9); (II) WESTFALIA SEPARATOR INDIA PVT. LTD. VS. ACIT ( ITA NO.4446/DEL/2007)(AY 2003-04) (PAGE 6 16 AT PAGE 15 & 16); (III) CISCO SYSTEMS (INDIA) PRIVATE LIMITED VS. DCI T (IT (TP) A.NO.271/BANG/2014) (PAGE 15 & 16 AT PARA 23); AND (IV) SAP LABS INDIA PRIVATE LIMITED (2010) 6 ITR (T) 81) (AT PARA 42 & 46). IN VIEW OF THE ABOVE ORDERS OF THE TRIBUNAL, WE HOL D THAT THE CIT (A) IS JUSTIFIED IN INCLUDING THE FOREIGN EXCHANGE INCOME AND MISC. INCOME AS THE OPERATING INCOME. IT IS ORDERED ACCORDINGLY. CORPORATE TAX ISSUES IN DEPARTMENTALS APPEAL DENIAL OF DEDUCITON U/S 10A ON PROFITS OF AEGSC UNIT (GROUND NO.2 OF DEPARTMENTS APPEAL) 15. THE AO DENIED DEDUCTION U/S 10A OF THE ACT IN R ESPECT OF THE NEWLY SET UP AEGSC UNIT. THE REASONING GIVEN BY THE AO R EADS AS FOLLOWS :- ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 22 .. BASED ON THE DIRECTIONS GIVEN BY ADDL. CIT, RANGE-1 MY PREDECESSOR HAD TREATED THE BUSINESS OF AEGSC UNIT (REGD AS STP UNIT) AS HAVING BEEN CREATED BY SPLITTING/ EXPA NSION OF THE EXISTING BUSINESS OF FCE UNIT WHICH IS ALREADY ENJO YING THE BENEFIT OF SECTION 10B OF THE ACT AND THE ISSUE WAS DECIDED AGAINST THE ASSESSEE IN THE PRECEDING YEAR. IN VIEW OF FACTS OF THE CASE AND FOLLOWING THE DECI SION GIVEN BY MY PREDECESSOR FOR AY 2003-04, I AM SATISFIED THAT BUSINESS OF AEGSC UNIT (REGD AS STP UNIT) AS HAVING BEEN CREATE D BY SPLITTING/ EXPANSION OF THE EXISTING BUSINESS OF FC E UNIT WHICH IS ALREADY ENJOYING THE BENEFIT OF SECTION 10B OF T HE ACT. HENCE, AS A NATURAL COROLLARY TO ABOVE; THE ASSESSEE'S ELI GIBILITY FOR EXEMPTION U/S 10A FOR THE NEWLY SET UP AEGSC UNIT I S REJECTED. 15.1 THE CIT (A) DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY FOLLOWING HIS PREDECESSORS ORDER. THE CIT (A) HELD THAT NEW UNIT WAS NOT SET UP BY SPLITTING UP OR EXISTING BUSINESS AND, THEREFORE, I T WAS ENTITLED TO DEDUCTION U/S 10A OF THE ACT. THE RELEVANT FINDING OF THE CI T (A) READS AS FOLLOWS :- 17.3 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS M ADE BY THE APPELLANT AND THE OBSERVATIONS OF THE ASSESSING OFF ICER AS WELL AS THAT OF THE ADDITIONAL COMMISSIONER OF INCOME TA X. I HAVE ALSO GONE THROUGH THE OBSERVATIONS OF MY PREDECESSO R FOR THE ASSESSMENT YEAR 2003-2004 I.E. THE FIRST YEAR OF CL AIM OF DEDUCTION UNDER SECTION 10A. THIS IS NOT DENIED THA T THE TURNOVER OF BOTH THE UNITS ARE RISING AND NOT DETRI MENTAL TO THE PERFORMANCE OF EACH OTHER. HENCE IT CANNOT BE DRAGG ED UNDER MISCHIEF OF SPLITTING. THERE IS NO SIGN OF DECLINE IN THE TURNOVER OF FCE UNIT WHICH IS APPROACHING END OF TAX HOLIDAY OR EVEN AFTER THE TAX HOLIDAY. FURTHER THEY ARE NOT USING T HE SAME INFRASTRUCTURE. ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 23 17.4 IN VIEW OF ABOVE OBSERVATIONS, IT IS CLEAR TH AT THE NEW AEGSC UNIT (STP) WAS NOT FORMED BY SPLITTING UP OR RECONSTRUCTION OF EXISTING BUSINESS OF FCE UNIT (EO U) AND HENCE, I HOLD THAT THE AEGSC UNIT IS ELIGIBLE FOR D EDUCTION UNDER SECTION 10A. ACCORDINGLY, GROUND NOS. 2.1 IS DECIDED IN FAVOUR OF THE APPELLANT. 15.2 THE REVENUE, BEING AGGRIEVED, IS IN APPEAL BEF ORE US. 15.3 WE HAVE HEARD THE RIVAL SUBMISSIONS. WE NOTIC E THAT THE ISSUE IN QUESTION IS COVERED IN FAVOUR OF THE ASSESSEE BY OR DER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002-03 BEI NG ITA NO.4240/DEL/2009 & 4295/DEL/2009 (PAGE26 PARA 36) A ND ASSESSMENT YEAR 2007-08 BEING ITA NO.295/DEL/2012 (PAGE 7 & 8). FO R READY REFERENCE, THE FINDING OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 200 7-08 READS AS FOLLOWS :- 18. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. 19. WE FIND THAT TRIBUNAL IN ASSESSEES OWN CASE FO R AY 2003- 04 HAS HELD AS UNDER: - 36. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL PLACED BEFORE US. WE FIND THAT THE CIT(A) HAS CONSIDERED ALL THE PARAMETERS WHICH MAY BE NECESSAR Y FOR ADJUDICATING WHETHER THE SET UP OF THE NEW UNIT IS BY WAY OF SPLITTING UP OF THE EXISTING BUSINESS OR IT IS A NEW SET UP OVER AND ABOVE THE EXISTING SET UP. HE HAS RECORDED THE FINDING THAT THE PHYSICAL LOCATION OF BOTH THE UNITS IS DIFFERENT. THE NATURE OF ACTIVITIES IS DIF FERENT, SEPARATE LICENSE IS OBTAINED FOR THE NEW UNIT, SEPA RATE INFRASTRUCTURE IS CREATED IN THE NEW UNIT, FRESH FU NDS HAVE ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 24 BEEN INVESTED IN THE NEW UNIT AND EVEN AFTER THE SE TTING UP OF THE NEW UNIT, THE TURNOVER OF THE OLD UNIT HA S NOT REDUCED BUT, ON THE OTHER HAND, INCREASED. DURING A Y 2002-03, WHEN NO NEW UNIT WAS IN EXISTENCE, THE TUR NOVER OF OLD UNIT WAS RS. 129 CRORES WHICH, AFTER THE SET TING UP OF THE NEW UNIT, HAS INCREASED TO RS. 294 CRORES IN AY 2008-09. IN VIEW OF THE ABOVE FACTS, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD. CIT(A). THE SAME IS S USTAINED AND GROUND NO. 3 OF THE REVENUES APPEAL IS REJECTE D. 20. RESPECTFULLY FOLLOWING THE DECISION OF TRIBUNAL WE HOLD THAT ASSESSEE WAS ENTITLED FOR DEDUCTION U/S 10A AS IT HAD ESTABLISHED A NEW UNIT. THIS GROUND IS ALLOWED. 26.1 IN VIEW OF THE ABOVE FINDING OF THE TRIBUNAL, WE HOLD THAT THE CIT (A) IS JUSTIFIED IN GRANTING THE BENEFIT OF DEDUCTION U /S 10A OF THE ACT IN RESPECT OF NEWLY SET UP AEGSC UNIT OF THE ASSESSEE. IT IS ORDERED ACCORDINGLY. 27. IN THE RESULT, THE APPEAL OF THE REVENUE IS REJ ECTED. 28. TO SUM UP : THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 28 TH DAY OF AUGUST, 2015. SD/- SD/- (S.V. MEHROTRA) (GEORGE GEORGE K.) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 28 TH DAY OF AUGUST, 2015 TS ITA NO.1700/DEL/2010 ITA NO.1832/DEL/2010 25 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.