DCIT, New Delhi V. M/s. Birla Soft India Ltd., New Delhi

ITA 4713/DEL/2011

• Counselvise Citation: 471320114 RSA 2011
• Duration Of Justice: 2 year(s) 6 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-05-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 13-03-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 28-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Assessee Lawyers: AJAY VOHRA
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; Double taxation relief; International transaction; Question of law; Wholly owned subsidiary; Unabsorbed depreciation
• Section: 92C; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI A.D. JAIN, JUDICIAL MEMBER ITA NO.4713/DEL/2011 ASSESSMENT YEAR : 2005-06 DY. COMMISSIONER OF INCOME TAX, CIRCLE 3 (1), NEW DELHI. VS. BIRLA SOFT INDIA LTD., 8 TH FLOOR, BIRLA TOWERS, 25, BARAKHAMBA ROAD, NEW DELHI. PAN : AAACB2769E (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA & SHRI NEERAJ JAIN, ADVOCATES,& SHRI PUNEET CHUGH, CA DEPARTMENT BY : SHRI PEEYUSH JAIN, CIT, DR ORDER PER A.D. JAIN, JUDICIAL MEMBER: THIS IS DEPARTMENTS APPEAL FOR AY 2005-06 AGAINST THE ORDER DATED 26.08.2011 PASSED BY THE CIT (A)-XX, NEW DELHI, TAKING THE FOL LOWING GROUNDS 1. THE ORDER OF THE LD. CIT (A) IS ERRONEOUS & CON TRARY TO FACTS & LAW. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, LEARNED CIT (APPEALS) HAS ERRED IN DIRECTING THE A.O. TO ALLOW DEDUCTION U/S 10A IN RESPECT OF GE-GDC STP UNIT. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, LEARNED CIT (APPEALS) HAS ERRED IN DIRECTING THE A.O. TO ALLOW THE SET OFF OF LOSSES ARISING OUT OF STP UNITS AGAINST THE INCOME FROM THE STP UNITS. ITA NO.4713/DEL/2011 2 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, LEARNED CIT (APPEALS) HAS ERRED IN DIRECTING THE A.O. TO ALLOW CARRY FORWARD OF UNABSORBED LOSSES AND DEPRECIATION OF STP UNIT. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, LEARNED CIT (APPEALS) HAS ERRED IN DIRECTING THE A.O. TO ALLOW TRAVELLING EXPENSES OF RS.11,07,62,619/-. 5.1 THE LD. CIT (A) HAS INTER-ALIA IGNORED THE FACT THAT IN SPITE OF BEING SPECIFICALLY REQUIRED THE ASSESSEE DID NOT FILE BIL LS/VOUCHERS OF TRAVELLING EXPENSES EXCEEDING RS.1,00,000/- AND THAT IN THE AB SENCE OF THE BILLS AND VOUCHERS THE GENUINENESS OF THE EXPENSES CANNOT BE ACCEPTED. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, LEARNED CIT (APPEALS) HAS ERRED IN DIRECTING THE A.O. TO TREAT THE MISCELLANEOUS INCOME IN THE SHAPE OF RECOVERY OF NOTICE PAY AS INCOME OF THE UN IT ELIGIBLE FOR DEDUCTION U/S 10A OF THE IT ACT. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, LEARNED CIT (APPEALS) HAS ERRED IN DELETING THE ADDITION OF RS. 8,59,418/- MADE ON ACCOUNT OF EXCESS CLAIM OF DEPRECIATION ON COMPUTER PERIPHERAL S. 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, LEARNED CIT (APPEALS) HAS ERRED IN DIRECTING THE A.O. TO ALLOW CREDIT FOR TAXES PAID IN AUSTRALIA. SINCE THIS CLAIM HAS NOT BEEN EXAMINED B Y THE AO, THE CIT (A) SHOULD HAVE HELD THE CLAIM MAY BE ALLOWED AFTER EXAMINATIO N OF THE SAME BY THE AO. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, LEARNED CIT (APPEALS) HAS ERRED IN DELETING THE ADDITION OF RS. 7,25,40,785/- MADE U/S 92 CA (3) OF THE IT ACT ON ACCOUNT OF TP ADJUSTMENTS. 2. AS PER THE RECORD, THE ASSESSEE IS ENGAGED IN TH E ACTIVITIES OF SOFTWARE DEVELOPMENT AND RELATED SERVICES. IT IS A 100% SUBS IDIARY OF BIRLA SOFT ENTERPRISES, INDIA, WHICH, IN TURN, IS A 100% SUBSIDIARY OF BIRL A SOFT INC., USA. THE ASSESSEE PROVIDES CUSTOMIZED SOFTWARE TO ITS RELATED PARTIES . IT DOES OFFSHORE, I.E., ON SITE DELIVERY OF THE SOFTWARE ALSO. IT IS PAID AT THE COST PLUS A GREED MARK UP AND REIMBURSEMENT OF OVERHEAD EXPENSES BY ITS AES. IT ENTERED INTO THE F OLLOWING INTERNATIONAL TRANSACTIONS:- RELATED UNRELATED TOTAL NOIDA UNIT I REVENUE 67502710 10128297 81983020 TOTAL COST 151955943 43812111 193768054 OPERATING PROFIT (84453233) (33683814) (113785034) OP/TC -55.58% -76.88% 58.12% GE-GDC REVENUE 446188705 75924401 522113106 ITA NO.4713/DEL/2011 3 NOIDA STP TOTAL COST 334451977 86386255 420838232 OPERATING PROFIT 111736728 (10461854) 101274874 OP/T 33.41% -12.11% 24.07% NOIDA UNIT 2 REVENUE 184856979 18957315 210339132 TOTAL COST 185551703 33041904 218593607 OPERATING PROFIT (694724) (14084589) (8254475) OP/TC -0.37% -42.63% -3.78% CHENNAI REVENUE 171075757 64143704 26525L83 TOTAL COST 210078815 53680864 2637596791 OPERATING PROFIT (39003058) 10462840 1491904 OP/TC -18.57% 19.49% 0.57% NON STP REVENUE NIL 51775401 517754018 TOTAL COST NIL 493678670 493678670 OPERATING PROFIT NIL 2407538 2407538 OP/TC NIL 4.88% 4.88% COMPANY AS A WHOLE REVENUE 869624151 686907736 1598448572 TOTAL COST 882018439 710599803 1593597143 OPERATING PROFIT (12414287) (23692067) 4851429 OP/TC -1.41% -3.33% 0.30% 3. THE ASSESSEE BENCHMARKED ITS INTERNATIONAL TRANS ACTIONS USING THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE ME THOD (MAM) WITH OPERATING PROFIT/OPERATING COST (OP/OC) AS THE PROFIT LEVEL I NDICATOR (PLI). IT HAD RELATED PARTY TRANSACTIONS AS WELL AS UNRELATED PARTY TRANSACTION S IN THE SAME LINE OF BUSINESS. AS SUCH, INTERNAL TNMM WAS EMPLOYED, I.E., MARGIN ON C OST EARNED FROM THE UNRELATED PARTY TRANSACTIONS WAS COMPARED WITH THE MARGIN ON COST EARNED FROM THE RELATED PARTIES. THE TP DOCUMENTATION OF THE ASSESSEE CONCL UDED THAT THE OPERATING MARGIN OF THE ASSESSEE FROM SOFTWARE SERVICES TO UNRELATED PA RTIES WAS 2.51%, WHEREAS THE ITA NO.4713/DEL/2011 4 MARGIN OF THE ASSESSEE FROM ASSOCIATED ENTERPRISES WAS 2.04% AND THE OPERATING PROFIT EARNED BY THE ASSESSEE BEING, ACCORDING TO THE ASSE SSEE, WITHIN (-) 2.62% AND 7.63%, I.E., (+)/(-) 5% RANGE, THE TRANSACTIONS BETWEEN TH E ASSESSEE AND ITS AES WERE CONSIDERED AT ARMS LENGTH, AS PER THE PROVISO TO S ECTION 92C (2) OF THE IT ACT. THE AO MADE REFERENCE TO THE TPO FOR THE YEAR UNDER CONSID ERATION, I.E., AY 2005-06 TO DETERMINE THE ARMS LENGTH PRICE U/S 92CA (3) OF TH E IT ACT IN RESPECT OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE DURING TH E RELEVANT FINANCIAL YEAR, I.E., FY 2004-05. 4. GROUND NO.1 IS GENERAL. 5. APROPOS GROUND NO.2, THE ASSESSEE HAD INITIALLY SET UP AN UNDERTAKING AT 2 ND FLOOR, BLOCK-III, GANGA SHOPPING COMPLEX, SECTOR 29 , NOIDA IN THE YEAR 1995, VIDE STPI APPROVAL NO.5 (7)/94/17/2260 DATED 29 TH NOVEMBER, 1994. IN THE YEAR 1999, HOWEVER, THERE CAME ABOUT CHANGES IN THE EQUITY HOL DING STRUCTURE OF THE ASSESSEE AND GE TOOK EQUITY PARTICIPATION IN BIRLASOFT INC, THE PARENT COMPANY OF THE ASSESSEE. AS A RESULT OF GE PICKING UP A STAKE IN THE ULTIMATE PAR ENT COMPANY, AGGRESSIVE BUSINESS PLANS WERE PREPARED FOR GROWTH, AS SUBSTANTIAL BUSI NESS WAS EXPECTED FROM THE OVERSEAS AFFILIATES OF GE. FOR RENDERING SOFTWARE SERVICES TO THIS NEW CLIENT BASE, A NEW INDEPENDENT AND INTEGRATED UNIT WAS PROPOSED TO BE SET UP. CONSEQUENTLY, THE ASSESSEE APPLIED FOR THE REGISTRATION OF A NEW STP UNDERTAKING (THE GE-GDC UNDERTAKING) IN NOVEMBER, 2000. THE APPROVAL TO THI S NEW UNIT WAS GRANTED BY SOFTWARE TECHNOLOGY PARKS OF INDIA, AN AUTONOMOUS BODY UNDER THE MINISTRY OF INFORMATION TECHNOLOGY, GOVERNMENT OF INDIA ON 4 TH DECEMBER, 2000 VIDE APPROVAL NO. REF. NO. PCMG/PSE/05/025-STPN/518. ON THESE FACTS, IT WAS SU BMITTED BY THE ASSESSEE BEFORE THE AO THAT THE NEW GE-GDC UNIT WAS A SEPARATE UNDE RTAKING FOR THE PURPOSE OF DEDUCTION UNDER SECTION 10A OF THE ACT. THE AO H AS HELD THAT THE NEW BUSINESS STARTED BY THE ASSESSEE COMPANY WAS AN EXTENSION OF THE EXISTING BUSINESS, SINCE BOTH THE UNITS WERE SITUATED IN THE SAME BUILDING AND DO ING THE SAME BUSINESS, I.E. BOTH THE UNITS WERE PRODUCING SOFTWARE ITEMS AND EXPORTING T HE SAME. THIS ORDER OF THE AO IS SIMILAR TO THE EARLIER ORDER OF THE AO FOR THE AY 2 003-04. THE FINDING OF THE AO FOR THAT YEAR WAS THAT THE OLD AND THE NEW UNITS WERE IDENTI CAL EVEN AS PER THE SUBMISSION OF THE ITA NO.4713/DEL/2011 5 ASSESSEE BEFORE THE AO THAT THE SITTING CAPACITY AT THE EXISTING FACILITY WAS LIMITED AND THEREFORE THE ASSESSEE STARTED THE NEW UNIT TO MEET THE INCREASED CLIENT BASE. AS SUCH, THE AO CAME TO THE CONCLUSION THAT IT WAS AN EXTENS ION OF THE EXISTING BUSINESS. 6. THE LD. CIT(A) DIRECTED THE AO TO GIVE THE BENEF IT OF SECTION 10A OF THE ACT TO THE GE-GDC UNIT OF THE ASSESSEE. 7. AGGRIEVED, THE DEPARTMENT HAS RAISED GROUND NO.2 . 8. THE LD. DR HAS CONTENDED THAT THE LD. CIT (A) HA S ERRED IN DIRECTING THE AO TO ALLOW DEDUCTION U/S 10A TO THE ASSESSEE IN RESPECT OF ITS GE-GDC STP UNIT; THAT THE LD. CIT (A) HAS FAILED TO TAKE INTO CONSIDERATION THAT THE NEW UNIT STARTED BY THE ASSESSEE WAS SITUATED IN THE SAME BUILDING AS HOUSED THE ASS ESSEES EXISTING UNIT; THAT THE LD. CIT (A) ALSO FAILED TO APPRECIATE THAT BOTH THE UNI TS WERE DOING THE SAME BUSINESS; THAT IN THIS MANNER, THE LD. CIT (A) FAILED TO COMPREHEN D THAT THE OLD UNIT AND THE NEW UNIT OF THE ASSESSEE WERE IDENTICAL AND THAT AS SUCH, THE N EW BUSINESS STARTED BY THE ASSESSEE COMPANY WAS BUT AN EXTENSION OF ITS EXISTI NG BUSINESS. 9. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER H AND, HAS PLACED STRONG RELIANCE ON THE IMPUGNED ORDER . IT HAS BEEN CONTENDED THAT THE ISSUE STANDS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE IN THE ASSESSEES OWN CAS E, BY THE TRIBUNAL ORDERS FOR AYS 2003-04, 2006-07 AND 2008-09. IT HAS FURTHER BEEN S UBMITTED THAT THE DEPARTMENTS APPEAL ON THIS VERY ISSUE ALSO STANDS DISMISSED BY THE HONBLE DELHI HIGH COURT. COPIES OF THESE ORDERS HAVE BEEN PLACED ON RECORD. 10. WHILE COMING TO THE CONCLUSION THAT THE NEW BUS INESS OF THE ASSESSEE WAS ONLY AN EXTENSION OF ITS EXISTING BUSINESS, THE AO FOLLO WED THE ASSESSMENT ORDER IN THE ASSESSEES CASE FOR AY 2003-04. IT WAS HELD THAT SI NCE BOTH THE UNITS WERE SITUATED IN THE SAME BUILDING AND WERE DOING THE SAME BUSINESS, I.E., PRODUCTION OF SOFTWARE ITEMS AND EXPORT THEREOF, BOTH THE UNITS WERE IDENTICAL. HOWEVER, FOR AY 2003-04, THE MATTER TRAVELLED UPTO THE TRIBUNAL AND THE TRIBUNAL HELD T HAT THE FIRST STP AND THE SECOND STP UNDERTAKINGS OF THE ASSESSEE WERE TO BE TREATED AS SEPARATE UNDERTAKINGS IN ACCORDANCE WITH THE PARAMETERS LAID DOWN IN SECTION 10A OF THE ACT. A COPY OF THE SAID ORDER HAS BEEN PLACED AT PAGES 557-578 OF THE ASSES SEES PAPER BOOK. THEREIN (APB ITA NO.4713/DEL/2011 6 572-573, PARA 2.10), IT WAS HELD THAT VARIOUS JUDIC IAL PRONOUNCEMENTS, AS RELIED ON BY THE ASSESSEE, HAD HELD THAT WHERE A NEW UNDERTAKING HAS BEEN FORMED WITH FRESH CAPITAL AND INVESTMENT WITH A MOTIVE TO INCREASE TH E PRODUCTION CAPACITY AND EXPAND THE BUSINESS, IT CANNOT BE SAID THAT THE NEW UNDERTAKIN G WAS NOT A NEW INDUSTRIAL UNIT BY ITSELF; AND THAT ESTABLISHMENT OF A NEW INDUSTRIAL UNIT AS A PART OF ALREADY EXISTING INDUSTRIAL ESTABLISHMENT MAY RESULT IN AN EXPANSION OF THE INDUSTRY, BUT IF THE ONLY ESTABLISHED UNIT ITSELF IS AN INTEGRATED UNIT IN WH ICH NEW PLANT AND MACHINERY ARE PUT UP AND THE SAME ITSELF, INDEPENDENTLY OF THE OLD UNIT, IS CAPABLE OF PRODUCTION OF GOODS, THEN IT CAN BE CLASSIFIED AS A NEWLY ESTABLISHED IN DUSTRIAL UNDERTAKING. ON THIS BASIS, THE TRIBUNAL HELD THAT EVEN IF A NEW UNIT WAS ESTABLISH ED BY THE ASSESSEE COMPANY AS EXPANSION OF ITS EXISTING UNIT, SUBSTANTIAL FRESH C APITAL HAVING BEEN INVESTED IN THE SAID UNIT AND IT WAS CAPABLE OF DOING BUSINESS OF ITS OW N, INDEPENDENT OF THE OLD UNIT, THE SAME WAS ELIGIBLE TO BE TREATED AS A NEWLY ESTABLIS HED UNDERTAKING; AND THAT THEREFORE, THE CIT (A) WAS NOT CORRECT IN HOLDING THAT BOTH TH E UNITS WERE LIABLE TO BE TREATED AS ONE UNIT FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A OF THE ACT. 11. THE AFORESAID TRIBUNAL DECISION FOR AY 2003-04 IN THE ASSESSEES CASE WAS FOLLOWED BY HE TRIBUNAL IN THE ASSESSEES CASE FOR AY 2006-07. A COPY OF THE TRIBUNAL ORDER IN THE ASSESSEES CASE FOR AY 2006-07 HAS BEE N PLACED AT APB 585-597. IT IS REPORTED AS 136 TTJ 505 (DEL). THEREIN (PARA 5.7, A T PAGE 512 OF THE REPORT, AS CONTAINED AT APB 589), THE TRIBUNAL FOLLOWED ITS AF ORESAID ORDER FOR AY 2003-04 AND AGAIN DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE, HOLDING THAT THE NEW UNIT OF THE ASSESSEE WAS TO BE TREATED AS SEPARATE AND INDEPEND ENT UNIT FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A OF THE ACT. THE AO WAS DIRECTED TO ALLOW DEDUCTION U/S 10A IN RESPECT OF THE ASSESSEES NEW UNIT SET UP AT THIRD FLOOR, BLOCK-3, SECTOR 29, NOIDA. IT IS THE AFORESAID TWO TRIBUNAL ORDERS IN T HE ASSESSEES OWN CASE, I.E., FOR AYS 2003-04 AND 2006-07, WHICH HAVE BEEN FOLLOWED BY TH E CIT (A) IN ALLOWING THE ASSESSEES GROUND OF APPEAL IN THIS REGARD AND DIRE CTING THE AO TO GIVE THE BENEFIT OF SECTION 10A OF THE ACT TO THE GE-GDC STP UNIT OF TH E ASSESSEE. 12. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS PLACED FURTHER RELIANCE ON THE TRIBUNAL ORDERS IN THE ASSESSEES CASE FOR AYS 2007 -08 AND 2008-09. THE ORDER FOR AY ITA NO.4713/DEL/2011 7 2007-08 IS AT APB 598-617, WHEREAS THAT FOR AY 2008 -09 IS TO BE FOUND AT APB 624- 632. 13. IN THE ORDER FOR AY 2007-08, THE TRIBUNAL, IN P ARA 8 (APB 611) OF THE ORDER, HAS, FOLLOWING THE TRIBUNAL ORDER (SUPRA) FOR AY 2006-07 , HELD THAT THE TRIBUNAL, FOR AY 2006- 07, HAD ACCEPTED THE ASSESSEES CLAIM AND HAD HELD THAT THE NEW UNIT WAS TO BE TREATED AS A SEPARATE AND INDEPENDENT UNIT FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A OF THE ACT, FOLLOWING THE ITAT ORDER FOR AY 2003-04; T HAT THE FACTS OBTAINING FOR AY 2007-08 WERE SIMILAR TO THE FACTS AND CIRCUMSTANCES IN THE PRECEDING ASSESSMENT YEARS; THAT THE REVENUE HAD NOT PLACED ANY MATERIAL BEFORE THE TRIB UNAL FOR TAKING A DIFFERENT VIEW IN THE MATTER FOR THE YEAR UNDER CONSIDERATION (AY 2007-08 ); AND THAT THEREFORE, THE CLAIM OF THE ASSESSEE U/S 10A OF THE ACT WAS BEING ALLOWED. 14. IN THE ORDER FOR AY 2007-08, VIDE PARAS 19 AND 20 (APB -629), THE TRIBUNAL HAS, FOLLOWING THE AFORESAID TRIBUNAL ORDER FOR AY 2006- 07, HELD THAT THE GEDC-STP UNIT, SITUATED AT THIRD FLOOR, BLOCK 3, SECTOR 29, NOIDA, WAS TO BE TREATED AS A SEPARATE UNIT, AND, ACCORDINGLY, DEDUCTION U/S 10A OF THE ACT WAS ALLOWABLE. 15. IN THE CHART ON THE ISSUES DATED 13.03.2014 F ILED BEFORE US BY THE ASSESSEE, THE ASSESSEE HAS CONTENDED THAT VIDE ORDER DATED 06.01. 2011 (APB 618), PASSED IN ITA NO.71/2010, THE HONBLE DELHI HIGH COURT HAS DISMIS SED THE DEPARTMENTS APPEAL ON THE AFORESAID ISSUE. HOWEVER, A PERUSAL OF THE SAID HIGH COURT ORDER SHOWS THAT IT DOES NOT DEAL WITH THIS ISSUE AT ALL. THE ORDER READS A S FOLLOWS:- IN THIS APPEAL, FOLLOWING QUESTION OF LAW IS PROPO SED:- WHETHER ITAT WAS CORRECT IN LAW IN ALLOWING DEPRECI ATION TO THE ASSESSEE AT THE HIGHER RATE OF 60% ON COMPUTER ACCESSORIES AND PERI PHERALS? THIS ISSUE STANDS DECIDED AGAINST THE REVENUE AND I N FAVOUR OF THE ASSESSEE BY A JUDGMENT OF THIS COURT IN ITA 1266/2010, DATED 31 ST AUGUST, 2010 CATEGORICALLY HOLDING THAT THE DEPRECIATION ON COMPUTER ACCESSORI ES AND PERIPHERALS WOULD BE ADMISSIBLE AT THE RATE OF 60%. THIS APPEAL IS ACCORDINGLY DISMISSED. 16. BE THAT AS IT MAY, FOR AYS 2003-04 AND 2006-07 TO 2008-09, THIS ISSUE STANDS DECIDED IN FAVOUR OF THE ASSESSEE BY THE AFORE-NOTE D TRIBUNAL ORDERS. THE CIT (A) HAS ITA NO.4713/DEL/2011 8 FOLLOWED THE TRIBUNAL ORDERS FOR AYS 2003-04 AND 20 06-07. BEFORE US, THE OBTAINING FACTS HAVE NOT BEEN SHOWN TO BE ANY DIFFERENT FROM, BESIDES AYS 2003-04 AND 2006-07, AYS 2007-08 AND 2008-09 ALSO. THEREFORE, FINDING NO ERROR THEREIN, THE ORDER OF THE LD. CIT (A) IN THIS REGARD IS UPHELD. GROUND NO.2 IS, A CCORDINGLY REJECTED. 17. GROUND NOS.3 AND 4 RELATE TO THE ACTION OF THE LD. CIT (A) IN DIRECTING THE AO TO ALLOW THE SET OFF OF LOSSES ARISING OUT OF THE ASSE SSEES STP UNIT AGAINST THE INCOME FROM ITS NON-STP UNITS (MISTAKENLY TYPED AS STP UN ITS IN GROUND NO.3) AND IN DIRECTING THE AO TO ALLOW CARRY FORWARD OF UNABSORBED LOSSES AND DEPRECIATION OF THE ASSESSEES STP UNITS. 18. AS PER THE RECORD, DURING THE PREVIOUS YEAR REL EVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE WAS ENGAGED IN TH E ACTIVITIES OF SOFTWARE DEVELOPMENT AND RELATED SERVICES. THE SOFTWARE SERV ICES WERE BEING CARRIED OUT FROM ITS UNDERTAKINGS AT NOIDA AND CHENNAI SET UP IN ACCORDA NCE WITH THE SOFTWARE TECHNOLOGY PARK ('STP) SCHEME NOTIFIED BY THE GOVERNMENT OF I NDIA, MINISTRY OF COMMERCE AND INDUSTRY AND BRANCH OFFICES IN AUSTRALIA AND SINGAP ORE (HEREINAFTER REFERRED TO AS NON STPI UNDERTAKINGS). THE ASSESSEE COMPANY HAS INCUR RED BUSINESS LOSS AMOUNTING TO RS 152,333,790 IN ITS VARIOUS STP AND NON STP UNDER TAKINGS. THE DETAILS OF THE LOSSES INCURRED HAVE BEEN GIVEN AS UNDER: (I) NOIDA-I (FIRST STP UNDERTAKING) - RS. (104,937, 372) (II) NOIDA- II (STP UNDERTAKING) - RS. (31,826,734) (III) CHENNAI (STP UNDERTAKING) - RS. (6,383,402) (IV) SINGAPORE (NON-STP UNDERTAKING) - RS. (9,186,2 82) 19. THE AO DID NOT ALLOW THE CARRY FORWARD AND SET OFF OF LOSSES ARISING OUT OF THE BUSINESS OPERATIONS OF 10A UNITS FROM THE INCOME FR OM NON 10A UNITS. WHILE DOING SO, THE AO HAS RELIED ON THE ORDER DATED 13.04.07 OF TH E ITAT IN THE ASSESSEE'S OWN CASE FOR THE AY 1999-2000 IN ITA NO. 838/DEL/2003. 20. THE AO HAS OBSERVED AS FOLLOWS: ITA NO.4713/DEL/2011 9 'THE ASSESSEE'S UNIT UNDER QUESTION IS ENTITLED TO 'TAX HOLIDAY' BY WAY OF DEDUCTION U/S 10A. HAD THE ASSESSEE CO. BEEN GENERA TING PROFITS FROM SUCH UNIT, IT WOULD HAVE BEEN ENTITLED FOR SUCH 'TAX HOLIDAY' BY WAY OF DEDUCTION U/S 10A. IT IS THUS CLEAR THAT PROFITS AND GAINS FROM SUCH UNIT WOULD HAVE BEEN EXEMPT FROM TAX. HOWEVER IN THE CASE OF INSTANT ASSESSEE CO., L OSSES ARE SUFFERED IN RESPECT OF SUCH UNIT, WHICH IS ENTITLED FOR DEDUCTION U/S 1 0A OF THE ACT. AS STATED ABOVE, AS PER THE PROVISIONS OF IT ACT, LOSS FROM SUCH SOU RCE/ UNIT, WHICH IS EXEMPT FROM TAX CANNOT BE SET OFF AGAINST INCOME CHARGEABLE TO TAX..... ON THE SAME OBSERVATIONS AND FINDINGS THE ASSESSEE 'S CLAIM OF CARRY FORWARD OF LOSSES OF UNDERTAKING CLAIMING THE EXEMP TION U/S 10A IS REJECTED AND THE CLAIM OF RS. 53,732,227 OF BUSINESS LOSS AND RS . 42,927,772 OF THE UNABSORBED DEPRECIATION IS DISALLOWED FROM BEING CA RRY FORWARDED.' 21. WHILE HOLDING THAT THE ASSESSEE SHOULD BE ALLOW ED TO SET OFF THE LOSSES ARISING OUT OF ITS STP UNITS AGAINST THE INCOME OF ITS NON- STP UNITS AND ALLOWING THE ASSESSEE TO CARRY FORWARD UNABSORBED LOSSES AND DEPRECIATION OF ITS STP UNITS, THE CIT (A) FOLLOWED THE TRIBUNAL ORDERS OF THE ASSESSEE FOR AY S 2003-04 AND 2006-07. 22. IN THIS REGARD, THE DEPARTMENT HAS CHALLENGED T HE ACTION OF THE LD. CIT (A) AND HAS CONTENDED THAT THE LD. CIT (A) HAS FAILED TO TA KE INTO CONSIDERATION THE CATEGORICAL FINDING RECORDED BY THE AO THAT HAD THE ASSESSEE CO MPANY BEEN GENERATING PROFITS FROM ITS STP UNIT, THIS UNIT WOULD HAVE BEEN ENTITL ED FOR A TAX HOLIDAY BY WAY OF DEDUCTION U/S 10A AND THE PROFITS AND GAINS FROM SU CH UNITS WOULD HAVE BEEN EXEMPT FROM TAX, BUT SINCE THE STP UNIT OF THE ASSESSEE HA D SUFFERED LOSSES, THE LOSSES FROM SUCH UNIT COULD NOT BE SET OFF AGAINST INCOME CHARG EABLE TO TAX; AND THAT THE SAME WAS THE POSITION WITH REGARD TO THE CLAIM OF CARRY FORW ARD OF UNABSORBED DEPRECIATION. 23. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, HAS SUBMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE T RIBUNAL ORDERS FOR AYS 2006-07 TO 2008-09 (SUPRA). IT HAS BEEN FURTHER CONTENDED THAT MOREOVER, RECENTLY, THE CBDT, VIDE CIRCULAR NO.7/2013 DATED 16.07.2013, CLARIFIED THAT IRRESPECTIVE OF THEIR CONTINUED PLACEMENT IN CHAPTER III, SECTIONS 10A AND 10B OF T HE ACT, AS SUBSTITUTED BY FINANCE ACT, 2000, PROVIDE FOR DEDUCTION OF PROFITS AND GAI NS DERIVED FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE; THAT TAX BENEFIT U/ S 10B OF THE ACT IS IN THE NATURE OF DEDUCTION; THAT INCOME/LOSS FROM VARIOUS SOURCES, I .E., ELIGIBLE AND INELIGIBLE UNITS, UNDER THE SAME HEAD HAVE TO BE AGGREGATED IN ACCORDANCE W ITH THE PROVISIONS OF SECTION 70 ITA NO.4713/DEL/2011 10 OF THE ACT; AND THAT THEREFORE, LOSS FROM INELIGIBL E UNIT WOULD HAVE TO BE SET OFF AGAINST THE PROFITS OF THE NON-ELIGIBLE UNIT. 24. IN THIS REGARD, IT IS SEEN THAT THE AO, WHILE D ECIDING THIS ISSUE AGAINST THE ASSESSEE, RELIED ON THE TRIBUNAL ORDER FOR AY 99-00 . SECTION 10A OF THE ACT WAS MODIFIED BY THE FINANCE ACT, 2000. THE PRE-AMENDED SECTION STATED THAT ANY PROFITS AND GAINS DERIVED BY AN ASSESSEE FROM AN INDUSTRIAL UNDERTAKING TO WHICH THIS SECTION APPLIES SHALL NOT BE INCLUDED IN THE TOTAL INCOME O F THE ASSESSEE. THIS PROVISION STANDS CHANGED BY THE AFORESAID AMENDMENT, W.E.F. 01.04.20 01. SECTION 10A(1) NOW STATES THAT SUBJECT TO THE PROVISIONS OF THIS SECTION, A DEDUCTION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF A RTICLES OR THINGS OR COMPUTER SOFTWARE FOR A PERIOD OF TEN CONSECUTIVE ASSESSMENT YEARS BE GINNING FROM THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAK ING BEGINS TO MANUFACTURE OR PRODUCE SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE, AS TH E CASE MAY BE, SHALL BE ALLOWED FROM THE TOTAL INCOME OF THE ASSESSEE.. (EMPHASIS SUP PLIED). 25. IN THE ASSESSEES CASE FOR AY 99-00, VIDE ITS O RDER DATED 13.04.07 (RELEVANT PORTION PRODUCED IN THE ASSESSMENT ORDER AT PAGES 5 AND 6 THEREOF), IN ITA NO.838/DEL/2003, THE TRIBUNAL HAD HELD THAT AS PER SECTION 10A (1) OF THE ACT, ANY PROFITS AND GAINS DERIVED FROM AN INDUSTRIAL UNDERT AKING, TO WHICH THIS SECTION APPLIES, SHALL NOT BE INCLUDED IN THE TOTAL INCOME OF THE AS SESSEE; THAT THUS, THE PROFITS OF THE ELIGIBLE INDUSTRIAL UNDERTAKING DID NOT FORM PART O F THE TOTAL INCOME AT ALL; THAT IT DID NOT ENTER THE COMPUTATION PROVISION; THAT THUS, WHAT WA S TO BE COMPUTED WAS THE PROFITS OF THE ELIGIBLE INDUSTRIAL UNDERTAKING AND NOT THE RES ULTANT BUSINESS INCOME AFTER SET OFF OF LOSS IN OTHER ACTIVITIES; AND THAT THE LOSS FROM OT HER BUSINESS ACTIVITIES SHOULD NOT BE SET OFF AGAINST PROFITS DERIVED FROM ELIGIBLE INDUSTRIA L UNDERTAKING. 26. EVIDENTLY, SINCE THE AFORESAID ORDER OF THE TRI BUNAL WAS FOR AY 99-00, IT PERTAINED TO THE PRE-AMENDED PROVISIONS OF SECTION 10A OF THE ACT. THE ASSESSMENT YEAR AT HAND IS AY 2005-06. UNDISPUTEDLY, IT IS THE AMENDED PROV ISION OF SECTION 10A OF THE ACT WHICH APPLY HERETO AND NOT THE ERSTWHILE PROVISIONS . THEREFORE, AS RIGHTLY CONTENDED ON BEHALF OF THE ASSESSEE, THE SAID TRIBUNAL ORDER FOR AY 99-00 IS NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION. ITA NO.4713/DEL/2011 11 27. FOR AY 2006-07, THE TRIBUNAL (APB 589 & 590), R ESTORED THE MATTER TO THE FILE OF THE AO FOR FRESH ADJUDICATION BY TREATING THE PROVI SIONS OF SECTION 10A OF THE ACT TO BE IN THE NATURE OF A DEDUCTION PROVISION AND NOT AN EXEM PTION PROVISION. WHILE DOING SO, THE TRIBUNAL FOLLOWED THE DECISIONS IN MINDTREE CONSUL TING (P) LTD. VS. ACIT 102 TTJ (BANGALORE) 691, HONEYWELL INTERNATIONAL (INDIA) ( P) LTD. VS. DCIT, 108 TTJ (DEL) 924, NAVEEN BHARAT INDUSTRY VS. DCIT, 90 ITD 1 (MUM) TM , HINDUSTAN UNILEVER VS. DCIT AND ANOTHER 325 ITR 102 (BOM) AND SCIENTIFIC ATLA NTA INDIA TECHNOLOGY (P) LTD. VS. ACIT, 37 DTR (CHENNAI) (TRIB) (SB) 46. FOR AY 2007 -08, THE TRIBUNAL FOLLOWED (APB 613-614) ITS ORDER FOR AY 2006-07, NOTING THAT FOR THAT YEAR, EVEN THE DRT HAD REFERRED TO THE ITAT DECISION FOR AY 2006-07 AND REMANDED TH E MATTER TO THE AO FOR FRESH ADJUDICATION WITH SIMILAR DIRECTIONS AS ISSUED FOR AY 2006-07. 28. FOR AY 2008-09, THE TRIBUNAL (APB 631, PARA 26) , FOLLOWED THE TRIBUNAL ORDERS FOR AYS 2006-07 AND 2007-08 IN RESTORING THE ISSUE TO THE FILE OF THE AO FOR FRESH ADJUDICATION. 29. FURTHER, IN SOVIKA INFOTEK LTD. VS. ITO, 23 S OT 271 (MUM), IT HAS BEEN HELD THAT THE ASSESSEE IS ENTITLED TO SET OFF THE LOSS INCURR ED IN A SECTION 10B UNDERTAKING AGAINST THE OTHER INCOMES EARNED BY HIM. THERE IS NO DISPUT E THAT THE PROVISIONS OF SECTION 10B ARE IN PARI MATERIA WITH THOSE OF SECTION 10A OF TH E ACT. FURTHER, IN A.V. THOMAS LEATHER AND ALLIED PRODUCTS LTD. 2009 TIOL 434 ITA T (MADRAS), THE CHENNAI BENCH OF THE TRIBUNAL TOOK THE SAME VIEW OF THE MATTER WHILE RELYING ON HONEYWELL INTERNATIONAL INDIA (P) LTD. VS. DCIT (SUPRA), MINDTREE CONSULT ING (P) LTD. VS. ACIT (SUPRA) AND NAVEEN BHARAT INDUSTRIES LTD. VS. DCIT (SUPRA). 30. THE FACTS REMAINING THE SAME FOR THE YEAR UNDER CONSIDERATION ALSO, THERE IS NO REASON FOR US TO DIFFER FROM THE ACTION OF THE CIT (A) IN DIRECTING THE AO TO RECOMPUTE THE TOTAL INCOME OF THE ASSESSEE AFTER ALLOWING THE SET OFF OF THE LOSSES ARISING OUT OF THE STP UNITS OF THE ASSESSEE AGAINST THE INCOME OF ITS NON-STP UNDERTAKINGS AND TO ALLOW CARRY FORWARD OF UNABSORBED LOSSES AND DEPRECIATION AS PER LAW. THEREFORE, GROUND NOS.3 AND 4 ARE REJECTED. ITA NO.4713/DEL/2011 12 31. GROUND NO.5 IS AGAINST THE ACTION OF THE CIT (A ) IN DIRECTING THE AO TO ALLOW TRAVEL EXPENSES OF RS.11,07,62,619/-. 32. FOR THE YEAR, THE ASSESSEE CLAIMED TRAVELLING E XPENSES TO THE TUNE OF RS.23,20,33,587/-. THE AO NOTED THAT FOR AY 2004-05 , SUCH EXPENSE WAS OF RS.12,12,70,968/- AND THAT THEREFORE, THERE WAS AN INCREASE OF CLOSE TO 100%. THE ASSESSEE, VIDE REPLY DATED 24.09.2008, SUBMITTED TH E DETAILS FOR THE LAST FOUR YEARS, AS FOLLOWS:- F.Y. AMOUNT (RS.) 04-05 232033587/- 03-04 121270968/- 02-03 2052812/- 01-02 2890097/- 33. VIDE REPLY DATED 31.10.08, THE ASSESSEE SUBMITT ED DETAILS OF TRAVELLING ADVANCES FOR THE LAST FIVE YEARS ALONG WITH COMPARISON TO TH E TOTAL REVENUE FOR THAT YEAR, AS FOLLOWS:- F.Y. AMOUNT (RS.) TURNOVER (RS.) 04-05 114000667 1580856777 03-04 9758868 1688939505 02-03 18185256 1062840865 01-02 19758868 326492064 00-01 6905578 149 401616 34. THE ASSESSEE ALSO SUBMITTED, AS NOTED AT PAGE 1 1 OF THE ASSESSMENT ORDER, THE DETAILS OF FOREIGN TRAVEL EXPENSES OF MORE THAN RS. 1 LAC. THE AO OBSERVED THAT NO OTHER DETAILS WERE PROVIDED BY THE ASSESSEE, NOR ANY JUST IFICATION FOR SUCH A HUGE INCREASE IN THE EXPENSES WAS PROVIDED; THAT BESIDES, EVEN BILLS AND VOUCHERS PERTAINING TO TRAVELLING EXPENSES OF MORE THAN RS.1 LAC, WHICH WE RE SPECIFICALLY ASKED FOR, WERE ALSO NOT FILED. FROM THIS, THE AO OBSERVED THAT THE ASSE SSEE HAD FAILED TO DISCHARGE ITS ONUS TO SUBSTANTIATE THE CLAIM OF THE EXPENSES AND TO JU STIFY THE SAME. THE TRAVELLING EXPENDITURE IN EXCESS OF THE AMOUNT CLAIMED IN THE EARLIER YEAR WAS DISALLOWED BY THE ITA NO.4713/DEL/2011 13 AO AS SUCH, ALSO FOR THE REASON THAT THE TURNOVER O F THE ASSESSEE COMPANY HAD DECREASED IN COMPARISON TO THE EARLIER YEAR. 35. THE LD. CIT (A), WHILE DIRECTING THE AO TO DELE TE THE ADDITION, HELD THAT THE DISALLOWANCE MADE WAS PURELY AD HOC; THAT THE ASSES SEE HAD PRODUCED BOOKS OF ACCOUNT BEFORE THE AO, WHICH BOOKS WERE AUDITED; AN D THAT THERE WAS NOTHING ON RECORD TO SHOW THAT THE AO HAD ASKED THE ASSESSEE FOR FUR THER EVIDENCE TO JUSTIFY THE CLAIM OF EXPENSES. BESIDES, THE LD. CIT (A) FOLLOWED THE TRI BUNAL ORDER IN THE ASSESSEES CASE FOR AY 2006-07 IN THIS REGARD. 36. THE LD. DR HAS CHALLENGED THE CIT (A)S ACTION, ALLEGING THAT THE CIT (A) IGNORED THE FACT THAT IN SPITE OF BEING SPECIFICALLY REQUIR ED TO DO SO, THE ASSESSEE DID NOT FILE BILLS/VOUCHERS FOR TRAVELLING EXPENSES EXCEEDING RS .1 LAC AND THAT IN THE ABSENCE THEREOF, THE GENUINENESS OF THE EXPENSES WAS RIGHTL Y NOT ACCEPTED BY THE AO. 37. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, HAS PLACED STRONG RELIANCE ON THE IMPUGNED ORDER. 38. HERE, THE OBSERVATIONS OF THE AO WITH REGARD TO THE ASSESSEE NOT HAVING PRODUCED THE RELEVANT DOCUMENTARY EVIDENCE IN THE S HAPE OF BILLS/VOUCHERS CONCERNING THE TRAVELLING EXPENSES CLAIMED, HAVE BEEN FOUND BY THE LD. CIT (A) TO BE INCORRECT. THIS FINDING OF THE LD. CIT (A) HAS NOT BEEN SUCCESSFULL Y REFUTED BEFORE US BY THE DEPARTMENT. THEREFORE, THERE IS NOTHING FOR US TO DIFFER FROM T HE CIT (A)S CONCLUSION THAT THE ASSESSEE HAD, IN FACT, PRODUCED THE CONCERNED EVIDENCE BEFORE TH E AO. ON MERIT, THE TRIBUNAL (APB 591), FOR AY 2006-07, OBSERVED AS FOL LOWS:- AT THIS STAGE, IT IS PERTINENT TO NOTE THE SETTLED PROPOSITION THAT WHEN ONCE AN OUTLAY IS MADE FOR THE PURPOSE OF THE BUSINESS, IT NEED NOT TURN OUT TO BE PROFITABLE. IT IS A MISTAKE TO SUPPOSE THAT ANY DED UCTIBLE EXPENDITURE MUST NOT ONLY BE INCURRED FOR THE PURPOSE OF BUSINESS OR TRA DE BUT MUST ALSO BE PROFITABLY LAID OUT. THE DEDUCTIBLE EXPENDITURE INCURRED FOR T HE PURPOSE OF BUSINESS DOES NOT REQUIRE THE PRESENCE OF A RECEIPT ON THE CREDIT SIDE TO JUSTIFY DEDUCTION OF AN EXPENSE. IT IS NOT AS IF THE EXPENDITURE SHOULD BE CO-RELATED TO PROFITS OR TURNOVER AND IT IS DEDUCTIBLE ONLY IF PROFIT IS MADE OR TURN OVER IS INCREASED. IT IS WELL-SETTLED THAT EXPENDITURE WHOLLY AND EXCLUSIVELY FOR THE PUR POSE OF BUSINESS CANNOT BE DISALLOWED MERELY BECAUSE THE ASSESSEES INCOME OR THE TURNOVER WOULD BE VERY MUCH REDUCED THEREBY. IN THE PRESENT CASE, THE AO H AS NOT BROUGHT ANY MATERIAL ITA NO.4713/DEL/2011 14 OR EVIDENCE ON RECORD TO SHOW AND ESTABLISH THAT TH E TRAVELLING EXPENSES INCURRED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAVE NOT BEEN EXPENDED FOR THE PURPOSE OF ASSESSEES BUSINESS OR HAVE NOT BEEN INCURRED IN THE COURSE OF CARRYING OF ANY BUSINESS ACTIVITY OF THE ASSESSEE. IN THE LIGHT OF THE DISCUSSIONS MADE ABOVE, WE DELETE THE DISALLOWANCE OF TRAVELING EXPENSES MADE BY THE AO. IN OTHER WORDS, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 39. THE FACTS FOR THE YEAR UNDER CONSIDERATION REM AINING THE SAME AS THAT BEFORE THE TRIBUNAL FOR AY 2006-07, WE UPHOLD THE CIT (A)S OR DER ON THIS GROUND AND REJECT GROUND NO.5. 40. AS PER GROUND NO.6, THE LD. CIT (A) HAS ERRED I N DIRECTING THE AO TO TREAT THE MISCELLANEOUS INCOME EARNED BY THE ASSESSEE IN THE SHAPE OF RECOVERY OF NOTICE PAY AS INCOME OF ITS UNIT ELIGIBLE FOR DEDUCTION U/S 10A O F THE ACT. 41. THE AO ASKED THE ASSESSEE TO SHOW AS TO WHY THE SAID INCOME SHOULD NOT BE TREATED AS INCOME FROM OTHER SOURCES AND BE INCLUDE D FOR THE COMPUTATION OF DEDUCTION U/S 10A OF THE ACT. THE ASSESSEE, VIDE REPLY DATED 28.08.08, STATED THAT THE MISCELLANEOUS INCOME CONSISTED OF NOTICE PAY RECOVE RED FROM ITS EMPLOYEES, WHICH INCOME WAS INCIDENTAL TO THE SOFTWARE EXPORT AND HE NCE, IT FORMED PART OF THE NORMAL BUSINESS PROFIT AND LOSS ACCOUNT OF THE ASSESSEE. H OWEVER, THE AO TREATED THE MISCELLANEOUS INCOME AS INCOME FROM OTHER SOURCES. 42. THE LD. CIT (A) RELIED ON THE TRIBUNAL DECISION IN THE ASSESSEES CASE FOR AY 2006-07 AND GAVE THE IMPUGNED DIRECTION TO THE AO. 43. THE LD. DR HAS CONTENDED THAT THE LD. CIT (A) H AS FAILED TO CONSIDER THAT THE MISCELLANEOUS INCOME OF THE ASSESSEE WAS NOT OF THE SAME NATURE AS INTEREST INCOME AND WAS RIGHTLY TREATED BY THE AO AS INCOME FROM OT HER SOURCES. 44. THE LD. COUNSEL FOR THE ASSESSEE HAS PLACED REL IANCE ON THE IMPUGNED ORDER. RELIANCE HAS ALSO BEEN PLACED ON THE TRIBUNAL ORDER S FOR AY 2007-08 AND 2008-09. 45. FOR AY 2006-07 (APB 590, PARA 7.3), THE TRIBUNA L, FOLLOWING THE DELHI ITAT DECISION IN THE CASE OF JUBILANT EMPRO (P) LTD. VS . DCIT, (2007) TIOL 458 DEL, HELD THAT THE AMOUNT RECEIVED BY THE ASSESSEE TOWARDS NO TICE PERIOD WAS TO BE TREATED AS INCOME DERIVED FROM THE ELIGIBLE UNDERTAKING AND TH AT DEDUCTION U/S 10A OF THE ACT SHALL ITA NO.4713/DEL/2011 15 BE ALLOWED ACCORDINGLY. THE CIT (A) FOLLOWED THIS O RDER TO HOLD THAT THE MISCELLANEOUS INCOME SHOULD BE TREATED AS INCOME FROM BUSINESS. 46. FOR AY 2007-08 (APB 616, PARA 18), THE ITAT DEC ISION FOR AY 2006-07 WAS FOLLOWED BY THE TRIBUNAL. FOR AY 2008-09 (APB 631-6 32), A SIMILAR VIEW WAS TAKEN BY THE TRIBUNAL. 47. HERE AGAIN, THE FACTS FOR THE YEAR UNDER CONSID ERATION REMAIN THE SAME AS THOSE PRESENT IN THE EARLIER YEARS. IN ACCORDANCE WITH TH E TRIBUNAL ORDERS FOR THOSE YEARS (SUPRA), WE HOLD THAT THE AMOUNT RECEIVED BY THE AS SESSEE TOWARDS NOTICE PERIOD IS TO BE TREATED AS INCOME DERIVED FROM THE ELIGIBLE UNDE RTAKING AND DEDUCTION U/S 10A OF THE ACT IS TO BE ALLOWED ACCORDINGLY. THE FINDING OF TH E LD. CIT (A) TO THIS EFFECT IS, ACCORDINGLY, UPHELD. GROUND NO.6 IS REJECTED. 48. GROUND NO.7 CHALLENGES THE ACTION OF THE LD. CI T (A) IN DELETING THE ADDITION OF RS. 8,59,418/- MADE ON ACCOUNT OF EXCESS CLAIM OF D EPRECIATION ON COMPUTER PERIPHERALS. THE CIT (A) FOLLOWED THE TRIBUNAL ORDE R FOR AY 2006-07 IN THE ASSESSEES CASE AND DELETED THE ADDITION. THE TRIBUNAL, FOR AY 2006-07 HAD FOLLOWED THE DECISION DATED 31.8.10 OF THE HONBLE DELHI HIGH COURT IN TH E CASE OF CIT VS. BSES RAJADHANI POWER LTD. IN ITA NO.1266/2010, WHEREIN IT WAS HEL D THAT THE TRIBUNAL HAD RIGHTLY ALLOWED DEPRECIATION ON COMPUTER PERIPHERALS AT 60 %. 49. FINDING NO INFIRMITY IN THE CIT (A)S ORDER IN THIS REGARD ALSO, GROUND NO.7 IS ALSO REJECTED. 50. AS PER GROUND NO.8, THE LD. CIT (A) HAS ERRED I N DIRECTING THE AO TO ALLOW CREDIT FOR TAXES PAID FOR ASSESSEE IN AUSTRALIA. 51. THE ASSESSEE HAD PAID TAXES AMOUNTING TO RS.59, 71,754/- IN AUSTRALIA IN RESPECT OF PROFITS EARNED BY ITS BRANCH OFFICE SITUATED IN AUSTRALIA. OUT OF THIS AMOUNT, A CREDIT OF RS.12,61,811/-, CORRESPONDING TO THE INCOME-TAX LIABILITY OF THE ASSESSEE, WAS CLAIMED IN ACCORDANCE WITH SECTION 90 OF THE ACT, R EAD WITH PARA 4 OF ARTICLE XXIV OF THE DTAA BETWEEN INDIA AND AUSTRALIA. THE AO ASKED THE ASSESSEE TO JUSTIFY ITS CLAIM. ITA NO.4713/DEL/2011 16 HOWEVER, THE AO REJECTED THE CLAIM OF THE ASSESSEE AND DISALLOWED THE CREDIT OF TAXES PAID IN AUSTRALIA AGAINST THE INDIAN TAX LIABILITY OF THE ASSESSEE COMPANY. 52. THE CIT (A) HAS OBSERVED AS FOLLOWS:- THE AFORESAID CLAIM OF RS 1,261,811 MADE BY THE AP PELLANT WAS DULY ALLOWED BY THE LD. AO IN HIS ASSESSMENT ORDER. HOWEVER, AO FAI LED TO TAKE COGNIZANCE OF THE FACT THAT AFTER TAKING INTO CONSIDERATION 'HE ADDIT IONS MADE IN THE ASSESSMENT ORDER, THE TAXABLE INCOME OF THE APPELLANT, HAD INC REASED AND THEREFORE THE LD. AO SHOULD HAVE GRANTED AN ENHANCED CREDIT OF THE TA XES PAID IN AUSTRALIA. IN VIEW OF THE ABOVE, THERE SEEMS TO BE NO DISPUTE IN PRINCIPAL BETWEEN THE AO AND THE APPELLANT ABOUT THE CREDIT, OF TAXES PAID I N AUSTRALIA BY THE APPELLANT. THE AO IS DIRECTED TO GIVE CREDIT TO THE TAXES PAID AS PER THE DTAA BETWEEN INDIA AND AUSTRALIA. 53. THE LD. DR HAS CONTENDED THAT WHILE WRONGLY DIR ECTING THE AO TO ALLOW THE CREDIT FOR TAXES PAID IN AUSTRALIA, THE LD. CIT (A) HAS FA ILED TO CONSIDER THAT THIS CLAIM HAD NOT BEEN EXAMINED BY THE AO AND ONCE THIS WAS SO, THE L D. CIT (A) OUGHT TO HAVE REMITTED THE ISSUE TO THE FILE OF THE AO, TO BE ALLOWED AFTE R EXAMINATION BY THE AO. 54. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, HAS CONTENDED THAT THE AO FAILED TO APPRECIATE THE FACT THAT AFTER TAKING INT O CONSIDERATION THE ADDITION MADE IN THE ASSESSMENT ORDER, THE TAXABLE INCOME OF THE ASSESSE E HAS INCREASED AND, THEREFORE, THE ASSESSEE IS TO BE GRANTED ENHANCED CREDIT OF TA XES PAID IN AUSTRALIA. 55. HERE, WE FIND THAT INDEED, CONSIDERING THE ADDI TIONS MADE, THE TAXABLE INCOME OF THE ASSESSEE HAS INCREASED. AS SUCH, ENHANCED CREDI T OF TAXES PAID IN AUSTRALIA NEEDS TO BE GRANTED TO THE ASSESSEE. AS SUCH, THE CIT (A) HAS RIGHTLY REMITTED THE MATTER TO THE FILE OF THE AO TO ALLOW THIS CLAIM OF THE ASSES SEE ON EXAMINATION. GROUND NO.8 STANDS REJECTED. 56. GROUND NO.9 STATES THAT THE LD. CIT (A) HAS ERR ED IN DELETING THE ADDITION OF RS.7,25,40,785/- MADE U/S 92CA (3) OF THE ACT, ON A CCOUNT OF TRANSFER PRICING ADJUSTMENT. IN THIS MATTER, THE FACTS AS PER THE RE CORD ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT AND RELATED SERVICE S TO ITS ASSOCIATED ENTERPRISES (AES). THE ASSESSEE IS A 100% SUBSIDIARY OF BIRLASO FT ENTERPRISES INDIA WHICH, IN TURN, IS A 100% SUBSIDIARY OF BIRLASOFT INC., USA. THE ASSES SEE PROVIDES CUSTOMIZED SOFTWARE ITA NO.4713/DEL/2011 17 TO ITS RELATED PARTIES. IT DOES OFFSHORE, I.E. ON S ITE DELIVERY OF THE SOFTWARE ALSO. THE ASSESSEE IS PAID AT THE COST PLUS AGREED MARKUP AND REIMBURSEMENT OF OVER HEAD EXPENSES BY ITS AES. THE COMPANY ENTERED INTO THE F OLLOWING INTERNATIONAL TRANSACTIONS: S. NO. DESCRIPTION OF TRANSACTION METHOD VALUE (IN RS.) 1. SOFTWARE DEVELOPMENT AND RELATED SERVICES TNMM 86,42,08,521/- 2. REIMBURSEMENT OF EXPENSES PAID - 3,71,44,544/- 3. REIMBURSEMENT OF EXPENSES RECEIVED - 7,67,535/- 56.1 THE ASSESSEE BENCHMARKED ITS INTERNATIONAL TRA NSACTION USING THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE ME THOD WITH OPERATING PROFIT/ OPERATING COST (OP/OC) AS THE PROFIT LEVEL INDICATO R (PLI). IT HAD RELATED PARTY AS WELL AS UNRELATED PARTY TRANSACTIONS UNDER THE SAME LINE OF BUSINESS. THEREFORE, INTERNAL TNMM WAS EMPLOYED, I.E., MARGIN ON COST EARNED FROM THE UNRELATED PARTY TRANSACTIONS WAS COMPARED WITH THE MARGIN ON COST EARNED FROM TH E RELATED PARTIES. THE TP DOCUMENTATION OF THE ASSESSEE CONCLUDED THAT THE OP ERATING MARGIN OF THE ASSESSEE FROM SOFTWARE SERVICES TO UNRELATED PARTIES WAS 2.5 1%, WHEREAS THE MARGIN OF THE ASSESSEE FROM ASSOCIATED ENTERPRISES WAS 2.04% AND SINCE THE OPERATING PROFIT, WHICH THE ASSESSEE EARNS WAS WITHIN -2.62% AND 7.63% (I.E ., +/- 5% RANGE), THE TRANSACTION BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISE HAD BEEN CONSIDERED TO BE AT ARM'S LENGTH. IN OTHER WORDS, ON COMPARISON, THE ASSESSEE FOUND THAT THE INTERNATIONAL TRANSACTIONS FELL WITHIN THE PROVISO TO SECTION 92C (2) OF THE IT ACT AND, THEREFORE, MAINTAINED THAT ITS TRANSACTIONS ARE AT ARM'S LENGT H. 56.2. NEITHER THERE IS ANY DISPUTE ABOUT THE MOST A PPROPRIATE METHOD USED BY THE ASSESSEE, NOR ON THE PLI. HOWEVER, THE TPO DID NOT ACCEPT THE COMPARISON AT THE ENTITY LEVEL. THE ASSESSEE HAD VARIOUS STPI UNITS. THE TPO ASKED FOR FORM NO. 56F IN RESPECT OF EACH OF THE UNITS AND ALSO TO PROVIDE UN IT-WISE DETAILS OF RELATED AND UNRELATED ITA NO.4713/DEL/2011 18 PARTY TRANSACTIONS, WHICH WERE SUBMITTED BY THE ASS ESSEE ON 08.10.2008 TO THE TPO, AS BELOW: RELATED UNRELATED TOTAL NOIDA UNIT I REVENUE 67502710 10128297 81983020 TOTAL COST 151955943 43812111 193768054 OPERATING PROFIT (84453233) (33683814) (113785034) OP/TC -55.58% -76.88% 58.12% GE-GDC NOIDA STP REVENUE 446188705 75924401 522113106 TOTAL COST 334451977 86386255 420838232 OPERATING PROFIT 111736728 (10461854) 101274874 OP/T 33.41% -12.11% 24.07% NOIDA UNIT 2 REVENUE 184856979 18957315 210339132 TOTAL COST 185551703 33041904 218593607 OPERATING PROFIT (694724) (14084589) (8254475) OP/TC -0.37% -42.63% -3.78% CHENNAI REVENUE 171075757 64143704 26525L83 TOTAL COST 210078815 53680864 2637596791 OPERATING PROFIT (39003058) 10462840 1491904 OP/TC -18.57% 19.49% 0.57% NON STP REVENUE NIL 51775401 517754018 TOTAL COST NIL 493678670 493678670 OPERATING NIL 2407538 2407538 ITA NO.4713/DEL/2011 19 PROFIT OP/TC NIL 4.88% 4.88% COMPANY AS A WHOLE REVENUE 869624151 686907736 1598448572 TOTAL COST 882018439 710599803 1593597143 OPERATING PROFIT (12414287) (23692067) 4851429 OP/TC -1.41% -3.33% 0.30% 56.3 THE TPO OBSERVED THAT THE INTERNATIONAL TRANSA CTIONS OF THE ASSESSEE WERE EMANATING FROM THREE STP UNITS, WHICH HAD DISTINCT IDENTITY AND WERE EASILY DISTINGUISHABLE, BOTH, IN THE FORM OF FUNCTIONS, AN D FINANCIALS, AND THAT MERELY BECAUSE ALL OF THEM WERE INTO AN ACTIVITY OF PROVIDING SOFT WARE SERVICES, ONLY ON THIS ACCOUNT, THE TRANSACTIONS FROM EACH ONE OF THEM DID NOT BECOME ' CLOSELY LINKED'. ACCORDING TO THE TPO, THE ASSESSEE WAS NOT ABLE TO DISTINGUISH BETWE EN THE FUNCTIONAL PROFILE OF RELATED AND UNRELATED PARTY PRODUCTS, SO AS TO JUSTIFY LOSS ES IN THE UNRELATED SEGMENT AND PROFITS IN THE RELATED SEGMENT. MOREOVER, ACCORDING TO THE TPO THE ASSESSEE WAS NOT ABLE TO FURNISH COMPLETE AND CREDIBLE INFORMATION ABOUT REL ATED AND UNRELATED ACCOUNTS. THEREFORE, THE RESULTS OF EACH STP UNIT WERE BENCHM ARKED BY THE TPO WITHOUT SEGREGATING THEM BETWEEN RELATED AND UNRELATED PART IES. 56.4. IN THIS WAY, THE TPO COMPARED THE MARGIN, I.E . OP/TC OF EACH UNIT INDEPENDENTLY. HE COMPARED THE MARGIN OF UNRELATED TRANSACTION WITH THE RELATED PARTY TRANSACTIONS OF EACH UNIT SEPARATELY. THE OP/TC EAR NED BY THE CHENNAI UNIT IN ITS RELATED PARTY TRANSACTION WAS LOWER THAN THE MARGIN EARNED FROM UNRELATED PARTY TRANSACTION. THE TPO HELD THAT THE INTERNATIONAL TR ANSACTIONS OF OTHER UNIT WAS AT ARM'S LENGTH, BUT MADE ADJUSTMENT TO THE INTERNATIONAL TR ANSACTION UNDERTAKEN BY THE CHENNAI UNIT, BASED ON REVISED ACCOUNTS OF THE CHENNAI UNIT , AS SUBMITTED BY THE ASSESSEE. THE UNRELATED PARTY TRANSACTION RESULTED INTO A MARGIN OF 19.47% AS AGAINST -4.27% FROM THE RELATED PARTY TRANSACTION. AS A RESULT, THE DIFFERE NCE OF RS. 7,25,40,785/- WAS ADDED TO THE INTERNATIONAL TRANSACTION TO BRING IT AT ARM'S LENGTH. ITA NO.4713/DEL/2011 20 57. IN THE IMPUGNED ORDER, THE LD. CIT (A) HAS OBSE RVED: 14.8. THE TPO HAD BENCHMARKED THE INTERNATIONAL TRA NSACTION UNIT WISE INSTEAD OF ENTITY WISE IN THE AY 2004-05. THIS MATT ER HAD TRAVELLED TO THE HON'BLE ITAT AND IT PRONOUNCED ITS DECISION ON 11.0 6.2011 DECIDING IN FAVOR OF THE APPELLANT. FOR THE AY 2006-07 ALSO THE APPELLANT BENCHMARKED ITS INTERNATIONAL TRANSACTION AT THE EN TITY WISE UNDER TNMM USING OP/TC AS THE PLI. DISPUTE RESOLUTION PANEL (D RP) CONCURRED WITH THE APPROACH OF THE TPO WHO HAD DONE UNIT WISE BENC HMARKING. THE MATTER TRAVELLED UP TO THE ITAT AND ITAT DECIDED TH E MATTER THROUGH ITS PRONOUNCEMENT ON 20.01.2011 DECIDING IN FAVOR OF TH E APPELLANT. IT IS IMPORTANT TO NOTE THAT ON THE ISSUE OF WHAT SHOULD BE THE UNIT OR LEVEL OF COMPARISON BETWEEN RELATED AND UNRELATED TRANSACTIO NS ARE COMMON FOR THE AY 2004-05, 2005-06 AND 2006-07. THE HON'BLE IT AT HAS DECIDED THIS ISSUE FOR BOTH EARLIER AND SUBSEQUENT ASSESSMENT YE ARS. THE ISSUES ARE IDENTICAL. THE CONTENTION OF THE APPELLANT IS THAT THE RELATED PARTY TRANSACTIONS SHOULD BE AGGREGATED AT THE ENTITY LEV EL AND IN THE SAME WAY THE TRANSACTIONS WITH UNRELATED PARTY ALSO SHOULD B E AGGREGATED AT THE ENTITY LEVEL AND THEN THE RESULTANT PLI SHOULD BE C OMPARED. WHEREAS, THE CONTENTION OF THE TPO IS THAT EACH UNIT OF THE APPE LLANT COMPANY SHOULD BE BENCHMARKED SEPARATELY BASED ON THE UNIT'S TRANS ACTIONS WITH RELATED AND UNRELATED PARTIES. THERE ARE NO DISPUTE ON OTHE R ISSUES LIKE MOST APPROPRIATE METHOD AND PLI TO BE USED. 14.10. I HAVE EXAMINED THE ISSUES CAREFULLY AFTER G OING THROUGH THE RECORD. I AM OF THE VIEW THAT THE TPO HAS NOT DONE ANY SEPA RATE EVALUATION OF THE UNIT WISE ASSETS EMPLOYED, FUNCTIONS PERFORMED AND RISK UNDERTAKEN. THERE IS NO DISTINGUISHABLE FEATURE IN THE FACTS OR NATURE OF THE CONTROVERSY AS COMPARED TO THE PAST ASSESSMENT YEAR I.E. 2004-0 5 OR THE NEXT ASSESSMENT YEAR I.E. 2006-07. THE HON'BLE ITAT IN B OTH THE YEARS HAS HELD THAT THE SEGMENTS AS CREATED BY THE APPELLANT ARE ACCEPTABLE EVEN THOUGH THERE ARE NOT TO BE MAINTAINED BY THE APPELL ANT AS SUCH UNDER ACCOUNTING STANDARDS. ALLOCATIONS OF THE COSTS ARE BASED ON RATIONAL PRINCIPLES. WISDOM OF THE HIGHER AUTHORITIES ARE AV AILABLE IN THE FORM OF THE TWO ABOVE MENTIONED JUDGMENTS OF THE HON'BLE ITAT I N THE EARLIER AS WELL AS NEXT ASSESSMENT YEARS IN THE CASE OF THE ASSESSE E ITSELF. THEREFORE, RESPECTFULLY FOLLOWING THE DECISIONS OF THE HON'BLE ITAT AND ALSO FOR THE REASONS MENTIONED ABOVE, I COME TO THE CONCLUSION T HAT THE BENCHMARKING SHOULD BE BASED ON THE AGGREGATION AT THE ENTITY LEVEL AND NOT AT THE UNIT LEVEL. AS THE PLI OF THE INTERNATIO NAL TRANSACTION FALLS WITHIN +/-5% AS COMPUTED BY THE APPELLANT, THE BENEFIT OF PROVISO TO SECTION 92C(2) IS AVAILABLE TO THE APPELLANT. THEREFORE, TH IS GROUND OF THE APPELLANT IS ALLOWED. THE AO/ TPO IS DIRECTED TO DELETE THE A DJUSTMENT MADE TO INTERNATIONAL TRANSACTION. ITA NO.4713/DEL/2011 21 58. THUS, THE CIT (A) OBSERVED THAT WHEREAS THE TPO HAD BENCHMARKED THE INTERNATIONAL TRANSACTION UNITWISE, INSTEAD OF ENTI TYWISE, FOR AYS 2004-05 AND 2006-07, THE TRIBUNAL, FOR BOTH THESE YEARS, HAD DECIDED THI S ISSUE IN FAVOUR OF THE ASSESSEE, HOLDING THAT THE BENCHMARKING OF THE INTERNATIONAL TRANSACTIONS HAD TO BE DONE ENTITYWISE. HE, FOLLOWING THE SAID TRIBUNAL ORDERS, DIRECTED THE AO/TPO TO DELETE THE ADJUSTMENT MADE TO THE INTERNATIONAL TRANSACTIONS. WHILE DOING SO, HE ALSO OBSERVED THAT THE TPO HAD NOT DONE ANY SEPARATE EVALUATION O F THE UNITWISE ASSETS EMPLOYED AND FUNCTIONS PERFORMED AND RISKS UNDERTAKEN. 59. THE LD. DR HAS CONTENDED THAT THE LD. CIT (A) H AS ERRED IN DELETING THE ADDITION CORRECTLY MADE BY THE AO; THAT THE ASSESSEE IS INTO SOFTWARE SERVICES; THAT THE ASSESSEE HAS FOUR UNITS, ALL OF WHICH HAVE DIFFERENT PROFITA BILITY; THAT THE ASSESSEE EMPLOYED THE TNMM, WHEREAS THE TPO WENT UNITWISE; THAT EXTERNAL COMPARABLES WERE USED (REFERENCE MADE TO THE TRIBUNAL ORDER FOR AY 2004-0 5 AT APB 583-584, 587, 593 AND 594). IT HAS BEEN CONTENDED THAT THERE, INTERNAL BE NCHMARKING WAS NOT DONE. IT HAS ALSO BEEN CONTENDED THAT THE ANALYSIS DONE THIS YEAR, AS COMPARED TO THAT IN AY 2004-05, IS DIFFERENT, INASMUCH AS FOR THE YEAR UNDER CONSIDERA TION, THE ANALYSIS IS SUPERIOR. IT HAS BEEN CONTENDED THAT THIS WAS NEVER DONE BY THE TPO IN AYS 2004-05 AND 2006-07. 60. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSE SSEE HAS PLACED RELIANCE ON THE IMPUGNED ORDER AND IT HAS BEEN CONTENDED THAT AS I N THE EARLIER TWO YEARS, I.E., AYS 2004-05 AND 2006-07, FOR THE YEAR AT HAND ALSO, THE PROFIT OF EACH OF THE STP UNITS OF THE ASSESSEE CANNOT BE EVALUATED SEPARATELY AND IND EPENDENTLY OF ONE ANOTHER; THAT THE TRIBUNAL ORDERS FOR AYS 2004-05 AND 2006-07 HAV E BEEN RELIED ON BY THE TRIBUNAL FOR AYS 2007-08 AND 2008-09 TOO, HOLDING THAT THE A SSESSEE WAS JUSTIFIED IN UNDERTAKING INTERNAL BENCHMARKING ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE. CONTENDING THAT RULE 10B (E) OF THE RULES PROVIDES THAT PREFERENCE SHALL BE GIVEN TO INTERNALLY COMPARABLE UNCONTROLLED TRANSACTIONS VIS--VIS EXTE RNALLY COMPARABLE UNCONTROLLED TRANSACTIONS, RELIANCE HAS BEEN PLACED ON THE THIRD MEMBER DECISION DATED 13.7.12 OF THE MUMBAI TRIBUNAL IN THE CASE OF TECHNIMONT ICB PVT. LTD. VS. ACIT (COPY AT APB 635-654), RENDERED IN ITA NOS. 4608 AND 5085/MUM/20 10. RELIANCE HAS ALSO BEEN PLACED ON: ITA NO.4713/DEL/2011 22 I) DESTINATION OF THE WORLD VS. DCIT, RENDERED BY THE DELHI BENCH OF THE TRIBUNAL IN ITA NO.5534/DEL/2010, ORDER DATED 08.07 .11 (COPY AT APB 655- 675); II) INTERRA INFORMATION TECHNOLOGIES INDIA (P) LTD . VS. DCIT, RENDERED BY THE DELHI BENCH OF THE TRIBUNAL IN ITA NO.5568 & 5680/D EL/2011 (COPY AT APB 676-729); III) HONEYWELL INDIA LTD. VS. ACIT, RENDERED BY T HE CHENNAI BENCH OF THE TRIBUNAL IN ITA NO.2152/MDS/2011, ORDER DATED 12.12 .13 (COPY AT APB 737- 764); AND IV) LUMMUS TECHNOLOGY HEAT TRANSFER B.V. VS. DCIT , RENDERED BY THE DELHI BENCH OF THE TRIBUNAL IN ITA NO.6227/DEL/12, ORDER DATED 21.02.14 (COPY AT APB 730-736) 61. HAVING CONSIDERED THE RIVAL CONTENTIONS IN THE LIGHT OF THE MATERIAL PLACED ON RECORD QUA THIS ISSUE, WE FIND THAT DURING THE YEAR , THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS OF SOFTWARE DEVELOPMENT AND RELATED SERVICES WITH ITS ASSOCIATED ENTERPRISES (AES), I.E., BIRLA SOFT INC ., USA AND BIRLA SOFT (UK) LTD. IT APPLIED THE TNMM FOR BENCHMARKING THE INTERNATIONAL TRANSAC TIONS OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES AS THE MOST APPROPRIATE METHOD , WITH OP/OC AS THE PROFIT LEVEL INDICATOR (PLI). IT AGGREGATED THE MARGIN FROM THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES FROM ALL ITS STP UNITS. THE TPO, HOWEVER, BENCHMARKED EACH OF THE STP UNITS ON A STAND ALONE BASIS. THE ASSESSEE CONSIDERED ITS INTERNATIONAL TRANSACTIONS TO BE AT ARMS LENGTH, TAKING THE OPERATING PROFIT MARGIN EA RNED FROM THE SERVICES RENDERED TO ITS AES, COMPUTED AT 2.04%, RATHER THAN THE OPERATING P ROFIT MARGIN EARNED BY IT FROM RENDERING OF SERVICES TO UNRELATED PARTIES, COMPUTE D AT 2.51%, TO BE WITHIN THE SAFE HARBOUR RANGE OF (+)/(-) 5%. THE TPO, HOWEVER, CONS IDERED THE RELATED MARGIN OF THE ASSESSEES CHENNAI STP UNIT AT (-) 4.27%, ARRIVING AT AN ARMS LENGTH MARGIN OF 30.26%, THUS MAKING AN ADDITION OF RS. 7,25,40,785/ -. THEREFORE, THE TPO DID NOT ACCEPT THE COMPARISON AT THE ENTITY LEVEL, OBSERVIN G THAT THE THREE STP UNITS OF THE ASSESSEE, TO WHICH THE INTERNATIONAL TRANSACTIONS O F THE ASSESSEE WERE RELATED, HAD DISTINCT IDENTITIES. THE TPO OBSERVED THAT THE OP/T C EARNED BY THE ASSESSEES CHENNAI ITA NO.4713/DEL/2011 23 UNIT IN ITS RELATED PARTY TRANSACTION [(-) 18.57%] WAS LOWER THAN THE MARGIN EARNED FROM UNRELATED PARTY TRANSACTION (19.49%). 62. THE CIT (A), HOWEVER, DISAGREED WITH THE TPOS CONCLUSION THAT THE BENCHMARKING OUGHT TO BE BASED ON THE AGGREGATION A T THE UNIT LEVEL AND NOT AT THE ENTITY LEVEL, AS CONTENDED BY THE ASSESSEE. FOR THI S, THE LD. CIT (A) FOLLOWED THE TRIBUNAL DECISIONS IN THE ASSESSEES CASE FOR AYS 2004-05 (S UPRA) AND 2006-07 (SUPRA). 63. FOR THE DEPARTMENT, IT HAS BEEN CONTENDED BEFOR E US THAT FOR AYS 2004-05 AND 2006-07, EXTERNAL COMPARABLES WERE USED AND THE ANA LYSIS DONE FOR THE YEAR UNDER CONSIDERATION IS DIFFERENT FROM THOSE YEARS, INASMU CH AS SUCH ANALYSIS FOR THE YEAR UNDER CONSIDERATION IS SUPERIOR, WHICH WAS NOT DONE FOR AYS 2004-05 AND 2006-07. 64. AS NOTED BY THE LD. CIT (A), THE RELEVANT OBSER VATIONS OF THE ITAT FOR AYS 2004- 05 AND 2006-07 ARE AS FOLLOWS, RESPECTIVELY:- ACIT VS. BIRLA SOFT. LTD. ITA NO. 4001/DEL/2009 AY , 2004-05 '13. THE TERMS AND CONDITIONS FOR RENDERING SUCH SE RVICES BY EACH OF STP UNIT WAS GOVERNED BY ONE SINGLE AGREEMENT ENTERED U TO B ETWEEN BIRLA SOFT INDIA AND BIRLA SOFT INC. US. THE LEARNED TPO HAS ASSURED THA T FUNCTIONS, ASSETS AND RISK UNDERTAKEN BY EACH OF THE STP UNIT ARE DISTINCT FRO M EACH OTHER AND IS COMPARABLE WITH THE FUNCTION, ASSETS AND RISK UNDER TAKEN BY EXISTING COMPARABLES. IN OTHER WORDS, LEARNED TPO HAS TOTALL Y IGNORED THE UNITY OF THE BUSINESS, ADMINISTRATIVE CONTROL AND UNITY OF FUNDS ETC. THE INDEPENDENT FAR ANALYSIS OF EACH UNIT WITH EXISTING COMPARABLES IS PRACTICALLY NOT POSSIBLE THERE IS A COMMON MANAGEMENT, INTERLACING OF THE FUNDS ETC. 14. THUS, ON DUE CONSIDERATION OF THE ORDER OF THE LEARNED CIT(APPEALS), WE ARE SATISFIED THAT LEARNED FIRST APPELLATE AUTHORIT Y RIGHTLY DID NOT CONCUR WITH THE CONCLUSION OF THE TPO FOR SEGREGATING THE EACH STP UNIT AND CONSIDERING THE RESULT OF EACH STP UNIT AS A STAND-ALONE FOR THE P URPOSE OF DETERMINING THE ALP RELATING TO INTERNATIONAL TRANSACTION.' BIRLASOFT (INDIA) LTD. VS. DCIT ITA NO. 3839/ DEL/2 010 AY 2006-07 ''17. IN THE LIGHT OF THE DISCUSSIONS MADE ABOVE WE THEREFORE, HOLD THAT THE ASSESSEE WAS JUSTIFIED IN UNDERTAKING INTERNAL BENC H MARKING ANALYSIS ON STANDALONE BASIS BY PLACING ON RECORD WORKING OF OP ERATING PROFIT MARGIN FROM INTERNATIONAL TRANSACTIONS WITH AES AND TRANSACTION S WITH UNRELATED PARTIES UNDERTAKEN IN SIMILAR FUNCTIONAL AND ECONOMIC SCENA RIO, AND THE SAME SHOULD BE THE BASIS FOR DETERMINATION OF ARM'S LENGTH, PRICE IN RESPECT OF INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH THE ASSOCIATED ENTERPR ISE. IN THE LIGHT OF THE FACTS OF THE PRESENT CASE AS DISCUSSED ABOVE, WE THEREFORE, HOLD THAT THE TRANSFER PRICING OFFICER HAD NO MANDATE TO HAVE RECOURSE TO EXTERNAL COMPARABLES WHEN, IN THE ITA NO.4713/DEL/2011 24 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 P RICING OFFICER TO DETERMINE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS WI TH AES BY MAKING INTERNAL COMPARISON OF THE NET MARGIN EARNED BY THE ASSESSEE FROM THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES AND THE PR OFIT EARNED BY THE ASSESSEE FROM THE INTERNATIONAL TRANSACTIONS WITH UNRELATED PARTIES. IN THIS RESPECT, THE ASSESSEE HAS ALREADY GIVEN HIS WORKING BY ALLOCATIN G REVENUE AND EXPENSES TO BOTH THE SEGMENTAL AND DETERMINED SEPARATE PROFITAB ILITY.' 65. EVIDENTLY, THEREFORE, FOR AYS 2004-05 AND 2006- 07 ALSO, AS FOR THE YEAR UNDER CONSIDERATION PRESENTLY, THE TPO HAD NOT ACCEPTED T HE COMPARISON AT THE ENTITY LEVEL. THE TRIBUNAL, HOWEVER, FOR BOTH THESE YEARS, ACCEPT ED THE ASSESSEES STAND THAT THE RELATED PARTY TRANSACTIONS AS WELL AS THE UNRELATED PARTY TRANSACTIONS SHOULD BE AGGREGATED AT THE ENTITY LEVEL AND THEN THE RESULTA NT PLI SHOULD BE COMPARED. 66. FOR AY 2006-07, IT IS NOTEWORTHY, THE TPO HAD R EJECTED THE METHOD OF INTERNAL COMPARISON ADOPTED BY THE ASSESSEE, FOR THE REASON THAT THE ASSESSEE HAD NOT MAINTAINED SEGMENTAL ACCOUNTS AND HAD NOT REPORTED SEGMENTAL RESULTS IN ITS AUDITED FINANCIAL STATEMENTS. THE TRIBUNAL, HOWEVER, HELD T HAT THE GUIDELINES PROVIDED UNDER AS-17, WHICH IS THE ACCOUNTING STANDARD REQUIRING R EPORTING OF FINANCIAL INFORMATION OR RESULT ABOUT THE DIFFERENT TYPES OF PRODUCTS AND SE RVICES THAT THE CONCERNED BUSINESS SEGMENT PRODUCES, WERE NOT APPLICABLE TO THE ASSESS EES CASE, SINCE THE ASSESSEE COMPANY WAS PROVIDING THE SAME SOFTWARE RELATED SER VICES TO BOTH, ITS AES AND UNRELATED PARTIES, AND SO, THE LACK OF SEGMENTAL RE PORTING COULD NOT BE MADE A BASIS FOR REJECTING THE ASSESSEES METHOD OF COMPUTING THE AL P BY WAY OF INTERNAL COMPARISON MADE BETWEEN THE TRANSACTIONS AND AES UNRELATED PA RTIES. 67. THE ABOVE IS NOT THE ISSUE BEFORE US. HOWEVER, DESPITE THEREOF, THE FACT REMAINS THAT FOR AY 2006-07, THE TRIBUNAL HELD THAT THE ASS ESSEE WAS JUSTIFIED IN UNDERTAKING INTERNAL BENCHMARKING ANALYSIS ON A STAND ALONE BAS IS BY PLACING ON RECORD THE WORKING OF THE OPERATING PROFIT MARGIN FROM INTERNATIONAL T RANSACTIONS WITH ITS AES AND TRANSACTIONS WITH UNRELATED PARTIES, UNDERTAKEN IN A SIMILAR FUNCTIONAL AND ECONOMIC SCENARIO, AND THAT THE SAME OUGHT TO BE THE BASIS F OR DETERMINATION OF THE ARMS LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES. ITA NO.4713/DEL/2011 25 68. FOR AY 2004-05, WHILE DECIDING IN FAVOUR OF TH E ASSESSEE, THE TRIBUNAL FOUND THAT THERE WAS NO SIGNIFICANT FUNCTIONAL DIFFERENCE IN THE SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES RENDERED BY THE ASSESSEE TO IT S RELATED AND UNRELATED PARTIES. THE SERVICES RENDERED BY THE STP UNITS OF THE ASSES SEE WERE RENDERED TO THE SAME AES OF THE ASSESSEE, I.E., BIRLA SOFT INC. AND BIRL A SOFT UK, ON A CONTINUING BASIS (THE POSITION REMAINS THE SAME FOR THE YEAR UNDER CONSID ERATION ALSO). IT WAS OBSERVED THAT THERE WAS UNITY OF BUSINESS, ADMINISTRATIVE CONTROL AND FUNDS, ETC., IN EACH OF THE STP UNITS OF THE ASSESSEE, AND THAT BECAUSE OF SUCH COM MONNESS OF MANAGEMENT AND INTERLACING OF FUNDS, ETC., OR SOFTWARE DEVELOPMENT SERVICES, IT WAS NOT PRACTICALLY POSSIBLE TO CARRY OUT AN INDEPENDENT FAR ANALYSIS O F EACH UNIT WITH THE EXISTING COMPARABLES. IT REMAINS UNDISPUTED THAT THE POSITIO N, AS ABOVE, REMAINS THE SAME FOR THE YEAR UNDER CONSIDERATION ALSO. THE TRIBUNAL ORD ERS FOR THE EARLIER YEARS HAVE NOT BEEN SHOWN TO HAVE BEEN UPSET, OR EVEN STAYED, ON A PPEAL. THEREFORE, SINCE THERE CONTINUES TO BE UNITY OF BUSINESS AND ADMINISTRATIV E CONTROL AND INTERLACING OF FUNDS AMONGST THE UNITS OF THE ASSESSEE COMPANY, FOR THIS YEAR ALSO, IT IS NOT POSSIBLE TO CARRY OUT AN INDEPENDENT FAR ANALYSIS OF EACH UNIT WITH E XISTING COMPARABLES. THE ASSESSEE HAD PROVIDED VARIOUS KINDS OF SOFTWARE RELATED SERV ICES, SUCH AS SOFTWARE DEVELOPMENT SERVICES, SOFTWARE MAINTENANCE AND REPAIR SERVICES AND QUALITY TESTING SERVICES, ETC., FROM EACH OF ITS STP UNITS LOCATED IN NOIDA AND CHE NNAI. THESE SERVICES WERE RENDERED TO THE SAME TWO AES OF THE ASSESSEE. IT WAS A SINGL E AGREEMENT QUA EACH OF THE ASSESSEES AES, WHICH GOVERNED THE TERMS AND CONDIT IONS THEREOF, AS WELL AS THE CONSIDERATION FOR THE RENDERING OF SUCH SERVICES. T HE SERVICES WERE PROVIDED ON A CONTINUOUS BASIS FROM EACH OF THE STP UNITS OF THE ASSESSEE COMPANY. THEREFORE, THE ASSESSEE IS CORRECT IN CONTENDING THAT SUCH SERVIC ES ARE OF THE SAME OR SIMILAR NATURE AMONGST ALL THREE OF ITS STP UNITS, INTER SE, AND T HEY SHOULD BE COMBINED AND EVALUATED BY ADOPTING A COMBINED TRANSACTION APPROACH, RATHER THAN EMPLOYING THE UNITWISE APPROACH, AS ADOPTED BY THE TPO. 69. IN TECHNIMONT ICB PVT. LTD. (SUPRA) (AUTHORED BY ONE OF US THE LD. AM, SITTING AS THIRD MEMBER), IT HAS BEEN HELD IN THIS REGARD T HAT RULE 10B (E)(II) OF THE INCOME-TAX RULES PROVIDES THAT THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE, FROM A COMPARABLE UNCONTROLLED TRANSACT ION, OR A NUMBER OF SUCH ITA NO.4713/DEL/2011 26 TRANSACTIONS, IS COMPUTED HAVING REGARD TO THE SAME BASE, AS IS REFERRED TO IN RULE 10B (E) (I), WITH REFERENCE TO COST INCURRED, OR SALES EFFECTED, OR ASSETS EMPLOYED, OR TO BE EMPLOYED; THAT IN CLAUSE (II) OF THE SAID RULE, REF ERENCE IS MADE TO INTERNAL AND EXTERNAL COMPARABLES; THAT AS PER THIS RULE, WHAT IS TO BE C OMPARED IS PROFIT FROM A COMPARABLE UNCONTROLLED TRANSACTION; THAT THE WORD COMPARABLE MAY ENCOMPASS INTERNAL COMPARABLE OR EXTERNAL COMPARABLE; THAT THE RULE PR OVIDES THAT PREFERENCE IS TO BE GIVEN TO INTERNALLY COMPARABLE UNCONTROLLED TRANSAC TIONS VIS--VIS EXTERNALLY COMPARABLE UNCONTROLLED TRANSACTIONS; THAT THIS IS SO, BECAUSE THE RULE REFERS FIRST TO THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE (INTERNAL) FROM A COMPARABLE UNCONTROLLED TRANSACTION AND THEREAFTER, IT TALKS OF NEW PROFIT MARGIN REALI ZED BY AN UNRELATED ENTERPRISE (EXTERNAL) FROM A COMPARABLE UNCONTROLLED TRANSACTION; THAT TH US, WHERE A POTENTIAL COMPARABLE IS AVAILABLE IN THE SHAPE OF AN UNCONTROLLED TRANSACTI ON OF THE SAME ASSESSEE, IT IS LIKELY TO HAVE A HIGHER DEGREE OF COMPARABILITY VIS--VIS COM PARABLES IDENTIFIED AMONGST THE UNCONTROLLED TRANSACTIONS OF THIRD PARTIES; THAT TH E UNDERLYING OBJECT BEHIND COMPUTING THE ALP OF AN INTERNATIONAL TRANSACTION IS TO FIND OUT THE PROFITS WHICH SUCH ENTERPRISE WOULD HAVE EARNED, IF THE TRANSACTION HAD BEEN WITH SOME THIRD PARTY, INSTEAD OF THE RELATED PARTY; THAT WHEN DATA IS AVAILABLE SHOWING PROFIT MARGIN OF THAT ENTERPRISE ITSELF FROM A THIRD PARTY, IT IS ALWAYS SAFE AND ADVISABLE TO HAVE RECOURSE TO SUCH INTERNAL COMPARABLE CASE; THAT THE REASON FOR THIS I,S THAT VARIOUS FACTORS HAVING BEARING ON THE QUALITY OF OUTPUT, ASSETS EMPLOYED, INPUT COST, ETC ., CONTINUE TO REMAIN, BY AND LARGE THE SAME IN THE CASE OF AN INTERNAL COMPARABLE; THAT TH E EFFECT OF DIFFERENCE DUE TO SUCH INHERENT FACTORS ON THE COMPARISON MADE WITH THE TH IRD PARTIES GETS NEUTRALIZED WHEN COMPARISON IS MADE WITH INTERNAL COMPARABLES; AND T HAT THEREFORE, AN INTERNALLY COMPARABLE UNCONTROLLED TRANSACTION IS MORE NOTEWO RTHY THAN AN EXTERNALLY COMPARABLE UNCONTROLLED TRANSACTION. 70. IN DESTINATION OF THE WORLD PVT. LTD. (SUPRA) , IT HAS BEEN HELD, INTER ALIA, THAT THE OECD GUIDELINES MENTION THAT NET MARGIN OF THE TAX PAYER FROM THE CONTROLLED TRANSACTIONS SHOULD BE ESTABLISHED WITH REFERENCE T O THE NET MARGIN WHICH THE SAME TAX PAYER EARNS IN COMPARABLE UNCONTROLLED TRANSACTIONS ; THAT WHERE THIS IS NOT POSSIBLE, THE NET MARGIN THAT WOULD HAVE BEEN EARNED IN COMPARABL E TRANSACTIONS BY AN INDEPENDENT ENTERPRISE, MAY SERVE AS A GUIDE; THAT THUS, THESE GUIDELINES SUGGEST PREFERENCE FOR ITA NO.4713/DEL/2011 27 INTERNAL COMPARABLES AND REFERENCE HAS TO BE MADE T O THE RESULT OF INDEPENDENT ENTERPRISES ONLY WHEN THE FORMER COURSE OF ACTION I S NOT POSSIBLE; THAT IN THE CASE OF BIRLA SOFT (INDIA) LTD., IN ITA NO.3839/DEL/00, IT HAS BEEN CLEARLY HELD THAT THE ASSESSEE WAS JUSTIFIED IN UNDERTAKING INTERNAL COMPARISON ON A STAND ALONE BASIS, BY PLACING ON RECORD THE WORKING OF OPERATIVE PROFIT MARGIN FROM INTERNATIONAL TRANSACTIONS WITH AES AND TRANSACTIONS WITH UNCONTROLLED PARTIES, UNDERTA KEN IN A SIMILAR FUNCTIONAL AND ECONOMIC SCENARIO; THAT SUCH AN INTERNAL COMPARISON IS VALID IN ALL THE METHODS; AND THAT THEREFORE, THE ATTEMPT SHOULD BE TO DETERMINE ARMS LENGTH PRICE OF CONTROLLED TRANSACTIONS ON COMPARING THE SAME WITH INTERNAL UN CONTROLLED TRANSACTIONS UNDERTAKEN IN THE SAME OR SIMILAR ECONOMIC SCENARIO. 71. IN VIEW OF THE ABOVE, WE HOLD THAT THE ASSESSEE IS RIGHT IN CONTENDING THAT SINCE THE PROFIT OF EACH OF THE STP UNITS OF THE ASSESSEE COMPANY CANNOT BE EVALUATED SEPARATELY AND INDEPENDENTLY OF ONE ANOTHER, THEY C ANNOT BE SEGREGATED AND THE APPROACH OF THE TPO IN CONSIDERING THE RESULT OF EA CH STP UNIT, ON A STAND ALONE BASIS, FOR THE PURPOSE OF DETERMINING THE ALP RELATING TO THE ASSESSEES INTERNATIONAL TRANSACTIONS, WAS INCORRECT. THE ACTION OF THE CIT (A) IN ACCEPTING THIS CONTENTION OF THE ASSESSEE IS HEREBY UPHELD AND CONFIRMED. THE LD. CI T (A), IN OUR CONSIDERED OPINION, FOR THE ABOVE DISCUSSION, HAS RIGHTLY CONCLUDED THA T THE BENCHMARKING OF THE TRANSACTIONS SHOULD BE BASED ON THE AGGREGATION AT THE ENTITY LEVEL AND NOT AT THE UNIT LEVEL. THIS FINDING OF THE LD. CIT (A) IS ENDORSED. ACCORDINGLY, GROUND NO.9 IS REJECTED. 72. IN THE RESULT, THE APPEAL FILED BY THE DEPARTME NT IS PARTLY ALLOWED, AS INDICATED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 06.05. 2014. SD/- SD/- [R.S. SYAL] [A.D. JAIN] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED, 06.05.2014. DK ITA NO.4713/DEL/2011 28 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.