Global Vantedge Private Limited, New Delhi V. DCIT, New Delhi

ITA 2764/DEL/2009

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 2174 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-12-2009
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 26-11-2009
• Assessment Year: 2004-2005
• Appeal Filed On: 05-06-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: L M
• Assessee Lawyers: VIKAS SRIVASTAVA
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary; Unabsorbed depreciation
• Section: 143(3); 10B; 250; 32; 263; 28; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C: NEW DELHI BEFORE SHRI C.L. SETHI, JUDICIAL MEMBER & SHRI K.D. RANJAN, ACCOUNTANT MEMBER ITA NOS. 2763 & 2764/DEL/2009 ASSESSMENT YEARS : 2003-04 & 2004-05 GLOBAL VANTEDGE P. LTD. C/O LUTHRA & LUTHRA, LAW OFFICES, A-16/4, VASANT VIHAR, NEW DELHI. PAN: AABCR8435J VS. DCIT CIRCLE 12(1), NEW DELHI. (APPELLANT) (RESPONDENT) ITA NOS. 1432 & 2321/DEL/2009 ASSESSMENT YEARS : 2003-04 & 2004-05 DCIT CIRCLE 12(1), NEW DELHI. VS. GLOBAL VANTEDGE (P) LTD., 77B, IFFCO ROAD, SECTOR-28, GURGAON PAN: AABCR8435J (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VIKAS SRIVAS TAVA, C.A. DEPARTMENT BY : SHRI L.M. PANDEY, CIT DR & SHRI PANKAJ JINDAL, SR. D.R. O R D E R PER: C.L. SETHI, J.M. THESE CROSS APPEALS, FILED BY THE ASSESSEE AS WELL BY THE REVENUE, ARE DIRECTED AGAINST TWO SEPARATE ORDERS DATED 28.01.20 09 AND 27.03.2009 PASSED BY THE LD. CIT(A) IN THE MATTER OF AN ASSESSMENT MADE BY THE A.O. U/S 143(3) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2003- 04 AND 2004-05 RESPECTIVELY. 2 2. THE GROUNDS OR THE ISSUES RAISED BY THE ASSESSEE AS WELL AS BY REVENUE IN BOTH THE ASSESSMENT YEARS ARE COMMON AND IDENTICAL. 3. THE GROUNDS RAISED BY THE ASSESSEE IN THE ASSESS MENT YEAR 2003-04 ARE AS UNDER:- 1. THE ORDER PASSED BY THE LD. CIT(A)-XX [HEREINAF TER REFERRED AS CIT(A)] U/S 250 OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED AS THE ACT) IS BAD IN LAW AND ON THE FACTS AND CIRCUMSTAN CES OF THE CASE. 2. THE LD. CIT(A), AS WELL LD. AO/TPO HAVE ERRED IN LA W AS WELL AS FACTS OF THE CASE IN NOT ACCEPTING THE ARMS LENGTH PRICE (HEREINAFTER REFERRED AS ALP) DETERMINED BY THE APPELLANT. 3. THE LD. CIT(A), AS WELL LD. AO/TPO HAVE ERRED IN LA W AS WELL AS FACTS OF THE CASE BY PASSING AN ORDER IN A MECHANIC AL MANNER BY IGNORING THE FACT THAT THE APPELLANT IS ENTITLED TO DEDUCTION U/S 10A OF THE ACT AND THERE IS NOT INCENTIVE FOR IT TO MANIPU LATE THE PRICE OF INTERNATIONAL TRANSACTION. 4. THE LD. CIT(A), AS WELL LD. AO/TPO HAVE IGNORED THE FACTUAL POSITION THAT THE ASSOCIATED ENTERPRISE OF THE APPE LLANT I.E. RCS CENTRE CORP., HAS INCURRED LOSSES AND AS SUCH THERE IS NO TRANSFER OF PROFITS BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISE. 5. THE LD. CIT(A), AS WELL LD. AO/TPO HAVE ERRED IN DE TERMINING THE ALP BY TAKING THE APPELLANT AS THE TESTED PARTY AND BY REJECTING THE SUBMISSION OF THE APPELLANT THAT RCS CENTRE CORP (N OW KNOWN AS GLOBAL VANTEDGE INC.) HAS TO BE CONSIDERED AS THE T ESTED PARTY. 6. THE LD. CIT(A), AS WELL AS THE LD. AO/TPO HAVE ERRE D IN SELECTING AND USING CERTAIN COMPANIES AS COMPARABLES TO DETER MINE THE ALP BY NOT APPRECIATING THE FACT THAT THE COMPARABLE COMPA NIES SELECTED BY THEM ARE NOT COMPARABLE TO THE APPELLANT AND HENCE, CANNOT BE USED IN THE INSTANT CASE. 7. THE LD. CIT(A) HAS ERRED IN REFUSING TO ALLOW THE C ORRECTIONS SOUGHT BY THE APPELLANT, IN THE WORKING CAPITAL ADJ USTMENTS MADE BY THE LD. AO/TPO TO ACCOUNT FOR FUNCTIONAL DIFFERENCES BE TWEEN THE INTERNATIONAL TRANSACTION AND COMPARABLE TRANSACTIO NS. 8. THE LD. CIT(A) HAS ERRED IN NOT ALLOWING AN ADJUSTM ENT OF + 5% WHILE DETERMINING THE ALP, AS PROVIDED BY PROVISO T O SECTION 92C(2) OF THE ACT. 3 9. THE LD. CIT(A) HAS ERRED IN LAW BY IGNORING SEVERAL JUDICIAL PRECEDENTS RELIED UPON BY THE APPELLANT INCLUDING F EW DECISIONS BY THE JURISDICTIONAL BENCH OF INCOME TAX APPELLANT TRIBUN AL AND HIGH COURT. 4. THE GROUNDS RAISED BY THE REVENUE FOR THE ASSESS MENT YEAR 2003-04 ARE AS UNDER: 1 (I) THAT THE LD. CIT(A) OUGHT NOT TO HAVE HELD TH AT THE TOTAL ADJUSTMENTS TO BE MADE IN THE HANDS OF THE ASSESSEE TOGETHER WITH THE ALP ALREADY REPORTED BY IT CANNOT EXCEED T HE TOTAL REVENUE EARNED BY THE ASSESSEE AND ITS AE FROM THIR D PARTY INDEPENDENT CLIENTS. (II) THAT THE TNMN (TRANSACTION NET MARGIN METHOD) ADOPT ED BY THE ASSESSEE SEEKS TO DETERMINE THE ARMS LENGTH PR ICE OF THE TESTED PARTY ONLY. IT CANNOT CAPTURE THE PROFITABI LITY OF THE AE, WHICH IS AT THE OTHER END OF THE INTERNATIONAL TRAN SACTION. (III) THAT THE PROFIT SHARING MOTIVE AND TAX AVOIDING PUR POSE CANNOT BE TAKEN AS AN ESSENTIAL INGREDIENT FOR THE TP PURPOSE AS SUCH CRITERIA WOULD BURDEN THE OPERATION OF ARM S LENGTH REVENUE AND IT WOULD DEFEAT THE BASIC PURPOSE OF TH E ARMS LENGTH PRINCIPLE AND ITS FOUNDATION. THIS IS AGAINS T THE INTERNATIONALLY ACCEPT TENETS OF TRANSFER PRICING A S HELD IN THE CASE OF THE AUSTRALIAN TAX OFFICE IN W.R. CARPENTER HOLDINGS PVT. LTD. ET.AL. V. COMMISSIONER OF INCOME TAX (200 8) HCA 33. 2. THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ARMS LE NGTH PRICE AS DETERMINED BY THE AO/TPO ON A MARK-UP BASED AVERAGE PRICE OF THE COMPARABLES OF 11.08% ON THE TOTAL OPERATING COSTS OF THE ASSESSEE OF RS. 22,46,97,971/- AND UPHELD THE ADJUSTMENT OF EXCEED TOTAL REVENUE EARNED BY THE ASSESSEE AND ITS AE FROM THIR D PARTY INDEPENDENT CLIENTS. 5. IN THE LIGHT OF THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE AND BY THE REVENUE, IT IS SEEN THAT THE GROUNDS RAISED BY THE ASSESSEE AND REVENUE REVOLVED AROUND THE ISSUE REGARDING THE DETERMINATION OF THE ARMS LENGTH PRICE IN RESPECT OF TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH R ELATED PARTIES. 4 6. UNDER THE BUSINESS PROFILE, THE TPO MENTIONED TH AT THE ASSESSEE IS SUBSIDIARY OF GLOBAL VANTEDGE, MAURITIUS AND WHICH IN TURN IS A WHOLLY OWNED SUBSIDIARY OF GLOBAL VANTEDGE, BERMUDA. THE ASSESS EE IS ENGAGED IN RENDERING IT ENABLED SERVICES IN THE FIELD OF CREDIT COLLECTI ON AND TELEMARKETING SERVICES AND IS ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT AS A STPI UNIT. THE RCS CENTRE CROP, A DELAWARE CORPORATION, IS WHOLLY OWNED SUBSI DIARY OF GLOBAL VANTEDGE, BERMUDA. AS THE ASSESSEE AND RCS HAVE THE COMMON S HAREHOLDER OF GLOBAL VANTEDGE, BERMUDA, WHICH HOLDS MORE THAN 26% SHARES (DIRECTLY AND INDIRECTLY), THEY ARE ASSOCIATED ENTERPRISE BY VIRTUE OF PROVISI ONS OF SECTION 92A(2)(B) OF THE ACT. RCS IS ENGAGED IN THE BUSINESS OF CONTRACTING WITH CLIENTS LOCATED IN USA, TO PROVIDE THEM DEBT COLLECTION AND TELEMARKETING S ERVICES. RCS DOES NOT OWN THE REQUISITE INFRASTRUCTURE OR CAPACITY FOR EXECUT ION OF THAT WORK. THE WORK IS ACTUALLY PERFORMED IN INDIA BY THE APPELLANT UNDER AN ARRANGEMENT WITH RCS. THE APPELLANT AND RCS HAVE ENTERED INTO AN AGREEMEN T AS PER WHICH THE APPELLANT PERFORMS THE WORK FOR CLIENT WHO ENTERED INTO CONTR ACT WITH RCS. ONCE A CLIENT IS IDENTIFIED BY RCS AND A CONTRACT FINALIZING THE TERMS OF SERVICES IS ENTERED INTO WITH IT, A CORRESPONDING WORK ORDER IS EXECUTED BY RCS WITH THE APPELLANT TO PERFORM THAT WORK. DURING THE YEAR 2002-03 THE APPE LLANT RECEIVED RS. 8,32,66,596/- FROM RCS FOR CLIENTS SERVICES BY THE APPELLANT (WHICH IS 90.6% OF THE REVENUE EARNED BY RCS FROM CLIENTS). IN ADDITION TO RENDERING SERVICES TO CLIENTS OF THE RCS, THE APPELLANT IS ALSO ENGAGED I N RENDERING SERVICES TO OTHER INDEPENDENT CLIENTS AND DURING THE FINANCIAL YEAR 2 002-03, APPROXIMATELY 18% OF 5 THE TOTAL REVENUE EARNED BY THE APPELLANT WAS ATTRI BUTABLE TO SUCH INDEPENDENT CLIENTS SERVICES BY THE APPELLANT. 7. IN THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE A.O. THAT THE FOLLOWING INTERNATIONAL TRANSACTIONS WERE ENTER ED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES:- SR. NO. NAME & ADDRESS OF ASSOCIATED ENTERPRISES DESCRIPTION OF TRANSACTION AMOUNT PAID/ PAYABLE FOR THE SERVICES PROVIDED METHOD USED FOR DETERMINING THE ALP BOOK VALUE OF TRANSACTION (RS.) VALUE OF TRANSACTION AS COMPUTED BY THE ASSESSEE HAVING REGARD TO THE ALP (RS.) 1. RCS CENTRE CORP. 700 LARKSPUR LANDING CIRCLE, SUITE 235, LARKSPUR, CALIFORNIA 94939, USA MARKET SUPPORT SERVICES 8,32,66,596 8,32,66,596 TNMN 8. THEREFORE, THE A.O. MADE REFERENCE U/S 92CA(1) O F THE ACT TO THE TPO FOR COMPUTATION OF ARMS LENGTH PRICE IN RESPECT OF THE ABOVE TRANSACTION. THE TPO AFTER ANALYZING THE INTERNATIONAL TRANSACTION, BUSI NESS MODEL AND THE RELATIONSHIP BETWEEN THE ASSESSEE AND ASSOCIATED ENTERPRISE CONC LUDED THAT ASSOCIATED ENTERPRISES IS NOT TO BE TREATED A TESTED PARTY. T HE TPO HAD CHOSEN THE ASSESSEE ITSELF AS THE TESTED PARTY AND IDENTIFIED 9 INDIAN COMPARABLES. THE AVERAGE OPERATING MARGIN OF THE COMPARABLES WAS 11.88% AS A GAINST THE LOSS OF 53.5% INCURRED BY THE ASSESSEE. APPLYING THE ARMS LENGT H MARGIN OF 11.88% ON THE 6 TOTAL OPERATING COST OF RS. 22,46,97,971/-, THE TPO PROPOSED THE ADJUSTMENT TO THE EXTENT OF RS. 14,70,10,071/-. 9. ON THE BASIS OF THE TPOS REPORT, THE A.O. MADE AN ADJUSTMENT OF RS. 14,70,10,071/- WHILE MAKING THE ASSESSMENT U/S 143( 3) OF THE ACT. 10. BEING AGGRIEVED WITH THE A.O.S ORDER, THE ASSE SSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) RAISING AS MUCH AS 25 GROUNDS OF APPEAL WHICH HAVE BEEN REPRODUCED BY THE LD. CIT(A) IN HIS ORDER. AFTER C ONSIDERING THE VARIOUS GROUNDS RAISED BY THE ASSESSEE AND SUBMISSION OF THE ASSESS EE, THE FOLLOWING ISSUES WERE FRAMED BY THE LD. CIT(A) FOR HIS CONSIDERATION:- 1. WHETHER AO/TPO HAVE ERRED WHILE DETERMINING THE ALP BY TAKING APPELLANT AS THE TESTED PARTY AS OPPOSED TO THE ANA LYSIS CARRIED OUT BY THE APPELLANT IN WHICH RCS WAS ACCEPTED AS THE TEST ED PARTY? 2. CAN THE ALP OF THE INTERNATIONAL TRANSACTION BETWEE N THE APPELLANT AND ITS ASSOCIATED ENTERPRISE EXCEED THE TOTAL AMOUNT O F REVENUE EARNED FROM CLIENTS BY THE APPELLANT AND RCS TOGETHER? 3. WHETHER A.O./TPO ERRED IN REJECTING THE ALP DETERMI NED BY THE APPELLANT? 4. IN CASE THE ALP DETERMINED BY EITHER THE APPELLANT OR THE AO IS FOUND TO BE IMPROPER, WHAT WILL BE THE APPROPRIATE ALP. 11. THE AFORESAID FOUR ISSUES HAVE BEEN DISCUSSED A ND DECIDED BY THE LD. CIT(A) BY OBSERVING AND HOLDING AS UNDER:- 12. WITH REGARD TO THE ASSESSEES CLAIM THAT RCS IS TO BE ACCEPTED AS THE TESTED PARTY AS AGAINST THE ASSESSEE, THE LD. CIT(A) HAS C ONSIDERED THE ASSESSEES 7 SUBMISSION AND HELD THAT INTERNATIONAL COMPARABLES CANNOT BE ACCEPTED BY GIVING THE FOLLOWING REASONS:- 5.1.1 I HAVE CONSIDERED THE ABOVE SUBMISSION OF THE APPEL LANT AND KEEPING IN VIEW THE PRACTICE INVOLVED IN SELECTING THE TEST ED PARTY I AM IN TOTAL AGREEMENT WITH THE CONTENTION OF APPELLANT THAT IT IS THE LEAST COMPLEX PARTY WHICH NEEDS TO BE SELECTED AS THE TESTED PART Y FOR THE PURPOSE OF CARRYING OUT ARMS LENGTH ANALYSIS. THE REASONS FOR TESTING THE MARGINS OF A LESS COMPLEX PARTY IS THAT THE SIMPLER PARTY REQU IRES A FEWER AND MORE RELIABLE ADJUSTMENTS TO BE MADE TO ITS OPERATING PR OFIT MARGINS. HOWEVER, IT IS DIFFICULT TO ACCEPT THE APPELLANTS CONTENTIONS TO SELECT A FOREIGN ENTITY AS A TESTED PARTY BECAUSE IT IS DIFF ICULT TO COMPARE ENTITLES IN DIFFERENT JURISDICTIONS SINCE THE FACTS AND CIRCUMS TANCES ARE DIFFERENT IN EACH GEOGRAPHICAL LOCATION. MOREOVER, IT IS DIFFIC ULT TO OBTAIN ALL RELEVANT FACTS THAT COULD LEAD TO A PROPER FAR ANALYSIS. FU RTHER THE RELEVANT DATA WHICH MAY BE REQUIRED TO MAKE THE REQUISITE ADJUSTM ENTS IS ALSO VERY DIFFICULT TO OBTAIN IN RELATION TO THE FOREIGN COMP ARABLES. IN VIEW OF THE ABOVE, I HOLD THAT INTERNATIONAL COMPARABLES CANNOT BE ACCEPTED. THIS ISSUE HAS ACCORDINGLY BEEN DECIDED AGAINST THE APPELLANT. 13. ON ISSUE NO. 2, THE LD. CIT(A) HAS DISCUSSED TH E MATTER AND GIVEN HIS FINDING AS UNDER:- 5.2.1 THE CRUX OF THE CONTENTION RAISED BY THE AP PELLANT IS THAT IN A REVENUE SHARING ARRANGEMENT BETWEEN THE ENTITIES, W HAT MAY BE QUESTIONED IS THE PROPORTION OF SHARING BETWEEN THE ENTITIES A ND NOT THE ABSOLUTE AMOUNT OF REVENUE ITSELF WHICH IS SUBJECT OF SHARIN G BECAUSE THAT IS BEYOND THE CONTROL OF EITHER THE APPELLANT OR ITS ASSOCIAT ED ENTERPRISE(S). I WOULD AGREE WITH SUCH A VIEW BECAUSE THE INDIAN TRANSFER PRICING REGULATIONS ONLY REQUIRE US TO ANALYSE THE TRANSACTIONS BETWEEN ASSOCIATED ENTERPRISE AND NOT THE TRANSACTIONS WITH THIRD PARTIES SINCE E XTRANEOUS FACTORS CANNOT BE CONTROLLED. MOREOVER, IF AN ENTITY IS UNABLE TO EARN ADEQUATE PROFITS ON ACCOUNT OF LEGITIMATE BUSINESS EXIGENCIES AND NOT D UE TO MANIPULATION OF TRANSACTIONS UNDERTAKEN BY THE ASSOCIATED ENTERPRIS ES, SUCH ENTITY CANNOT BE PENALIZED. 5.2.2 IN THE CASE OF A REVENUE SHARING MODEL BETWEEN TWO ENTITIES (SAY A & B), IT MAY BE CONTENDED THAT THE AMOUNT OF REVENU E RECEIVED BY AN ENTITY (SAY ENTITY A IS LOWER THAN THE FAIR AMOUNT OF REVE NUE RECEIVABLE BY IT IS DUE TO THE OTHER ENTITY (SAY ENTITY B) RECEIVING A LARGER SHARE. SUCH UNFAIRNESS MAY BE MITIGATED BY REQUIRING THE ENTITY B TO RETAIN ONLY ITS FAIR 8 SHARE AND GIVE UP THE BALANCE AMOUNT IN FAVOUR OF E NTITY A. IN THE WORST CASE, ENTITY B MAY BE REQUIRED TO GIVE UP ITS ENTIR E SHARE OF REVENUE WHICH WOULD RESULT IN ENTITY A RECEIVING 100% OF THE REVE NUE. HOWEVER, IT CANNOT BE LOGICAL TO SAY THAT THE FAIR AMOUNT OF REVENUE T O BE RECEIVED BY ENTITY A IS MORE THAN 100% OF THE TOTAL REVENUE EARNED BY BO TH A AND B. UNDER SUCH CIRCUMSTANCES, ENTITY B WILL HAVE TO PAY THE A DDITIONAL AMOUNT FROM ITS INTERNAL SOURCES WHICH IN ADDITION TO BEING A H IGHLY ABSURD PROPOSITION, MAY ALSO LEAD TO THE BANKRUPTCY OF B SINCE THIS CAN NOT BE SUSTAINED OVER A PERIOD OF TIME. 5.2.3 IN VIEW OF THE ABOVE DISCUSSIONS, THE CONTENTION OF APPELLANT IS FOUND TO BE ACCEPTABLE, ESPECIALLY WITH REFERENCE TO THE OBJECT AND SCHEME OF TRANSFER PRICING REGULATION WHICH GOVERN THE INTERN ATIONAL TRANSACTION UNDERTAKEN BY AN ASSESSEE WITH ITS ASSOCIATED ENTER PRISE AND NOT WHEN TRANSACTIONS TAKE PLACE BETWEEN ASSESSEE AND INDEPE NDENT CLIENTS. THUS, THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT WITH AN OBSERVATION THAT THE TOTAL ADJUSTMENT MADE IN THE H ANDS OF THE APPELLANT TOGETHER WITH THE ALP ALREADY REPORTED BY IT CANNOT EXCEED THE TOTAL REVENUE EARNED BY THE APPELLANT AND ITS ASSOCIATED ENTERPRISE FROM THIRD PARTY INDEPENDENT CLIENTS. 5.2.4 IT IS ALSO RELEVANT TO NOTE THAT IF ALP IS DETERMIN ED TO BE MAXIMUM I.E. 100% OF THE REVENUE EARNED BY RCS FROM THIRD P ARTY INDEPENDENT CLIENTS IT WOULD MEAN THAT RCS PERFORMS THE MARKETI NG ACTIVITIES WITHOUT ANY CONSIDERATION WHICH AGAIN IS AN ABSURD PROPOSIT ION SINCE IN A COMMERCIAL WORLD NO PERSON OF ORDINARY PRUDENCE WOU LD PERFORM ANY ACTIVITY WITHOUT ANY REWARD. THEREFORE, BEFORE PRO CEEDING FURTHER IT BECOMES PERTINENT TO DETERMINE THE FAIR AMOUNT OF R EVENUE RECEIVABLE BY RCS FOR ITS SERVICES. 5.2.5 IT IS IMPORTANT TO NOTE THAT WHILE DETERMINING THE FEES PAYABLE TO ANY AGENCY RESPONSIBLE FOR MARKETING, THE COMPLEXITY OF THE PROCESS BEING OUTSOURCED, THE OPERATING MARGINS THAT THE SERVICE PROVIDER IS EXPECTED TO EARN, THE SIZE OF THE CONTRACT, ETC. ALL PLAY AN IM PORTANT ROLE. IN ORDER TO DETERMINE THE REMUNERATION OF RCS FOR ITS ACTIVITIE S, THE APPELLANT WAS ASKED TO FURNISH AN INDEPENDENT RESEARCH REPORT / S URVEY ON THE INDIAN BPO INDUSTRY. THE APPELLANT SUBMITTED A REPORT ON THE INDIAN BPO INDUSTRY PREPARED BY INGRES, A DIVISION OF ICRA LTD IN DECEM BER, 2003. THE REPORT SUGGESTS THAT ON AN AVERAGE BPO COMPANIES HA VE SELLING EXPENSES OF 1.40% TO 4.40% OF THEIR TURNOVER (REFERRED AS OP ERATING INCOME IN THE REPORT) OVER A PERIOD OF THREE YEARS (FY 2001 TO FY 2003). KEEPING IN VIEW THIS STANDARD, THE REVENUE RETAINED BY RCS (9. 40%) SEEMS UNREASONABLE. THOUGH IT IS RECOGNIZED THAT THE STA NDARD AS PER THE REPORT (4.40% TO 1.40%) IS NOT A SACROSANCT APPLICABLE ACR OSS ALL THE COMPANIES 9 AND IN THE ABSENCE OF REQUISITE INFORMATION IT IS N OT POSSIBLE TO COMPARE THE TWO FIGURES (9.40% AND 4.40% - 1.40%), A REFERE NCE TO IT CAN USEFULLY BE MADE TO UNDERSTAND A GENERAL MAGNITUDE OF THE IT EM INVOLVED VIS--VIS OTHER EXPENSES. IT IS PERTINENT TO MENTION HERE THA T THE AVERAGE SELLING/ MARKETING EXPENSES INCURRED BY THE COMPARABLES FINA LLY SELECTED IN THE LATER PART OF THIS ORDER, ALSO COMES TO 1.64% OF TU RNOVER. HENCE THE INDUSTRY AVERAGE SHOWN BY ICRA REPORT FOR THE FINAN CIAL YEAR 2003 AT 1.40% IS VERY MUCH RELIABLE AND AUTHENTIC FIGURE. KEEPING IN VIEW THE FUNCTIONAL PROFILE OF THE TWO E NTITIES (APPELLANT AND RCS) INCLUDING THE FAR ANALYSIS AND ALSO KEEPIN G IN VIEW THE FACT THAT AS PER RULE 10B(4) ON DATA FOR THE CURRENT YEAR TO BE USED. AS IN THE FINANCIAL YEAR 2002-03 THE AVERAGE EXPENDITURE ON S ELLING EXPENSES IN THE SOFTWARE INDUSTRY WERE IN THE RANGE OF 1.4% ACCORDI NGLY I AM OF THE VIEW THAT A SHARE OF 1.40% OF THE REVENUE IS ADEQUATE TO COMPENSATE RCS FOR ITS ACTIVITIES. THUS, AS PER THIS HYPOTHESIS, THE ALP DETERMINED CANNOT EXCEED 98.60% OF THE REVENUE EARNED BY THE GLOBAL VANTEDGE GROUP AS A WHOLE I.E. THE ALP 98.60% OF THE REVENUE EARNED BY THE GL OBAL VANTEDGE GROUP AS A WHOLE I.E. THE ALP HAS TO BE RESTRICTED TO RS. 9,16,55,231/- (RS. 9,29,56,624 X 98.6%). 14. WITH REGARD TO THE QUESTION WHETHER TPO OR THE AO HAS ERRED IN REJECTING THE ARMS LENGTH PRICE DETERMINED BY THE ASSESSEE, T HE LD. CIT(A) HAS GIVEN HIS DECISION AND FINDING AS UNDER:- 5.3.1 THE MAIN ARGUMENT OF THE APPELLANT IS T HAT THE APPELLANT IS BETTER EQUIPPED TO CARRY THE TRANSFER PRICING ANALY SIS AS IT HAS A BETTER UNDERSTANDING OF THE INTRICACIES OF THE BUSINESS AN D CAN CARRY ON THE ANALYSIS ON THE BASIS OF FAR ANALYSIS IN A MORE COM PREHENSIVE MANNER. THEREFORE, THE ALP DETERMINED BY THE APPELLANT SHOU LD HAVE BEEN ACCEPTED. 5.3.2 I HAVE CONSIDERED THE CONTENTIONS OF THE APPEL LANT AND I AM OF THE VIEW THAT THE CONTENTIONS OF THE APPELLANT ARE UNACCEPTABLE. THE CASE THAT THE APPELLANT IS TRYING TO MAKE IS THAT I N EVERY CASE, THE ALP DETERMINED BY THE TAXPAYER SHOULD BE ACCEPTED. THI S CANNOT BE ACCEPTED SINCE IF THE ASSESSEE IS GIVEN THE POWER T O DETERMINE THE ALP WHICH CANNOT BE CHALLENGED BY THE TAX OFFICERS, THE N THE TRANSFER PRICING REGULATIONS INTRODUCED INTO THE TAX LEGISLATION SHA LL BECOME INFRUCTUOUS. THE TAXPAYER SHOULD BE THE ONE DETERMINING THE SAME , HOWEVER, IT SHOULD BE SUBJECT TO SCRUTINY BY THE TAX ADMINISTRA TION SO THAT ANY PROFIT SHIFTING METHODOLOGY BEING ADOPTED BY THE ASSESSEE CAN BE REJECTED. HOWEVER, WITH THIS POWER, ALSO COMES THE RESPONSIBI LITY OF BEING 10 JUDICIOUS AND THUS, THE AO/TPO HAVE TO EXERCISE THE IR AUTHORITY IN ACCORDANCE THE TRANSFER PRICING REGULATIONS. I AM THOUGH IN AGREEMENT WITH THE CONTENTION OF THE APPELLANT THAT FAR ANALYSIS FORMS THE BASIC FOUNDATION ON WHI CH THE ALP IS DETERMINED AND ITS IMPORTANCE JUST CAN NOT BE OVERE MPHASIZED. I HAVE PROVIDED FULL OPPORTUNITY TO THE APPELLANT T O PRESENT THE FACTS OF THE CASE, INCLUDING FAR ANALYSIS, AND HENC E, HAS BEEN ADJUDICATED ON MERITS IN THE SUBSEQUENT PARAS OF TH IS ORDER. THUS, FOR STATISTICAL PURPOSES, THIS ISSUE IS DECID ED AGAINST THE APPELLANT. 15. WITH REGARD TO THE QUESTION AS WHAT WOULD BE TH E APPROPRIATE ARMS LENGTH PRICE IN CASE THE ARMS LENGTH PRICE DETERMINED EITH ER BY THE ASSESSEE OR BY THE TPO FOUND TO BE IMPROPER, THE LD. CIT(A) HAS DECIDE D THE ISSUE AS UNDER:- 5.4.1 I HAVE CAREFULLY GONE THROUGH THE VARIO US CONTENTIONS AND SUBMISSION MADE BY THE APPELLANT. THOUGH THERE IS MERIT IN THE APPELLANTS ARGUMENT THAT THERE IS NO TAX BENEFIT B EING OBTAINED BY THE APPELLANT THOUGH SHIFTING OF PROFITS. IT CANNOT BE THE ONLY BASIS TO ACCEPT APPELLANTS CONTENTIONS IN THIS REGARD. IT IS WELL UNDERSTOOD THAT ONE ASSOCIATED ENTERPRISE CAN TRY TO USE ITS INFLUENCE TO DETERMINE THE TRANSACTION IN A MANNER PREJUDICIAL TO THE INTEREST OF THE OTHER ASSOCIATED ENTERPRISE BECAUSE OF SEVERAL REASONS. 5.4.2 AS REGARDS CONTENTION OF THE APPELLANT THAT TRANSAC TION OF THE APPELLANT WITH INDEPENDENT CLIENTS, SHOULD NOT BE B ENCHMARKED UNDER TNMN I AGREE THAT WHEN TNMN IS USED AS THE MOST APP ROPRIATE METHOD TO DETERMINE THE ARMS LENGTH PRICE, THE TNMN, AS T HE NAME ITSELF SUGGESTS, EVALUATES PROFITABILITY OF TRANSACTIONS R ATHER THAN PROFITABILITY OF AN ENTERPRISE. TRANSACTION OF DIFFERENT NATURE CANNOT BE AGGREGATED FOR THE PURPOSE OF COMPARISON UNDER TNMN. IN PRACT ICE THOUGH THE PROFITABILITY OF COMPARABLE ENTITIES IS USED TO BEN CHMARK THE INTERNATIONAL TRANSACTIONS OF TAXPAYERS, HOWEVER, I N SUCH A SCENARIO AN UNDERLYING ASSUMPTION OVERRIDES THE ANALYSIS FOR TH E LACK OF DATA. THE ACTING ASSUMPTION IN SUCH A SCENARIO IS THAT DUE TO A WELL DESIGNED FUNCTIONAL ANALYSIS ONLY THOSE COMPANIES ARE SELECT ED AS COMPARABLES WHICH HAVE UNDERTAKEN HOMOGENEOUS AND COMPARABLE TR ANSACTIONS. THUS, IN SUCH A SCENARIO, THE PROFITABILITY OF THE COMPARABLE ENTITIES, IN EFFECT, REPRESENTS THE PROFITABILITY OF COMPARABLE TRANSACTIONS. 11 EVEN THE OECD TRANSFER PRICING GUIDELINES FOR MULTI NATIONAL ENTERPRISES AND TAX ADMINISTRATION 1995 SUPPORTS THIS VIEW AND CLAUSE 3.42 STATES AS UNDER:- 3.42 AN ANALYSIS UNDER THE TRANSACTIONAL NET MARG IN METHOD SHOULD CONSIDER ONLY THE PROFITS OF THE ASSOCIATED ENTERPRISE THAT ARE ATTRIBUTABLE TO PARTICULAR CONTROLLED TRANSACTIONS. THEREFORE, IT WOULD BE INAPPROPRIATE TO APPLY THE TRANSACTIONAL N ET MARGIN METHOD ON A COMPANY-WIDE BASIS IF THE COMPANY ENGAG ES IN A VARIETY OF DIFFERENT CONTROLLED TRANSACTIONS THAT C ANNOT BE APPROPRIATELY COMPARED ON AN AGGREGATE BASIS WITH T HOSE OF AN INDEPENDENT ENTERPRISE. SIMILARLY, WHEN ANALYZING THE TRANSACTION BETWEEN THE INDEPENDENT ENTERPRISES TO THE EXTENT T HEY ARE NEEDED, PROFITS ATTRIBUTABLE TO TRANSACTIONS THAT ARE NOT S IMILAR TO THE CONTROLLED TRANSACTIONS UNDER EXAMINATION SHOULD BE EXCLUDED FROM THE COMPARISON. FINALLY, WHEN PROFIT MARGINS OF AN INDEPENDENT ENTERPRISE ARE USED, THE PROFITS ATTRIBUTABLE TO TH E TRANSACTIONS OF THE INDEPENDENT ENTERPRISE MUST NOT BE DISTORTED BY CON TROLLED TRANSACTIONS OF THAT ENTERPRISE. IN VIEW OF ABOVE DISCUSSIONS, I HOLD THAT WHILE AP PLYING THE TNMN TO DETERMINE ALP, THE REVENUE EARNED BY THE APPELLA NT FROM SERVICING THE INDEPENDENT CLIENTS, WITHOUT ANY INVOLVEMENT OF RCS SHOULD NOT BE BENCHMARKED. THE PROPORTIONATE COSTS (18.14%) ATTRI BUTABLE TO SUCH REVENUE SHOULD BE IGNORED WHILE COMPUTING ALP OF TH E INTERNATIONAL TRANSACTIONS. 5.4.3 AS REGARD THE OBJECTION RAISED BY THE APPELLANT AGA INST THE SELECTION OF COMPARABLES PERFORMING DISSIMILAR FUNC TIONS, I HAVE PERUSED THE PROFILE OF GENESYS AND HINDUJA TMT AND IT IS FO UND THAT THEY ARE ENGAGED IN DISSIMILAR ACTIVITY PROFILE VIS--VIS AP PELLANT. HINDUJA TMT WAS ALSO FOUND TO HAVE SUBSTANTIAL RELATED PARTY TR ANSACTIONS. THESE TWO COMPANIES CANNOT BE TAKEN AS COMPARABLE AND ARE THU S REJECTED FOR THE PURPOSE OF DETERMINING THE ALP. FURTHER IN RELATION TO KARVY CONSULTANTS, IT WAS NOTICED THAT NO DATA IS AVAILABLE IN THE PUBLIC DOMAIN FOR THE RELE VANT FINANCIAL YEAR I.E. F.Y. 2002-03. THE TPO ERRONEOUSLY USED THE DATA FOR FY 2000-02 WHILE DETERMINING THE ALP. THUS, THIS COMPANY IS ALSO NO T CONSIDERED TO BE COMPARABLE ENTITY OF THE APPELLANT DUE TO LACK OF S UFFICIENT DATA. 5.4.4 PROCEEDING TO THE NEXT ISSUE, REGARDING CLAIM OF AP PELLANT FOR GIVING SUITABLE ADJUSTMENT ON ACCOUNT OF IDLE CAPAC ITY AND THAT THEY WERE IN START UP PHASE, I HAVE CONSIDERED THE SUBMISSION S OF THE APPELLANT AND LOOKING TO THE FACT THAT THE REMAINING 6 COMPARABLE S WERE ESTABLISHED ENTITIES, ACCORDINGLY ADJUSTMENT NEEDS TO BE MADE W HILE DOING THE COMPARABILITY ANALYSIS. NORMALLY WHEREVER AN ENTITY IS ESTABLISHED IT 12 ALWAYS CARRIED SOME SURPLUS CAPACITY VIS--VIS PRES ENT/ PROJECTED BUSINESS OPERATIONS. LOOKING INTO THE IT INDUSTRIE S WHICH WERE IN BOOMING STAGE I HOLD THAT A SURPLUS CAPACITY TO THE EXTENT OF 1/3 RD OF THE EXISTING CAPACITY IS TREATED AS NORMAL IN THIS INDU STRY IN ANTICIPATION OF FUTURE GROWTH IN BUSINESS. HENCE AN ADJUSTMENT TO THE PROFITABILITY OF THE COMPARABLES SHOULD BE MADE TO THE EXTENT OF 33.33%. THIS IS ALSO IN ACCORDANCE WITH THE PROVISION OF RULE 10B(2) WHICH STATES THAT CONDITION PREVAILING INN THE MARKET IN WHICH THE TESTED PARTY AND COMPARABLES OPERATES HAVE TO BE CONSIDERED WHILE JUDGING COMPAR ABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION. THE WORKING SUBMITTED BY THE APPELLANT, HOWEVER, TR IES TO ADJUST THE PROFITABILITY OF THE APPELLANT BY ELIMINATING THE I DLE COSTS INCURRED BY THE APPELLANT DUE TO EXCESS CAPACITY DUE TO INITIAL BUS INESS PHASE AND LOW VOLUME OF BUSINESS. HOWEVER, IN ORDER TO MAKE A TR UE COMPARISON BETWEEN THE APPELLANT AND THE COMPARABLES SUCH AN A DJUSTMENT IS REQUIRED TO BE MADE TO THE PROFITABILITY OF THE COM PARABLES I.E. THE PROFITABILITY OF THE COMPARABLES NEED TO BE ADJUSTE D SUITABLY TO BRING THEM TO A LEVEL OF INEFFICIENCY THAT APPELLANT OPER ATED AT. SUCH ADJUSTMENT IS BEING MADE AT THE TIME OF FINAL COMPUTATION OF OPERATING MARGIN OF COMPARABLE COMPANIES LATER IN T HIS ORDER. WITH REGARD TO THE WORKING CAPITAL ADJUSTMENT, I HA VE CAREFULLY EXAMINED THE CONTENTIONS RAISED BY THE APPELLANT AND I AM SA TISFIED THAT THE TPO HAS ALREADY GIVEN THE SUITABLE ADJUSTMENT AND HENCE AT THIS STAGE IT DOES NOT CALL FOR ANY INTERFERENCE. 16. AFTER DECIDING ALL THE AFORESAID ISSUES, THE LD . CIT(A) COMPUTED THE ARMS LENGTH PRICE AS UNDER:- RE-COMPUTATION OF ALP TO SUMMARIZE, THE ALP DETERMINED BY THE AO/TPO NEED S TO BE RECOMPUTED IN VIEW OF MATTERS ADJUDICATED ABOVE. T HEREFORE, THE ALP IS RECOMPUTED AFTER MAKING THE FOLLOWING ADJUSTMENTS:- 1. OUT OF 9 COMPARABLES IDENTIFIED BY THE TPO, 3 COMPA NIES NAMELY GENESYS AND HINDUJA TMT AND KARVY CONSULTANTS ARE R EJECTED. 2. THE OPERATING MARGIN OF THE REMAINING 6 COMPARABLES HAS BEEN SUITABLY ADJUSTED TO ACCOUNT FOR THE IDLE CAPACITY COSTS INCURRED ADDITIONALLY BY THE APPELLANT. A STATEMENT SHOWING THE COMPUTATION OF AVERAGE OF A VERAGE OPERATING MARGIN OF THE COMPARABLE IS AS PER ANNEXURE. 13 THE COMPUTATION OF ALP ON THE BASIS OF AFORESAID AV ERAGE OPERATING MARGIN OF COMPARABLES IS GIVEN HEREUNDER:- PARTICULARS AMOUNT (RS.) TOTAL OPERATING COST OF THE APPELLANT AS COMPUTED BY TPO 22,46,97,971 LESS: OPERATING COST INCURRED IN RELATION TO SERVICE TO THIRD PARTIES (18.14%) 4,07,60,212/- NET OPERATING COST IN RELATION TO THE INTERNATIONAL TRANSACTION WITH RCS (A) 18,39,37,759 ARMS LENGTH MARGIN THAT SHOULD HAVE BEEN EARNED BY THE APPELLANT I.E. 38.11% OF THE OPERATING COST (B)=(A) * -38.11% -7,00,98,680 ARMS LENGTH VALUE OF THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE APPELLANT (C)=(A) + (B) 11,38,39,079 VALUE AT WHICH INTERNATIONAL TRANSACTION BETWEEN THE APPELLANT AND RCS TOOK PLACE (D) 8,32,66,596 MAXIMUM ADDITIONS THAT CAN BE MADE TO THE TAXABLE INCOME OF THE APPELLANT (E) = (C) (D) 3.05,72,483 THUS THE ALP DETERMINED ON THE BASIS OF ABOVE WORK ING COMES TO RS. 11,38,39,079/- WHICH EXCEEDS THE TOTAL REVENUE EARNED BY THE GROUP AS A WHOLE. IN VIEW OF THE ADJUDICATION MADE FOR I SSUE 2, THE ALP CANNOT EXCEED RS. 9,16,55,231/-, THEREFORE, THE ALP IS DETERMINED TO BE 9,16,55,231/-. HENCE ADDITIONS TO THE INCOME OF TH E APPELLANT IS CONFIRMED AT RS. 83,88,625/- (I.E. RS. 9,16,55,231 I.E. THE MAXIMUM ALP LESS RS. 8,32,66,596 I.E. THE ACTUAL VALUE OF T HE INTERNATIONAL TRANSACTION). 17. WITH REGARD TO THE ASSESSEES CLAIM THAT THERE SHOULD BE AN ADJUSTMENT TO THE EXTENT OF + 5% UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT, THE LD. CIT(A) HAS DECIDED THE POINT BY OBSERVING AND HOLDING AS U NDER:- ADJUSTMENT OF + 5% UNDER PROVISO TO SECTION 92C(2) AS FAR AS RELIEF ON ACCOUNT OF + 5% ADJUSTMENT UNDER THE PROVISO TO SECTION 92C(2) IS CONCERNED, IN ORDER TO EXAMINE TH E CONTENTION OF THE APPELLANT, IT BECOMES PERTINENT TO HAVE A LOOK AT T HE SAID SECTION, AS REPRODUCED HEREUNDER: 14 THE MOST APPROPRIATE METHOD REFERRED TO IN SUB-S ECTION 92C(2) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, IN THE MANNER AS MAY BE PRESCRIBED:- PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMI NED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR, AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN B Y AN AMOUNT NOT EXCEEDING FIVE PER CENT OF SUCH ARITHMETICAL ME AN. IT MAY BE SENT THAT THERE ARE TWO LIMBS OF THE PRO VISION. ITS FIRST LIMB DELAS WITH THE SITUATION WHERE THE MOST APPROP RIATE METHOD LEADS TO MORE THAN ONE ALP AND IN THAT SITUATION THE ALP SHOULD BE THE ARITHMETIC MEAN. SECOND LIMB OF THE PROVISION, PRO VIDES THE FACILITY OF OPTION TO THE TAXPAYER IF PRICE VARIES BY AN AMOUNT NOT EXCEEDING + 5% OF SUCH MEAN. THERE IS NO DISPUTE AS TO THE INTERPRETATION OF TH E ABOVE PART OR LIMB OF THE PROVISION AND THE CONTROVERSY IS RELATE D TO THE SECOND LIMB OF THE PROVISION WHERE AN OPTION IS GIVEN TO THE TAX PAYER TO TAKE ALP WHICH MAY VARY FROM THE ARITHMETIC MEAN BY AN AMOUN T NOT EXCEEDING 5% OF SUCH ARITHMETIC MEAN. IT IS CLEAR FROM THE L ANGUAGE OF THE PROVISION THAT THE OPTION IS TO TAKE ALP WHICH IS N OT IN EXCESS OF 5% OF THE SAID MEAN. IN THE PRESENT CASE, SINCE THE DIFFERENCE (RS. 83, 88,635) BETWEEN THE ALP DETERMINED (9,16,55,231) AND VALUE OF TRANS ACTION DECLARED (RS. 83,266,596) EXCEEDS 5% OF THE ALP (9,16,55,231/-), NO ADJUSTMENT IS ALLOWABLE TO THE APPELLANT. THUS THIS GROUND IS AD JUDICATED AGAINST THE APPELLANT. 18. BEING AGGRIEVED, ASSESSEE AS WELL AS THE DEPART MENT ARE IN APPEAL BEFORE US. 19. DURING THE COURSE OF HEARING OF THIS APPEAL, NE ITHER THE LD. COUNSEL FOR THE ASSESSEE NOR THE LD. D.R. FOR THE REVENUE HAVE BEEN ABLE TO POINT OUT ANY BASIS OR MATERIAL OR CRITERIA TO CONTROVERT OR TO REBUT THE FINDINGS AND CONCLUSION ARRIVED AT BY THE LD. CIT(A) EXCEPT BY RELYING UPON THEIR RESP ECTIVE STAND TAKEN BEFORE THE LD. CIT(A). THOUGH THE LD. COUNSEL FOR THE ASSESSE E MADE A SPECIFIC SUBMISSION ABOUT THE BENEFIT OF ADJUSTMENT OF + 5% TO BE GIVEN WHILE DETERMINING THE ARMS 15 LENGTH PRICE, THE LD. COUNSEL FOR THE ASSESSEE HAS NOT BEEN POINT OUT AS TO HOW AND IN WHAT MANNER, THE ORDER OF LD. CIT(A) IN REJE CTING THIS CLAIM OF THE ASSESSEE IS IMPROPER AND UNJUSTIFIED. SINCE BOTH THE PARTIE S HAVE NOT BEEN ABLE TO CONTROVERT THE FINDINGS RECORDED BY THE LD CIT(A) O R POINT OUT ANY MATERIAL TO ENABLE US TO TAKE A VIEW OTHER THAN VIEW TAKEN BY T HE LD. CIT(A), WE ARE INCLINED TO UPHOLD THE ORDER OF LD. CIT(A) ON THE POINT OF D ETERMINATION OF ARMS LENGTH PRICE IN RESPECT OF THE TRANSACTIONS ENTERED INTO B Y THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISES, NAMELY, RCS CENTRE CORP. THEREFORE, T HE ORDER OF LD. CIT(A) IS UPHELD, AND THE GROUNDS RAISED BY THE ASSESSEE AS W ELL AS BY THE REVENUE ON THIS ISSUE ARE REJECTED. 20. SIMILARLY, IN THE ASSESSMENT YEAR 2004-05, AN I DENTICAL ISSUE ABOUT THE DETERMINATION OF ARMS LENGTH PRICE IS INVOLVED AND IN THAT YEAR, THE LD. CIT(A) DETERMINED THE ARMS LENGTH PRICE IN THE SAME MANNE R OR BASIS AS DONE IN THE ASSESSMENT YEAR 2003-04. THE ARMS LENGTH PRICE DE TERMINED BY THE LD. CIT(A) IS AS UNDER:- 8. RE-COMPUTATION OF ALP TO SUMMARIZE, THE ALP DETERMINED BY THE AO/TPO NEE DS TO BE RECOMPUTED IN VIEW OF MATTERS ADJUDICATED ABOVE. T HEREFORE, THE ALP IS RECOMPUTED AFTER MAKING THE FOLLOWING ADJUSTMENTS: 1. OUT OF 6 COMPARABLES WHOSE OPERATING MARGIN IS U SED BY THE TPO TO BENCHMARK THE INTERNATIONAL TRANSACTION, 2 COMPA RABLES NAMELY GENESYS AND HINDUJA TMT ARE REJECTED. THE OPERATIN G MARGIN OF THESE 4 COMPARABLES IS SUMMARIZED AS BELOW: 16 S. NO. NAME OF THE COMPANY OP/TC 1. ACE SOFTWARE 1.44% 2. ALLSEC (36.12)% 3. MCS LIMITED 15.43% 4. NUCLEUS 23.95% MEAN 1.175% 2. A SUITABLE WORKING CAPITAL ADJUSTMENT HAS BEEN MADE TO ADJUST THE OPERATING MARGIN OF THE ABOVEMENTIONED REMAINING 4 COMPARABLES. THE FINAL OPERATING MARGIN OF THE COMPARABLES, AFTER GI VING EFFECT TO THE SAID WORKING CAPITAL ADJUSTMENT COMES TO 0.43%. THE DET AILED COMPUTATION OF THE OPERATING IS GIVEN AT ANNEXURE 3. 10. THE COMPUTATION OF ALP ON THE BASIS OF AFORESAID AV ERAGE OPERATING MARGIN OF COMPARABLES IS GIVEN HEREUNDER: PARTICULARS AMOUNT (RS.) TOTAL OPERATING COST OF THE APPELLANT AS COMPUTED BY THE TPO 393,307,198 LESS: OPERATING COST INCURRED IN RELATION TO SERVICE TO THIRD PARTIES (0.58%) 2,281,182 NET OPERATING COST IN RELATION TO THE INTERNATIONAL TRANSACTION WITH RCS (A) 391,026,016 ARMS LENGTH MARGIN THAT SHOULD HAVE BEEN EARNED BY THE APPELLANT I.E. 0.43% OF THE OPERATING COST (B)=(A) * 0.43% 1,681,412 ARMS LENGTH VALUE OF THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE APPELLANT (C)=(A) +(B) 392,707,428 VALUE AT WHICH INTERNATIONAL TRANSACTION BETWEEN THE APPELLANT AND RCS TOOK PLACE 393,386,386 THUS THE ALP DETERMINED ON THE BASIS OF ABOVE WORKI NG COMES TO RS. 393,386,386 WHICH IS LOWER THAN THE BOOK VALUE OF T HE INTERNATIONAL TRANSACTION, AS DECLARED BY THE APPELLANT. THEREFO RE, THE BOOK VALUE OF THE INTERNATIONAL TRANSACTIONS AS DECLARED BY THE A PPELLANT IS ACCEPTED TO BE AT ALP. HENCE ENTIRE ADDITION OF RS. 5,22,28,112 /- MADE BY THE TPO TO THE INCOME OF THE APPELLANT IS DELETED. 17 21. THE LD. CIT(A) HAS ALSO DECIDED THE ISSUE ABOUT THE ADJUSTMENT OF + 5% AS PER PROVISO TO SECTION 92C(2) IN THE SAME MANNER AS HAVE BEEN DECIDED BY HIM IN THE ASSESSMENT YEAR 2003-04. 22. THUS, IN THE LIGHT OF THE DECISION WE HAVE TAKE N IN ASSESSMENT YEAR 2003- 04, THE IDENTICAL GROUND ABOUT THE DETERMINATION OF ARMS LENGTH PRICE RAISED BY THE REVENUE AS WELL BY THE ASSESSEE IN THE ASSESSME NT YEAR 2004-05 ARE REJECTED. 23. IN THE ASSESSMENT YEAR 2004-05, THE ASSESSEE HA S TAKEN ONE MORE GROUND CONTENDING THAT THE AUTHORITIES BELOW HAVE ERRED IN NOT CONSIDERING THE INTEREST FROM FIXED DEPOSIT PLACED WITH BANK FOR BANK GUARAN TEES AND THE INTEREST IN FIXED DEPOSIT KEPT AS LIEN IN FAVOUR OF IBM FOR THE PURPO SE OF OBTAINING COMPUTERS ON LEASE AS BUSINESS INCOME FOR THE PURPOSE OF CALCULA TING THE DEDUCTION U/S 10A OF THE ACT. THE ASSESSEE HAS ALSO TAKEN A GROUND FOR AUTHORITIES BELOW HAVE ERRED IN EXCLUDING THE MISCELLANEOUS INCOME WHILE COMPUTING THE DEDUCTION U/S 10A OF THE ACT. 24. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFUL LY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. 25. SECTION 10A PROVIDES FOR A DEDUCTION OF SUCH PR OFITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICL ES OR THINGS OR COMPUTER SOFTWARE FROM THE TOTAL INCOME OF THE ASSESSEE. IT IS, THUS, CLEAR THAT DEDUCTION TO BE ALLOWED U/S 10A IS IN RESPECT OF PROFIT AND GAIN S DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER S OFTWARE. THE EXPRESSION USED 18 BY THE LEGISLATURE IS DERIVED BY UNDERTAKING FROM T HE EXPORT OF ARTICLES OR THINGS OR COMPUTER. THEREFORE, EARNING OF INTEREST FROM FI XED DEPOSITS PLEDGED WITH BANK FOR BANK GUARANTEES AND INTEREST IN FIXED DEPOSITS KEPT IN LIEN IN FAVOUR OF IBM FOR THE PURPOSE OF OBTAINING COMPUTERS ON LEASE AND THE MISCELLANEOUS INCOME CANNOT BE CONSIDERED TO BE A PROFIT DERIVED BY A UN DERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE. RECENTLY, THE HONBLE SC IN THE CASE OF LIBERTY INDIA VS. CIT (2009) 317 ITR 218, HAS CONSI DERED THE MEANING OF DERIVED FROM AND HELD AS UNDER:- (EXTRACTED FROM HEAD NOTE) THE INCOME TAX ACT, 1961, BROADLY PROVIDES FOR TWO TYPES OF TAX INCENTIVES, VIZ., INVESTMENT-LINKED INCENTIVES AND PROFIT-LINKED INCENTIVES. CHAPTER VI-A OF THE ACT WHICH PROVIDES FOR INCENTIV ES IN THE FORM OF DEDUCTIONS ESSENTIALLY BELONGS TO THE CATEGORY OF PROFIT-LINKED INCENTIVES. THEREFORE, WHEN SECTION 80-IA/80-IB R EFERS TO PROFITS DERIVED FROM ELIGIBLE BUSINESS, IT IS NOT THE OWNERSHIP OF THAT BUSINESS WHICH ATTRACTS THE INCENTIVES : WHAT ATTRACTS THE INCENTI VES UNDER SECTION 80- IA/80-IB IS THE GENERATION OF PROFITS (OPERATIONAL PROFITS). IT IS FOR THIS REASON THAT PARLIAMENT HAS CONFINED DEDUCTION OF PR OFITS DERIVED FROM ELIGIBLE BUSINESSES MENTIONED IN SUB-SECTIONS (3) T O (11A). EACH OF THE BUSINESS MENTIONED IN SUB-SECTIONS (3) TO (11A) CON STITUTES A STAND-ALONE ITEM IN THE MATTER OF COMPUTATION OF PROFITS. SECTION 80-IB AND 80-IA ARE A CODE BY THEMSELVES AS THEY CONTAIN BOTH SUBSTANTIVE AS WELL AS PROCEDURAL PROVISIONS. SECTION 80-IB PROVIDES FOR THE ALLOWING OF DEDUCT ION IN RESPECT OF PROFITS AND GAINS DERIVED FROM THE ELIGIBLE BUSINES S. THE CONNOTATION OF THE WORDS DERIVED FROM IS NARROWER AS COMPARED TO THAT OF THE WORDS ATTRIBUTABLE TO. BY USING THE EXPRESSION DERIVE D FROM PARLIAMENT INTENDED TO COVER SOURCES NOT BEYOND THE FIRST DEGR EE. SECTIONS 80-I, 80-IA AND 80-IB ARE TO BE READ AS HAVING A COMMON SCHEME. SUB-SECTION (5) OF SECTION 80-IA (WHICH IS REQUIRED TO BE READ INTO SECTION 80-IB) PROVIDES FOR THE MANNER OF COMPUTATI ON OF THE PROFITS OF AN ELIGIBLE BUSINESS. SUCH PROFITS ARE COMPUTED AS IF SUCH ELIGIBLE BUSINESS IS THE ONLY SOURCE OF INCOME OF THE ASSESSEE. THEREFO RE, DEVICES ADOPTED TO 19 REDUCE OR INFLATE THE PROFITS OF THE ELIGIBLE BUSIN ESS HAVE TO BE REJECTED IN V VIEW OF THE OVERRIDING PROVISIONS OF SECTION 80-IA( 5). SECTION 80-I, 80-IA AND 80-IB PROVIDE FOR INCENTI VES IN THE FORM OF DEDUCTIONS WHICH ARE LINKED TO PROFITS AND NOT INVE STMENT. ON ANALYSIS OF SECTIONS 80-IA AND 80-IB IT BECOMES CLEAR THAT ANY INDUSTRIAL UNDERTAKING WHICH BECOMES ELIGIBLE ON SATISFYING SUB-SECTION (2 ) WOULD BE ENTITLED TO DEDUCTION UNDER SUB-SECTION (1) ONLY TO THE EXTENT OF PROFITS DERIVED FROM SUCH INDUSTRIAL UNDERTAKING AFTER THE SPECIFIED DAT E. APART FROM ELIGIBILITY, SUB-SECTION (1) PURPORTS TO RESTRICT THE QUANTUM OF DEDUCTION TO A SPECIFIED PERCENTAGE OF THE PROFITS. THIS IS THE IMPORTANCE OF THE WORDS DERIVED FROM AN INDUSTRIAL UNDERTAKING AS AGAINST PROFITS ATTRIBUTABLE TO AN INDUSTRIAL UNDERTAKING. DEPB/DUTY DRAWBACK ARE INCENTIVES WHICH FLOW FROM THE SCHEMES FRAMED BY THE CENTRAL GOVERNMENT OR FROM SECTION 75 OF THE CUSTOMS ACT, 1962. INCENTIVE PROFITS ARE NOT PROFITS DERIVED FROM ELIG IBLE BUSINESS UNDER SECTION 80-IB : THEY BELONG TO THE CATEGORY OF ANCI LLARY PROFITS OF SUCH UNDERTAKING. PROFITS DERIVED BY WAY OF INCENTIVES SUCH AS DEPB/DUTY DRAWBACK CANNOT BE CREDITED AGAINST THE COST OF MAN UFACTURE OF GOODS DEBITED IN THE PROFIT AND LOSS ACCOUNT AND THEY DO NOT FALL WITHIN THE EXPRESSION PROFITS DERIVED FROM INDUSTRIAL UNDERTA KING UNDER SECTION 80- IB. 26. IN THE LIGHT OF THE AFORESAID PROPOSITION LAID DOWN BY THE HONBLE SC IN THE CASE OF LIBERTY INDIA VS. CIT (SUPRA), WE DO NOT FI ND ANY MERIT IN THE CLAIM OF THE ASSESSEE THAT INTEREST FROM FIXED DEPOSIT ETC. AND MISCELLANEOUS INCOME SHOULD BE TAKEN INTO ACCOUNT FOR THE PURPOSE OF COMPUTING DED UCTION U/S 10A OF THE ACT. THUS, THESE GROUNDS RAISED BY THE ASSESSEE ARE REJE CTED. 27. IN THE ASSESSMENT YEAR 2004-05, THE ASSESSEE HA S ALSO TAKEN A GROUND ABOUT WHETHER SETTING OFF OF THE BROUGHT FORWARD BUSINESS LOSS AND UNOBSERVED DEPRECIATION IS TO BE MADE BEFORE OR AFTER ALLOWING DEDUCTION U/S 10A OF THE ACT. 28. THIS GROUND RAISED BY THE ASSESSEE READS AS UND ER:- 9. THE LD. CIT(A) AS WELL LD. AO HAVE ERRED IN SET TING OFF THE BROUGHT FORWARD BUSINESS LOSSES AND UNABSORBED DEPRECIATION BEFORE ALLOWING DEDUCTION U/S 10A OF THE ACT. 20 29. THIS GROUND HAS BEEN DECIDED BY THE LD. CIT(A) BY OBSERVING AS UNDER:- 12.5 HOWEVER WITH REGARD TO THE CONTENTION OF THE APPELLANT THE DECISION BY HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF HIMATASINGIKE SEIDE LTD. (286 ITR 255) ALSO NEEDS T O BE TAKEN NOTE OF. IN THIS DECISION THE HIGH COURT HAS UPHELD THE ACTI ON OF CIT IN REVISING THE ASSESSMENT ORDER UNDER SECTION 263 BY HOLDING T HAT BEFORE ALLOWING THE DEDUCTION UNDER SECTION 10A THE BROUGHT FORWARD LOSSES AND UNABSORBED DEPRECIATION HAVE TO BE ADJUSTED BEFORE ALLOWING THE CLAIM UNDER SECTION 10A. IN VIEW OF THIS DECISION OF THE HIGH COURT, I HOLD THAT THE AO WAS RIGHT IN HOLDING THE VIEW THAT THE CLAIM UNDER SECTION 10A SHOULD BE ALLOWED ONLY AFTER ADJUSTING THE BROUGHT FORWARD LOSSES AND UNABSORBED DEPRECIATION. THEREFORE, THIS GROUND IS DISMISSED. 30. WE HAVE HEARD BOTH THE PARTIES AND HAVE CONSIDE RED VARIOUS DECISIONS CITED BY THE LD. COUNSEL FOR THE ASSESSEE ON THIS ISSUE. 31. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF RENDERING BUSINESS PROCESS OUT SOURCING BUSINESS. IT STARTED ITS BUSI NESS OPERATION IN THE FINANCIAL YEAR 2001-02 RELEVANT TO THE ASSESSMENT YEAR 2002-0 3. IN THE ASSESSMENT YEAR 2002-03, THE ASSESSEE WAS ASSESSED AT BUSINESS LOSS OF RS. 3,72,77,332/- AND ALSO HAD UNABSORBED DEPRECIATION TO THE EXTENT OF R S. 89,08,926/-. IN THE ASSESSMENT YEAR 2003-04, THE ASSESSEES TOTAL INCOM E WAS INITIALLY ASSESSED AT RS. 2,89,84,301/-. THEREAFTER, THE ASSESSEE FILED AN APPLICATION U/S 154 OF THE ACT STATING THAT BROUGHT FORWARD LOSS OF RS. 3,72,7 7,332/- AND UNABSORBED DEPRECIATION OF RS. 89,08,926/- PERTAINING TO THE A SSESSMENT YEAR 2002-03 IS TO BE SET OFF AGAINST THE TOTAL INCOME DETERMINED FOR THE ASSESSMENT YEAR 2003-04. ON AN APPLICATION U/S 154 OF THE ACT, MADE BY THE A SSESSEE, THE A.O. PASSED AN ORDER U/S 154 OF THE ACT DATED 12.06.2006 WHEREBY H E SET OFF THE BROUGHT FORWARD LOSS OF ASSESSMENT YEAR 2002-03 TO THE EXTE NT THE TOTAL INCOME OF RS. 21 2,89,84,301/- DETERMINED FOR THE ASSESSMENT YEAR 20 03-04 AND, THUS, ARRIVED AT THE TOTAL INCOME OF RS. NIL. AFTER SET OFF OF THE LOSS OF ASSESSMENT YEAR 2002- 03, THE BUSINESS LOSS AND UNABSORBED DEPRECIATION P ERTAINING TO THAT ASSESSMENT YEAR 2002-03 STILL REMAINED TO BE SET OFF ARE AS UN DER:- (I) UNABSORBED LOSS BROUGHT FORWARD FROM ASSESSMENT YEAR 2002-03 89,08,926/- (II) UNABSORBED DEPRECIATION 82,93,021/- AGGREGATING TOTAL 1,72,01,947/- THE AFORESAID AMOUNT OF RS. 1,72,01,947/- HAS BEEN SET OFF AGAINST THE PROFIT FOR THE ASSESSMENT YEAR 2004-05 BY THE A.O. BEFORE ALLOWING OR DETERMINING THE AMOUNT OF DEDUCTION AVAILABLE TO TH E ASSESSEE U/S 10A OF THE ACT. 32. FROM THE FACTS NARRATED IN IMMEDIATELY PRECEDIN G PARA, IT BECOMES CLEAR THAT IN THE ASSESSMENT YEAR 2003-04, THE ASSESSEE H AS ITSELF MADE A CLAIM TO SET OFF BROUGHT FORWARD LOSSES AGAINST THE INCOME FOR A SSESSMENT YEAR 2003-04 AND NO CLAIM OF DEDUCTION UNDER SECTION 10A WAS MADE WI TH REGARD TO THE PROFIT DETERMINED BEFORE SETTING OFF OF BROUGHT FORWARD LO SS PERTAINING TO THE ASSESSMENT YEAR 2002-03. HOWEVER, IN THE PRESENT AS SESSMENT YEAR 2004-05, THE ASSESSEE HAS ADVANCED A CLAIM THAT DEDUCTION U/S 10 A SHOULD BE CLAIMED BEFORE MAKING SET OFF OF BROUGHT FORWARD UNABSORBED BUSINE SS LOSS AND UNABSORBED DEPRECIATION BY THE RELYING ON FOLLOWING DECISIONS: - 1. NOUS INFOSYSTEMS PVT. LTD. VS. ITO (2008) TIOL 389 ITAT BENCH 2. ENERCON WIND FARMS (KRISHNA) LTD. VS. ACIT (2008) 2 1 SOT 29 (MUM.) 3. ACIT VS. YOKOGAWA INDIA LTD. (2008) TIOL 301 (ITAT) (BANG) 22 33. IN THE CASE OF CIT VS. HIMATASINGIKE SEIDE LTD. (2006) 286 ITR 255 (KARNATAKA), ON WHICH RELIANCE HAS BEEN PLACED BY T HE LD. CIT(A), THE HONBLE KARNATAKA HIGH COURT HAS HELD AS UNDER:- 8. AT THIS STAGE, WE SHOULD NOTICE THE DEFINITION OF TOTAL INCOME IN TERMS OF SECTION 2(45) OF THE INCOME TAX ACT. TOTA L INCOME HAS BEEN DEFINED AS THE TOTAL AMOUNT OF INCOME REFERRED TO I N SECTION 5, COMPUTED IN THE MANNER LAID DOWN IN THIS ACT. 9. SECTION 4 PROVIDES FOR CHARGE OF INCOME TAX. 10. SECTION 5 PROVIDES FOR SCOPE OF TOTAL INCOME. 11. SUB SECTION (1) OF SECTION 5 SAYS THAT SUBJECT TO THE PROVISIONS OF THIS ACT, THE TOTAL INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE D ERIVED WHICH - (A) IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON; OR (B) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE T O HIM IN INDIA DURING SUCH YEAR; OR (C) ACCRUES OR ARISES TO HIM OUTSIDE INDIA DURING SUCH YEAR: PROVIDED THAT IN THE CASE OF A PERSON NOT ORDINARIL Y RESIDENT IN INDIA WITHIN THE MEANING OF SUB-SECTION (6) OF SECTION 6, THE INCOME WHICH ACCRUES OR ARISES TO HIM OUTSIDE INDIA SHALL NOT BE SO INCLUDED UNLESS IT IS DERIVED FROM A BUSINESS CONTROLLED IN OR A PROFESSI ON SET UP IN INDIA. 12. CHAPTER III PROVIDES FOR INCOMES WHICH DO NOT F ORM PART OF TOTAL INCOME. 13. CHAPTER IV PROVIDES FOR COMPUTATION OF TOTAL INCOME . 14. SECTION 32 OF THE INCOME-TAX ACT PROVIDES FOR DEDUC TION ON DEPRECIATION. SECTION 32(2) PROVIDES FOR ADJUSTMENT FOR SUBSEQUEN T YEARS. IF WE SEE SECTION 10B, IT PROVIDES FOR EXEMPTION OF PAYMENT O F TAX WITH REFERENCE TO PROFITS AND GAINS DERIVED BY 100 PER CENT EXPORT-OR IENTED UNDERTAKINGS. TO ARRIVE AT A PROFIT AND GAIN, ONE HAS TO NECESSAR ILY TAKE INTO CONSIDERATION THE TOTAL INCOME IN TERMS OF THE ACT. TO ARRIVE AT THE INCOME ONE HAS TO TAKE INTO CONSIDERATION, THE VARI OUS ADDITIONS AND DELETIONS IN TERMS OF THE ACT. IN FACT, THE PETITIO NER KNOWING FULLY WELL HAS CHOSEN TO TAKE INTO CONSIDERATION THE ALLOWABILITY OF DEPRECIATION FOR THE PURPOSE OF CALCULATING OF TOTAL INCOME. BUT CURIOUS LY AN ARGUMENT HAS NOW BEEN ADVANCED THAT EXEMPTION IN TERMS OF SECTIO N 10B COULD ALSO BE ON COMMERCIAL BASIS NOT NECESSARILY IN TERMS OF THE CALCULATION. WE DO NOT ACCEPT THIS SUBMISSION, SECTION 10B CANNOT BE R EAD IN ISOLATION OF 23 OTHER PROVISIONS. IT IS ONLY AN EXEMPTION PROVISION . EXEMPTION CANNOT BE FANCIFUL AND IT HAS SOME RATIONALE WITH OTHER PROVI SIONS OF THE ACT. THEREFORE, A COMBINED READING OF THE DEFINITION OF EXEMPTION, TOTAL INCOME-TAX LIABILITY DEDUCTABILITY, ETC., ONE HAS T O COME TO A CONCLUSION THAT CALCULATION AS FAR AS POSSIBLE IS TO BE IN TER MS OF THE INCOME-TAX ACT. THAT IS EXACTLY WHAT HAS BEEN DONE BY THE ASSESSEE. HAVING CALCULATED IN A PARTICULAR MANNER, NOW IT DOES NOT LIE IN THE MOU TH OF THE ASSESSEE TO CONTEND CONTRA IN THESE PROCEEDINGS. IT CANNOT BE ARGUED THAT THE CALCULATION SO PROVIDED IS ON A MISTAKEN BASIS OR T HAT COULD BE ON COMMERCIAL BASIS. WE ARE NOT PREPARED TO ACCEPT TH IS ARGUMENT ADVANCED BY THE ASSESSEE. EXEMPTION ALSO HAS TO BE SCRUTINIZED BY THE DEPARTMENT AS OTHERWISE THERE IS EVERY CHANCE OF EX EMPTION BEING MISUSED BY AN ASSESSEE. IT MAY BE TRUE THAT EVEN A FTER TAKING INTO CONSIDERATION, THE UNABSORBED DEPRECIATION, THE ASS ESSEE MAY GET EXEMPTION BUT NONE THE LESS HE CANNOT TAKE ONLY A P ORTION OF DEPRECIATION JUST TO SUIT HIS INCOME FOR THE PURPOSE OF NIL LIAB ILITY AND ADJUST THE BALANCE OF UNABSORBED DEPRECIATION FOR OTHER BUSINE SS INCOME ONCE AGAINST TO SHOW NIL LIABILITY. WHEN THE UNABSORBED DEPRECIATION COULD HAVE BEEN TAKEN FOR ARRIVING AT AN EXEMPTED INCOME, THE ASSESSEE CANNOT PLAY WITH THE FIGURES FOR THE PURPOSE OF SHOWING NI L LIABILITY AS HAS BEEN DONE IN THE CASE ON HAND. THE INTENTION OF THE LEG ISLATURE IS ONLY TO PROVIDE 100 PER CENT EXEMPTION FOR EXPORT INCOME AN D NOT FOR OTHER INCOME. THE PETITIONER BY DIVIDING DEPRECIATION CO NTRARY TO SECTION 32 HAS VIRTUALLY TAKEN EXEMPTION FROM PAYMENT OF TAX E VEN FOR OTHER BUSINESS INCOME IN THE CASE ON HAND. THAT CANNOT B E ALLOWED AS RIGHTLY RULED BY THE COMMISSIONER. THE ALLOWANCE OF THE DE PRECIATION BY THE TRIBUNAL, IN OUR VIEW, IS PREJUDICIAL TO THE INTERE STS OF THE REVENUE AS ARGUED BY HE DEPARTMENT. THE TRIBUNAL HAS TAKEN A N ARROW VIEW OF THE MATTER WITHOUT TAKING INTO CONSIDERATION, THE LAUDA BLE OBJECT OF EXEMPTION AND AT HE SAME TIME PROVIDING FOR TAX LIA BILITY TOWARDS OTHER LIABILITY. THE INTERPRETATION HAS TO BE MEANINGFUL AND ACCEPTABLE AND IT CANNOT BE AGAINST THE INTENTION OF THE LEGISLATION. LEGISLATION NEVER WANTED THE ENTIRE INCOME TO BE EXEMPTED BY TAKING A DVANTAGE OF SECTION 10B OF THE ACT. THE APPROACH OF THE TRIBUNAL TO OU R MIND IS INCORRECT AND, HENCE, WE FIND SUBSTANCE IN THE ARGUMENT OF TH E REVENUE. 34. IN THE LIGHT OF THE AFORESAID DECISION OF HONB LE KARNATAKA HIGH COURT IN THE CASE OF HIMATSINGIKE SEIDE LTD. (SUPRA), WHICH HAS BEEN RENDERED IN THE CONTEXT OF PROVISIONS CONTAINED IN SECTION 10B, WHI CH IS ANALOGOUS TO THE PROVISIONS CONTAINED IN SECTION 10A OF THE ACT, IT IS CLEAR THAT TO ARRIVE AT A PROFIT 24 AND GAIN OF ELIGIBLE UNDERTAKING, ONE HAS TO NECESS ARILY TAKE INTO CONSIDERATION THE TOTAL INCOME IN TERMS OF THE PROVISIONS OF THE INCOME TAX ACT, AND SECTION 10A CANNOT BE READ IN ISOLATION OF OTHER PROVISION OF THE INCOME TAX ACT PERTAINING TO THE MANNER OF COMPUTATION OF PROFIT F OR THE PURPOSE OF DETERMINING TOTAL INCOME UNDER THE INCOME TAX ACT. THE HONBLE HIGH COURT HAS ALSO HELD THAT CALCULATION OF DEDUCTION IS TO BE MADE IN TERM S OF THE PROVISIONS OF INCOME TAX ACT. THEREFORE, THE ASSESSEES CONTENTION THAT THE DEFINITION OF TOTAL INCOME GIVEN U/S 2(45) OF THE ACT CANNOT BE IMPORTED INTO FOR THE PURPOSE OF DETERMINING PROFIT TO BE DEDUCTED FROM THE TOTAL INCOME U/S 10A CANNOT BE ACCEPTED. THE ASSESSEES CONTENTION THAT PROVISIONS OF SECTION 32 (2) PERTAINING TO THE SET-OFF OF BROUGHT FORWARD UNABSORBED DEPRECIATION CANNOT BE A PPLIED WHILE DETERMINING THE PROFIT OF UNDERTAKING U/S 10A IS ALSO NOT TENAB LE, WHICH CONTENTION IS AGAINST THE VERY SCHEME OF THE SECTION 10A READ WITH OTHER PROVISIONS OF THE INCOME TAX ACT. IT IS NOT IN DISPUTE THAT UNDER SECTION 10A, THE DEDUCTION OF PROFIT IS TO BE ALLOWED FROM THE TOTAL INCOME AND, THEREFORE, WHILE DETERMINING PROFIT OF ELIGIBLE UNDERTAKING UNDER SECTION 10A, THE PROVISIONS OF SE CTION 28 TO 44D AND PROVISIONS RELATING TO THE ADJUSTMENT OF BROUGHT FO RWARD LOSSES OF THE SAME ELIGIBLE BUSINESS ARE TO BE TAKEN INTO ACCOUNT AS S O PROPOUNDED IN THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF HIMATSI NGIKE SEIDE LTD. (SUPRA). WE FURTHER OBSERVE THAT MERE BECAUSE THE EFFECT TO THE PROVISIONS OF SECTION 72 ARE TO BE FIRST GIVEN AS AGAINST THE EFFECT TO THE PROVISIONS OF SECTION 32(2), IT WOULD NOT MEAN THAT SECTION 32(2) IS NOT A PART OF THE CHAPTER IV-D CONTAINING 25 PROVISIONS OF SECTION 28 TO SECTION 44D OF THE ACT AND IT SHOULD GO OUT OF THAT RELEVANT CHAPTER IV-D OF THE ACT IN WHICH SECTION 3 2(2) IS INCLUDED. THEREFORE, THE ASSESSEES CONTENTION RAISED IN LINE OF DECISIO N OF ITAT, BANGLORE BENCH IN THE CASE OF KPIT CUMMINS INFOSYSTEMS (INDIA) PVT. L TD. VS. ACIT, WHICH DECISION HAS NOT TAKEN INTO ACCOUNT THE RATIO OF TH E DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF HIMATSINGIKE SEIDE LTD., ARE MISPLACED, AND WE REJECT THE CONTENTION SO ADVANCED BY THE LD. COUNSEL FOR T HE ASSESSEE. 35. IN THE CASE OF ACIT VS. YOKOGAWA INDIA LTD. (SU PRA), THE ISSUE IN DISPUTE WAS WHETHER THE LOSS OF NON-ELIGIBLE UNIT, I.E., NO N-10A UNIT CAN BE SET OFF AGAINST THE INCOME OF ELIGIBLE UNIT, I.E., 10A UNIT. IN TH IS CASE, THE LD. CIT(A) DIRECTED THE A.O. TO ALLOW EXEMPTION UNDER SECTION 10A WITHOUT S ETTING OFF THE LOSSES OF THE NON-10A UNIT. ON AN APPEAL BEFORE THE TRIBUNAL, TH E TRIBUNAL UPHELD THE ORDER OF THE LD. CIT(A) BY OBSERVING AND HOLDING AS UNDER:- 11. SECTION 10A WAS INSERTED BY FINANCE ACT, 2000 W.E.F. 1 ST APRIL, 2009 MENTIONS THE DEDUCTION OF SUCH PROFITS AND GAI NS AS DERIVED BY UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS O R COMPUTER SOFTWARE. THIS SECTION DOES NOT REFER THAT SUCH PROFITS AND G AINS DERIVED BY UNDERTAKING FROM THE EXPORT WILL NOT BE INCLUDED IN THE TOTAL INCOME. UNDER SECTION 10, THE OPERATIVE PART OF THE SECTION IS THAT ANY INCOME FALLING WITHIN THE CLAUSE IN SECTION 10 SHALL NOT B E INCLUDED IN COMPUTING THE TOTAL INCOME. FROM WORDING OF SECTIO NS 10 AND 10A, IT IS CLEAR THAT THE LEGISLATURE WAS FULLY AWARE OF THE M EANING OF THE WORDS AMOUNT NOT TO BE INCLUDED AND THE DEDUCTION TO BE ALLOWED. HENCE, WE ARE NOT INCLINED TO ACCEPT THE CONTENTION OF THE LD. AR THAT SUBSTITUTED SECTION 10A SHOULD ALSO BE INTERPRETED TO MEAN THAT PROFITS AS MENTIONED UNDER SECTION 10A SHOULD NOT BE INCLUD ED IN THE TOTAL INCOME. 12. THE LD. CALCUTTA HIGH COURT IN THE CASE OF ROYA L CALCUTTA TURF CLUB V. CIT (1983) 144 ITR 7091 OBSERVED AT PAGE 71 4 AS UNDER:- 26 IN COMPUTING THE TOTAL INCOME, CERTAIN INCOMES ARE NOT INCLUDED UNDER SECTION 10 OF THE INCOME TAX ACT. IT DEPENDS ON THE PARTICULAR CASE WHERE CERTAIN INC OME, IN RESPECT OF WHICH THE ACT IS MADE INAPPLICABLE TO THE SCHEME OF THE ACT, AND IN SUCH A CASE, THE PROFIT AND LOSS RESULTING FROM SUCH A S OURCE DO NOT ENTER INTO THE COMPUTATION AT ALL. BUT THERE ARE OTHER SOURCE S WHICH FOR CERTAIN ECONOMIC REASONS ARE NOT INCLUDED OR EXCLUDED BY TH E WILL OF THE LEGISLATURE. IN SUCH A CASE WE MUST LOOK TO THE SP ECIFIC EXCLUSION THAT HAS BEEN MADE. 13. IN VIEW OF THE ABOVE REFERRED JUDGMENT, WE HAVE TO CONSIDER THE EXCLUSION OR DEDUCTION AS PER SECTION 10A. AS POINT ED OUT EARLIER, SECTION 10A SPECIFICALLY STATES THAT A DEDUCTION IS TO BE GIVEN. THE DEDUCTION IS IN RESPECT OF PROFITS AND GAINS AND TH E WORD SUCH MENTIONED BEFORE THE PROFIT AND GAINS REFERS TO THE PROFITS AND GAINS OF THE UNDERTAKING, WHICH IS RELATED IN THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE. BEFORE THE WORD UNDERTAKING, IT IS QUALIFIED BY THE WORD AN. IT MEANS THAT IT REFERS TO A SINGLE UND ERTAKING. THE WORDS PROFIT AND GAINS AND ITS COMPUTATION IS MENTIONED UNDER SECTION 29 OF THE INCOME TAX ACT. AS PER SECTION 29, PROFIT AND GAINS OF BUSINESS OR PROFESSION IS TO BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED UNDER SECTION 30 TO 43D. SECTION 70 OF T HE INCOME TAX ACT GOVERNS THE SETTING OFF A LOSS FROM ONE SOURCE AGAI NST INCOME FROM ANOTHER SOURCE UNDER THE SAME HEAD OF INCOME. SECT ION 10A IS NOT PART OF THE SECTION MENTIONED IN SECTION 29 OF THE INCOM E TAX ACT. HENCE, BUSINESS LOSSES OF THE UNDERTAKING WHOSE INCOME IS NOT EXEMPT UNDER SECTION 10A CANNOT BE SET OFF TO ASCERTAIN THE PROF ITS AND GAINS DERIVED BY AN UNDERTAKING FROM THE EXPORT OF COMPUTER SOFTW ARE. HENCE, BUSINESS LOSSES OF OTHER UNITS WILL NOT BE SET OFF AGAINST THE PROFITS OF THE UNDERTAKING ENGAGED IN EXPORT OF COMPUTER SOFTW ARE FOR THE PURPOSE OF DETERMINING THE ALLOWABLE DEDUCTION UNDER SECTIO N 10A OF HT INCOME TAX ACT. UNABSORBED BUSINESS LOSS IS TO BE SET OFF UNDER SECTION 72 OF THE INCOME TAX ACT AND THE SAME IS NOT MENTIONED UN DER SECTION 29 OF THE INCOME TAX ACT. HENCE, UNABSORBED BUSINESS LOS SES WILL NOT BE SET OFF AGAINST THE PROFIT OF THE UNDERTAKING ENGAGED I N THE EXPORT OF COMPUTER SOFTWARE FOR THE PURPOSE OF ASCERTAINING T HE DEDUCTION ADMISSIBLE UNDER SECTION 10A. 14. AS PER SECTION 72(2), UNABSORBED BUSINESS LOSS IS TO BE FIRST SET OFF AND THEREAFTER UNABSORBED DEPRECIATION TREATED AS CURRENT YEARS DEPRECIATION UNDER SECTION 32(2) IS TO BE SET OFF. FOR COMPUTING DEDUCTION UNDER SECTION 10A, WE ARE CONCERNED ONLY WITH THE PROFIT DERIVED FROM EXPORT OF COMPUTER SOFTWARE. AS ALREA DY OBSERVED UNABSORBED BUSINESS LOSSES OF OTHER UNITS CANNOT BE SET OFF AND THEREFORE, UNABSORBED DEPRECIATION WHICH IS TO BE S ET OFF AFTER 27 UNABSORBED BUSINESS LOSS AS PER SECTION 72(2) ALSO CANNOT BE SET OFF FOR ASCERTAINING THE DEDUCTION UNDER SECTION 10A. 15. IN THE INSTANT CASE, THERE IS NO UNABSORBED DEP RECIATION OR UNABSORBED BUSINESS LOSS IN RESPECT OF SOFTWARE SER VICES DIVISION AND THEREFORE PROFITS AND GAINS OF THE SOFTWARE SERVICE S DIVISION WILL BE EXEMPT UNDER SECTION 10A WITHOUT SETTING OFF THE LO SS OF OTHER DIVISION OR THE SETTING OFF OF CARRY FORWARD LOSSES OF OTHER DIVISION. IN VIEW OF ABOVE DISCUSSION WE HOLD THAT LD. CIT(A) WAS JUSTIF IED IN DIRECTING THE ASSESSING OFFICER TO ALLOW EXEMPTION UNDER SECTION 10A WITHOUT SETTING OFF LOSS OF NON-10A UNIT AND CONSEQUENTIALLY ALLOWE D CARRY FORWARD OF SUCH LOSSES AND DEPRECIATION OF NON-10A UNIT. IN THE RESULT, THE APPEAL IS DISMISSED. 36. FROM THE SAID DECISION, IT IS CLEAR THAT THE AS SESSEES CONTENTION THAT PROFIT OF THE ELIGIBLE UNIT, I.E., 10A UNIT SHOULD NOT BE INCLUDED IN THE TOTAL INCOME HAS BEEN REJECTED BY THE TRIBUNAL. AFTER AMENDMENT MAD E BY THE FINANCE ACT, 2000, W.E.F. 1 ST APRIL, 2001, SECTION 10A MENTIONS THE DEDUCTION OF SUCH PROFITS AND GAINS AS DERIVED BY UNDERTAKING FORM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE, AND IT DOES NOT REFER THAT SUCH PROFITS A ND GAINS DERIVED BY UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER S OFTWARE WILL NOT BE INCLUDED IN THE TOTAL INCOME. THUS, SECTION 10A SPECIFICALLY S TATES THAT A DEDUCTION IS TO BE GIVEN FROM THE TOTAL INCOME. THE TRIBUNAL FURTHER OBSERVED THAT SECTION 10A REFERS TO ELIGIBLE UNDERTAKING. THUS, THE BUSINESS LOSSES OF THE UNDERTAKING, WHOSE INCOME IS NOT EXEMPT UNDER SECTION 10A, CANNOT BE S ET OFF TO ASCERTAIN THE PROFITS AND GAINS DERIVED BY AN UNDERTAKING FROM THE EXPORT OF COMPUTER SOFTWARE, I.E., 10A UNIT, AND HENCE, BUSINESS LOSSES OF OTHER UNITS WILL NOT BE SET OFF AGAINST THE PROFITS OF THE UNDERTAKING ENGAGED IN EXPORT OF COM PUTER SOFTWARE FOR THE PURPOSE OF DETERMINING THE ALLOWABLE DEDUCTION U/S 10A OF T HE ACT. HOWEVER, THIS DECISION IS OF NO HELP TO THE ASSESSEE, RATHER IT S UPPORTS THE REVENUES STAND 28 INASMUCH AS THE DISPUTE IN THE PRESENT CASE IS ABOU T THE MATTER WHETHER UNABSORBED DEPRECIATION AND BUSINESS LOSS OF SAME E LIGIBLE UNIT, I.E., 10A UNIT BROUGHT FORWARD FROM EARLIER YEAR PERTAINING TO THE YEARS AFTER THE ASSESSMENT YEARS 2001-02, CAN BE SET OFF AGAINST THE PROFITS O F THE SAME ELIGIBLE UNIT FOR THE PURPOSE OF DETERMINING THE ALLOWABLE DEDUCTION U/S 10A. THE ABOVE-MENTIONED DECISION OF THE TRIBUNAL MAKES IT VERY CLEAR VIDE P ARA 15 OF THE ORDER THAT IN THAT CASE BEFORE THE TRIBUNAL, THERE BEING NO UNABSORBED DEPRECIATION OR UNABSORBED BUSINESS LOSS IN RESPECT OF SOFTWARE SERVICES DIVIS IONS AND, THEREFORE, PROFITS AND GAINS OF THE SOFTWARE SERVICES DIVISIONS WILL BE EX EMPT UNDER SECTION 10A WITHOUT SETTING OFF THE LOSS OF OTHER DIVISION. THUS, THE TRIBUNAL WAS CONCERNED WITH THE LOSSES OF OTHER DIVISION OTHER THAN THE ELIGIBLE DI VISION, AND HAS SPECIFICALLY POINTED OUT THAT THERE WAS NO UNABSORBED DEPRECIATI ON OR UNABSORBED BUSINESS LOSSES IN RESPECT OF ELIGIBLE UNIT, I.E., DIVISION OF SOFTWARE SERVICES. HAD THERE BEEN UNABSORBED BUSINESS LOSSES OR DEPRECIATION IN RESPECT OF ELIGIBLE UNIT, THE SAME WOULD HAVE BEEN ALLOWED TO BE SET OFF AGAINST THE PROFIT OF SAME ELIGIBLE UNIT FOR THE PURPOSE OF DETERMINING THE ALLOWABLE D EDUCTION OF PROFIT IN RESPECT OF ELIGIBLE UNIT U/S 10A OF THE ACT. 37. IN THIS VIEW OF THE MATTER AND APPLYING THE RAT IO DECIDENDI OF THE ABOVE MENTIONED DECISION OF THE TRIBUNAL IN THE CASE OF A CIT VS. YOKOGAWA INDIA LTD., WE HOLD THAT, ON THE FACTS OF THE PRESENT CASE, THE AFORESAID DECISION GOES AGAINST THE ASSESSEE RATHER THAN SUPPORTING THE ASSESSEES CASE. 29 38. SIMILARLY, THE DECISION OF ITAT, CHENNAI A BE NCH IN THE CASE OF CHANGEPOND TECHNOLOGIES (P) LTD. VS. ACIT (2008) 2 2 SOT 220 (TMAD), THE ISSUE FOR CONSIDERATION WAS WHETHER CIT(A) ERRED IN LAW IN DIRECTED THE A.O. TO ALLOW DEDUCTION UNDER SECTION 10A WITHOUT SETTING O FF BROUGHT FORWARD AND CURRENT YEAR LOSSES OF NON-SECTION 10A UNIT AND NOT WITH REGARD TO THE SETTING OFF OF BROUGHT FORWARD BUSINESS LOSSES OR UNABSORBED DE PRECIATION OF THE 10A UNIT AGAINST THE PROFIT OF SAME 10A UNIT. 39. IN THIS DECISION, THE TRIBUNAL FOLLOWED THE DEC ISION OF THE TRIBUNAL IN THE CASE OF CIT VS. YOKOGAWA INDIA LTD. AND HAS OBSERVE D AND HOLD AS UNDER:- 20. AFTER CONSIDERING THE RIVAL CONTENTIONS, THE M ATERIALS ON RECORD AND THE LEGAL PROPOSITIONS ON THE ISSUE WE NOTE THA T A PERUSAL OF THE PROVISIONS CONTAINED IN SECTION 10A ALONG WITH SUB- SECTION (6) SHOWS THAT IT IS A DISTINCT AND SEPARATE DEEMING PROVISION WHI CH LAID DOWN A SPECIAL MANNER OF COMPUTATION OF PROFITS AND GAINS ENTITLED FOR DEDUCTION UNDER SECTION 10A OF THE ACT. MOREOVER THE SUB-SECTION ( 6) OF SECTION 10A IS OF AN OVERRIDING NATURE PROVIDING SPECIFICALLY THAT DU RING EACH OF THE ASSESSMENT YEARS IN THE TAX HOLIDAY PERIOD IN WHICH THE ASSESSEE IS ENTITLED TO DEDUCTION UNDER SECTION 10A OF THE ACT THIS PROVISION WILL BE APPLIED AS IF THE UNDERTAKING IS AN INDEPENDENT UNI T AND IS THE ONE AND THE ONLY SOURCE OF INCOME OF THE ASSESSEE. THEREFOR E, WHILE COMPUTING THE DEDUCTION UNDER SECTION 10A THE PROFITS AND GAINS O F THAT UNDERTAKING FOR THE PURPOSE OF DETERMINING THE QUANTUM OF DEDUCTION IS TO BE COMPUTED IF SUCH ELIGIBLE ACTIVITY OF THE SAID UNDERTAKING IS T HE ONLY SOURCE OF INCOME OF THE ASSESSEE AND AS SUCH BEFORE COMPUTING THE DE DUCTION UNDER SECTION 10A THE INCOME, PROFIT AND LOSS PERTAINING TO THE O THER ACTIVITIES OF THE ASSESSEE CANNOT BE TAKEN INTO CONSIDERATION. AS PER THE IT RETURN ITR-6 THE DESCRIPTION OF COLUMN 34 IS PROFIT OR LOSS BEFO RE DEDUCTION UNDER SECTION 10A/10AA/10D/10DA WHICH MEANS THE AMOUNT OF DEDUCTION UNDER SECTION 10A WOULD BE FOR EACH UNDERTAKING SEP ARATELY AND THE DEDUCTION UNDER SECTION 10A IS TO BE ALLOWED WITHOU T SETTING OFF THE BROUGHT FORWARD LOSSES. AFTER THE AMENDMENT W.E.F. 1 ST APRIL, 2001 ONWARDS THE BROUGHT FORWARD LOSS PERTAINING TO THE SPECIFIC UNDERTAKING ELIGIBLE FOR DEDUCTION UNDER SECTION 10A ARE ALLOWE D TO BE CARRIED FORWARD AND SET OFF AGAINST THE INCOME OF SUCH UNDE RTAKING IN THE FUTURE 30 ASSESSMENT YEAR BUT WITHIN THE BLOCK PERIOD WHICH M EANS THAT DURING THE TAX HOLIDAY PERIOD IF ANY LOSS IS TO BE CARRIED FOR WARD AND SET OFF WITHIN THE BLOCK PERIOD ITSELF. THUS IT IS CLEAR THAT THE COMPUTATION OF PROFIT OF THE SPECIFIC UNDERTAKING FOR THE PURPOSE OF COMPUTA TION OF DEDUCTION IS TO BE AS PER THE PROVISIONS OF SECTION 10A. ONLY AFTER THE COMPUTATION OF DEDUCTION UNDER THIS SECTION, CARRY FORWARD OF LOSS ES CAN BE SET OFF AGAINST THE REMAINING INCOME OF THE SAID UNDERTAKIN G. 40. THEREFORE, THIS DECISION WAS RENDERED IN THE LI GHT OF A DISPUTE WHETHER PROFIT AND LOSSES PERTAINING TO THE OTHER ACTIVITIE S OR UNITS OF THE ASSESSEE CAN BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF COMPUTI NG DEDUCTION IN RESPECT OF ELIGIBLE UNIT U/S 10A OF THE ACT. THUS, THIS DECIS ION IS ALSO OF NO HELP TO THE ASSESSEES CASE WHERE THE QUESTION INVOLVED IS ALTO GETHER DIFFERENT ABOUT SETTING OFF OF UNABSORBED LOSSES OR DEPRECIATION OF ELIGIBL E 10A UNIT AGAINST THE PROFIT OF SAME ELIGIBLE 10A UNIT. 41. IN THE LIGHT OF THE AFORESAID TWO DECISIONS IN THE CASE OF CIT VS. YOKOGAWA INDIA LTD. (SUPRA) AND CHANGEPOND TECHNOLO GIES (P) LTD. VS. ACIT (SUPRA), AND IN THE LIGHT OF DECISION OF HONBLE KA RNATAKA HIGH COURT IN THE CASE OF CIT VS. HIMATSINGIKE SEIDE LTD. (SUPRA), IT IS, THUS, CLEAR THAT THE UNABSORBED DEPRECIATION OR UNABSORBED BUSINESS LOSS IN RESPECT OF ELIGIBLE 10A UNIT OR DIVISION OR UNDERTAKING IS TO BE SET OFF AG AINST THE PROFIT OF THE SAME ELIGIBLE 10A UNIT OR UNDERTAKING FOR THE PURPOSE OF DETERMINING THE AMOUNT OF DEDUCTION AVAILABLE U/S 10A OF THE ACT. 42. WITH REGARD TO THE DECISION OF ITAT, BANGALORE BRANCH IN THE CASE OF KPIT CUMMINS INFOSYTEMS (BANGLORE) (P) LTD. VS. ACI T (2009) 120 TTJ (BANG.) 956, WE FIND THAT THE SAME DECISION IS REND ERED IN FAVOUR OF THE ASSESSEE 31 WITHOUT APPLYING THE RATIO OF THE DECISION OF HONB LE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. HIMATSINGIKE SEIDE LTD. (SUPRA) . IT IS WELL SETTLED THAT THE DECISION OF HIGH COURT HAS A BINDING FORCE AS COMPA RED TO THE DECISION OF TRIBUNAL. THERE IS NO DECISION OF ANY OTHER HIGH C OURT OR JURISDICTIONAL HIGH COURT CONTRARY TO THE DECISION OF KARNATAKA HIGH CO URT. IN THIS VIEW OF THE MATTER, THE AFORESAID DECISION OF TRIBUNAL IN THE C ASE OF KPIT CUMMINS INFOSYSTEMS (BANGALORE) (P) LTD. VS. ACIT CANNOT BE APPLIED TO THE PRESENT CASE. 43. THE DECISION OF ITAT, MUMBAI BENCH IN THE CASE OF ENERCON WIND FARMS (KRISHNA) LTD. VS. ACIT (SUPRA) WAS RENDERED IN RESPECT OF SETTING OFF THE BUSINESS LOSS BROUGHT FORWARD FORM ASSESSMENT YEAR 1999-2000, WHICH IS TO BE CONSIDERED ON A DIFFERENT FOOTING IN THE LIGHT OF I NSERTION OF WORDS ENDING BEFORE THE 1 ST DAY OF APRIL, 2001 IN SUB-SECTION (6) OF SECTION 10A BY THE FINANCE ACT, 2000. AFTER THE AMENDMENT W.E.F. 1 ST APRIL, 2001 ONWARDS, THE BROUGHT FORWARD LOSS PERTAINING TO THE SPECIFIC UND ERTAKING ELIGIBLE FOR DEDUCTION UNDER SECTION 10A ARE ALLOWED TO BE CARRI ED FORWARD AND SET OFF AGAINST THE INCOME OF SUCH UNDERTAKING IN THE FUTUR E ASSESSMENT YEAR AND SET OFF WITHIN THE BLOCK PERIOD ITSELF. 44. IN THE LIGHT OF THE DISCUSSION MADE ABOVE, WE, THEREFORE, DO NOT FIND ANY JUSTIFICATION CAUSE TO INTERFERE WITH THE ORDER OF THE LD. CIT(A) WHEREBY THE LD. CIT(A) HAS UPHELD THE ORDER OF THE A.O. IN SETTING OFF OF UNABSORBED BUSINESS LOSSES OR UNABSORBED DEPRECIATION IN RESPECT OF ELI GIBLE UNIT BROUGHT FORWARD 32 FROM ASSESSMENT YEAR 2002-03 AGAINST THE PROFIT OF SAME ELIGIBLE UNIT FOR THE PURPOSE OF DETERMINING THE AMOUNT OF DEDUCTION AVAI LABLE U/S 10A TO THE ASSESSEE IN THE PRESENT ASSESSMENT YEAR 2004-05. T HEREFORE, THIS GROUND RAISED BY THE ASSESSEE IS DECIDED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. 45. IN THE RESULT, ALL THE APPEALS FILED BY THE ASS ESSEE AND AS WELL AS BY THE REVENUE ARE DISMISSED. 46. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 17TH DECEMBER, 2009. (K.D. RANJAN) ACCOUNTANT MEMBER (C.L. SETHI) JUDICIAL MEMBER DATED: 17 TH DECEMBER, 2009. MAMTA COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. BY ORDER DEPUTY REGISTRAR