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

ITA 4776/DEL/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53500 (ITAT-DELHI)
• Duration Of Justice: 1 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-12-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 02-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS GEETMALA MOHANANEY
• Assessee Lawyers: ARCHANA GUPTA ARS
• Keywords: Related party transaction; Business income; Transfer pricing; Opportunity of being heard; International transaction; Application of stay
• Section: 92C; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI A BENC H BEFORE SHRI R.P. TOLANI, JM & SHRI A.N. PAHUJA, AM ITA NO4776./D/2011 WITH STAY APPLICATION NO.127/D/2011 ASSESSMENT YEAR:2007-08 BIRLASOFT (INDIA) LTD., (FORMERLY BIRLASOFT LTD.), 8 TH FLOOR, BIRLA TOWER, 25 TH BARAKHAMBA ROAD, NEW DELHI V/S . DY. C.I.T.,CIRCLE 3 (1), NEW DELHI [PAN:AAACB 2769 E] (APPELLANT) (RESPONDENT) ASSESSEE BY S/SHRI AJAY VOHRA, RAMIT KATYAL, ABHISHEK AGGARWAL & MS. ARCHANA GUPTA, ARS REVENUE BY MRS. GEETMALA MOHANANEY, DR DATE OF HEARING 02-12-2011 DATE OF PRONOUNCEMENT 30-12-2011 O R D E R A.N.PAHUJA:- THIS APPEAL FILED ON 2.11.2011 BY THE ASSESSEE AGAI NST AN ORDER DATED 28.09.2011 OF THE ASSESSING OFFICER (A.O. IN SHORT) READ WITH ORDER DATED 10 TH AUGUST, 2011 OF THE DRP-I, NEW DELHI, RAISES THE F OLLOWING GROUNDS:- 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING THE ASSESSMENT UNDER SECTION 144C READ WITH SECTION 143 (3) OF THE INCOME- TAX ACT (THE ACT) AT AN INCOME OF ` .53,03,26,140 AS AGAINST THE RETURNED LOSS OF ` .74,32,731/-. 2. THAT THE ASSESSING OFFICER/DISPUTE RESOLUTION PA NEL ('DRP') ERRED ON FACTS AND IN LAW IN MAKING ADJUSTMENT OF ` 51,76,94,438 TO THE INCOME OF THE APPELLANT ON ACCOUNT OF THE DIFFERENCE IN THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN DURING THE PR EVIOUS YEAR. 2.1 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN DISREGARDING THE INTERNAL BENCHMARKING UNDERTAKEN BY THE ASSESSE E FOR DETERMINING THE I.T.A. NO.4776/DEL./2011 2 ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION S APPLYING TNMM ON THE GROUND THAT - (I) THE RELATED PARTY AND UNRELATED PARTY TRANSACTI ONS ARE SO CLOSELY LINKED OR CONTINUOUS THAT THEY CANNOT BE EVALUATED ADEQUATELY ON A SEPARATE BASIS. (II) THE APPELLANT DID NOT MAINTAIN SEGMENTAL ACCOU NTS FOR THE RELATED AND NON RELATED TRANSACTIONS AND THERE WAS NO SEGRE GATION OF THESE ACTIVITIES IN THE AUDITED FINANCIALS. (III) THE APPELLANT HAS ARTIFICIALLY BIFURCATED IT S ACCOUNT IN TWO SEGMENTS OF RELATED AND NON RELATED, IN ABSENCE OF ANY CREDI BLE, EXPLAINED OR DISCLOSED BASIS OF ALLOCATION OF EXPENSES. (IV) THE APPELLANT WAS NOT ABLE TO PRODUCE ANY SUC H DOCUMENTS OR DATA WHICH CAN BE SAID TO BE SUBSTANTIAL PROOF OF MAINTE NANCE OF SEGMENTAL ACCOUNTS. 2.2 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN DISREGARDING THE SEGMENTAL PROFITABILITY SUBMITTED BY THE APPELL ANT, HOLDING AS UNDER: (I) THE APPELLANT DID NOT MAINTAIN AUDITED SEGMENT AL ACCOUNTS; (II) THE SEGMENTAL ACCOUNTS WERE DRAWN IN TRANSFER PRICING REPORT BY MAKING AD HOC ALLOCATION OF EXPENSES BECAUSE SEGMEN TAL INFORMATION WAS NOT AVAILABLE IN THE AUDITED ACCOUN TS. (III) IN ABSENCE OF ANY RELIABLE BASIS OF ALLOCATI ON OF EXPENSES AND REASONS TO DIFFERENTIATE THE SEGMENTS, THE SEGMENTA L ACCOUNTS DRAWN BY THE APPELLANT IN THE TRANSFER PRICING STUD Y COULD NOT BE RELIED UPON TO BENCHMARK THE INTERNATIONAL TRANSACT IONS. (IV) THE ALLOCATION OF EXPENDITURE BETWEEN THESE T WO SEGMENTS WITHOUT ANY EXPLAINED OR DISCLOSED ALLOCATION KEYS COULD NO T BE RELIED UPON TO DETERMINE THE CORRECT SEGMENTAL RESULTS 2.3 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN NOT TAKING INTO ACCOUNT THE SEGMENTAL ANALYSIS CERTIFIED BY A CHART ERED ACCOUNTANT, ALLEGEDLY OBSERVING THAT (I) AS PER TAX AUDITOR REP ORT THE APPELLANT HAS NOT MAINTAINED SEGMENTAL ACCOUNT FOR PROVISION OF CONSU LTANCY SERVICES AND (II) THAT THE SEGMENTS WERE DRAWN BY THE MANAGEMENT . 2.4 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN EVALUATING THE INTERNATIONAL TRANSACTIONS APPLYING TNMM AT ENTITY LEVEL BY COMPARING THE NET OPERATING PROFIT MARGIN OF THE ASSESSEE WITH UN CONTROLLED NET OPERATING PROFIT MARGIN OF COMPARABLE UNCONTROLLED ENTERPRISE S. 2.5 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN DISREGARDING MULTIPLE YEAR DATA, AS THE USE OF SINGLE YEAR DATA OF THE COMPARABLE COMPANIES DID NOT ADEQUATELY CAPTURE THE MARKET AND BUSINESS CYCLE REFLECTED IN THE INDUSTRY. I.T.A. NO.4776/DEL./2011 3 2.6 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS A ND IN LAW IN APPLYING THE ADDITIONAL FILTERS OF WAGES/SALES RATIO, PERSISTENT LOSSES AND DECLINING REVENUE FOR DETERMINING COMPARABILITY ANALYSIS, WHI CH WERE UNWARRANTED AND AGAINST THE INTENT OF TRANSFER PRICING REGULATI ONS. 2.7 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS A ND IN LAW IN ARBITRARILY APPLYING THE FILTER OF WAGES/SALES RATIO OF ABOVE 2 5% WITHOUT APPRECIATING THE FACT THAT THE WAGES TO SALES RATIO OF THE APPEL LANT WAS 61 %. 2.8 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN APPLYING INCONSISTENT APPROACH BY ELIMINATING LOSS MAKING CO MPANIES WITHOUT CORRESPONDINGLY ELIMINATING SUPER NORMAL PROFIT MAK ING COMPANIES 2.9 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN CONSIDERING FOLLOWING COMPANIES HAVING VERY HIGH TURNOVER AS CO MPARED TO THE ASSESSEE: A. INFOSYS TECHNOLOGIES LIMITED B. FLEXTRONICS SOFTWARE SYSTEMS LTD. C. IGATE GLOBAL SOLUTIONS LTD. D. MINDTREE LIMITED E. WIPRO LIMITED 2.10 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN SELECTING CELESTIAL BIO LABS, A COMPANY OPERATING IN PHARMACE UTICAL INDUSTRY, AS A COMPARABLE TO APPELLANT. 2.11 THAT THE ASSESSING OFFICER/DRP ERRED IN SELEC TING MEGASOFT LTD. AS A COMPARABLE TO ASSESSEE, DISREGARDING THE FACT THAT IT HAS RELATED PARTY TRANSACTION IN EXCESS OF 25% OF ITS REVENUE. 2.12 THAT THE ASSESSING OFFICER/DRP ERRED IN CONSI DERING ACCEL TRANSMATIC LTD AS A COMPARABLE TO THE ASSESSEE, DISREGARDING THE F ACT THAT IT DOES NOT SATISFY THE FILTER OF EMPLOYEE COST RATIO. 2.13 THAT THE ASSESSING OFFICER/DRP ERRED IN REJEC TING INDIUM SOFTWARE (INDIA) LIMITED AS A COMPARABLE ALLEGEDLY ON THE GROUND THA T THE SALE FROM SOFTWARE SERVICES IS LESS THAN 1 CRORE WITHOUT CONS IDERING THE ACTUAL TURNOVER OF ` 6.49 CRORE. 2.14 THAT THE ASSESSING OFFICER/DRP ERRED IN REJEC TING FOLLOWING COMPARABLE COMPANIES PROPOSED BY THE APPELLANT ALLEGEDLY ON TH E GROUND OF FUNCTIONAL INCOMPARABILITY: A. INDIUM SOFTWARE (INDIA) LIMITED B. INTENSE TECHNOLOGIES LTD. I.T.A. NO.4776/DEL./2011 4 C. SAGARSOFT (INDIA) LTD. D. VMF SOFT TECH LTD. E. WASHINGTON SOFTWARE LTD. F. SANKHYA INFOTECH LTD. G. APPLABS TECHNOLOGIES PRIVATE LIMITED H. JEEVAN SOFTECH LTD. I. COMPULINK SYSTEMS LTD. J. SUNDARAM INFOTECH SOLUTIONS LTD. 2.15 THAT THE ASSESSING OFFICER/DRP ERRED IN REJEC TING VMF SOFT TECH LIMITED ALLEGEDLY ON THE BASIS THAT IT HAS EMPLOYEE COST TO SALES OF LESS THAN 25% WITHOUT CONSIDERING THE ACTUAL EMPLOYEE COST TO SAL ES AS 53.77%. 2.16 THAT THE ASSESSING OFFICER/DRP ERRED IN REJECT ING VISION COMPTECH INTEGRATORS LIMITED ALLEGEDLY ON THE BASIS THAT THE COMPANY HAD RELATED PARTY TRANSACTION IN EXCESS OF 25% EVEN WHEN IT WAS FAIRLY DEMONSTRATED THAT THE RELATED PARTY TRANSACTIONS IN THAT COMPANY WERE LESS THAN 25%. 2.17 THAT THE ASSESSING OFFICER/DRP ERRED IN NOT C ONSIDERING THE FRESH DATABASE SEARCH CONDUCTED BY APPELLANT BASED ON THE FILTERS TAKEN BY TPO IN THE ASSESSMENT FOR THE PRECEDING YEAR. 2.18 THAT THE ASSESSING OFFICER / DRP ERRED ON FAC TS AND IN LAW IN NOT APPRECIATING THAT THE ASSOCIATED ENTERPRISE HAS, IN FACT, INCURRED A LOSS FROM THE INTERNATIONAL TRANSACTIONS AND, THEREFORE, NO ADJUSTMENT ON ACCOUNT OF THE ALLEGED DIFFERENCE IN ARM'S LENGTH P RICE WAS EVEN OTHERWISE WARRANTED. 2.19 WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER /IDRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IN ANY CASE THE ADJUST MENT CANNOT EXCEED THE REVENUE EARNED BY THE ASSOCIATED ENTERPRISE. 2.20 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN DISREGARDING THE RISK IMMUNE PROFILE OF THE ASSESSEE AND REJECTI NG THE CLAIM TOWARDS ADJUSTMENT FOR DIFFERENCES IN THE RISK PROFILE OF T HE APPELLANT VIS-A-VIS THE COMPARABLE COMPANIES. 2.21 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE INCOME OF THE APPELLANT IS EX EMPT UNDER SECTION L0A OF THE INCOME TAX ACT AND HENCE, THERE COULD NOT BE ANY MOTIVE FOR THE TRANSFER OF PROFITS OUTSIDE INDIA. 2.22 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN COMPUTING THE ARMS LENGTH PRICE OF THE TRANSACTION BY APPLYING AR MS LENGTH MARGIN ON TOTAL COST OF THE ASSESSEE INSTEAD OF OPERATING COS T INCURRED IN RELATION TO PROVISION OF SERVICES TO ASSOCIATED ENTERPRISE ONLY . I.T.A. NO.4776/DEL./2011 5 2.23 THAT THE ASSESSING OFFICER/DRP ERRED IN NOT A LLOWING THE APPELLANT, BENEFIT OF +/-5% IN TERMS OF PROVISO TO SECTION 92C(2). 3. THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AN D IN LAW IN NOT ALLOWING DEDUCTION UNDER SECTION L0A OF THE ACT IN RESPECT O F THE 3RD FLOOR GE-GDC STPI UNIT. 3.1 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN HOLDING THAT GE- GDC UNIT IS NOT ALTOGETHER DIFFERENT OR NEW UNI T BUT AN EXTENSION OF AN EXISTING STP UNIT AS BOTH THE UNITS ARE SITUATED IN THE SAME BUILDING AND DOING THE SAME BUSINESS. 3.2 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT GE-GDC WAS SET UP AS AN INDEPENDE NT STAND ALONE UNIT WITH SUBSTANTIAL FRESH INVESTMENT OF ` 8.42 CRORES AND WAS SEPARATELY REGISTERED WITH STPI AND CUSTOM AUTHORITY AS A NEW UNDERTAKING FOR PRODUCTION OF COMPUTER SOFTWARE. 4. THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AN D IN LAW IN NOT ALLOWING PROFIT OF NON STPI UNITS TO BE SET OFF AGAINST THE LOSS OF STP UNITS ALLEGEDLY HOLDING THAT LOSS FROM SUCH SOURCE/ UNIT, WHICH IS EXEMPT FROM TAX, CANNOT BE SET OFF AGAINST INCOME CHARGEABLE TO TAX. 4.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT SECTION 10A OF THE ACT IS A DEDUCTION PROVISION AND THE PROFITS OF THE UNIT ELIGIBLE FOR DEDUCTION UNDER SECTION 10A OF THE ACT WOULD FORM PART OF INCOME COMPUTED UNDER THE HEAD' PROFITS AND GAINS O F BUSINESS OR PROFESSION'. 5. THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AN D IN LAW IN NOT REGARDING MISCELLANEOUS INCOME AS PART OF BUSINESS INCOME INS TEAD IN TREATING THE SAME AS 'INCOME FROM OTHER SOURCES'. 5.1 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT MISCELLANEOUS INCOME OF ` 42,95,817, REPRESENTED AMOUNT RECEIVED ON ACCOUNT OF NOTICE PAY, WHICH IS INCIDENTAL TO SOFTWARE EXPORT BUSINESS AND IS TO BE CONSIDERED AS PART OF THE INCOME OF THE ELIGIBLE UNDERTAKING. 2. ADVERTING FIRST TO GROUND NOS.2 TO 2.23 IN T HE APPEAL, FACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING LOSS OF ` 74,32,731/- UNDER THE NORMAL PROVISIONS AND BOOK PROFIT OF ` 11,022,438/- U/S 115JB OF THE INCOME-TAX ACT, I.T.A. NO.4776/DEL./2011 6 1961 (HEREINAFTER REFERRED TO AS THE ACT) FILED ON 30 TH OCTOBER,2007 BY THE ASSESSEE, AFTER BEING PROCESSED U/S 143(1) OF THE A CT, WAS SELECTED FOR SCRUTINY WITH THE SERVICE OF A NOTICE U/S 143(2) OF THE ACT ISSUED ON 18.9.2008. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFF ICER[AO IN SHORT] NOTICED THAT THE ASSESSEE WAS ENGAGED IN THE ACTIVITIES OF SOFTWARE RELATED TO SERVICES CARRIED OUT FROM STP UNITS. ON PERUSAL OF FORM 3CB FILED WITH THE RETURN, THE AO NOTICED THAT THE ASSESSEE HAD ENTERED INTO INTERNAT IONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES TO THE EXTENT OF ` ` 206,86,92,958/- .IN ORDER TO DETERMINE ARMS LENGTH PRICE[ALP] IN RELATION TO INTERNATIONA L TRANSACTIONS, THE MATTER WAS REFERRED TO TPO. THE TPO VIDE HIS ORDER DATED 26 TH OCTOBER, 2010 DETERMINED ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION S OF ` ` 3,24,60,66,652/- WITH AN UPWARD ADJUSTMENT OF ` ` 51,76,94,438/-. ACCORDINGLY, THE AO ASKED THE ASSESSEE AS TO WHY ADDITION BE NOT MADE TO THE EXTE NT OF ` ` 51,76,94,438/-. AFTER CONSIDERING THE REPLY OF THE ASSESSEE, THE AO REJECTED THEIR OBJECTIONS IN THE DRAFT ORDER IN THE FOLLOWING TERMS:- I) ENOUGH OPPORTUNITIES WERE AFFORDED BY THE TPO T O THE ASSESSEE IN THE PROCEEDINGS BEFORE HIM. AFTER HEAR ING THE ASSESSEES ARGUMENTS, THE TPO HAS PASSED THE ORDER U/S 92CA(3). II) THE ASSESSEE HAS ONLY REPEATED THE SUBMISSIONS MADE BEFORE THE TPO. III) NO COMPARABLES WERE GIVEN BY THE ASSESSEE COMP ANY EITHER BEFORE TPO OR BEFORE THE UNDERSIGNED DURING THE COURSE OF ASSESSMENT PROCEEDINGS. IV) THE ASSESSEE CANNOT PLACE NEW ARGUMENTS BEFORE THE ASSESSING OFFICER AS IT HAD AMPLE OPPORTUNITIES TO DO SO BEFORE THE TPO. V) IN THE ORDER, THE TPO HAS ALREADY DEALT WITH EAC H ASPECT IN DETAIL FOR THE DETERMINATION OF CORRECT ARMS LENGTH PRICE FOR THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE AS SESSEE. IN VIEW OF THE ABOVE REASONS, I AM SATISFIED AND IN AGREEMENT WITH THE ORDER DATED 26.10.2010 U/S 92CA(3) PASSED BY TH E TRANSFER PRICING-II (1), NEW DELHI. THE PROVISIONS OF SECTI ON 92CA(4) OF THE INCOME-TAX ACT, 1961 ARE REPRODUCED AS UNDER:- I.T.A. NO.4776/DEL./2011 7 (4) ON RECEIPT OF THE ORDER UNDER SUB-SECTION(3), THE ASSESSING OFFICER SHALL PROCEED IN COMPUTE THE TOTAL INCOME O F THE ASSESSEE UNDER SUB-SECTION (4) OF SECTION 92C HAVING REGARD TO THE ARMS LENGTH PRICE DETERMINED UNDER SUB-SECTION (3) BY TH E TRANSFER PRICING OFFICER. IN VIEW OF THE ABOVE PROVISIONS, AN ADDITION OF ` `51,76,94,438/- IS MADE IN THE INCOME OF THE ASSESS EE BEING DIFFERENCE BETWEEN ARMS LENGTH PRICE. 2.1 IN THIS CASE DRAFT OF THE PROPOSED ORDER OF ASSESSMENT WAS FORWARDED TO THE ASSESSEE ON 30.12.2010. AGAINST THE DRAFT ORDER, THE ASSESSEE FILED DETAILED OBJECTIONS BEFORE THE DISPU TE RESOLUTION PANEL (DRP) . THE DRP, VIDE THEIR ORDER DATED 10.8.201 1, ISSUED THE FOLLOWING DIRECTIONS :.- 4.4 THE ASSESSEE HAS ARGUED FACTS AND CIRCUMSTANC ES OF THE CASE ARE SAME AS IN ASSESSMENT YEAR 2006-07 WHE REIN THE ITAT VIDE ITS ORDER DATED AT 20.1.2011 HAS GIVEN TH E FOLLOWING DIRECTIONS TO A.O./TPO FOR COMPLETING THE ASSESSMEN T. WE, THEREFORE, DIRECT TO ASSESSING OFFICER/TRANSFE R PRICING OFFICER TO DETERMINE ARMS LENGTH PRICE OF INTERNATIONAL TR ANSACTIONS WITH AES BY MAKING INTERNAL COMPARISON OF THE NET MARGIN EARNED BY THE ASSESSEE FROM THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES AND THE PROFIT EARNED BY THE ASSESSEE FROM THE INTERNATIONA L TRANSACTIONS WITH UNRELATED PARTIES. IN THIS RESPECT, THE ASSESSEE H AS ALREADY GIVEN HIS WORKING BY ALLOCATING REVENUES AND EXPENSES TO BOTH /THE SEGMENTAL AND DETERMINED SEPARATE PROFITABILITY. HOWEVER, ON PER USAL OF THE TPOS ORDER, WE FIND THAT THE TPO HAS NOT UNDERTAKEN ANY EXERCISE TO EXAMINE THE CORRECTNESS OF THE WORKING DONE BY THE ASSESSEE . WE, THEREFORE, RESTORE THIS MATTER BACK TO THE FILE OF THE ASSESSI NG OFFICER/TPO FOR FRESH ADJUDICATION AND/FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSACTIONS UNDERTAKE N WITH THE ASSOCIATED ENTERPRISE BY MAKING COMPARISON OF PROFITABILITY FR OM THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES AND PROFIT ABILITY FROM THE INTERNATIONAL TRANSACTIONS WITH UNRELATED PARTIES A FTER ALLOCATING RESPECTIVE REVENUES AND EXPENSES TO BOTH THE SEGMEN TAL. THE A.O./TPO SHALL PROVIDE REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE ASSESSEE SHALL FURNISH ALL THE DETAILS AND PARTICUL ARS BEFORE /THE AUTHORITIES BELOW TO ENABLE THEM TO MAKE INTERNAL C OMPARISON OF THE I.T.A. NO.4776/DEL./2011 8 PROFITABILITY FROM THE INTERNATIONAL TRANSACTIONS W ITH ASSOCITE ENTERPRISES AND UNRELATED PARTIES UNDERTAKEN BY THE ASSESSEE IN THE SIMILAR FUNCTIONAL AND ECONOMIC SCENARIO. WE ORDER ACCORDINGLY. 4.5 IN THE VIEW OF DRP, KEEPING THE TOTALITY OF F ACTS AND CIRCUMSTANCES IN MIND AND THAT FACTS ARE SAME AS LA ST YEAR AND/THE DIRECTIONS OF ITAT FOR ASSESSMENT YEAR 2006-07 ARE IN THE PROCESS OF BEING CONSIDERED BY HIGH COURT AS APPEAL U/S 260 A HAS BEEN FILED ON 25.06.2011, STATUS QUO MAY BE MAINTAINED F OR THIS YEAR ALSO. HENCE, THE ORDER OF TPO IS NOT DISTURBED FOR THIS YEAR AND OBJECTION IS REJECTED. 2.2 ACCORDINGLY, THE AO COMPLETED THE ASSESSMENT WITH THE ADDITION OF AN AMOUNT OF ` `51,76,94,438/- . 3. THE ASSESSEE IS NOW IN APPEAL BEFORE US AG AINST THE AFORESAID FINDINGS OF THE AO IN TERMS OF DIRECTIONS CONTAINED IN ORDER DA TED 10 TH AUGUST OF THE DRP. WHILE INVITING OUR ATTENTION TO THE DIRECTIONS OF T HE DRP, THE LEARNED AR CONTENDED THAT THE ADDITION HAS BEEN MADE,INTER ALI A, ON THE BASIS OF SIMILAR FACTS AND CIRCUMSTANCES OBTAINING IN THE PRECEDING ASSESS MENT YEAR 2006-07 WHEREIN THE ITAT VIDE THEIR ORDER DATED 29.01.2011 CONCLUDE D ON THIS ISSUE AS UNDER:- 17. IN THE LIGHT OF THE DISCUSSIONS MADE ABOVE, WE THEREFORE, HOLD THAT THE ASSESSEE WAS JUSTIFIED IN UNDERTAKING INTERNAL BENCH MAKING ANALYSIS ON STAND ALONE BASIS BY PLACING ON RECORD WORKING OF OPERATING PROFIT MARGIN FROM INTERNATIONAL TRANS ACTIONS WITH AES AND TRANSACTIONS WITH UNRELATED PARTIES UNDERTAKEN IN SIMILAR FUNCTIONAL AND ECONOMIC SCENARIO, AND THE SAME SHOU LD BE THE BASIS FOR DETERMINATION OF ARMS LENGTH PRICE IN RE SPECT OF INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH THE ASSO CIATED ENTERPRISE. IN THE LIGHT OF THE FACTS OF THE PRESE NT CASE AS DISCUSSED ABOVE, WE THEREFORE, HOLD THAT THE TRANSFER PRICING OFFICER HAD NO MANDATE TO HAVE RECOURSE TO EXTERNAL COMPARABLES WH EN, IN THE PRESENT CASE, INTERNAL COMPARABLES WERE AVAILABLE, WHICH COULD BE APPLIED FOR DETERMINING THE ARMS LENGTH PRICE OF I NTERNATIONAL TRANSACTIONS WITH AES. WE, THEREFORE, DIRECT THE A SSESSING OFFICER/TRANSFER PRICING OFFICER TO DETERMINE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS WITH AES BY MAKING INTER NAL COMPARISON OF THE NET MARGIN EARNED BY THE ASSESSEE FROM THE I NTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES AND THE PR OFIT EARNED BY THE ASSESSEE FROM THE INTERNATIONAL TRANSACTIONS WI TH UNRELATED PARTIES. IN THIS RESPECT, THE ASSESSEE HAS ALREADY GIVEN HIS WORKING I.T.A. NO.4776/DEL./2011 9 BY ALLOCATING REVENUE AND EXPENSES TO BOTH THE SEGM ENTAL AND DETERMINED SEPARATE PROFITABILITY. HOWEVER, ON PER USAL OF THE TPOS ORDER, WE FIND THAT THE TPO HAS NOT UNDERTAKE N ANY EXERCISE TO EXAMINE THE CORRECTNESS OF THE WORKINGS DONE BY THE ASSESSEE. WE, THEREFORE, RESTORE THIS MATTER BACK TO THE FILE OF THE ASSESSING OFFICER/TPO FOR FRESH ADJUDICATION AND FOR THE PURP OSE OF DETERMINING THE ARMS LENGTH PRICE IN RESPECT OF TH E INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH THE ASSOCIATED ENTERPR ISE BY MAKING INTERNAL COMPARISON OF PROFITABILITY FROM THE INTER NATIONAL TRANSACTIONS WITH UNRELATED PARTIES AFTER ALLOCATIN G RESPECTIVE REVENUES AND EXPENSES TO BOTH THE SEGMENTAL. THE A SSESSING OFFICER/TPO SHALL PROVIDE REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE ASSESSEE SHALL FURNISH ALL THE D ETAILS AND PARTICULARS BEFORE /THE AUTHORITIES BELOW TO ENABLE THEM TO MAKE INTERNAL COMPARISON OF THE PROFITABILITY FROM THE I NTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISE /AND UNRELA TED PARTIES UNDERTAKEN BY THE ASSESSEE IN THE SIMILAR FUNCTIONA L AND ECONOMIC SCENARIO. WE ORDER ACCORDINGLY. 18. SINCE WE HAVE ACCEPTED THE ASSESSEES STAND THA T ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTIO NS UNDERTAKEN WITH ASSOCIATED ENTERPRISES IS TO BE DETERMINED ON THE B ASIS OF INTERNAL COMPARISON OF PROFIT EARNED FROM THE INTERNATIONAL TRANSACTIONS WITH AES AND PROFIT EARNED FROM INTERNATIONAL TRANSACTIO NS WITH UNRELATED PARTIES, WE DO NOT GO TO DECIDE WHETHER THE EXTERNA L COMPARABLES SELECTED BY THE TPO WERE PROPER OR JUSTIFIED TO MAK E ARMS LENGTH PRICE IN THE PRESENT CASE AS THAT ISSUE HAS BECOME ACADEMIC AT THIS STAGE. 3.1 ON THE OTHER HAND, THE LD. DR SUPPORTED TH E FINDINGS OF THE AO IN TERMS OF THE DIRECTIONS OF THE DRP. 4. WE HAVE HEARD BOTH THE PARTIES AND GONE THROU GH THE FACTS OF THE CASE AS ALSO THE AFORESAID DECISION DATED 20 TH JANUARY, 2011 OF THE ITAT FOR THE AY 2006- 07.WE FIND THAT THE ITAT IN THE PRECEDING ASSESSMEN T YEAR CONCLUDED THAT THE ASSESSEE WAS JUSTIFIED IN UNDERTAKING INTERNAL BENC H MARKING ANALYSIS ON STAND ALONE BASIS BY PLACING ON RECORD WORKING OF OPERATI NG 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 ARMS LENGTH PRICE I N RESPECT OF INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH THE ASSOCIATED ENTERPR ISE. IT WAS FURTHER CONCLUDED I.T.A. NO.4776/DEL./2011 10 THAT THE TPO HAD NO MANDATE TO HAVE RECOURSE TO EX TERNAL COMPARABLES WHEN, IN THE PRESENT CASE, INTERNAL COMPARABLES WERE AVAI LABLE, WHICH COULD BE APPLIED FOR DETERMINING THE ARMS LENGTH PRICE OF INTERNATI ONAL TRANSACTIONS WITH AES. ACCORDINGLY, THE ITAT DIRECTED THE ASSESSING OFFIC ER/TRANSFER PRICING OFFICER TO DETERMINE ARMS LENGTH PRICE OF INTERNATIONAL TRANS ACTIONS WITH AES BY MAKING INTERNAL COMPARISON OF THE NET MARGIN EARNED BY THE ASSESSEE FROM THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRI SES AND THE PROFIT EARNED BY THE ASSESSEE FROM THE INTERNATIONAL TRANSACTIONS WITH U NRELATED PARTIES. FOR THIS PURPOSE, THE ITAT RESTORED THE MATTER BACK TO THE FILE OF THE AO/TPO FOR FRESH ADJUDICATION AND FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH T HE ASSOCIATED ENTERPRISE BY MAKING INTERNAL COMPARISON OF PROFITABILITY FROM TH E INTERNATIONAL TRANSACTIONS WITH UNRELATED PARTIES AFTER ALLOCATING RESPECTIVE REVEN UES AND EXPENSES TO BOTH THE SEGMENTAL. THE AO/TPO WERE DIRECTED TO PROVIDE RE ASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE WHILE THE ASSESSEE WAS DIRECTED TO FURNISH ALL THE DETAILS AND PARTICULARS TO ENABLE THE AO/TPO TO MAK E INTERNAL COMPARISON OF THE PROFITABILITY FROM THE INTERNATIONAL TRANSACTIONS W ITH ASSOCIATED ENTERPRISE /AND UNRELATED PARTIES UNDERTAKEN BY THE ASSESSEE IN THE SIMILAR FUNCTIONAL AND ECONOMIC SCENARIO. IN THE INSTANT CASE, FACTS AND C IRCUMSTANCES IN THE YEAR CONSIDERATION ARE , INDISPUTABLY, PARALLEL TO THE F ACTS AND CIRCUMSTANCES IN THE PRECEDING ASSESSMENT YEAR WHILE THE DIRECTIONS OF THE DRP ARE ALSO BASED ON THE CONCLUSION OF THE ITAT IN THE PRECEDING ASSESSM ENT YEAR. THE REVENUE HAVE ALSO NOT PLACED BEFORE US ANY MATERIAL SO AS TO ENA BLE US TO TAKE A DIFFERENT VIEW IN THE MATTER. IN SUCH A SITUATION, WE FIND MERIT I N THE CONTENTIONS THE LD.AR AND THEREFORE, RESTORE THE MATTER TO THE FILE OF AO/TPO WITH SIMILAR DIRECTIONS AS HAVE BEEN ISSUED BY THE ITAT IN THE PRECEDING ASSESSMENT YEAR. WITH THESE OBSERVATIONS ,GROUND NOS. 2 TO 2.23 ARE DISPOSED OF . 5. NEXT GROUND NOS.3 TO 3.2 RELATE TO DISALLO WANCE OF CLAIM FOR DEDUCTION U/S 10A OF THE ACT IN RESPECT OF THIRD FLOOR GE-GDC STP I UNIT. THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT ORIGI NALLY THE ASSESSEE COMPANY I.T.A. NO.4776/DEL./2011 11 HAD SET UP A STP UNIT AT 2 ND FLOOR, BLOCK-III, SECTOR-29, NOIDA AND IT WAS REGISTERED AS STP UNIT IN THE YEAR 1995. THEREAFTE R, ANOTHER NEW STP UNIT WAS SET UP AT 3 RD FLOOR, BLOCK-III, SECTOR-29, NOIDA IN THE ASSESSME NT YEAR 2002-03. THE NATURE OF WORK AND THE KIND OF SOFTWARE SERVICE S PROVIDED BY THE ASSESSEE COMPANY IN THE ABOVE MENTIONED TWO UNITS WERE IDENT ICAL. ACCORDING TO THE AO, NEW UNIT KNOWN AS GE-GDC WAS NOT ALTOGETHER DIFFERE NT OR NEW UNIT BUT WAS EXTENSION OF THE EXISTING STP UNIT, BOTH THE UNITS BEING SITUATED IN THE SAME BUILDING AND DOING SAME BUSINESS AND THE ASSESSEE H AVING ADMITTED THAT THE NEW UNIT WAS SET UP TO MEET THE INCREASED CLIENT DE MAND WHILE THE ORIGINAL UNIT AT SECOND FLOOR AT SECTOR-29, NOIDA WAS CLOSED BY THE ASSESSEE AND ALL THE EMPLOYEES WORKING IN THIS UNIT WERE ABSORBED IN THE THIRD FLOOR UNIT IN THE SAME COMPLEX AS ALSO THE MAJOR PART OF THE FIXED ASSETS WERE TRANSFERRED TO THE THIRD FLOOR GE-GDC UNIT. SIMILAR FINDINGS WERE RECORDED BY THE LEARNED CIT(A) FOR THE ASSESSMENT YEAR 2003-04, WHERE IT WAS HELD THAT NEW UNIT WAS THE EXTENSION OF THE EARLIER UNIT. ACCORDINGLY, THE ASSESSEE COMPANY WAS ASKED TO EXP LAIN AS TO WHY THE NEW STP UNIT ESTABLISHED BE NOT TREATED AS RECONSTRUCTION OF THE ASSESSEE COMPANYS ORIGINAL BUSINESS AND WHY BOTH U NITS SHOULD NOT BE TREATED AS SINGLE UNIT , THE NATURE OF BUSINESS AND THE KIN D OF SERVICES PROVIDED BY THE ASSESSEE BEING THE SAME IN THE TWO UNITS. AFTER CON SIDERING THE REPLY OF THE ASSESSEE, THE AO CONCLUDED THAT THE ASSESSEE WAS NO T ENTITLED TO ANY DEDUCTION U/S 10A OF THE ACT, SINCE 10 YEARS HAD ALREADY EXPI RED IN THE PERIOD RELEVANT TO THE AY 2005-06. 6. THE ASSESSEE APPROACHED DRP AGAINST THE AFOR ESAID FINDINGS OF THE AO IN THE DRAFT ASSESSMENT ORDER. IT WAS CONTENDED THAT T HE ASSESSEES CLAIM THAT THERE WERE TWO UNITS HAD BEEN ACCEPTED BY THE ITAT IN TH E AYS 2003-04 ,2004-05 & 2006-07 AND THUS, THE AFORESAID UNIT WAS ELIGIBLE F OR DEDUCTION U/S 10A OF THE ACT. HOWEVER, THE DRP VIDE THEIR ORDER DATED 10.8.2011 DIRECTED AS UNDER:- 5. ..AS THE DEPARTMENT HAS NOT ACCEPTED THE C LAIM OF THE ASSESSEE U/S 10A IN THE THREE ASSESSMENT YEARS AS M ENTIONED ABOVE,AS SUCH THIS ISSUE HAS NOT ACHIEVED FINALITY. IT WOULD, THEREFORE, BE PROPER TO DISALLOW THE CLAIM U/S 10A IN THIS YEAR. I.T.A. NO.4776/DEL./2011 12 THEREFORE, IT IS HELD THAT THE ASSESSEE IS NOT ELI GIBLE FOR DEDUCTION U/S 10A OF THE IT ACT. 6.1 IN THE LIGHT OF AFORESAID DIRECTIONS OF THE DR P, THE AO FINALIZED THE ASSESSMENT. 7. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE AO IN THE LIGHT OF DIRECTIONS OF THE DRP. TH E LD. AR SUBMITTED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION DATED 20 TH JANUARY, 2011 OF THE ITAT FOR THE PRECEDING ASSESSMENT YEAR WHEREIN IT WAS HE LD AS UNDER:- 5.6 WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY P ERUSED THE ORDERS OF THE AUTHORITIES BELOW. THE ASSESSEE COMP ANY IS ENGAGED IN THE ACTIVITIES OF SOFTWARE DEVELOPMENT AND RELAT ED SERVICES. THE SOFTWARE RELATED BUSINESS IS BEING CARRIED OUT FROM THE STP UNIT AND THE EXEMPTION U/S 10A HAS BEEN CLAIMED. ORIGIN ALLY, THE ASSESSEE COMPANY HAD SET UP A STP UNIT AT 2 ND FLOOR, BLOCK-3, SECTOR-29, NOIDA AND IT WAS REGISTERED AS STP UNIT IN THE YEAR OF 1995. THEREAFTER, ANOTHER NEW STP UNIT WAS SET UP AT 3 RD FLOOR, BLOCK-3, SECTOR-29, NOIDA IN THE ASSESSMENT YEAR 20 02-03. THE NEW STP UNIT WAS TREATED BY THE ASSESSEE TO BE AN I NDEPENDENT UNIT FOR THE PURPOSE OF EXEMPTION CLAIMED U/S 10A O F THE ACT. HOWEVER, THE ASSESSING OFFICER HAS NOT ACCEPTED THE CLAIM OF THE ASSESSEE BY HOLDING THAT THE NEW UNIT IS NOTHING BU T AN EXTENSION OF THE EXISTING UNIT AND NOT ENTITLED TO SEPARATE DEDU CTION OF EXEMPTION U/S 10A. WE FIND THAT AN IDENTICAL ISSUE HAD ARISE N IN THE ASSESSMENT YEAR 2003-04 BEFORE THE TRIBUNAL WHERE T HE TRIBUNAL VIDE ORDER DATED 27.03.2009 IN I.T.A. NOS. 3821/D/2 006 AND I.T.A. NOS.3919/D/2006 HAS HELD AND OBSERVED AS UNDER:- 2.9 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND A LSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED TH AT THE CLAIM OF ASSESSEE FOR DEDUCTION U/S 10A IN RESPECT OF PROFITS DERIVED FROM THE NEW STP UNIT KNOWN AS GE-GDC WAS DISALLOWED BY THE ASSESSING OFFICER ON THE GROUND T HAT THE SAID UNIT WAS SET UP AS A RESULT OF RECONSTRUCTION OF THE EXISTING BUSINESS OF THE ASSESSEE COMPANY. IN HIS IMPUGNED ORDER, THE LEARNED CIT(A) HOWEVER, HELD TH AT THE SAID NEW UNIT WAS NOT SET UP BY THE ASSESSEE COMPAN Y BY WAY OF RECONSTRUCTION OR SPLITTING UP OF THE UNIT A LREADY IN EXISTENCE. IN ITS APPEAL BY REVENUE AGAINST THE SA ID ORDER OF LEARNED CIT(A), THE DECISION SO RENDERED BY LEAR NED CIT(A) HAS NOT BEEN CHALLENGED AND THE SAME, THEREF ORE, I.T.A. NO.4776/DEL./2011 13 HAS BECOME FINAL. THE LEARNED CIT(A), HOWEVER, FUR THER HELD THAT THE ESTABLISHMENT OF A NEW UNIT BY THE AS SESSEE COMPANY WAS A PART OF EXPANSION OF ITS EXISTING UNI T AND SINCE BOTH THESE UNITS WERE ENTITLED FOR DEDUCTION U/S 10A, THE SAID DEDUCTION SHOULD BE COMPUTED ON THE COMBIN ED PROFIT OF BOTH THESE UNITS TREATING THE SAME AS ONE UNIT. HE, HOWEVER, HAS NOT GIVEN ANY REASON WHATSOEVER OR HAS NOT REFERRED TO ANY PROVISIONS OF THE ACT OF SUPPOR T HIS CONCLUSION THAT BOTH THE UNITS SHOULD HAVE BEEN TRE ATED AS ONE UNIT FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A. 2.10 AT THE TIME OF HEARING BEFORE US, THE LEARNED COUNS EL FOR THE ASSESSEE HAS RELIED ON THE VARIOUS JUDICIAL PRONOUNCEMENTS WHEREIN IT WAS HELD THAT WHERE A NEW UNDERTAKING HAS BEEN FORMED WITH FRESH CAPITAL AND INVESTMENT WITH A MOTIVE TO INCREASE THE PRODUCTION CAPACITY AND EXPAND ITS BUSINESS, THEN IT COULD NOT BE SAID THAT THE NEW UNDERTAKING WAS NOT THE NEW INDUSTRIAL UNIT BY ITSELF. IT WAS ALSO HELD THAT ESTABLISHMENT OF NEW INDUSTRIAL UNIT AS A PART OF ALREADY EXISTING INDUS TRIAL ESTABLISHMENT MAY RESULT IN AN EXTENSION OF THE IND USTRY, BUT IF THE NEWLY ESTABLISHED UNIT ITSELF IS AN INTE GRATED UNIT IN WHICH NEW PLANT AND MACHINERY ARE PUT UP AND THE SAME ITSELF INDEPENDENTLY OF THE OLD UNIT CAPABLE OF PRO DUCTION OF GOODS, THEN IT CAN BE CLASSIFIED AS A NEWLY ESTABLI SHED INDUSTRIAL UNDERTAKING. THIS MAKES IT ABUNDANTLY C LEAR THAT EVEN IF THE NEW UNIT WAS ESTABLISHED BY THE ASSESSE E COMPANY AS EXPANSION OF ITS EXISTING UNIT, A SUBSTA NTIAL FRESH CAPITAL HAVING BEEN INVESTED IN THE SAID UNIT AND IT WAS CAPABLE OF DOING BUSINESS OF ITS OWN INDEPENDEN T OF THE OLD UNIT, THE SAME WAS ELIGIBLE TO BE TREATED A S A NEWLY ESTABLISHED UNDERTAKING. IN OUR OPINION, THE LEARN ED CIT(A) THUS WAS NOT CORRECT IN HOLDING THAT BOTH THE UNITS WERE LIABLE TO BE TREATED AS ONE UNIT FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A. 5.7 FROM THE SAID DECISION OF TRIBUNAL PERTAINING T O THE ASSESSMENT YEAR 2003-04, IT IS CLEAR THAT THE TRIBU NAL HAS TAKEN A VIEW THAT NEW UNIT CANNOT BE TREATED TO BE AS ONE AND SAME UNIT WITH THE EXISTING UNIT FOR THE PURPOS E OF COMPUTING DEDUCTION U/S 10A OF THE ACT. RESPECTFUL LY FOLLOWING THE TRIBUNALS ORDER PASSED IN THE ASSESS MENT YEAR 2003-04, WE ALLOW THIS GROUND RAISED BY THE ASSESSE E AND HOLD THAT THE NEW UNIT IS TO BE TREATED AS A SEPARA TE AND I.T.A. NO.4776/DEL./2011 14 INDEPENDENT UNIT FOR THE PURPOSE OF COMPUTING DEDUC TION U/S 10A OF THE ACT. THE ASSESSING OFFICER SHALL ALLOW THE DEDUCTION U/S 10A IN RESPECT OF THE NEW UNIT SET UP AT 3 RD FLOOR, BLOCK-3, SECTOR-29, NOIDA. THUS, THIS GROUN D IS DECIDED IN FAVOUR OF THE ASSESSEE. 7.1 ON THE OTHER HAND, THE LD. DR SUPPORTED THE FI NDINGS OF THE AO IN THE LIGHT OF DIRECTIONS OF THE DRP.. 8. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS OF THE CASE AS ALSO THE AFORESAID DECISION DATED 20 TH JANUARY, 2011 OF THE ITAT FOR THE AY 2006- 07.WE FIND THAT THE ITAT IN THE PRECEDING ASSESSMEN T YEAR ACCEPTED THE CLAIM OF THE ASSESSEE WHILE HOLDING THAT NEW UNIT WAS TO BE TREATED AS A SEPARATE AND INDEPENDENT UNIT FOR THE PURPOSE OF COMPUTING DEDUC TION U/S 10A OF THE ACT, FOLLOWING THE ORDER OF THE ITAT FOR THE AY 2003-04. SINCE FACTS OBTAINING IN THE YEAR UNDER CONSIDERATION ARE SIMILAR TO THE FACTS A ND CIRCUMSTANCES IN THE PRECEDING ASSESSMENT YEARS WHILE THE REVENUE HAVE N OT PLACED BEFORE US ANY MATERIAL SO AS TO ENABLE US TO TAKE A DIFFERENT VIE W IN THE MATTER IN THE YEAR UNDER CONSIDERATION, WE HAVE NO HESITATION IN ALLOWING TH E CLAIM OF THE ASSESSEE U/S 10A OF THE ACT. CONSEQUENTLY, GROUND NOS.3 TO 3.2 IN THE APPEAL ARE ALLOWED. 9.. GROUND NOS.4 & 4.1 IN THE APPEAL RELATE TO SE T OFF OF PROFIT OF NON- STPI UNITS AGAINST THE LOSS OF STPI UNITS . ON P ERUSAL OF COMPUTATION OF TOTAL INCOME, THE AO NOTICED THAT THE ASSESSEE CLAIMED TH E FOLLOWING LOSSES:- [IN ` ] 1. HYDERABAD (STP UNDERTAKING) - `14,39 3,084 2. BANGALORE II (STP UNDERTAKING) - `11,451,484 TOTAL-A - `25,844,568 3. SINGAPORE (NON-STP UNDERTAKING - ` 5,033,751 TOTAL-B - ` 5,033,751 GRAND TOTAL(A+B)- 30,878,319 I.T.A. NO.4776/DEL./2011 15 9.1 RELYING UPON HIS FINDINGS IN THE ASSESSMENT O RDER FOR THE AYS 2003-04 AND 2004-05 & 2006-07, THE AO CONCLUDED THA T LOSSES OF ` 1.57 CRORES FROM EXEMPTED UNITS CANNOT BE SET OFF AGAINST INCOM E CHARGEABLE TO TAX OF NON- STPI UNDERTAKING. ACCORDINGLY, THE AO DISALLOWED T HE CLAIM FOR SET OFF OF LOSS OF 10A-UNITS AGAINST INCOME OF ` 85,35,889/- OF NON-STPI UNITS. 10. THE ASSESSEE APPROACHED DRP AGAINST THE AF ORESAID FINDINGS OF THE AO IN THE DRAFT ASSESSMENT ORDER. THE DRP IN THEIR DIR ECTIONS WHILE REFERRING TO THE DECISION OF THE ITAT FOR THE ASSESSMENT YEAR 2006-0 7 OBSERVED THAT SINCE THE SAID DECISION HAS NOT BEEN ACCEPTED BY THE DEPARTME NT AND APPEAL HAS BEEN FILED BEFORE HONBLE HIGH COURT, THE ISSUE DID NOT ACHIEVE FINALITY. 11. ACCORDINGLY, THE AO FINALIZED THE ASSESSMENT IN THE LIGHT OF THESE DIRECTIONS OF DRP. 12 THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAI NST THE AFORESAID FINDINGS OF THE AO IN THE LIGHT OF DIRECTIONS OF TH E DRP. THE LD. AR SUBMITTED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION DATED 20 TH JANUARY, 2011 OF THE ITAT FOR THE PRECEDING ASSESSMENT YEAR WHEREIN THE ITAT CONCLUDED AS UNDER :- 6.3 THE LEARNED COUNSEL FOR THE ASSESSEE HAS FURTH ER PLACED RELIANCE ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HINDUSTAN UNILEVER LTD. VS. DCIT, 325 ITR 1 02, WHEREIN THE LOSSES OF THE UNIT ELIGIBLE FOR DEDUCTION U/S 1 0B OF THE ACT WERE HELD ALLOWABLE TO BE SET OFF AGAINST PROFIT OF THE BUSINESS. HE FURTHER PLACED RELIANCE UPON THE RECENT SPECIAL BEN CH DECISION OF ITAT, BENCH C CHENNAI (SB) IN THE CASE OF M/S SCI ENTIFIC ATLANTA INDIA TECHNOLOGY PVT. LTD. VS. ACIT, ORDER BEING DA TED FEBRUARY 5, 2010, PASSED IN I.T.A. NOS. 229/MDS./2007, I.T.A. NO.352/MDS/2008 & I.T.A. NO.536/MDS./2007, PERTAINI NG TO THE ASSESSMENT YEARS 2003-04 & 2004-05, WHERE IT HAS BE EN HELD THAT EVEN THOUGH SECTION 10A FALLS UNDER CHAPTER III, IT HAS BEEN MENTIONED IN THE SECTION ITSELF THAT WHAT IS TO BE GIVEN IS ONLY A DEDUCTION AND NOT EXEMPTION AFTER AMENDMENT MADE WI TH EFFECT FROM 1 ST APRIL, 2001. IT WAS FURTHER HELD THEREIN THAT THE INTENTION OF I.T.A. NO.4776/DEL./2011 16 THIS LEGISLATURE W.E.F. 1 ST APRIL, 2001 WAS TO GIVE ONLY DEDUCTION AND NOT EXCLUSION FROM TOTAL INCOME. 6.4 WE HAVE HEARD BOTH THE PARTIES AND HAVE GONE TH ROUGH THE AFORESAID DECISIONS. RESPECTFULLY FOLLOWING THE A FORESAID DECISIONS, WE RESTORE THE MATTER BACK TO THE FILE O F THE ASSESSING OFFICER FOR HIS FRESH COMPUTATION BY TREATING THE P ROVISIONS OF SECTION 10A TO BE IN THE NATURE OF DEDUCTION PROVIS ION AND NOT EXEMPTION. THE ASSESSING OFFICER SHALL RECOMPUTE T HE TOTAL INCOME OF THE ASSESSEE IN THE LIGHT OF THE AFORESAID DECIS IONS AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE ASSESSEE SHALL FURNISH A FRESH COMPUTATION OF I NCOME TO THE ASSESSING OFFICER IN THE LIGHT OF THE PRINCIPLES AN D PROPOSITIONS LAID DOWN IN THE CASES REFERRED TO HEREINABOVE. WE ORDE R ACCORDINGLY. 12.1 ON THE OTHER HAND, THE LD. DR SUPPORTED THE F INDINGS OF THE AO IN THE LIGHT OF DIRECTIONS OF THE DRP.. 13.. WE HAVE HEARD BOTH THE PARTIES AND GONE THRO UGH THE FACTS OF THE CASE AS ALSO THE AFORESAID DECISION DATED 20 TH JANUARY, 2011 OF THE ITAT FOR THE AY 2006- 07. INDISPUTABLY, FACTS AND CIRCUMSTANCES IN THE YE AR UNDER CONSIDERATION ARE SIMILAR TO THE FACTS AND CIRCUMSTANCES IN THE PRECE DING ASSESSMENT YEAR. WE FIND THAT THE ITAT IN THE PRECEDING ASSESSMENT YEAR REST ORED THE MATTER BACK TO THE FILE OF THE AO FOR FRESH COMPUTATION BY TREATING T HE PROVISIONS OF SECTION 10A TO BE IN THE NATURE OF DEDUCTION PROVISION AND NOT EXE MPTION. INTER ALIA, THE AO WAS DIRECTED TO RECOMPUTE THE TOTAL INCOME OF THE ASSES SEE IN THE LIGHT OF THE VARIOUS DECISIONS REFERRED TO IN THE SAID ORDER AFTER PROVI DING REASONABLE OPPORTUNITY TO THE ASSESSEE WHILE THE LATTER WAS DIRECTED TO FURNI SH A FRESH COMPUTATION OF INCOME TO THE AO IN THE LIGHT OF THE PRINCIPLES AND PROPOSITIONS LAID DOWN IN THE SAID DECISIONS . IN THE INSTANT CASE, FACTS AND CIR CUMSTANCES IN THE YEAR CONSIDERATION ARE , INDISPUTABLY, PARALLEL TO THE F ACTS AND CIRCUMSTANCES IN THE PRECEDING ASSESSMENT YEAR WHILE THE DIRECTIONS OF THE DRP ALSO REFER TO THE CONCLUSION OF THE ITAT IN THE PRECEDING ASSESSMENT YEAR. THE REVENUE HAVE ALSO NOT PLACED BEFORE US ANY MATERIAL SO AS TO ENA BLE US TO TAKE A DIFFERENT VIEW IN THE MATTER. IN SUCH A SITUATION, WE FIND MERIT I N THE CONTENTIONS THE LD. AR AND I.T.A. NO.4776/DEL./2011 17 THEREFORE, RESTORE THE MATTER TO THE FILE OF AO FOR FRESH ADJUDICATION WITH SIMILAR DIRECTIONS AS HAVE BEEN ISSUED BY THE ITAT IN THE P RECEDING ASSESSMENT YEAR, KEEPING IN MIND THE VARIOUS DECISIONS INCLUDING I N HINDUSTAN UNILEVER LTD. VS. DCIT, 325 ITR 102 (BOM.) AND SPECIAL BENCH DECISION OF ITAT IN THE CASE OF M/S SCIENTIFIC ATLANTA INDIA TECHNOLOGY PVT. LTD. VS. A CIT, ORDER DATED FEBRUARY 5, 2010 PASSED IN I.T.A. NOS. 229/MDS./2007, I.T.A. NO .352/MDS./2008 AND I.T.A. NO.536/MDS./2007 FOR THE ASSESSMENT YEARS 2003-04 A ND 2005-06. WITH THESE OBSERVATIONS ,GROUND NOS. 4 & 4.1 IN THE APPEAL ARE DISPOSED OF. . 14.. COMING NOW TO GROUND NOS.5 & 5.1 RELATING T O TREATMENT OF MISC. INCOME AS PART OF BUSINESS INCOME, THE AO CONCLUDED IN THE DRAFT ASSESSMENT ORDER THAT THE MISCELLANEOUS INCOME OF ` `42,95,817/- ON ACCOUNT OF NOTICE PAY WAS NOT DERIVED FROM THE BUSINESS OF THE UNDERTAKIN G, EXPORTING SOFTWARE. ACCORDINGLY, RELYING UPON THE DECISION OF THE HON BLE SUPREME COURT IN CIT VS. STERLING FOODS LTD.237 ITR 579(SC), THE AO ASSESSED THE INCOME UNDER THE HEAD OTHER SOURCES. 15. THE ASSESSEE APPROACHED DRP AGAINST THE AFORE SAID FINDINGS OF THE AO IN THE DRAFT ASSESSMENT ORDER. THE DRP IN THEIR DIRECT IONS WHILE REFERRING TO THE DECISION OF THE ITAT FOR THE ASSESSMENT YEAR 2006-0 7 OBSERVED THAT SINCE THE SAID DECISION HAS NOT BEEN ACCEPTED BY THE DEPARTME NT AND APPEAL HAS BEEN FILED BEFORE HONBLE HIGH COURT, THE ISSUE DID NOT ACHIEVE FINALITY. 16. ACCORDINGLY, THE AO FINALIZED THE ASSESSMENT IN THE LIGHT OF THE DIRECTIONS OF THE DRP. 17 THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAI NST THE AFORESAID FINDINGS OF THE AO IN THE LIGHT OF DIRECTIONS OF TH E DRP. THE LD. AR SUBMITTED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION DATED 20 TH JANUARY, 2011 OF THE ITAT FOR THE PRECEDING ASSESSMENT YEAR WHEREIN THE ITAT CONCLUDED AS UNDER :- I.T.A. NO.4776/DEL./2011 18 7.2 IT WAS CONTENDED BY THE ASSESSEE THAT THE AMOU NT OF ` `24,56,485/- WAS ACTUALLY RECEIVED TOWARDS NOTICE P AY RECEIVABLE FROM EMPLOYEES WORKING IN THE SOFTWARE UNITS. THE AMOUNT WAS RECEIVED TOWARDS REDUCTION OF SALARY COST DEBITED T O THE ELIGIBLE UNDERTAKING. IN THE LIGHT OF THESE FACTS, THE ASSE SSEE CLAIMED THE MISCELLANEOUS INCOME AS INCOME DERIVED FROM THE ELI GIBLE UNDERTAKING FOR THE PURPOSE OF SECTION 10A OF THE A CT. THE ASSESSEES CLAIM HAS BEEN REJECTED BY THE ASSESSING OFFICER BY TREATING THE MISCELLANEOUS INCOME AS INCOME FROM OT HER SOURCES AND NOT INCOME DERIVED FROM ELIGIBLE UNDERTAKING. 7.3 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THE COURSE OF HEARING OF THIS APPEAL, R ELIANCE WAS PLACED BY THE LEARNED COUNSEL FOR THE ASSESSEE UPON THE DE CISION OF ITAT, DELHI BENCH IN THE CASE OF JUBILANT EMPRO (P) LTD. VS. DCIT IN I.T.A. NO.107/D/2007. IN THE ABOVE REFERRED CASE O F JUBILANT EMPRO (P) LTD. PERTAINING TO THE ASSESSMENT YEAR 2000-01, THE ASSESSEE HAD RECOVERED A SUM OF ` ` 4,95,070/- BEING NOTICE PERIOD PAY. THIS SUM WAS RECOVERED FROM THE EMPLOYEES, WHO HAD LEFT THE SERVICES PRIOR TO THE AGREED PERIOD OF RENDERING SERVICES WI TH THE ASSESSEE. THE TRIBUNAL RELYING UPON THE EARLIER DECISION OF T HE TRIBUNAL PERTAINING TO THE ASSESSMENT YEAR 1999-2000 IN THE CASE OF JUBILANT EMPRO (P) LTD. HAS HELD THAT THE NOTICE PE RIOD PAY WAS TO BE CONSIDERED AS INCOME DERIVED BY THE ELIGIBLE UND ERTAKING AND AS SUCH, NOTICE PERIOD PAY WOULD GO TO REDUCE THE EXPE NSES ON ACCOUNT OF SALARY AND THE REAL NATURE OF THE TRANSA CTION WILL NOT HAVE ANY EFFECT ON THE INCOME DERIVED BY THE ASSESSEE FR OM THE ELIGIBLE UNDERTAKING. IN THE EARLIER DECISION THE TRIBUNAL HAD TAKEN A VIEW THAT BECAUSE THE ASSESSEE INSTEAD OF CREDITING THE NOTICE PERIOD PAY TO THE SALARY ACCOUNT AND REDUCING THE SALARY E XPENSES, HAD SHOWN THE AMOUNT SEPARATELY IN THE PROFIT AND LOSS ACCOUNT, THAT BOOK ENTRY BY ITSELF WOULD NOT CHANGE THE REAL NATU RE OF TRANSACTION AND IT WAS ACCORDINGLY HELD THAT THE RECOVERY OF NO TICE PAY REPRESENTS INCOME DERIVES FROM THE INDUSTRIAL UNDER TAKING. RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINA TE BENCH, WE HOLD THAT THE AMOUNT RECEIVED TOWARDS NOTICE PERIOD IS TO BE TREATED AS INCOME DERIVED FROM THE ELIGIBLE UNDERTAKING AND DEDUCTION U/S 10A SHALL BE ALLOWED ACCORDINGLY. THE ASSESSING OF FICER SHALL MODIFY THE ASSESSMENT ORDER IN THE LIGHT OF THIS DI RECTION AND ALLOW THE DEDUCTION U/S 10A IN TERMS OF THIS ORDER. 17.1 ON THE OTHER HAND, THE LD. DR SUPPORTED THE F INDINGS OF THE AO IN THE LIGHT OF DIRECTIONS OF THE DRP.. I.T.A. NO.4776/DEL./2011 19 18. WE HAVE HEARD BOTH THE PARTIES AND GONE THRO UGH THE FACTS OF THE CASE AS ALSO THE AFORESAID DECISION DATED 20 TH JANUARY, 2011 OF THE ITAT FOR THE AY 2006-07. INDISPUTABLY, FACTS AND CIRCUMSTANCES I N THE YEAR UNDER CONSIDERATION ARE SIMILAR TO THE FACTS AND CIRCUMST ANCES IN THE PRECEDING ASSESSMENT YEAR .IN THE LIGHT OF AFORESAID VIEW TAK EN BY THE ITAT ESPECIALLY WHEN FACTS AND CIRCUMSTANCES IN THE YEAR UNDER CONS IDERATION ARE SIMILAR TO THE FACTS AND CIRCUMSTANCES IN THE ASSESSMENT YEAR 2006 -07, WE HAVE NO ALTERNATIVE BUT TO ALLOW THE CLAIM OF THE ASSESSEE .ACCORDINGLY , AMOUNT RECEIVED TOWARDS NOTICE PERIOD IS TO BE TREATED AS INCOME DERIVED FR OM THE ELIGIBLE UNDERTAKING AND DEDUCTION U/S 10A SHALL BE ALLOWED . CONSEQUENTLY , GROUND NOS..5 & 5.1 IN THE APPEAL ARE ALLOWED. 19. GROUND NO.1 IN THE APPEAL BEING GENERAL IN NA TURE NOR ANY SUBMISSIONS HAVING BEEN MADE BEFORE US ON THIS GROUND, DOES NOT REQUIRE ANY SEPARATE ADJUDICATION AND IS, THEREFORE, DISMISSED. 20. NO OTHER PLEA OR ARGUMENT WAS MADE BEFORE US. 21. SINCE, WE HAVE DISPOSED OF THE INSTANT APPEAL ,STAY APPLICATION FILED BY THE ASSESSEE IS DISMISSED. 22. IN THE RESULT, APPEAL IS ALLOWED BUT PARTLY FO R STATISTICAL PURPOSES WHILE STAY APPLICATION IS DISMISSED.. ORDER PRONOUNCED IN OPEN COURT SD/- SD/- (R.P. TOLANI) (A.N. PAH UJA) JUDICIAL MEMBER ACCOUNTANT MEMBER NS COPY OF THE ORDER FORWARDED TO :- 1. M/S BIRLASOFT INDIA LTD. 2. INCOME TAX OFFICER, WARD 10 (4), NEW DELHI. 3. CIT (APPEALS)-XIII, NEW DELHI 4. THE CIT CONCERNED. 5. THE DR, ITAT,A BENCH, NEW DELHI I.T.A. NO.4776/DEL./2011 20 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, DELHI