Birlasoft (India) Ltd., New Delhi V. DCIT, New Delhi

ITA 200/DEL/2015

• Counselvise Citation: 20020114 RSA 2015
• Duration Of Justice: 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-04-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 19-03-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 09-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJIT KUMAR SINGH
• Assessee Lawyers: NEERAJ K JAIN
• Keywords: Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Cost of acquisition; Capital expenditure
• Section: 234B; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I , NEW DELHI BEFORE SMT. DIVA SINGH , JM AND SH. N. K. SAINI, AM ITA NO. 200 /DEL/201 5 : ASSTT. YEAR : 2010 - 11 BIRLASOFT (INDIA) LIMITED , (FORMERLY BIRLASOFT LIMITED), 10 TH FLOOR, PRAKASH DEEP BUILDING, 7 - TOLSTOY MARG, NEW DELHI VS DY. COMMISSIONER OF INCOME - TAX, CIRCLE 3(1), NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. A AACB2769E ASSESSEE BY : SH. AJAY VOHRA , SR. ADV. & SH. N EERAJ K. JAIN, ADV. REVENUE BY : SH. AJIT KUMAR SINGH, CIT DR DATE OF HEARING : 19 .0 3 .2015 DATE OF PRONOUNCEMENT : 17 .04 .2015 ORDER PER N. K. SAINI, AM: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 27.0 1 .2014 OF TPO - I(3), NEW DELHI . 2. FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEAL: 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING THE ASSESSMENT UNDER SECTION 144C READ WITH SECTION143(3) OF THE INCOME - TAX ACT (THE ACT) AT AN I NCOME OF RS. 20,87,87,127 AS AGAINST THE RETURNED LOSS OF RS. 11,10,02,263 BY THE APPELLANT. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING ADJUSTMENT OF RS. 30,08,43,288 TO THE INCOME OF THE APPELLANT ON ACCOUNT OF THE ALLEGED DIFFERE NCE IN THE ARM'S LENGTH PRICE OF THE ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 2 INTERNATIONAL TRANSACTIONS UNDERTAKEN DURING THE PREVIOUS YEAR ON THE BASIS OF ORDER PASSED BY TRANSFER PRICING OFFICER ('TPO') UNDER SECTION 92CA(3) OF THE ACT. 2.1 THAT THE D ISPUTE RESOLUTION PANEL ('DRP')/ TPO ERRE D ON FACTS AND IN LAW IN DISREGARDING THE INTERNAL BENCHMARKING UNDERTAKEN BY THE APPELLANT FOR DETERMINING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS APPLYING TNMM ON THE GROUND THAT - (I) THE APPELLANT DID NOT MAINTAIN SEGMENTAL ACCO UNTS FOR THE RELATED AND NON RELATED TRANSACTIONS AND THERE WAS NO SEGREGATION OF THESE ACTIVITIES IN THE AUDITED FINANCIALS. (II) IN THE SEGMENTAL ACCOUNTS PREPARED BY THE APPELLANT, EXPENSES WHICH CANNOT BE DIRECTLY ALLOCATED ARE APPORTIONED ON THE BASIS OF RESPECTIVE TURNOVER AND IS NOT RELIABLE AT ALL. (III) THE SEGMENTAL ACCOUNT PREPARED AND CERTIFIED BY THE INDEPENDENT FIRM OF CHARTERED ACCOUNTANTS ARE NOT RELIABLE. (IV) THAT THE AUDITOR WHILE AUDITING THE SEGMENT ANALYSIS HAS RELIED ON THE SEGMENTS DRAWN BY TH E MANAGEMENT. (V) THAT THE APPELLANT HAS FAILED TO PROVIDE THE DETAILS OF EMPLOYEES FUNCTIONING UNDER THE AE AND NON - AE SEGMENTS. 2.2 THAT THE ASSESSING OFFICER/D RP ERRED ON FACTS AND IN LAW IN HOLDING THAT THE INTERNAL COMPARABILITY DOES NOT PROVIDE MEA NINGFUL BENCHMARKING, EVEN AFTER ACCEPTING THAT, FAR OF THE ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 3 SEGMENTS ARE IDENTICAL AND CONCURRENT TRANSACTIONS OF BOTH THE SEGMENTS ARE HOMOGENEOUS. 2.3 THAT THE ASSESSING OFFICER/D RP ERRED ON FACTS AND IN LAW IN DISREGARDING THE INTERNAL BENCHMARKING UN DERTAKEN BY THE APPELLANT, WITHOUT POINTING OUT ANY ERROR OR MISTAKE IN THE PROFITABILITY SUMMARY IN RELATION TO REVENUE EARNED FROM AE AND NON AES TRANSACTION WORKED OUT BY THE APPELLANT AND ALSO CERTIFIED BY INDEPENDENT CHARTERED ACCOUNTANTS. 2.4 THAT THE TPO/D RP ERRED ON FACTS AND IN LAW IN APPLYING ADDITIONAL FILTER OF 'TURNOVER LESS THAN 5 CRORE' AS AGAINST 'TURNOVER LESS THAN 1 CRORE' CONSISTENTLY FOLLOWED BY HIM IN THE PRECEDING YEARS AND THEREBY REJECTED FOLLOWING COMPARABLE COMPANIES: (I) CRES SANDA SOLUTIONS LTD. (II) CYBERSCAPE MULTIMEDIA LTD. (III) ZIGMA SOFTWARE LTD. (IV) R D L INFOTECH LTD. 2.5 THAT THE ASSESSING OFFICER/D RP ERRED ON FACTS AND IN LAW IN ALLEGEDLY CONSIDERING FOLLOWING COMPANIES HOLDING THEM TO BE FUNCTIONALLY COM PARABLE TO THE APPELLANT: (I) INFOSYS LIMITED (II) PERSISTENT SYSTEMS LIMITED 2.6 THAT THE ASSESSING OFFICER/D RP ERRED ON FACTS AND IN LAW IN CONSIDERING INFOSYS LIMITED IN THE FINAL SET OF COMPARABLE COMPANIES WITHOUT APPRECIATING THAT COMPANIES WITH SUCH HIGH TURNOVER DOES NOT SATISFY THE TEST OF COMPARABILITY LAID DOWN UNDER RULE 10B (2) OF THE INCOME TAX RULES, 1962, FOR BEING OPERATING IN DIFFERENT MARKET CONDITIONS AND LEVEL OF COMPETITION. ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 4 2.7 THAT THE DRP/ TPO ERRED ON FACTS AND IN LAW IN N OT ALLOWING APPROPRIATE RISK ADJUSTMENT TO ESTABLISH COMPARABILITY ON ACCOUNT OF THE APPELLANT BEING A LOW - RISK - BEARING CAPTIVE SERVICE PROVIDER AS OPPOSED TO THE COMPARABLE COMPANIES WHO WERE INDEPENDENT SOFTWARE SERVICE PROVIDER, EVEN WHILE HOLDING THAT 'THE ASSESSEE CANNOT BE COMPARED TO A RISK FREE ENTITY'. 2.8 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP ERRED IN REJECTING THE CONTENTION OF THE APPELLANT REGARDING RISK ADJUSTMENT, HOLDING THAT IN ABSENCE OF ROBUST AND R ELIABLE DATA, BOTH FOR THE ASSESSEE AND FOR THE COMPARABLES, RISK ADJUSTMENT CANNOT BE CONSIDERED FOR ENHANCING COMPARABILITY. 2.9 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN CONSIDERING REIMBURSEMENT RECEIVED FROM ASSOCIATED ENTERPRISE A S OPERATING INCOME AND EXPENDITURE OF THE APPELLANT WITHOUT APPRECIATING THAT THE SAME WERE PASS THROUGH COST AND NO SERVICE WERE RENDERED BY THE APPELLANT ON THIS ACCOUNT. 2.10 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN CONSIDERING REIM BURSEMENT RECEIVED FROM ASSOCIATED ENTERPRISE AS OPERATING INCOME AND EXPENDITURE OF THE APPELLANT ALLEGEDLY HOLDING THAT: I) THE REIMBURSEMENT IS DIRECTLY LINKED TO THE SERVICES THAT THE APPELLANT HAS PROVIDED TO IT'S AE. II) THE APPELLANT HAS DEP LOYED ITS OWN PERSONNEL AND THERE IS COST INVOLVED IN DEPLOYING SUCH PERSONNEL BY WAY OF SALARY AND OTHER EXPENSES. III) THE APPELLANT HAS DEPLOYED HUGE AMOUNT OF MONEY. ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 5 IV) THE AMOUNT FALLS WITHIN THE CATEGORY OF 'TOTAL COST' AS IT IS DIRECTLY LINKED TO PRIMAR Y BUSINESS ACTIVITY OF THE APPELLANT. V) THE APPELLANT HAS TAKEN UP ITSELF CERTAIN DUTIES OF THE ASSOCIATED ENTERPRISE FOR WHICH THE APPELLANT NEEDS TO BE COMPENSATED ADEQUATELY. 3. THAT THE ASSESSING OFFICER/D RP ERRED ON FACTS AND IN LAW IN TREATING MISCELLANEOUS INCOME AS 'INCOME FROM OTHER SOURCES' AS AGAINST BUSINESS INCOME CONSIDERED BY THE APPELLANT. 3.1 THAT THE ASSESSING OFFICER/D RP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT MISCELLANEOUS INCOME OF RS. 30,76,102, REPRESENTED AMOUNT R ECEIVED ON ACCOUNT OF NOTICE PAY, WHICH IS INCIDENTAL TO SOFTWARE EXPORT BUSINESS AND IS TO BE CONSIDERED AS PART OF THE INCOME OF THE ELIGIBLE UNDERTAKING. 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN AD - HOC DISALLOWANCE OF INTER EST EXPENSES OF RS. 1,58,70,000 ALLEGEDLY HOLDING THAT THE INTEREST PAID ON SHORT TERM LOANS WHICH ARE INVESTED IN ACQUISITION OF FIXED ASSETS SHALL BE CAPITALIZED ALONG WITH THE FIXED ASSETS. 4.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN N OT APPRECIATING THAT THE FIXED ASSETS WERE ACQUIRED BY THE ASSESSEE OUT OF ITS OWN FUNDS AND ACCORDINGLY, NO INTEREST EXPENSES SHALL BE AGGREGATED WITH THE VALUE OF FIXED ASSETS. 4.2 WITHOUT PREJUDICE, THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN A LLEGEDLY CONSIDERING THE INTEREST RATE AT 15% ON THE SHORT TERM LOANS FOR THE PURPOSE OF COMPUTING THE INTEREST TO BE CAPITALIZED. ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 6 4.3 WITHOUT PREJUDICE THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEPRECIATION ON THE INCREASED COST OF ACQUISITION I WRITTEN DOWN VALUE OF SUCH ASSET AFTER INCLUDING INTEREST EXPENSES OF RS. 1,58,70,000. 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN LEV YING INTEREST UNDER SECTION 234B AND SECTION 234C OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR VARY FROM THE AFORESAID APPEAL BE FORE OR AT THE TIME OF HEARING. 3. G ROUND NO. 1 IS GENERAL IN NATURE SO DO NOT REQUIRE AY COMMENTS ON OUR PART. 4. AS REGARDS TO THE GROUND NO. 2 TO 2.10 RELATING TO THE ADJUSTMENT MADE BY THE A O ON ACCOUNT OF DIFFERENCE IN ARM S LENGTH PRICE AMOUNTING TO RS. 30,08,43,288/ - . THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE EARLIER ORDERS OF THE ITAT IN ASSESSEE S OWN CASE , L ATEST BEING THE ORD ER DATED 28.07.2014 FOR THE ASSESSMENT YEAR 2009 - 10 WHEREIN BY FOLLOWING ORDERS OF THE TRIBUNAL IN ASSESSEE S OWN CASE IN EARLIER YEARS, THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. 5. IN HIS RIVALS SUBMISSIONS THE LD. CIT DR ALTHOUGH SUPPORTED THE ORDER OF THE TPO BUT COULD NOT CONTROVERT THE AFORESAID CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE . ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 7 6. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IT IS NOTICED THAT AN IDENTICAL ISSUE HAVING SIMILAR FACTS WAS A SUBJECT MATTER OF ADJUDICATION IN ASSESSEE S OWN CASE IN ITA NO. 1572/DEL/2014 FOR THE ASSESSMENT YEAR 2009 - 10 WHEREIN THE RELEVANT FINDINGS HAVE BEEN GIVEN IN PARAS 17 & 18 OF THE ORDER DATED 28.07.2014 WHICH REA D AS UNDER: 17. THE LD COUNSEL POINTED OUT THAT A CO - ORDINATE BENCH OF THIS TRIBUNAL IN APPELLANT S OWN CASE FOR THE ASSESSMENT YEAR 2006 - 07 REPORTED IN 136 TTJ 505, HAD ALLOWED THE APPEAL OF THE ASSESSEE, AND HELD AS UNDER: - 17. IN THE LIGHT OF THE DI SCUSSIONS MADE ABOVE, WE THEREFORE, HOLD THAT THE ASSESSEE WAS JUSTIFIED IN UNDERTAKING INTERNAL BENCH MARKING ANALYSIS ON STANDALONE BASIS BY PLACING ON RECORD WORKING OF OPERATING PROFIT MARGIN FROM INTERNATIONAL TRANSACTIONS WITH AES AND TRANSACTIONS WI TH UNRELATED PARTIES UNDERTAKEN IN SIMILAR FUNCTIONAL AND ECONOMIC SCENARIO, AND THE SAME SHOULD BE THE BASIS FOR DETERMINATION OF ARM S LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH THE ASSOCIATED ENTERPRISE. IN THE LIGHT OF THE FA CTS OF THE PRESENT CASE AS DISCUSSED ABOVE, WE THEREFORE, HOLD THAT THE TRANSFER PRICING OFFICER HAD THE PRESENT CASE AS DISCUSSED ABOVE, WE THEREFORE, HOLD THAT THE TRANSFER PRICING OFFICER HAD TO MANDATE TO HAVE RECOURSE TO EXTERNAL COMPARABLES WHEN, THE PRESENT CASE, INTERNAL COMPARABLES WERE AVAILABLE, WHICH COULD BE APPLIED FOR DETERMINING THE ARM S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS WITH AES. WE THEREFORE, DIRECT THE ASSESSING OFFICER/ TRANSFER PRICING OFFICER TO DETERMINE ARM S LENGTH PRICE O F INTERNATIONAL TRANSACTIONS WITH AES BY MAKING INTERNAL COMPARISON OF THE NET MARGIN EARNED BY THE ASSESSEE FROM ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 8 THE INTERNATIONAL TRANSACTION WITH ASSOCIATED ENTERPRISES AND THE PROFIT EARNED BY THE ASSESSEE FROM THE INTERNATIONAL TRANSACTIONS WITH UNREL ATED PARTIES. IN THIS RESPECT THE ASSESSEE HAS ALREADY GIVEN HIS WORKING BY ALLOCATING REVENUE AND EXPENSES TO BOTH THE SEGMENTAL AND DETERMINED SEPARATE PROFITABILITY. HOWEVER, ON PERUSAL OF THE TPO S ORDER, WE FIND THAT THE TPO HAS NOT UNDERTAKEN ANY EXE RCISE TO EXAMINE THE CORRECTNESS OF THE WORKINGS DONE BY THE ASSESSEE. WE, THEREFORE, RESTORE THIS MATTER BACK TO THE FILE OF THE ASSESSING OFFICER/ TRANSFER PRICING OFFICER FOR FRESH ADJUDICATION AND FOR THE PURPOSE OF DETERMINING THE ARM S LENGTH PRICE I N RESPECT OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH THE ASSOCIATED ENTERPRISE BY MAKING INTERNAL COMPARISON OF PROFITABILITY FROM THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISE AND PROFITABILITY FROM THE INTERNATIONAL TRANSACTIONS WITH U NRELATED PARTIES AFTER ALLOCATING RESPECTIVE REVENUES AND EXPENSES TO BOTH THE SEGMENTAL. THE ASSESSING OFFICER/TPO SHALL PROVIDE REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE ASSESSEE SHALL FURNISH ALL THE DETAILS AND PARTICULARS BEFORE THE A UTHORITIES BELOW TO ENABLE THEM TO MAKE INTERNAL COMPARISON OF THE PROFITABILITY FROM THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISE AND UNRELATED PARTIES UNDERTAKEN BY THE ASSESSEE IN THE SIMILAR FUNCTIONAL AND ECONOMIC SCENARIO WE ORDER ACCORD INGLY. 18. SINCE WE HAVE ACCEPTED THE ASSESSEE S STAND THAT ARM S LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH ASSOCIATED ENTERPRISES IS TO BE DETERMINED ON THE BASIS OF INTERNAL COMPARISON OF THE PROFIT EARNED FROM THE INTERNATI ONAL TRANSACTIONS WITH AES AND PROFIT EARNED, FROM INTERNATIONAL TRANSACTIONS WITH UNRELATED PARTIES, WE DO NOT GO TO DECIDE WHETHER THE EXTERNAL COMPARABLES SELECTED BY THE TPO WERE PROPER OR JUSTIFIED ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 9 TO MAKE ARM S LENGTH PRICE IN THE PRESENT CASE AS THA T ISSUE HAS BECOME ACADEMIC AT THIS STAGE. 18 . WE FIND FROM A PERUSAL OF THE AFORESAID ORDER THAT THE CO - ORDINATE BENCH RESTORED THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER/ TRANSFER PRICING OFFICER FOR FRESH ADJUDICATION; AND FOR THE PURPOSE OF DETERMINING THE ARM S LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH THE ASSOCIATED ENTERPRISE BY MAKING INTERNAL COMPARISON OF PROFITABILITY FROM THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISE AND PROFITABILITY FROM THE INTERNATIONAL TRANSACTIONS WITH UNRELATED PARTIES AFTER ALLOCATING RESPECTIVE REVENUES AND EXPENSES TO BOTH THE SEGMENTS. WE FIND THAT IN ASSESSMENT YEAR 2007 - 08 AND 2008 - 09, TOO, THE TRIBUNAL HAS RELIED ON ITS OWN PREVIOUS ORDER AND UPHELD THE BENCHM ARKING ANALYSIS UNDERTAKEN BY THE APPELLANT CONSIDERING INTERNAL COMPARABLE FOR DETERMINING ARM S LENGTH PRICE. SIMILARLY, WE ALSO FIND THAT VIDE ORDER DATED 06.05.2014, THE A CO - ORDINATE BENCH OF THIS TRIBUNAL IN APPELLANT S OWN CASE FOR ASSESSMENT YEAR 2 005 - 06(ITA NO. 4713/DEL/2011), UPHELD THE INTERNAL BENCHMARKING UNDERTAKEN BY THE APPELLANT, CONSIDERING THE RATIO LAID DOWN IN THE DECISION OF TEHNIMONT (SUPRA) AND THE DECISION OF THIS TRIBUNAL IN THE APPELLANT S OWN CASE FOR ASSESSMENT YEAR 2006 - 07. THE REFORE IN THE LIGHT OF THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL WE RESPECTFULLY FOLLOW IT AND SET - ASIDE THE ORDER OF THE AO/TPO ON THIS ISSUE AND RESTORE IT BACK TO THE FILE OF THE AO/TPO WITH THE DIRECTION AS STATED IN ORDER FOR ASSESSMENT Y EAR 2006 - 07 AS REPRODUCED ABOVE IN PARA 20. 7. SINCE THE FACTS FOR THE YEAR UNDER CONSIDERATION ARE IDENTICAL TO THE FACTS INVOLVED IN THE AFORESAID REFERRED TO ORDERS DATED 28.07.2014 FOR THE ASSESSMENT YEAR 2009 - 10 IN ASSESSEE S OWN CASE IN ITA NO. 15 72/DEL/2014. SO, RESPECTFULLY FOLLOWING THE SAID ORDER , THIS ISSUE IS SET ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 10 ASIDE TO THE FILE OF THE AO/TPO TO BE DECIDED AS DIRECTED FOR THE ASSESSMENT YEAR 2009 - 10. 8. THE NEXT ISSUE VIDE GROUND NO. 3 TO 3.1 R ELATES TO DISALLOWANCE OF MISCELLANEOUS INCOME AMOUNTING TO RS. 30,76,102/ - BY C ONSIDERING THE SAME AS PART OF BUSINESS INCOME FOR THE PURPOSE OF CLAIM OF THE DEDUCTION U/S 10A OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). 9. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS ASKED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE NOTICE PAY OF RS. 30,76,101/ - BE NOT CONSIDERED AS INELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT. THE SUBMISSIONS OF THE ASSESSEE HAS BEEN INCORPORATED BY THE AO IN PARA 3.2 OF THE ASSESSMENT ORDER DATED 29.12.2014 , FOR THE COST OF REPETITION THE SAME ARE NOT REPEATED HEREIN. THE AO HOWEVER, DID NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE AND TREATED THE NOTICE PAY EARNED BY THE ASSESSEE AS INCOME FROM OTHER SO URCES AND HELD THAT THE SAME DID NOT FOR M PART OF BUSINESS INCOME FOR CLAIM OF EXEMPTION U/S 10A OF THE ACT. 10 . BEING AGGRIEVED THE ASSESSEE IS IN APPEAL. THE LD. COUNSEL FOR THE ASSESSEE AT THE VERY OUTSET STATED THAT THIS ISSUE IS ALSO COVERED VIDE EAR LIER ORDERS OF THE TRIBUNAL IN ASSESSEE S OWN CASE . IT WAS FURTHER STATED THAT EVEN THE DRP IN ITS ORDER DATED 17.11.2014 HAS OBSERVED THAT ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 11 THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE FOR THE ASSESSMENT YEARS 2006 - 07 TO 2008 - 09 BUT THE DEPARTMENT HAS NOT ACCEPTED THE SAME AND FILED APPEAL BEFORE THE HON BLE DELHI HIGH COURT , T HUS, THE ISSUE DID NOT ACHIEVE FINALITY. IT WAS POINTED OUT THAT THE IDENTICAL ISSUE HAS BEEN DECIDED BY THE ITAT IN ITA NO. 1572/DEL/2014 FOR THE ASSESSMENT YEAR 2009 - 10 VID E ORDER DATED 28.07.2014. 11 . IN HIS RIVAL SUBMISSIONS THE LD. CIT DR ALTHOUGH SUPPORTED THE ORDER OF THE AO BUT COULD NOT CONTROVERT THE AFORESAID CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE. 1 2 . WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON TH E RECORD. IT IS NOTICED THAT AN IDENTICAL ISSUE HAVING SIMILAR FACTS HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE VIDE AFORESAID REFERRED TO ORDER DATED 28.0 7.2014 AND RELEVANT FINDINGS HAVE BEEN GIVEN IN PARAS 25 TO 27 WHICH READ AS UNDER: 25. ACCORDING TO THE LD COUNSEL, SHRI AJAY VOHRA THE ASSESSING OFFICER HAS WRONGLY HELD THAT MISCELLANEOUS INCOME OF RS. 43,77,370/ - IS ASSESSABLE AS INCOME FROM OTHER SOURCES AND, ACCORDINGLY, DISALLOWED DEDUCTION IN RESPECT OF THE SAME INCOME U/S 10A OF THE ACT AND IT WAS CONTENDED BY THE LD COUNSEL THAT THE AMOUNT OF RS. 44,77,370/ - WAS ACTUALLY RECEIVED TOWARDS NOTICE PAY RECEIVABLE FROM EMPLOYEES WORKING IN THE SOFTWARE UNITS. ACCORDING TO SHRI AJAY VOHRA, THE S AID AMOUNT WAS RECEIVED TOWARDS REDUCTION OF SALARY COST DEBITED TO THE ELIGIBLE UNDERTAKING. IN THE LIGHT OF THESE FACTS, THE ASSESSEE CLAIMED THE MISCELLANEOUS INCOME AS INCOME ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 12 DERIVED FROM THE ELIGIBLE UNDERTAKING FOR THE PURPOSE OF SEC. 10A OF THE ACT. THE ASSESSEE S CLAIM HAS BEEN REJECTED BY THE ASSESSING OFFICER BY TREATING THE MISCELLANEOUS INCOME AS INCOME FROM OTHER SOURCES AND NOT INCOME DERIVED FROM ELIGIBLE UNDERTAKING. THE LD . COUNSEL POINTED OUT THAT THE CO - ORDINATE BENCH OF THE TRIBUNAL HAS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE IN ASSESSEE S OWN CASE FOR A.YS . 2003 - 04, 2004 - 05, 2005 - 06, 2006 - 07, 2007 - 08 AND 2008 - 09. 26 . FOR AY 2006 - 07 THE TRIBUNAL HELD AS ON THIS ISSUE IS AS FOLLOWS: - WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THE COURSE OF HEARING OF THIS APPEAL, RELIANCE WAS PLACED BY THE LD COUNSEL FOR THE ASSESSEE UPON THE DECISION OF ITAT, DELHI BENCH IN THE CASE OF JUBILANT EMPRO (P) LTD. VS. DCIT IN ITA NO. 107/DEL/2007=(2007 - TIOL - 458 - ITAT - DEL). IN THE ABOVE REFERRED CASE OF JUBILANT EMPRO (P) LTD. PERTAINING TO THE ASSESSMENT YEAR 2000 - 01, THE ASSESSEE HAD RECOVERED A SUM OF RS. 4,95,070/ - BEING NOTICE PERIOD PAY. THIS SUM WAS RECOVERED FROM THE EMPLOYEES, WHO HAD LEFT THE SERVICES PRIOR TO THE AGRE ED PERIOD OF RENDERING SERVICES WITH THE ASSESSEE. THE TRIBUNAL RELYING UPON THE EARLIER DECISION OF THE TRIBUNAL PERTAINING TO THE ASSESSMENT YEAR 1999 - 2000 IN THE CASE OF JUBILANT EMPRO (P) LTD. HAS HELD THAT THE NOTICE PERIOD PAY WAS TO BE CONSIDERED AS INCOME DERIVED BY THE ELIGIBLE UNDERTAKING AND AS SUCH NOTICE PERIOD PAY WOULD GO TO REDUCE THE EXPENSES ON ACCOUNT OF SALARY AND THE REAL NATURE OF THE TRANSACTION WILL NOT HAVE ANY EFFECT ON THE INCOME DERIVED BY THE ASSESSEE FROM THE ELIGIBLE UNDERTAKI NG. IN THE EARLIER DECISION THE TRIBUNAL HAD TAKEN A VIEW THAT BECAUSE THE ASSESSEE INSTEAD OF CREDITING THE NOTICE PERIOD PAY TO THE SALARY ACCOUNT AND REDUCING THE SALARY EXPENSES, HAD SHOWN THE AMOUNT SEPARATELY IN THE ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 13 PROFIT & LOSS ACCOUNT, THAT BOOK - E NTRY BY ITSELF WOULD NOT CHANGE THE REAL NATURE OF TRANSACTION AND IT WAS ACCORDINGLY HELD THAT THE RECOVERY OF NOTICE PAY REPRESENTS INCOME DERIVED FROM THE INDUSTRIAL UNDERTAKING. 27 . RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH, WE HOLD THAT THE AMOUNT RECEIVED BY THE ASSESSEE TOWARDS NOTICE PERIOD IS TO BE TREATED AS INCOME DERIVED FROM THE ELIGIBLE UNDERTAKING AND DEDUCTION U/S 10A SHALL BE ALLOWED ACCORDINGLY. THE ASSESSING OFFICER SHALL MODIFY THE ASSESSMENT ORDER IN THE LIGHT OF THE AFORESAID DIRECTION AND ALLOW THE DEDUCTION U/S 10A OF THE ACT IN TERMS OF THIS ORDER. 13 . SINCE THE FACTS FOR THE YEAR UNDER CONSIDERATION ARE IDENTICAL TO THE FACTS INVOLVED IN THE ASSESSMENT YEAR 2009 - 10, SO BY RESPECTFULLY FOLLOWING THE EARLIER OR DER DATED 28.07.2014 IN ITA NO. 1572/DEL/2014 FOR THE ASSESSMENT YEAR 2009 - 10 THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 14 . THE ISSUE AGITATED BY THE ASSESSEE VIDE GROUND NO. 4 TO 4.3 RELATES TO THE ADHOC DISALLOWANCE OF INTEREST EXPENSES AMOUNTING TO RS. 1,58,70,000/ - MADE BY THE AO BY HOLDING THAT THE INTEREST PAID ON SHORT TERM LOANS WHICH WERE INVESTED IN ACQUISITION OF FIXED ASSETS SHALL BE CAPITALIZED ALONGWITH THE FIXED ASSETS. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE AO NOTICED THAT THE ASSESSEE HAD TAKEN SHORT TERM LOANS OF RS.46.36 CRORES WHICH WERE UTILIZED FOR INVESTMENT PURPOSES. HE THEREFORE, ASKED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE INTEREST BE NOT CAPITALIZED IN TERMS OF PROVISO TO SECTION 36(1)(III) OF THE ACT. THE AO ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 14 WAS OF THE VIEW THAT THE INTEREST DESERVES TO BE CAPITALIZED ON THAT PORTION WHICH WAS ON CAPITAL EXPENDITURE. HE COMPUTED THE INVESTMENT ON CAPITAL ITEMS AT RS. 10.58 CRORES AND WORKED OUT THE INTEREST @ 15% AMOUNTING TO RS. 1,58,70,000/ - . THE SAID AMO UNT WAS DISALLOWED FROM THE INTEREST EXPENSES. THE PROPOSAL OF THE TPO/AO WAS UPHELD BY THE DRP , ACCORDING LY THE AO MADE THE DISALLOWANCE . 15 . NOW THE ASSESSEE IS IN APPEAL. THE LD. COUNSEL FOR THE ASSESSEE AT THE VERY OUTSET STATED THAT THIS ISSUE IS ALS O COVERED VIDE ORDER DATED 28.07.2014 FOR THE ASSESSMENT YEAR 2009 - 10 IN ITA NO. 1572/DEL/2014. 16 . IN HIS RIVAL SUBMISSIONS THE LD. DR ALTHOUGH SUPPORTED THE ORDER OF THE AO BUT COULD NOT CONTROVERT THE AFORESAID CONTENTION OF T HE LD. COUNSEL FOR THE ASS ESSEE. 17 . AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PARTIES AND THE MATERIAL AVAILABLE ON THE RECORD. IT IS NOTICED THAT AN IDENTICAL ISSUE HAVING SIMILAR FACTS HAS ALREADY BEEN ADJUDICATED BY THIS BENCH OF THE ITAT, NEW DELHI IN ASSESSEE S OWN CASE IN ITA NO. 1572/DEL/2014 FOR THE ASSESSMENT YEAR 2009 - 10 VIDE PARAS 32 TO 37 WHICH READ AS UNDER: 32. FROM A PERUSAL OF THE RECORDS WE TAKE NOTE THAT THE APPELLANT DURING THE RELEVANT PREVIOUS YEAR HAD TOTAL BORROWING AGGREGATING TO RS. 55.04 CRORES COMPR ISING OF THE FOLLOWING: (I) CASH AND EXPORT CREDIT FACILITY OF RS. 28,77,40,932/ - ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 15 (II) TERM LOAN OF RS. 2,16,66,667/ - (III) FOREIGN CURRENCY TERM LOAN OF RS. 11,41,18,750/ - (IV) EXTER NAL COMMERCIAL BORROWING OF RS . 12,61,36,047/ - 33. AND DURING THE RELEVANT PREVIOUS YEAR INCURRED TOTAL EXPENDITURE AMOUNTING TO RS. 18.02 CRORES ON ADDITION TO FIXED ASSET, COMPRISING OF THE FOLLOWING: - (I) SOFTWARE RS. 10,08,17,472/ - (II) LEASEHOLD IMPROVEMENTS RS. 4,01,94,19 4/ - (III) COMPUTER HARDWARE RS. 2,83,05,870/ - (IV) OFFICE EQUIPMENTS RS. 92,06,519/ - (V) FURNITURE & FIXTURES RS. 17,10,491/ - TOTAL RS. 18,02,34,546/ - 34. OUT OF THE AFORESAID TOTAL ADDITION OF RS. 18,02,34,546/ - , RS. 1,52,57,346/ - WAS ADDIT ION ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION OF RS. 4,79,38,507 ON ASSET TAKEN ON FINANCE LEASE. THE AUDITORS, HOWEVER, IN THEIR REPORT OBSERVED THAT SHORT TERM FUNDS AMOUNTING TO RS. 60.36 CRORE HAD BEEN USED FOR LONG TERM PURPOSES, AS FOLLOWS: - PATICU LARS RS. CRORE SHORT TERM FUNDS (I) UNSECURED LOAN 37,50,00,000 (II) SECURED LOANS 34,61,56,856 LESS: LONG TERM USE FIXED ASSETS - NET BLOCK 78,02,80,997/ - NET AMOUNT 60,36,15,834/ - 35. THE ASSESSING OFFICER ON THE BASIS OF TH E AFORESAID, OBSERVED THAT SHORT TERM BORROWED FUNDS AMOUNTING TO RS. 11.7 CRORES (RS. 18.02 CRORES ( - ) 1.53 CRORES ( - ) 4.7 CRORES) HAVE BEEN DIVERTED FOR PURCHASE OF FIXED ASSET AND, THEREFORE, INTEREST PERTAINING TO SUCH FUNDS AMOUNTING TO RS. 11.7 CRORE S OUGHT TO ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 16 HAVE BEEN CAPITALIZED AND ACCORDINGLY DISALLOWED INTEREST AMOUNTING TO RS. 1,75,50,000@ 15% ON THE SAID SUM OF RS. 11.7 CRORES. THE SAID FINDING OF THE ASSESSING OFFICER WAS UPHELD BY THE DRP, WHICH HAS ALSO OBSERVED THAT THE APPELLANT HAS NOT E XPLAINED, HOW THE ACQUISITION OF ASSET IS SOURCED FROM THE PROFIT EARNED BY IT AND AS TO WHY THE APPELLANT HAS RAISED LOAN OF RS. 60.365 CRORES FOR LONG TERM PURPOSE. 36. IT MAY BE TAKEN NOTE THAT INTEREST ON CAPITAL BORROWED EVEN FOR ACQUISITION OF ASSE TS IS ELIGIBLE FOR DEDUCTION AS PER SECT 36(I)(III) OF THE ACT. SUBSEQUENTLY A PROVISO HAS BEEN INSERTED BY THE FINANCE ACT 2003. APRIL1, 2004 RELATING TO ASSESSMENT YEAR 2004 - 05 AND SUBSEQUENT YEARS. HENCE THE SAID PROVISO WILL APPLY TO THE PRESENT ASSESS MENT YEAR PROVIDED THE ASSESSEE S CASE FALLS UNDER IT. IN TERMS OF SECTION 36(1)(III) OF THE ACT, DEDUCTION IS ALLOWED IN RESPECT OF INTEREST ON CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION. IN TERMS OF THE PROVISO TO SAID SECTION, NO DEDUC TION, HOWEVER, IS ALLOWED IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSINESS OR PROFESSION FOR THE PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHI CH SUCH ASSET WAS FIRST PUT TO USE. A READING OF SECTION 36(1)(III) MANDATES THAT ONLY INTEREST FOR THE PERIOD BETWEEN THE DATE OF BORROWING TO THE DATE OF PUT TO USE IS TO BE CAPITALIZED AS PART OF ACTUAL COST OF ASSET. IN OTHER WORDS, NO INTEREST IS R EQUIRED TO BE CAPITALIZED FOR THE PERIOD AFTER SUCH ASSETS ARE PUT TO USE. THEREFORE THE INTEREST EXPENDITURE ON THE UTILIZATION OF BORROWED FUNDS FOR THE ACQUISITION OF NEW ASSETS, FROM THE DATE OF ITS ACQUISITION TILL THE DATE WHEN THE ASSET IS PUT TO US E, IS TO BE DISALLOWED. IN OTHER WORDS, THE INTEREST PAID ON THE CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSINESS, SHALL NOT BE ALLOWED AS DEDUCTION, FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSE T TILL THE DATE ON WHICH THE ASSET WAS FIRST PUT TO USE. ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 17 37. HERE ADMITTEDLY AN AMOUNT OF RS.11.7 CRORE WAS BORROWED FOR ACQUISITION OF ASSETS FOR EXPANSION OF EXISTING BUSINESS; THEREFORE THE INTEREST ACCRUED ON THE BORROWED FUND FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHICH THE ASSET WAS PUT TO USE SHALL BE DISALLOWED. THEREFORE IN ORDER TO APPLY THE PROVISO TO SECTION 36(1)(III) OF THE ACT TO THE FACTS OF THE PRESENT CASE, THAT IS IN OTHER WORDS, BE FORE DISALLOWING THE INTEREST EXPENDITURE ON THE FUND BORROWED FOR PROCUREMENT OF ASSET FOR EXTENSION OF EXISTING BUSINESS, THE AO HAS TO RECORD AS A MATTER OF FACT THE DATE ON WHICH THE ASSESSEE BORROWED THE FUND FOR ACQUISITION OF ASSET FOR EXTENSION O F BUSINESS AND THE DATE ON WHICH THE ASSET THUS PROCURED WAS PUT TO USE IS ABSOLUTELY NECESSARY. HOWEVER IN THE INSTANT CASE, WE FIND THAT NO SUCH EXERCISE HAS BEEN DONE BY THE AO TO FIND OUT THE DATE ON WHICH THE ASSESSEE BORROWED THE FUND FOR ACQUISITION OF ASSET IN THE RELEVANT AY AND WE ALSO FIND THAT NO ATTEMPT HAS BEEN MADE BY THE AO TO FIND OUT ON WHICH DATE THE ASSET THUS PROCURED WITH THE SAID BORROWED FUND HAVE BEEN PUT TO USE. ONLY AFTER THE DATES AS AFORE - STATED HAS BEEN FOUND OUT THEN ONLY ONE CAN COMPUTE THE DISALLOWANCE AS PRESCRIBED BY THE PROVISO TO SECTION 36(1)(II) OF THE ACT. IN THE SAID CIRCUMSTANCES WE SET ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND REMAND THIS ISSUE BACK TO THE FILE OF AO, WITH A DIRECTION TO AO TO FIND OUT THE DATE ON WHICH THE ASSESSEE BORROWED THE FUND FOR ACQUISITION OF ASSET AND ALSO TO FIND OUT ON WHICH DATE THE ASSET FOR EXTENSION OF BUSINESS THUS PROCURED HAS BEEN PUT TO USE; AND THEREAFTER CAPITALIZE THE INTEREST INCURRED FOR THE PERIOD BETWEEN THE DATE OF BORRO WING OF THE FUND TO THE DATE ON WHICH THE ASSET WAS PUT TO USE AND WE ALSO CLARIFY THAT INTEREST DEDUCTION NEEDS TO BE ALLOWED FROM THE DATE AFTER THE ASSET HAS BEEN PUT TO USE BY THE ASSESSEE. ITA NO . 200 /DEL /2015 BIRLASOFT (INDIA) LTD. 18 18 . SO, BY RESPECTFULLY FOLLOWING THE AFORESAID REFERRED T O ORDER, THIS ISSUE IS REMANDED BACK TO THE FILE OF THE AO TO BE DECIDED IN ACCORDANCE WITH THE DIRECTION GIVEN IN THE ORDER DATED 28.07.2014 FOR THE ASSESSMENT YEAR 2009 - 10 , IN ASSESSEE S OWN CASE IN ITA NO. 1572/DEL/2014 19 . IN THE RESULT, THE APPEAL O F THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES . ( ORDER PRON OUNCED IN THE COURT ON 17 /04 /2015 ) SD/ - SD/ - (DIVA SINGH ) (N. K. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 17 /04 /2015 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR