M/s Genisys Integrating Systems (India) Pvt. Ltd., Bangalore V. DCIT, Bangalore

ITA 908/BANG/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0629 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 3 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 08-01-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 18-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA CIT DR I
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Depreciation; Transfer pricing; International transaction; Question of law; Difference of opinion; Unabsorbed depreciation
• Section: 92C; 143(3); 133(6); 10B

Judgement Text

PAGE 1 OF 23 ITA NO.908/ BANG/2011 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO.908 /BANG/2011 (ASSESSMENT YEAR 2007-08) M/S GENISYS INTEGRATING SYSTEM (INDIA) PRIVATE LIMITED, 43-46 & 33-36, EXPORT PROMOTIONAL INDUSTRIAL PARK, WHITEFIELD ROAD, BANGALORE-66. PA NO.AAACG 6635 N VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(3), BANGALORE. (APPELLANT) (RESPONDENT) DATE OF HEARING : 08.01.2013 DATE OF PRONOUNCEMENT : 29.01.2013 APPELLANT BY : SHRI PADAM CHAND KH INCHA, C.A. & RESPONDENT BY : SHRI S K AMBASTHA, CI T (DR-I), ITAT ORD ER PER GEORGE GEORGE K : THIS APPEAL, AT THE INSTANCE OF THE ASSESSEE, IS DIRECTED AGAINST THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) RW S 144C OF THE ACT, IN PURSUANCE TO THE DIRECTION OF THE DISPUTE RESOLUTIO N PANEL (DRP) DATED 23.8.2011. THE RELEVANT ASSESSMENT YEAR IS 2007-08. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE AS FOL LOWS:- THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE B USINESS OF PROVIDING SOFTWARE DEVELOPMENT AND IT ENABLE SERVIC ES (CALL CENTRES). THE PAGE 2 OF 23 ITA NO.908/ BANG/2011 2 ASSESSEE EXPORTS THE SERVICES TO THE ASSOCIATED ENT ERPRISES (AE) AND OTHER CLIENTS. DURING THE RELEVANT ASSESSMENT YEAR, THE A SSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS AE (AS REPORTED IN FORM NO.3CEB) FOR SOFTWARE DEVELOPMENT SERVICES AND CALL CENTRE AMOUN TING TO RS.15,37,95,126/-. BASED ON THIS INFORMATION IN FO RM NO.3CEB, THE ASSESSING OFFICER REFERRED THE MATTER UNDER SECTION 92CA OF THE ACT TO THE TRANSFER PRICING OFFICER (TPO) TO DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION MADE BY TH E ASSESSEE WITH ITS AE. ON RECEIVING THE REFERENCE FROM THE AO, THE TPO PAS SED AN ORDER UNDER SECTION 92CA ON 10/10/2010 DETERMINING THE ADJUSTME NT TO THE ARMS LENGTH PRICE OF RS.1,79,47,930/- IN RESPECT OF SOFTWARE DE VELOPMENT SERVICES SEGMENT. HOWEVER, NO ADJUSTMENT WAS SUGGESTED IN R ESPECT OF PROVIDING OF IT ENABLE SERVICES (CALL CENTRE). A COPY OF THE TPO S ORDER AS WELL AS DRAFT ASSESSMENT ORDER WAS PROVIDED TO THE ASSESSEE. THE ASSESSEE RAISED VARIOUS OBJECTIONS BEFORE THE DRP. THE DRP, AFTER GOING THROUGH THE TPOS ORDER, THE DRAFT ASSESSMENT ORDER AND AFTER CONSIDE RING THE ASSESSEES SUBMISSION, UPHELD THE TPOS ADJUSTMENTS. THE ASSE SSING OFFICER, HAS, ACCORDINGLY, INCORPORATED THE TPOS ADJUSTMENTS WHI LE DETERMINING THE TOTAL INCOME. 2.1 AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE IS IN APPEAL BEFORE US. 2.2 THE ASSESSEE HAS RAISED 19 GROUNDS IN ITS MEMO RANDUM OF APPEAL. GROUND NOS.1 TO 16 ARE REGARDING THE TRANS FER PRICING ISSUE. GROUND NOS.17 TO 19 ARE REGARDING NON TRANSFER PRICING ISS UE. PAGE 3 OF 23 ITA NO.908/ BANG/2011 3 I) TRANSFER PRICING ISSUE 3. THOUGH THE ASSESSEE HAS RAISED SEVERAL GROUNDS OF APPEAL REGARDING THE TRANSFER PRICING ISSUE, IN THE COURSE OF HEARING, THE LEARNED AR CONFINED HIS ARGUMENT ONLY TO GROUND NO.8. SINCE NO ARGUMENT WAS ADVANCED ON THE SAME, GROUND NOS.1 TO 7 AND 9 TO 16 ARE NOT ADJUDICATED, GROUND NO.8 RAISED IN THE MEMORANDUM OF APPEAL READ S AS FOLLOWS:- THE LOWER AUTHORITIES (THE LEARNED ASSESSING OFFICE R, LEARNED TRANSFER PRICING OFFICER AND HONBLE DISPUT E RESOLUTION PANEL) HAVE ERRED IN REJECTING INTERNAL COMPARABLES SELECTED BY THE APPELLANT AND REJECTING TRANSFER PRICING ANALYSIS OF THE APPELLANT. 3.1 THE FACTUAL MATRIX IN REGARD TO THE ABOVE ISSU E IS RECAPITULATED BELOW:- THE ASSESSEE HAD RENDERED SOFTWARE DEVELOPMENT SE RVICES TO ITS AE. THE TOTAL VALUE OF THE SOFTWARE DEVELOPMEN T SERVICES WAS RS.12,38,48,331/-. THE ASSESSEE HAD ALSO RENDERED SOFTWARE DEVELOPMENT SERVICES TO OVERSEAS THIRD PARTIES, APART FROM DOME STIC CLIENTS. THE ASSESSEE ADOPTED TRANSACTION NET MARGIN METHOD (TNM M) TO JUSTIFY THE PRICE CHARGED IN THE INTERNATIONAL TRANSACTION WITH ITS AE. ACCORDING TO THE ASSESSEE, SINCE ADEQUATE DATA WAS AVAILABLE WITH IT , THE NET MARGIN EARNED FROM SERVICES RENDERED TO ITS AE WAS COMPARED WITH THE NET MARGIN EARNED ON THE SERVICES RENDERED TO THE NON-AE (HEREINAFTER REFERRED TO AS INTERNAL TNMM). THE COMPARABLES CHOSEN FOR THIS E XERCISE WHERE THE COMPANIES SITUATED OUTSIDE INDIA TO WHOM THE ASSESS EE EXPORTED SOFTWARE MUCH LIKE THE AE TO WHOM ALSO THE SOFTWARE HAD BEEN EXPORTED. BASED ON THE COMPARISON OF THE NET MARGIN EARNED FROM AE AND NON-AE (INTERNAL PAGE 4 OF 23 ITA NO.908/ BANG/2011 4 TNMM), THE ASSESSEE CONCLUDED THAT ITS TRANSACTION WITH THE AE WAS AT ARMS LENGTH PRICE. 3.2 THE TPO ISSUED SHOW-CAUSE NOTICE DATED 21/6/20 10 (PAGE 62 TO 79 OF THE PAPER BOOK FILED BY THE ASSESSEE). THE NO TICE HAD PROPOSED RE- DETERMINING THE ARMS LENGTH PRICE FOR THE SOFTWARE DEVELOPMENT SERVICES. THE NOTICE CONTAINED REMARK ON THE ASSESSEES STUDY, NEW SEARCH METHODOLOGY COMPARABLES PROPOSED (28) AND THE COPIES OF THE REPLY RECEIVED UNDER SECTION 133(6) FROM OTHER COMPANIES. IN REPLY TO THE SHOW-CAUSE NOTICE, A DETAILED REPLY WAS FILED BY THE ASSESSEE ON 6/9/2010 RAISING VARIOUS OBJECTIONS TO THE PROPOSED ACTION OF THE TP O (THE ASSESSEES REPLY AT PAGE 80 TO 646 OF THE PAPER BOOK-1 FILED BY THE A SSESSEE). 3.2.1 THE TPO HOWEVER REJECTED THE ASSESSEES OBJE CTIONS AND SELECTED 26 EXTERNAL COMPANIES AS COMPARABLES. THE ARITHMETICAL MEAN WAS DETERMINED AT 25.14%. AFTER FACTORING WORKING CAPI TAL ADJUSTMENT OF 02.38%, THE ADJUSTED ARITHMETICAL MEAN WAS DETERMIN ED AT 22.76%. THE TPO DETERMINED THE TRANSFER PRICING ADJUSTMENT AT R S.1,79,47,930/-. WHILE COMPUTING THE ARMS LENGTH PRICE, THE TPO HAD AGGRE GATED THE AE AND NON- AE TRANSACTIONS. THE COMPUTATION OF ARMS LENGTH PRICE IN THE TPOS ORDER IS DETAILED BELOW:- 13.6 COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEX URE B FOR DETAILS OF COMPUTATION OF PLI OF THE COMPARABLE S). BASED ON THIS, THE ARMS LENGTH PRICE OF THE SOFTWAR E DEVELOPMENT SERVICES RENDERED BY THE TAXPAYER TO ITS AE(S) IS COMPUTED AS UNDER: PAGE 5 OF 23 ITA NO.908/ BANG/2011 5 ARITHMETIC MEAN PLI : 25.14% LESS: WORKING CAPITAL ADJUSTMENT (ANNEXURE C) : 2.38% ADJ. ARITHMETIC MEAN PLI : 22.76% ARMS LENGTH PRICE: OPERATING COST RS.13,95,83,579 ARMS LENGTH MARGIN 22.76% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) @ 122.76% OF OPERATING COST RS.17,13,52,801 PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRICE: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATED ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: ARMS LENGTH PRICE (ALP) @ 122.76% OF OPERATING COST RS.17,13,52,801 PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS.15,34,04,872 SHORTFALL BEING ADJUSTMENT U/S 92CA RS.1,79,47,930 THE ABOVE SHORTFALL OF RS.1,79,47,930/- IS TREATED AS TRANSFER PRICING ADJUSTMENT UNDER SECTION 92CA. IF ANY FILTER OR CRITERIA APPLIED BY THE TAXPAYER FOR SEARCH OF COMPARABLES IS ACCEPTED OR ANY FILTER OR CRITERIA APPLIED BY THE TPO IS RELAXED, THE ENTIRE ACCEPT/REJECT MATR IX CHANGES RESULTING IN A NEW COMPARABLE SET INCLUDING THOSE COMPANIES WHICH ARE NOT TAKEN EITHER BY THE TAXPAYER OR BY THE TPO IN ITS FINAL COMPARABLE SET AND WHICH MAY NOT BE FINDING PLACE IN THIS ORDER. IN ESSENCE, ANY DIS TURBANCE IN ANY ONE OF THE CRITERIA OF THE TAXPAYER OR THE TP O RESULTS IN FRESH COMPARABILITY ANALYSIS AND THE TPO S HOULD BE GIVEN AN OPPORTUNITY IF SUCH SITUATION ARISES. PAGE 6 OF 23 ITA NO.908/ BANG/2011 6 3.3 THE ASSESSEE FILED DETAILED OBJECTIONS WITH TH E DRP ON 21/1/2011 (PAGES 647 TO 820 OF THE PAPER BOOK-I FIL ED BY THE ASSESSEE). FURTHER, ADDITIONAL SUBMISSIONS WERE MADE BEFORE TH E DRP ON 5/7/2011 (PAGES 821 TO 827 OF THE PAPER BOOK-I FILED BY THE A SSESSEE). HOWEVER, THE OBJECTIONS RAISED BY THE ASSESSEE WERE REJECTED BY TH E DRP. THE ASSESSING OFFICER HAD, ACCORDINGLY, INCORPORATED TH E TP ADJUSTMENTS, AS SUGGESTED BY THE TPO, WHILE DETERMINING THE TOTAL IN COME. 3.4 BEFORE US, THE LEARNED AR FILED WRITTEN SUBMIS SION DATED 21/2/2012. THE SUBSTANCE OF THE SAME IS REPRODUCED BELOW FOR READY REFERENCE:- DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT RENDERED SOFTWARE DEVELOPMENT SERVICES TO ITS AE. THE APPELLANT ALSO RENDERED SOFTWARE DEVELOPMENT SERVIC ES TO OVERSEAS THIRD PARTIES AND DOMESTIC CLIENTS. THE TO TAL REVENUES IN THE SOFTWARE SEGMENT WAS RS. 24,18,89,6 27. THIS REVENUE COMPRISED OF THE FOLLOWING: PARTICULARS AMOUNT IN INR EXPORT SALES TO ASSOCIATED ENTERPRISE (INCLUDING EXCHANGE GAIN) 12,41,18,038 EXPORT SALES TO NON-ASSOCIATED ENTERPRISE (INCLUDING EXCHANGE GAIN) 2,92,86,834 DOMESTIC SALES 8,84,84,755 TOTAL 24,18,89,627 DURING THE FINANCIAL YEAR, THE SOFTWARE SERVICES RE NDERED TO AE WERE AS FOLLOWS: PAGE 7 OF 23 ITA NO.908/ BANG/2011 7 PARTICULARS AMOUNT IN INR GENISYS UK 8,04,58,101 GENISYS USA 3,73,97,465 WENTWORTH COMPUTER HOLDING, UK 61,01,985 UNBILLED REVENUE (1,09,220) FOREIGN EXCHANGE GAIN 2,69,707 TOTAL 12,41,18,038 THE DETAILS OF EXPORTS TO THIRD PARTIES (NON-AE) AR E AS FOLLOWS: NAME OF THE COMPANY AMOUNT HARLEY STREET SERVICES LTD. 10,55,538 HP GLOBALSOFT LTD. (UK) 49,27,218 ING VYSYA - ASIA PACIFIC TEAM 85,997 MARLABS SOFTWARE PVT. LTD 151,232 MERIDIO LIMITED 1,46,10,721 SYSTEMS LOGIC SOLUTIONS LTD 69,29,664 WIPRO TECHNOLOGIES 13,19,651 ROXBURGHE LTD 143,174 FOREIGN EXCHANGE GAIN 63,640 TOTAL 2,92,86,834 PAGE 8 OF 23 ITA NO.908/ BANG/2011 8 IN THE CASE OF SOFTWARE SERVICES RENDERED BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISES, THE FUNCTI ONS PERFORMED BY THE APPELLANT WERE THE SAME AS THOSE PERFORMED IN THE COURSE OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO UNRELATED PARTIES (NON-AES) . FURTHER, THE APPELLANT HAD ADEQUATE DATA SO AS TO E NABLE IT DETERMINE THE NET MARGINS FOR SERVICES RENDERED TO ITS AE AS WELL AS NON-AE. ACCORDINGLY, INTERNAL TNMM WAS SELECTED AS THE MOST APPROPRIATE METHOD TO JUSTIFY T HE PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS. COST ALLOCATION (PAGE 82 TO 84 OF PB-I) THE APPELLANT INCURS VARIOUS COSTS IN RENDERING SOF TWARE DEVELOPMENT SERVICES. THESE COSTS COMPRISES OF DIR ECT COSTS, INDIRECT COSTS AND OTHER GENERAL ADMINISTRAT ION COSTS. THE APPELLANT ALLOCATED THE SALARY COST (EXCEPT GRAT UITY AND MANAGEMENT/SUPPORT SALARY) BASED ON THE TIME SPE NT BY EMPLOYEES FOR VARIOUS SEGMENTS VIZ AE EXPORTS, NON - AE EXPORTS AND DOMESTIC. GRATUITY AND MANAGEMENT/SUPPORT SALARY COST WAS APPORTIONED BASED ON REVENUE. THE SALARY OF EMPLOYEES ENGAGED IN OTHER THAN SOFTWARE DEVELOPMENT ACTIVITIES (LIKE FINANCE, ADMIN ETC) WAS ALLOCATED BASED ON REVENUE. THE APPELLANT ALLOCATED STAFF WELFARE, STAFF RECRUI TMENT AND TRAINING AND SECURITY AND OFFICE MAINTENANCE EXPENSES BASED ON EMPLOYEE HEAD COUNT. OTHER EXPENSE S WHERE ACTUAL WERE IDENTIFIABLE WERE BOOKED ACCORDIN GLY. ALL THE OTHER EXPENSES WERE ALLOCATED BASED ON REVE NUE RATIO. PLI AND MARGIN COMPUTATION THE APPELLANT ADOPTED OPERATING PROFIT TO OPERATING COST AS THE PRIME LEVEL INDICATOR (PLI). THE NET OPER ATING PAGE 9 OF 23 ITA NO.908/ BANG/2011 9 MARGIN ON COST OF AE AND NON AE TRANSACTIONS WAS AS BELOW: PARTICULARS AE NON-AE OPERATING REVENUES SOFTWARE DEVELOPMENT SERVICES 124,118,038 29,286,834 OPERATING COST SOFTWARE DEVELOPMENT EXPENSES SALARY 101,760,865 23,685,676 ADMINISTRATION AND OTHER EXPENSES (EXCLUDING LOSS ON SALE OF ASSETS) 8,375,402 2,015,528 BANK CHARGES 207,792 48,741 DEPRECIATION 3,716,410 871,751 TOTAL COST 114,060,469 26,621,696 OPERATING PROFIT 10,057,569 2,665,138 OPERATING PROFIT/OPERATING COST 8.82% 10.01% ON THE BASIS OF THE ABOVE, THE NET OPERATING MARGIN ON COST OF THE COMPARABLE TRANSACTION (NON-AE EXPORTS) WAS AT 10.01% PERCENT. AS THE APPELLANTS OPERATING MA RGIN ON OPERATING COST IN CASE OF CONTROLLED TRANSACTION WA S WITH THE ARMS LENGTH RANGE PROVIDED UNDER THE TP REGULATIONS, THE TRANSACTION BETWEEN THE APPELLANT AND ITS AES IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES WAS JUSTIFIED AND CONSIDERED TO BE AT ARMS LENGTH. IN THE SHOW CAUSE NOTICE DATED 21.06.2010, THE TPO HAD RAISED DOUBTS ABOUT APPORTIONMENT OF SALARY AND OTHE R EXPENSES BETWEEN AE AND NON AE SEGMENTS. THE TPO ALSO RAISED DOUBT ABOUT FUNCTIONAL SIMILARITY AND BI LLING MODEL BETWEEN AE AND NON-AE TRANSACTIONS. PAGE 10 OF 23 ITA NO.908 /BANG/2011 10 ALL THE QUERIES RAISED BY THE TPO WERE ADEQUATELY ADDRESSED (PAGES 86 TO 95 OF PB-I PART 1). IN THIS REGARD, THE APPELLANT SUBMITTED AGREEMENTS, TIME SH EET DETAILS, INVOICES AND BILLING RATES RELATING TO AE AND NON AE SEGMENT ON A SAMPLE BASIS FOR THE MONTHS OF APRI L, OCTOBER AND DECEMBER (IN THE PAPER BOOK ATTACHED ON SAMPLE BASIS DUE TO THE VOLUMINOUS NATURE). THE APPELLANT DETAILED THE FUNCTIONAL SIMILARITY AS WELL AS THE METHODOLOGY OF APPORTIONMENT OF EXPENSES. IN THE TRANSFER PRICING ORDER, THERE IS NO DISCUSSI ON ABOUT INTERNAL TNMM, ON THE BASIS OF WHICH THE APPE LLANT HAD STATED THAT ITS INTERNATIONAL TRANSACTIONS WERE AT ARMS LENGTH. THERE IS NO REASON WHY THE INTERNAL COMPARABLES HAVE NOT BEEN ADOPTED. THE LEARNED TPO HAS ADOPTED EXTERNAL TNMM AND COMPUTED THE ARMS LENGTH PRICE. LARGE PORTIONS OF THE ORDER U/S 92CA ARE BORROWED OR COPIED FROM THE ORDERS PASSED FOR O THER SOFTWARE COMPANIES (VARIOUS SUCH EXAMPLES ARE DETAI LED ON PAGE 657 & 658 OF THE PB-I PART 2). IN THE TP O RDER, THE TPO HAS PROCEEDED AS IF THE APPELLANT HAD SELEC TED EXTERNAL TNMM (REFER PAGE OF 5 OF THE TP ORDER) AND HAD PERFORMED A SEARCH ON PROWESS AND CAPITAL-LINE DATABASE. VARIOUS SUBMISSIONS WHICH WERE NEVER MAD E BY THE APPELLANT HAVE BEEN RECORDED AND THEREAFTER REBUTTED. THE ORDER U/S 92CA APPEARS TO BE A MECHANICAL EXERCISE. IT IS A REPRODUCTION LARGELY O F ORDERS PASSED IN OTHER CASES. IN THIS PROCESS, THE TPO HAS OVERLOOKED THE ESSENCE OF THE COMPARABILITY EXER CISE UNDERTAKEN BY THE APPELLANT. THE INITIAL NOTICE FRO M THE TPO DOES REFER TO THE INTERNAL TNMM. HOWEVER, IN T HE FINAL ORDER, THERE IS NOT EVEN A WHISPER OF THE SAM E OR ABOUT VARIOUS CONTENTIONS URGED. THE ORDER U/S 92C A HAS BEEN PASSED ROUTINELY AND WITHOUT APPLICATION OF MIND. THE ORDER SO PASSED IS BAD IN LAW AND HENCE LIABLE TO BE QUASHED. PAGE 11 OF 23 ITA NO.908 /BANG/2011 11 THE APPELLANT SUBMITS THAT INTERNAL COMPARABLES ARE MORE APPROPRIATE AND ARE TO BE GIVEN PRECEDENCE OVER EXT ERNAL COMPARABLES. THE COMPUTATION OF ARMS LENGTH PRICE IN CASE OF TNMM IS DONE AS PER RULE 10B(1)(E). . THE RULES READS AS FOLLOWS: (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; SUB CLAUSE (I) PROVIDES THAT FIRST NET PROFIT REALI ZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION SH OULD BE COMPUTED. SUB CLAUSE (II) PROVIDES THAT NET PRO FIT REALIZED FROM UNCONTROLLED TRANSACTIONS SHALL BE COMPUTED. THE PROFIT FROM UNCONTROLLED TRANSACTION S CAN BE REALIZED BY THE (1) ENTERPRISE OR (II) UNRELATED ENTERPRISE FROM COMPARABLE UNCONTROLLED TRANSACTION . THE APPELLANT SUBMITS THAT THE RULES RECOGNIZE AND ACCEPT THE ADOPTION OF NET PROFIT REALIZED BY THE ENTERPRISE FROM COMPARABLE UNCONTROLLED TRANSACTION . SUCH A RESULT SHOULD BE PREFERRED OVER NET PROFIT REALIZED BY UNRELATED PARTIES FROM COMPARABLE UNCONTROLLED TRANSACTION. THIS IS BECAUSE, SUCH AN ALYSIS IS MORE MEANINGFUL AS THE RELEVANT DATA, FACTS AND FEA TURES OF BOTH THE SEGMENTS ARE AVAILABLE AND ARE MORE REL IABLE. PAGE 12 OF 23 ITA NO.908 /BANG/2011 12 THE APPELLANT SUBMITS RELIES ON THE FOLLOWING DECIS IONS WHEREIN IT HAS BEEN HELD THAT INTERNAL COMPARABLES ARE TO BE PREFERRED: 1. ABHISHEK AUTO INDUSTRIES LTD V DCIT 2010-TII-54- ITAT-DEL-TP HELD THAT INTERNAL CPM IS BETTER THAN EXTERNAL TNMM 2. ACIT V SCHLAFHORST MARKETING CO LTD 13 TAXMANN.COM 104 HELD THAT INTERNAL TNMM TO BE ADOPTED 3. ACIT V BIRLA SOFT LTD 12 TAXMANN.COM 31 INTERNAL TNMM ACCEPTED 4. DESTINATION OF THE WORLD (SUBCONTINENT) (P.) LTD. V ACIT 12 TAXMANN.COM 310 HELD THAT PREFERENCE SHOULD BE GIVEN TO INTERNAL COMPARISON. BASED ON ALL THE ABOVE, THE APPELLANT SUBMITS THAT INTERNAL TNMM AS APPLIED BY IT DESERVES TO BE ACCEPTED. 3.4.1 THE LEARNED DR ON THE OTHER HAND HAD GIVEN W RITTEN SUBMISSIONS ON 4/7/2012. WITH REGARD TO GROUND NO .8, THE OBJECTIONS RAISED BY THE REVENUE READ AS FOLLOWS:- GROUND NO.8 : REJECTING INTERNAL COMPARABLES SELE CTED BY THE APPELLANT AND REJECTING TRANSFER PRICING ANAL YSIS OF THE APPELLANT IN PARA-4 OF THE TP ORDER, THE TPO DETAILED FOR REJECTION OF COMPARABLE SELECTED BY THE ASSESSEE. I N THE SELECTED COMPARABLES, THE FINANCIAL RESULT FOR THE YEAR ENDING 31/03/2005, 31/03/2006 AND 31/03/2007 WERE CONSIDERED WHEREAS THE TPO APPLIED FINANCIAL DATA F OR F.Y.2006-07 ONLY. SECONDLY, THE COMPANIES ENGAGED IN SOFTWARE DEVELOPMENT WERE CONSIDERED AS COMPARABLE IRRESPECTIVE OF VERTICALS HORIZONTALS OF SOFTWARE SERVICES. PAGE 13 OF 23 ITA NO.908 /BANG/2011 13 3.4.2 IN REBUTTAL, THE ASSESSEE SUBMITTED AS FOLLO WS:- THE APPELLANT SUBMITS THAT IT HAD USED INTERNAL COMPARABLE (ADOPTING TNMM AS THE MOST APPROPRIATE METHOD) TO JUSTIFY THE PRICE CHARGED IN INTERNATIONA L TRANSACTIONS. THEREFORE, THE CONTENTION OF THE LEA RNED DR THAT THE APPELLANT USED DATA RELATING TO EARLIER YEARS IS WITHOUT BASIS. 3.5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS ON RECORD. AS RIGHTLY POINTED OUT BY THE LEARNED AR, THE INTERNAL COMPARABLES ARE MORE APPROPRIATE AND ARE TO BE GIVE N PRECEDENCE OVER EXTERNAL COMPARABLES. THE COMPUTATION OF ARMS LEN GTH PRICE IN CASE OF TNMM IS DONE AS PER RULE 10B(1)(E). THE RULES READ S AS FOLLOWS: DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 9 2C 10B(1) ----------------------------------------- ----------- (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; (III) PAGE 14 OF 23 ITA NO.908 /BANG/2011 14 SUB CLAUSE (I) PROVIDES THAT FIRST NET PROFIT REALI ZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION SHOULD BE COMPUTED. S UB CLAUSE (II) PROVIDES THAT NET PROFIT REALIZED FROM UNCONTROLLED TRANSACT IONS SHALL BE COMPUTED. THE PROFIT FROM UNCONTROLLED TRANSACTIONS CAN BE RE ALIZED BY THE (1) ENTERPRISE OR (II) UNRELATED ENTERPRISE FROM COMPARABLE UNCON TROLLED TRANSACTION. THUS THE RULES RECOGNIZE AND ACCEPT T HE ADOPTION OF NET PROFIT REALIZED BY THE ENTERPRISE FROM COMPARABLE UNCONTROL LED TRANSACTION. SUCH A RESULT SHOULD BE PREFERRED OVER NET PROFIT REALIZ ED BY UNRELATED PARTIES FROM COMPARABLE UNCONTROLLED TRANSACTION. THIS IS BECAUSE, SUCH ANALYSIS IS MORE MEANINGFUL AS THE RELEVANT DATA, FACTS AND FEA TURES OF BOTH THE SEGMENTS ARE AVAILABLE AND ARE MORE RELIABLE. ON THE FOLLOWING DECISIONS, IT HAS BEEN HELD THAT INTERNAL COMPARABLES ARE TO BE P REFERRED:- ABHISHEK AUTO INDUSTRIES LTD V DCIT 2010-TII-54- ITAT-DEL-TP HELD THAT INTERNAL CPM IS BETTER THAN EXTERNAL TNMM ACIT V SCHLAFHORST MARKETING CO LTD 13 TAXMANN.COM 104 HELD THAT INTERNAL TNMM TO BE ADOPTED ACIT V BIRLA SOFT LTD 12 TAXMANN.COM 31 INTERNAL TNMM ACCEPTED DESTINATION OF THE WORLD (SUBCONTINENT) (P.) LTD. V ACIT 12 TAXMANN.COM 310 HELD THAT PREFERENCE SHOU LD BE GIVEN TO INTERNAL COMPARISON. 3.6 IN THE LATEST ORDER OF THE MUMBAI TRIBUNAL IN THE CASE OF M/S TECNIMONT ICB PRIVATE LIMITED (ITA NO.4608/MUM/2010 VIDE ORDER DATED 17 TH JULY, 2012), THE HONBLE THIRD MEMBER WAS CONSIDERI NG THE FOLLOWING ISSUE ON A DIFFERENCE OF OPINION:- PAGE 15 OF 23 ITA NO.908 /BANG/2011 15 WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE , THE NET MARGIN REALIZED FROM A TRANSACTION WITH AN ASSOCIATED ENTERPRISE (AE) FOUND AND ACCEPTED AT AR MS LENGTH PRICE (ALP) CAN BE TAKEN AS A COMPARABLE BEI NG AN INTERNAL COMPARABLE FOR COMPUTATION OF (SIC-ARM) AL P OF AN INTERNATIONAL TRANSACTION WITH ANOTHER AE? 3.6.1 THE HONBLE THIRD MEMBER OBSERVED THAT THE I NTERNAL UNCONTROLLED TRANSACTION/COMPARABLE IS TO BE GIVEN PREFERENCE TO THE EXTERNAL COMPARABLES. THE RELEVANT FINDING OF THE HONBLE TRIBUNAL AT PARA 10 READS AS FOLLOWS:- 10. CLAUSE (I) OF RULE 10B(E) STIPULATES THAT NET PROFIT MARGIN FROM AN INTERNATIONAL TRANSACTION WITH AN AE IS COMPUTED IN RELATION TO COST INCURRED OR SALES EFFE CTED OR ASSETS EMPLOYED ETC. CLAUSE (II) IS MATERIAL FOR THE PRESENT PURPOSE. IT PROVIDES THAT THE NET PROFIT M ARGIN REALIZED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPR ISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUM BER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO T HE SAME BASE. THE BASE OF THIS PROVISION TAKES ONE BACK TO CLAUSE (I) WHICH REFERS TO COST INCURRED OR SALES E FFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED. ON SPLITTING CLAUSE (II) INTO TWO PARTS, IT DIVULGES THAT THE RE FERENCE IS MADE TO INTERNAL AND EXTERNAL COMPARABLES. ONE PAR T OF CLAUSE (II) REFERS TO THE NET PROFIT MARGIN REALIZ ED BY THE ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION AND THE OTHER PART TALKS OF THE NET P ROFIT MARGIN REALIZED . BY AN UNCONTROLLED ENTERPRISE FR OM A COMPARABLE UNCONTROLLED TRANSACTION. IT TRANSPIRE S THAT WHEREAS THE FIRST PART REFERS TO THE PROFIT MARGIN FROM INTERNAL COMPARABLE UNCONTROLLED TRANSACTIONS, THE SECOND PART REFERS TO PROFIT MARGIN FROM AN EXTERNAL COMPA RABLE UNCONTROLLED TRANSACTION. THUS IT IS DISCERNIBLE T HAT WHAT IS TO BE COMPARED UNDER THIS METHOD IS PROFIT FROM A PAGE 16 OF 23 ITA NO.908 /BANG/2011 16 COMPARABLE UNCONTROLLED TRANSACTION. THE WORD COMPARABLE MAY ENCOMPASS INTERNAL COMPARABLE OR EXTERNAL COMPARABLE. THERE IS CUE IN THE RULE ITSE LF AS TO PREFERENCE TO BE GIVEN TO INTERNAL COMPARABLE UNCONTROLLED TRANSACTIONS VIS--VIS EXTERNALLY COMPA RABLE UNCONTROLLED TRANSACTIONS. IT IS BECAUSE THE DELEG ATED LEGISLATURE HAS FIRSTLY REFERRED TO THE NET PROFIT M ARGIN REALIZED BY THE ENTERPRISE (INTERNAL) FROM A COMPARA BLE UNCONTROLLED TRANSACTION AND, THEREAFTER, IT POINTS TOWARDS NET PROFIT MARGIN REALIZED BY AN UNRELATED ENTERPRISE (EXTERNAL) FROM A COMPARABLE UNCONTROLLE D TRANSACTION. THUS WHERE POTENTIAL COMPARABLE IS AV AILABLE IN THE SHAPE OF AN UNCONTROLLED TRANSACTION OF THE SAME ASSESSEE, IT IS LIKELY TO HAVE HIGHER DEGREE OF COMPARABILITY VIS--VIS COMPARABLES IDENTIFIED AMONG ST THE UNCONTROLLED TRANSACTIONS OF THIRD PARTIES. TH E UNDERLYING OBJECT BEHIND COMPUTING ALP OF AN INTERNATIONAL TRANSACTION IS TO FIND OUT THE PROFIT S WHICH SUCH ENTERPRISE WOULD HAVE EARNED IF THE TRANSACTIO N HAD BEEN WITH SOME THIRD PARTY INSTEAD OF RELATED PARTY. WHEN THE DATA IS AVAILABLE SHOWING PROFIT MARGIN OF THAT ENTERPRISE ITSELF FROM A THIRD PARTY, IT IS ALWAYS SA FE AND ADVISABLE TO HAVE RECOURSE TO SUCH INTERNAL COMPARA BLE CASE. THE REASON IS PATENT THAT THE VARIOUS FACTOR S HAVING BEARING ON THE QUALITY OF OUTPUT, ASSETS EMPL OYED, INPUT COST ETC. CONTINUE TO REMAIN BY AND LARGE SAME IN CASE OF AN INTERNAL COMPARABLE. THE EFFECT OF DIFF ERENCE DUE TO SUCH INHERENT FACTORS ON COMPARISON MADE WIT H THE THIRD PARTIES, GETS NEUTRALIZED WHEN COMPARISON IS MADE WITH INTERNAL COMPARABLE. EX CONSEQUENTI, IT FOLLOWS THAT AN INTERNAL COMPARABLE UNCONTROLLED TRANSACTIO N IS MORE NOTEWORTHY VIS--VIS ITS COUNTERPART I.E. EXTE RNAL COMPARABLE. 3.6.2 IN THE INSTANT CASE, THE TPO, IN HIS SHOW-CA USE NOTICE DATED 21/6/2010, PROPOSED TO RE-DETERMINE THE ARMS LENGT H PRICE FOR SOFTWARE DEVELOPMENT SERVICES. THE TPO HAD RAISED DOUBTS AB OUT THE APPORTIONMENT PAGE 17 OF 23 ITA NO.908 /BANG/2011 17 OF SALARY AND OTHER EXPENSES BETWEEN THE AE AND NON AE SEGMENT. THE TPO ALSO RAISED DOUBTS ABOUT THE FUNCTIONAL DISSIMILARI TY AND BILLING MODELS BETWEEN THE AE AND NON AE TRANSACTIONS. THE RELEV ANT PORTION OF TPO NOTICE PROPOSING TO REJECT THE INTERNAL TNMM APPLIE D BY THE ASSESSEE READS AS FOLLOWS: 3. --------------------------------------------- REJECTION OF TP DOCUMENT THE TAXPAYER IS RENDERING SOFTWARE DEVELOPMENT SERVICES TO BOTH AE AND NON-AE. THE TAXPAYER HAS COMPARED THE SERVICES, DIRECT COSTS, INDIRECT COSTS AND OTHER GENERAL ADMINISTRATION COSTS WITH ITS NON-AE. THE TAXPAYER HAS STATED THAT THESE EXPENSES WERE INCURRED FOR ALL THE SEGMENTS OF THE AE, NON-AE AND DOMESTIC. THE TAXPAYER HAS COMPARED THE PLI OF THE AE AND NON-AE WHICH IS AT 5.46% AND 6.58% RESPECTIVELY. BASED ON THESE ASSUMPTIONS THE TAXPAYER CONSIDERS THE TRANSACTIONS ARE AT ARMS LENGTH PRICE. THE INTERNAL TNMM APPLIED BY THE TAXPAYER IS REJECTED FOR THE FOLLOWING REASONS:- (I) THE NATURE AND SERVICES RENDERED TO NON-AE AND AE MAY NOT BE SIMILAR. IN THIS REGARD PLEASE PRODUCE COPIES OF AGREEMENT WITH NON- AE; (II) IT IS ALSO NOT KNOWN HOW THE SALARY EXPENSES ARE APPORTIONED BETWEEN AE AND NON-AE; (III) EVEN THE APPORTIONMENT OF ADMINISTRATIVE AND OTHER EXPENSES LIKE BANK CHARGES, DEPRECIATION BETWEEN AE AND NON-AE ARE ALSO NOT KNOWN; IN THIS REGARD PLEASE SUBMIT BASIS ON WHICH VARIOUS HEADS OF EXPENSES ARE APPORTIONED BETWEEN AE AND NON-AE. COPY OF THE AGREEMENT WITH AE TO BE PRODUCED. PAGE 18 OF 23 ITA NO.908 /BANG/2011 18 (IV) IT IS ALSO NOT KNOWN WHAT IS BILLING METHODOLOGY OF THE AE AND ALSO THAT OF THE NON-AE; PLEASE PRODUCE COPIES OF INVOICES RAISED WITH BOTH AES AND NON-AES TO SHOW THE BILLING METHODOLOGY. IN VIEW OF THE ABOVE, THE INTERNAL TNMM APPLIED BY T HE TAXPAYER IS REJECTED AND EXTERNAL TNMM IS ADOPTED BY THE TPO .. 3.6.3 ALL THE ABOVE QUERIES RAISED BY THE TPO WAS A DDRESSED TO IN THE ASSESSEES REPLY DATED 6/9/2010 (PAGES 86 TO 95 OF THE PAPER BOOK-I). WE HAVE NOTICED FROM THE REPLY FURNISHED BY THE ASSES SEE THAT IT HAD PRODUCED COPIES OF THE AGREEMENT, TIME SHEET DETAIL S, INVOICES AND THE BILLING RATES RELATING TO THE AE AND NON-AE SEGMENT S ON SAMPLE BASIS IN THE MONTHS OF APRIL, OCTOBER AND DECEMBER. THE ASSESSE E HAD ALSO FILED DETAILED FUNCTIONAL SIMILARITY AS WELL AS THE METHOD OLOGY OF APPORTIONMENT OF EXPENSES. HOWEVER, WE HAVE, FURTHER, NOTICED THAT IN THE TRANSFER PRICING ORDER, THERE WAS NO DISCUSSION ABOUT THE INTERNAL T NMM, ON THE BASIS OF WHICH, THE ASSESSEE HAD STATED THAT INTERNATIONAL T RANSACTIONS WERE AT ARMS LENGTH. THERE WAS NO REASON AS TO WHY THE INTERNAL COMPARABLES HAVE NOT BEEN ADOPTED. 3.6.4 IN THE LIGHT OF THE ABOVE MENTIONED ORDERS OF THE TRIBUNAL AND RULE 10B(1)(E)(II), WE DIRECT THE ASSESSING OFFICER /TPO TO ADOPT THE INTERNAL TNMM INSTEAD OF EXTERNAL TNMM. HOWEVER, THE ISSUE IS RESTORED TO THE FILE OF THE ASSESSING OFFICER/TPO TO VERIFY THE COST ALLOCATION AND THE PLI AND MARGIN COMPUTATION BETWEEN THE SOFTWARE SERVICE S RENDERED BY THE ASSESSEE TO ITS AE VIS--VIS THE NON-AE AND TO DETE RMINE THE OPERATIVE PROFIT/OPERATING COST AND THE MARGIN THEREOF AND TO CONCLUDE AS TO WHETHER PAGE 19 OF 23 ITA NO.908 /BANG/2011 19 THE INTERNATIONAL TRANSACTION WITH THAT OF THE AE I S WITHIN THE ARMS LENGTH RANGE PROFIT UNDER THE TP REGULATION. IT IS ORDERE D ACCORDINGLY. 3.6.5. IN THE RESULT, GROUND NO.8 IS ALLOWED FOR S TATISTICAL PURPOSES. (II) NON-TP ISSUE DEDUCTION UNDER SECTION 10A OF THE ACT 4. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSE E COMPANY HAD COMPUTED THE BUSINESS LOSS AT RS.77,58,532/- AFTER CLAIMING DEDUCTION OF RS.61,39,512/- UNDER SECTION 10A OF THE ACT. THE A SSESSING OFFICER HAD HELD THAT DEDUCTION UNDER SECTION 10A IS TO BE ALLO WED FROM THE TOTAL INCOME COMPUTED AFTER SETTING OFF OF THE LOSS OF OTHER UNI TS. AFTER SETTING OFF OF THE LOSS OF OTHER UNITS (NON-10A UNIT), 10A DEDUCTI ON WAS CONSIDERED AS NIL. 4.1 IT WAS SUBMITTED BEFORE US THAT DEDUCTION UNDE R SECTION 10A IS UNDERTAKING SPECIFIC AND SHOULD BE COMPUTED WITHOUT CONSIDERING THE LOSSES OF OTHER UNITS (NON STP UNIT). IT WAS STATED THAT THE CONTENTION OF THE ASSESSEE IS SUPPORTED BY THE JUDGMENT OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF ACIT V YOKOGAWA REPORTED I N 341 ITR 385 (KAR.). 4.2 THE LEARNED DR PRESENT WAS DULY HEARD. 4.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS ON RECORD. THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE CITED SUPRA HAD CATEGORICALLY HELD THAT SECTION 10A IS ALLOWABLE WIT HOUT SETTING OFF OF LOSSES OF THE OTHER UNITS. THE RELEVANT FINDING OF THE HO NBLE JURISDICTIONAL HIGH COURT AT PARAS 18, 19 & 29 TO 31 READS AS FOLLOWS:- PAGE 20 OF 23 ITA NO.908 /BANG/2011 20 18. IT IS AFTER THE DEDUCTION UNDER CHAPTER VI-A T HAT THE TOTAL INCOME OF AN ASSESSEE IS ARRIVED AT. CHA PTER VI-A DEDUCTIONS ARE THE LAST STAGE OF GIVING EFFECT TO ALL TYPES OF DEDUCTIONS PERMISSIBLE UNDER THE ACT. AT T HE END OF THIS EXERCISE, THE TOTAL INCOME IS ARRIVED A T. TOTAL INCOME IS THUS, A FIGURE ARRIVED AT AFTER GIVING EF FECT TO ALL DEDUCTIONS UNDER THE ACT. THERE CANNOT BE ANY FURTHER DEDUCTION FROM THE TOTAL INCOME AS THE TOTA L INCOME IS ITSELF ARRIVED AT AFTER ALL DEDUCTIONS. 19. FROM THE AFORESAID DISCUSSION IT IS CLEAR THAT THE INCOME OF 10A UNIT HAS TO BE EXCLUDED BEFORE ARRIVI NG AT THE GROSS TOTAL INCOME OF THE ASSESSEE. THE INCOM E OF 10A UNIT HAS TO BE DEDUCTED AT SOURCE ITSELF AND NO T AFTER COMPUTING THE GROSS TOTAL INCOME. THE TOTAL INCOME USED IN THE PROVISIONS OF SECTION 10A IN THIS CONTE XT MEANS THE GLOBAL INCOME OF THE ASSESSEE AND NOT THE TOTAL INCOME AS DEFINED IN SECTION 2(45). HENCE, T HE INCOME ELIGIBLE FOR EXEMPTION U/S 10A WOULD NOT ENT ER INTO COMPUTATION AS THE SAME HAS TO BE DEDUCTED AT SOURCE LEVEL. --------------------------------------------------- ----------- 29. AFTER MAKING ALL SUCH COMPUTATION THE ASSESSEE WOULD BE ENTITLED TO THE BENEFIT OF SET OFF OR CARR Y FORWARD OF LOSS AS PROVIDED U/S 72 OF THE ACT. TH AT IS THE BENEFIT WHICH IS GIVEN TO THE ASSESSEE UNDER TH E ACT IRRESPECTIVE OF THE NATURE OF BUSINESS WHICH HE IS CARRYING ON. THE SAID BENEFIT IS AVAILABLE EVEN TO UNDERTAKINGS U/S 10B OF THE ACT. THE EXPRESSION DEDUCTION OF SUCH PROFITS AND GAINS AS DERIVED BY A N UNDERTAKING SHALL BE ALLOWED FROM THE TOTAL INCOME OF THE ASSESSEE, HAS TO BE UNDERSTOOD IN THE CONTEXT WITH WHICH THE SAID PROVISION IS INSERTED IN CHAPTER III OF THE ACT. SUB-SECTION (4) OF SECTION 10A CLARIFIES THIS POSITION. IT PROVIDES THAT THE PROFITS DERIVED FRO M EXPORT OF ARTICLES OR THINGS FROM COMPUTER SOFTWARE PAGE 21 OF 23 ITA NO.908 /BANG/2011 21 SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF T HE BUSINESS OF THE UNDERTAKING, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUCH ARTICLES OR THIN GS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF TH E BUSINESS CARRIED ON BY THE UNDERTAKING. THEREFORE, IT IS CLEAR THAT THOUGH THE ASSESSEE MAY BE HAVING MORE TH AN ONE UNDERTAKING FOR THE PURPOSE OF SECTION 10A IT I S THE PROFIT DERIVED FROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE FROM THE BUSINESS OF THE UNDERTAK ING ALONE THAT HAS TO BE TAKEN INTO CONSIDERATION AND S UCH PROFIT IS NOT TO BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. IT IS ONLY AFTER THE DEDUCTION OF THE SAI D PROFITS AND GAINS, THE INCOME OF THE ASSESSEE HAS T O BE COMPUTED. 30. THE PROVISIONS OF THIS SUB-SECTION WILL APPLY E VEN IN THE CASE WHERE AN ASSESSEE HAS OPTED OUT OF SECTION 10A BY EXERCISING HIS OPTION UNDER SUB-SECTION (8). AS DISCUSSED, IT IS PERMISSIBLE FOR AN ASSESSEE TO OPT IN AND OPT OUT OF SECTION 10A. IN THE YEAR WHEN THE ASSESS EE HAS OPTED OUT, THE NORMAL PROVISIONS OF THE ACT WOU LD APPLY. THE PROFITS DERIVED BY HIM FROM THE STP UNDERTAKING WOULD SUFFER TAX IN THE NORMAL COURSE SUBJECT TO VARIOUS PROVISIONS OF THE ACT INCLUDING THOSE OF CHAPTER VI-A. IF IN SUCH A YEAR, THE ASSESSEE H AS SUFFERED LOSSES, SUCH LOSSES WOULD BE SUBJECT TO IN TER SOURCE AND INTER HEAD SET OFF. THE BALANCE IF ANY THEREAFTER CAN BE CARRIED FORWARD, FOR BEING SET OF F AGAINST PROFITS OF THE SUBSEQUENT ASSESSMENT YEARS I N THE NORMAL COURSE. UNABSORBED DEPRECIATION ALSO ME RITS A SIMILAR TREATMENT. 31. AS THE INCOME OF 10-A UNIT HAS TO BE EXCLUDED A T SOURCE ITSELF BEFORE ARRIVING AT THE GROSS TOTAL IN COME, THE LOSS OF NON 10-A UNIT CANNOT BE SET OFF AGAINST THE INCOME OF 10-A UNIT U/S 72. THE LOSS INCURRED BY TH E ASSESSEE UNDER THE HEAD PROFITS AND GAINS OF BUSINE SS OR PROFESSION HAS TO BE SET OFF AGAINST THE PROFITS AN D GAINS PAGE 22 OF 23 ITA NO.908 /BANG/2011 22 IF ANY, OF ANY BUSINESS OR PROFESSION CARRIED ON BY SU CH ASSESSEE. THEREFORE AS THE PROFITS AND GAINS UNDER SECTION 10-A IS NOT BE INCLUDED IN THE INCOME OF TH E ASSESSEE AT ALL, THE QUESTION OF SETTING OFF THE LO SS OF THE ASSESSEE OF ANY PROFITS AND GAINS OF BUSINESS AG AINST SUCH PROFITS AND GAINS OF THE UNDERTAKING WOULD NOT ARISE. SIMILARLY, AS PER SECTION 72(2), UNABSORBED BUSINESS LOSS IS TO BE FIRST SET OFF AND THEREAFTER UNABSORBED DEPRECIATION TREATED AS CURRENT YEARS DEPRECIATION U /S 32(2) IS TO BE SET OFF. AS DEDUCTION U/S 10A HAS T O BE EXCLUDED FROM THE TOTAL INCOME OF THE ASSESSEE, THE QUESTION OF UNABSORBED BUSINESS LOSS BEING SET OFF AGAINST SUCH PROFIT AND GAINS OF THE UNDERTAKING WO ULD NOT ARISE. IN THAT VIEW OF THE MATTER, THE APPROAC H OF THE ASSESSING AUTHORITY WAS QUITE CONTRARY TO THE AFORESAID STATUTORY PROVISIONS AND THE APPELLATE COMMISSIONER AS WELL AS THE TRIBUNAL WERE FULLY JUST IFIED IN SETTING ASIDE THE SAID ASSESSMENT ORDER AND GRAN TING THE BENEFIT OF SECTION 10A TO BE ASSESSEE. HENCE, THE MAIN SUBSTANTIAL QUESTION OF LAW IS ANSWERED IN FAV OUR OF THE ASSESSEES AND AGAINST THE REVENUE. 4.4 FOLLOWING THE ABOVE JUDGMENT OF THE HONBLE CO URT, WE HOLD THAT DEDUCTION UNDER SECTION 10A OF THE ACT IS TO BE ALL OWED PRIOR TO SETTING OFF OF LOSSES OF OTHER INDUSTRIAL UNITS, WHICH IS A NON -STP UNIT. 4.5 IN THE RESULT, GROUND NO.17 IS ALLOWED. 5. GROUND NO.18 IS CONSEQUENTIAL TO GROUND NO.17 A ND HENCE, THIS GROUND IS DISMISSED. 6. GROUND NO.19 IS WITH REGARD TO LEVY OF INTEREST UNDER SECTION 234D OF THE ACT. PAGE 23 OF 23 ITA NO.908 /BANG/2011 23 6.1 LEVY OF INTEREST UNDER SECTION 234D OF THE ACT IS MANDATORY AND CONSEQUENTIAL IN NATURE. ACCORDINGLY GROUND NO. 19 IS ALSO DISMISSED. 7. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED AS INDICATED ABOVE. THE ORDER IS PRONOUNCED ON THE 29 TH DAY OF JANUARY, 2013 AT BANGALORE. SD/- SD/- (N BARATHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCERNE D. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/ BY ORDER SENIOR PRIVATE SECRETARY, ITAT, BANGALORE.