Joint Commissioner Of Income Tax (LTU), Bangalore V. M/s. Dell International Services (India) Private Limited (earlier known as Perot Systems TSI), Bangalore

ITTPA 121/BANG/2014

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 5920 (ITAT-BANGALORE)
• Duration Of Justice: 7 year(s) 9 month(s) 21 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 21-12-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 02-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMER SINGH MEENA; SANKAR GANESH
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Additional evidence; Speculation loss; Valuation report; Assessment record; Notional interest; Reason to believe; Speculative transactions; TDS; Rule 8D; Set aside; Capital Gains
• Section: 37; 271(1)(c); 92C; 143(3); 92B; 2(22)(e); 234B; 14A; 40(a)(ia); 133(6); 43(5); 10B; 80HH; 143(2); 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “A”, BANGALORE Before Shri George George K, JM and Shri B.R.Baskaran, AM IT(TP)A No.130/Bang/2014 : Asst.Year 2009-2010 M/s.Dell International Services India Private Limited No.12/A, 12/12-A, 13/1-A Divyashree Greens, Challaghatta Village, Varthur Hobli Bangalore – 560 071. PAN : AAACH1925Q. v. The Joint Commissioner of Income-tax, Large Taxpayer Unit, Bangalore. (Appellant) (Respondent) IT(TP)A No.121/Bang/2014 : Asst.Year 2009-2010 The Joint Commissioner of Income-tax, Large Taxpayer Unit, Bangalore. v. M/s.Dell International Services India Private Limited Bangalore – 560 071. (Appellant) (Respondent) Assessee by : Sri.Percy Pardiwala, Senior Counsel Revenue by : Sri.Sumer Singh Meena, CIT-DR & Sri.Sankar Ganesh, JCIT-DR Date of Hearing : 09.11.2021 Date of Pronouncement : 22.12.2021 O R D E R Per Bench : These are cross appeals directed against final assessment order dated 02.01.2014. The relevant assessment year is 2009-2010. 2. The brief facts of the case are as follows: The assessee is a private limited company, engaged in the business of development and export of computer software and Information Technology Enabled Services (ITeS). The IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 2 assessee carries on its activities from the units set up in accordance with the Software Technology Park (STPI) Scheme of the Government of India, which are entitled for tax holiday benefits as per the provisions of section 10A of the I.T.Act. For the assessment year 2009-2010, the return of income was filed on 30.09.2009 declaring total income of RS.9,64,84,050. The assessment was selected for scrutiny by issuing notice u/s 143(2) of the I.T.Act. During the course of assessment proceedings, the case was referred to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) of the international taxations entered by the assessee with its Associate Enterprises (AEs). The activities carried on by the assessee, the margins earned thereon and the TPO’s calculation and the findings are as follows:- Transaction Assessee’s margins Arm’s length margin determined by TPO TPO’s finding Software development support services Net operating margin (NPM) of 33.18 per cent. NPM of 24.32 percent Transactions established to be at arm’s length. Management and administrative support services NPM of 10 per cent. NPM of less than 10 per cent -do- IT infrastructure support services NPM of 20 per cent. NPM of 25.03 per cent Transactions are within the 5 per cent tolerance range and hence accepted to be at arm’s length. 2.1 However, the TPO made an adjustment amounting to Rs.65,16,46,009 towards various transactions, which are as under:- IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 3 * Receivables from Debtors due for more than 6 months was treated as deemed loan; * Buyback of shares were treated as international transactions subject to Transfer pricing; * Secondary Transfer Pricing adjustment was made with respect to buyback of shares; and * Denial of Royalty paid for use of brand name towards its non-AE customers. 2.2 Subsequent to the TPO’s order, the Assessing Officer passed draft assessment order on 28.03.2013 making certain other additions / disallowances. The assessee being aggrieved, filed objections before the Dispute Resolution Panel (DRP). The DRP granted partial relief to the assessee. The DRP deleted the adjustment and secondary adjustment made towards buyback of shares amounting to Rs.55,48,13,611 and Rs.3,98,07,878 vide its directions dated 30.04.2013. As regards adjustment made in respect of long term pending debtors, the DRP held that if the assessee’s margin after adjustment for working capital differences was higher than the margin of the comparable companies, there should be no further TP adjustment towards interest on the long pending debtors. However, the AO retained the adjustment on the basis that the direction issued by the DRP to examine the computation of working capital adjustment amounted to a set aside. Accordingly, the AO did not give effect to the directions of the DRP. As regards the adjustment towards royalty payment by the assessee, the DRP upheld the order of the AO IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 4 /TPO. Based on the directions issued by the DRP, the AO passed the final assessment order determining the total income of assessee for assessment year 2009-2010 at Rs.109,06,16,302. The addition / disallowance made by the A.O., apart from the TP adjustment, are as follows:- * Denial of tax benefit under section 10A of the Act in respect of profits earned by Bangalore Units 2 – Rs.20,59,56,749; * Adjustment on account of mark to market losses – Rs.68,42,73,980; * Disallowance under section 40(a)(ia) of the I.T.Act – Rs.4,41,36,799; * Disallowance under section 14A of the I.T.Act – Rs.27,40,203; * Short grant of tax deduction at source; * Consequential levy of interest under section 234B and 234D of the I.T.Act, 2.3 Aggrieved by the final assessment order dated 02.01.2014, both assessee and revenue has filed appeals before the Tribunal. We shall first adjudicate the assessee’s appeal. IT(TP)A No.130/Bang/2014 (Assessee’s appeal) 3. The grounds raised by the assessee are as follows:- “1. The assessment order dated January 02, 2014, passed by the learned Joint Commissioner of Income-tax, Large taxpayer unit, Bangalore ("the Ld AO") under section 143(3) IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 5 read with section 144C( 13) of the Income-tax Act, 1961 ("the Act") is not in accordance with the law and is contrary to the facts and circumstances of the present case. Transfer Pricing adjustments 1.1. The Honourable DRP and the Ld TPO have erred in law and on the facts and circumstances of the case, by holding that the ALP of Royalty is NIL and adding back the entire amount of Rs 3.83 crores paid towards Royalty as an adjustment to ALP. 1.2. The Honourable DRP and the Ld TPO have erred in law and on facts in concluding that the' payment of royalty for the brand name owned by the AE was not justified without considering that its revenue of about Rs 130 crores out of a total revenue of Rs 433 crores was derived from non-AEs. 1.3. The Honourable DRP and the Ld TPO have erred in law and on facts in not considering that the royalty was paid only in respect of the revenue derived from non-AEs 1.4. The Honourable DRP and the Ld TPO has erred in law in rejecting the benchmarking carried out by the Appellant under TNMM (aggregation approach) without any basis for rejecting the approach and when it was not disputed that the Appellant had earned significantly higher margins than comparable companies as found by the Ld TPO himself. 1.5. The Honourable DRP and the Ld TPO has erred in law in concluding that the arm's length price of the royalty was NIL, without bringing on record any comparable transaction and without adopting any of the methods prescribed under section 92C of the Act 1.6. The Honourable DRP and the Ld TPO have erred in law and on facts in making the adjustment, which is contrary to the settled principle that the commercial expediency of a businessman cannot be questioned and without recognizing that the Transfer Pricing provisions only require the benchmarking of the international transaction with comparable uncontrolled transactions identified as per any of the methods prescribed under the Act. 2. Notional interest on AE debtors outstanding for over six months IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 6 2.1. The Honourable DRP and the Ld TPO have erred in law and on facts in making an addition amounting to Rs 18,704,192 towards interest on overdue receivables, and in doing so has considered the overdue receivable due for period exceeding six months as a deemed commercial or financial loan. 2.2. The Honourable DRP and the Ld TPO have erred in law and on facts by levying interest on overdue receivable from AE, without considering the fact that the Appellant does not levy any such interest even in respect of receivables due for a period exceeding six months from third party customers 1 non- AE, which qualifies as an internal comparable uncontrolled transaction. 2.3. The Honourable DRP and the Ld TPO have erred in law by not considering the Appellant's contention that the definition of international transaction under section 92B of the Act has been retrospectively amended to include overdue receivables vide Finance Act 2012 which was incorporated subsequent to the benchmarking study conducted by the Appellant for the subject assessment year. Therefore the treatment of overdue receivables to be deemed loan and levying interest is incorrect. 2.4. Without prejudice to the above, the Honourable DRP and the Ld AO 1 TPO have erred in law and on facts in benchmarking the outstanding trade receivables with interest receivable on loan transactions 2.5. The Ld AO 1 TPO have erred in law by not giving effect to the directions of the Honourable DRP despite the DRP explicitly ruling in its order that there should be any adjustment if the margins after adjustments for working capital differences are higher than the arm's length margin determined based on comparable company data 2.6. The Ld AOI TPO have erred in law in not giving effect to the order of the DRP, which action purports that the DRP should have itself examined the working capital adjustment and the mere direction to the Ld AOITPO to examine the workings amounted to a set aside without considering that it was only incidental to the DRP's explicit ruling that the adjustment should be deleted once the Appellant's margins after the working capital adjustment is higher than the margins of the comparable companies. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 7 3. Other Transfer pricing related grounds 3.1. Without prejudice to all of the above, the learned DRP, TPO and AO have erred in not accepting the argument that the transfer pricing provisions will not apply when tax payer's income is exempt as provided vide paragraph 55.5 of Circular no 14/200 of the CBDT and the principles of the Bangalore Tribunal in the case of Philips Software Centre Private Limited (26 SOT 226); Corporate tax adjustments 4. Denial of tax benefit under section 10A of the Act 4.1. The Ld AO and the honorable DRP have erred in law and on facts in disallowing the claim of relief under section 10A of the Act amounting to Rs 205,956,749 in respect of the Bangalore Unit 2 ("Unit 2") set up as an undertaking under the Software Technologies Park of India ("STPI"), on the basis of conjectures and surmises and passing several observations which were not relevant to the claim of tax holiday under section 10A of the Act. 4.2. The Ld AO and the honorable DRP have erred in law and on facts in denying the claim of tax holiday under section 10A of the Act despite the Appellant having satisfied all the provisions of section 10A of the Act and there being no violation of any provisions of the Act. 4.3. The Ld AO and the honorable DRP have erred on facts in holding that none of the services carried out by the Unit 2 qualify for a tax holiday merely on the basis of the narration and description on the invoices raised by the Unit 2 without acceding to the contention of the Appellant that the scope of services should also be looked into in light of the description of services in the Statement of Works ("SOWs") and agreements. 4.4. The Ld AO and the honorable DRP have erred in law and on facts in holding that Unit 2 is a result of splitting up and reconstruction of Bangalore Unit 1 ("Unit 1 "), as envisaged under section 1 OA(2)(ii) of the Act. 4.5. The Ld AO and the honorable DRP have erred in law and on facts in holding that in the absence of "endorsed" softex forms and Foreign Inward Remittance Certificates ("FIRC"), none of the export invoices could have been considered as being realized by the Appellant, disregarding the fact that actual realization of exports was evidenced by the Bank statements. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 8 5. Addition on account of Mark To Market losses. 5.1. The Ld AO and the honorable DRP have erred in law and on facts in disallowing the Mark to Market ("MTM") loss on account of forward contracts and options amounting to INR 684,273,980 holding the same as being notional loss which was contingent in nature- 5.2. The Ld AO and the honorable DRP have erred in law and on facts in holding that the Appellant had entered into speculative transactions and booked MTM losses without any basis and disregarding the fact that the forward contracts and options were in relation to underlying financial assets of the Appellant that were outstanding as at March 2009. 5.3. The Ld AO and the honorable DRP have erred in law and on facts in holding that the MTM loss of INR 684,273,980 is a speculative loss as envisaged under section 43(5) of the Act and is to be assessed separately as profit or loss from speculation. 5.4. The Ld AO and the honorable DRP have erred in law and on facts in concluding that the transaction was speculative in nature merely by relying on the internal instruction No 3/2010 dated March 23, 3010 issued by the Central Board of Direct Taxes ("CBDT"). 5.5. The Ld AO and the honorable DRP have erred in law and on facts in holding that the principles enunciated by the Honorable Supreme Court in the case of Woodward Governor India Private Limited (312 ITR 254) and State Bank of Travancore Vs CIT (158 ITR 102) and other decisions relied upon by the Appellant are distinguishable from the facts of the Appellant as the same had not been decided in relation to MTM loss on option contract in respect of forex derivatives. 5.6. The Ld AO and the honorable ORP have erred in law and on facts in stating that the Appellant is not dealing in foreign exchange and therefore the transactions entered by the Appellant in foreign exchange cannot be held as hedging transactions. 5.7. The Ld AO and the honorable DRP have erred in law and on facts in not appreciating the fact that MTM losses on forward contracts are no different than unrealized losses on foreign exchange fluctuation and the same cannot be held to be speculative in nature. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 9 6. Disallowance under section 40(a)(ia) of the Act 6.1. The Ld AO and the honorable DRP have erred in law and on facts in disallowing expenses amounting to INR 44,136,799 under section 40(a)(ia) of the Act while computing the taxable income of the Appellant without considering the relevant facts and submissions. 6.2. The Ld AO and the honorable DRP have erred in law and on facts in not accepting the contentions of the Appellant that certain expenses are not subject to Tax Deducted at Source (''TDS'') under the Act and ought not to be added back in computing the taxable income. 6.3. The Ld AO has erred in law and on facts in not adhering to the directions of the honorable DRP that the disallowance under section 40(a)(ia) of the Act is not attracted on provisions that are created at the end of the year on the basis of an estimate. 6.4. The Ld AO and the honorable DRP have erred in law and on facts in not appreciating that the provisions of section 40(a)(ia) of the Act are attracted only on amounts payable as on year end (ie March 31,2009 in this case) and not on amounts paid during the year. 6.5. The Ld AO has erred in law and on facts in not adhering to the directions of the honorable DRP, and failed to provide the Appellant an opportunity to furnish additional details in respect of the disallowance under section 40(a)(ia) of the Act. 6.6. Without prejudice to the above, even assuming without admitting that the disallowance is sustainable, the Ld AO has erred in law and on facts in not adhering to the directions of the honorable DRP to allocate the amount of disallowance amongst the various STPI units and computing the correct amount of relief under section 10A of the Act for each unit. 7. Disallowance under section 14A of the Act 7.1. The Ld AO and the honorable DRP have erred in law and on facts in disallowing the amount of Rs 2,740,203 under the provisions of section 14A of the Act by invoking the provisions of Rule 8D of the Income-tax Rules, 1962 without providing any cogent reasons and making conclusions on the basis of conjectures and surmises and without considering the relevant facts and submissions. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 10 7.2. The Ld AO and the honorable DRP have erred in law and on facts in not appreciating that disallowance under section 14A of the Act requires that such expense should have an inherent nexus with an exempt income. 7.3. Without prejudice to the above objection, in relation to the additional disallowance of Rs 2,740,203 under section 14A of the Act, the Ld AO and the honorable DRP have erred in not appreciating the fact that such disallowance should have been made in the computation of Profits and Gains from Business and Profession ("PGBP") in respect of each of the Units and has erred in adding back the entire amount to the total Income of the Appellant. 8. Short grant of credit for Tax Deduction at Source 8.1. The Ld AO has erred in not following the directions of the honorable DRP by granting short credit of Tax Deducted at Source ("TDS") to the extent of Rs 5,945,497 (Rs 17,859,370 as claimed in return of income less Rs 11,913,873 as granted in the final assessment order). 9. Levy of interest under section 234B and section 234D of the Act 9.1. Consequent to the above mentioned adjustments, the Ld AO has erred in law by levying of interest under sections 234B and 234D of the Act. 10. Levy of Penalty under section 271(1)(c) of the Act 10.1. The Ld AO has erred in initiating penalty proceedings under section 271 (1 )(c) of the Act. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds, at any time, before or at the time of hearing of the appeal. Each of the above grounds is independent and without prejudice to the other grounds preferred by the appellant.” 3.1 Apart from the above grounds, the assessee has also raised following additional grounds:- ADDITIONAL GROUNDS “Based on the facts and circumstances of the case, Mis Dell International Services India Private Limited [Formerly known IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 11 as Perot Systems TSI (India) Private Limited] ("the Appellant"), respectfully submits the following additional grounds of appeal for admission before Your Honours: Non-transfer pricing grounds 1. Without prejudice' to the ground numbers 5.1 to 5.7 relating to the addition made on account of mark to market losses, the Ld Assessing Officer ("AO") / Dispute Resolution Panel ("DRP”) has erred, in facts and circumstances of the case and in law, in not re-computing the relief under section 10Aof the Income tax Act 1961 ("the Act") by considering the addition on account of mark to market losses to the computation of total income of the units eligible for deduction under section 10Aof the Act. Transfer pricing grounds 2. The DRP has erred in not adjudicating the primary objections of the Appellant on the non-applicability of the Transfer Pricing provisions in relation to the Buy-back of shares by the Appellant and the consequent secondary adjustment of the notional interest. 3. The Ld Transfer Pricing Officer ("TPO") / AO has erred in law and on facts and circumstances of the case, by invoking provisions of section 92C of the Act and rule 10Bof the Income tax Rules, 1962 for buyback of shares in the absence of income accruing to the Company. 4. The Ld TPO / AO has erred in law and on facts and circumstances of the case, in considering that the alleged excess payment made by the Appellant to its shareholders on account of Buy-back of its own shares is in the nature of income to the Appellant and further erred in considering notional interest on the alleged excess amount of buyback of shares as income of the Appellant. The said grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above ground of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Honorable Income Tax Appellate Tribunal to decide this appeal according to law. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 12 The Appellant does not have a Managing Director and hence these additional grounds of appeal are signed by the Director of the Company in accordance with the provisions of the Act.” 3.2 Ground No.1 is a general ground. The learned AR did not press ground No.3.1. Grounds 9.1 and 10.1 are consequential grounds. Therefore, grounds 1, 3.1, 9.1 and 10.1 are dismissed. We shall adjudicate the surviving grounds / issues as under:- Addition on account of Royalty (grounds 1.1 to 1.6) 4. Brief facts of the case in relation to the above ground are as follows: The assessee had entered into an inter-company sublicense agreement with PSC Management Partnership (PSC) for payment of royalty to use (a) “Perot Systems” as a trade name and as part of a corporate name, (b) “Perot” as part of the internet domain name and (c) “Marks” in connection with the business and in provision of sale of certain goods and services. The copy of agreement in force for the relevant assessment year is placed at pages 272 to 277 of the paper book filed by the assessee. In the said agreement, as per para 5, the assessee has to pay PSC “royalty” equal to 3% in respect of third party gross revenues. Accordingly, the assessee paid royalty of Rs.3.83 crore on sales to third party customers amounting to Rs.129,88,01,587. For the relevant assessment year 2009-2010, the assessee received Rs.249 crore from its AE in respect of software development services as well as approximately Rs.130 crore from independent customers to whom similar services were rendered. According IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 13 to the assessee, the payment of royalty was inextricably linked and was wholly necessary for the assessee’s provision of software development and related services, hence, the same was aggregated with software development services and common TP analysis was carried out. The assessee selected Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and computed its margin at 33.37% on operating cost in respect of its software development segment. The assessee further carried out search for uncontrolled comparables using Prowess and Capitaline Database and applying certain qualitative and quantitative filters, arrived at 24 companies in the comparable list with the arithmetical mean profit of 21.84%. Accordingly, the profit margin earned by the assessee at 33.37% on operating cost was treated as arm’s length. 4.1 The TPO held that no independent party would pay royalty under similar circumstances. Therefore, the TPO determined the ALP of the international transaction in respect of “royalty” as Nil by applying test which he felt were relevant in determining the ALP of intra-group services. Accordingly, an amount of Rs.3,83,20,329 paid by the assessee to PSE was treated as ALP adjustment. 4.2 The DRP upheld the order of the TPO. The brief finding of the DRP are as follows:- IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 14 (i) The DRP held that the action of the assessee in aggregating the transaction of royalty with the software development services, for benchmarking was not in accordance with law. The DRP observed that the TNMM applied at enterprise level does not follow that each class of transaction including royalty paid are at arm’s length. (ii) The DRP has further observed that the assessee has not submitted any documentary evidence to justify receipt of service. The DRP therefore held that the assessee has not discharged the obligation to support the arm’s length nature of transaction and hence, the arm’s length price is taken as NIL using Comparable Uncontrolled Price (CUP) as MAM. (iii) The DRP relied on the Tribunal decision in Aztec and held that the onus on benchmarking was on the assessee and since the assessee had not produced any comparable uncontrolled transaction, the TPO had the option to allow the entire payment or disallow the entire payment. (iv) The DRP also relied on the decision of the Tribunal in the case of Knorr-Bremse India Pvt. Ltd. (ITA No.5097/Del/2011) and Gemplus India Pvt. Ltd. (ITA 352/Bang/2009) in support of its conclusion. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 15 4.3 Pursuant to the DRP’s order, final assessment order was passed confirming the addition of Rs.3,83,20,329. 4.4 Aggrieved by the final assessment order confirming the addition of Rs.3,83,20,329, the assessee has filed this appeal by raising grounds 1.1 to 1.6. The learned AR submitted that the license to use brand name is generally permitted only amongst group companies and not to third parties. Hence, it would be impossible to find CUP data to benchmark royalty payments made for use of `brand name’. It was stated that while there could be similar instances of brand payments, the same again would be tainted / controlled transactions between related parties and cannot be used as a valid CUP. In absence of CUP data, the assessee’s approach of adopting TNMM cannot be faulted with. It was further submitted that the principle of aggregation is also upheld in various judicial pronouncements. The judicial pronouncements relied on by the learned AR is placed in the case compilation from pages 1393 to 1455 of the paper book. It was submitted that the decision of Knorr-Bremse India Private Limited (ITA No.5097/Del/2011) and Gemplus India Private Limited (ITA No.352/Bang/2009), which has been relied on by the DRP in pages 33 to 36 of the directions have been considered subsequently and reversed by the decision of Knorr-Bremse India Pvt. Ltd. v. ACIT (IT(TP)A No.5886/Del/2012) and in any event are contrary to the subsequent judgment of the Hon’ble High Court of Delhi. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 16 4.4.1 It was further contended by placing reliance on the RBI Circular No.76 that the assessee had paid royalty at the rate of 3% only, which is much lower than the RBI approved rate (Circular No.76 had permitted payment of royalty up to 8% of the export sales and 5% of the domestic sales without any approvals). Accordingly, it was submitted that as an alternative argument in the absence of CUP data rate prescribed by the RBI could be considered as CUP. In this regard, reliance is placed on the following judicial pronouncements, which according to the learned AR, have upheld this principle:- (i) CIT v. SGS India Pvt. Ltd. (ITA No.1807 of 2013) (Bombay High Court) (ii) M/s.Ghyssen Krupp Industries India (P) Ltd v. ACIT (ITA No.6460/Mum/2012) (Mum ITAT) (iii) ACIT v. Dow Agrosciences India (P) Ltd. v. ACIT (2016) 76 taxmann.com 124 (Mumbai-Trib.) (iv) Dow Agrosciences India (P) Ltd. v. ACIT (ITA No.6618/Mum/2018) (Mum ITAT) – para 11 (internal page 13 – reliance on earlier ITAT order for AY 2011-12) 4.4.2 Lastly, it was contended that the TPO erred in concluding the ALP of the transaction to be NIL in totally arbitrary manner. It was stated that even if the TPO were to reject bench marking of the assessee, the TPO has to necessarily adopt one of the methods prescribed u/s 92C r.w.r 10B of the I.T.Rules, 1962. It was contended that if the TPO were to adopt CUP method as he purportedly to do, the TPO ought to have identified similar uncontrolled transaction IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 17 to benchmark the royalty payment and cannot conclude the same to be NIL. 4.5 The learned Departmental Representative, on the other hand, by referring to section 92B of the I.T.Act, submitted that the payment of royalty is a separate international transaction between assessee and its AE and the assessee ought to have made TP analysis for payment of royalty. It was submitted that clubbing / aggregation of non-international transaction with international transaction based on economic analysis carried out for international transaction itself is against TP regulations and TP guidelines laid down by OECD. As regards the assessee’s contention that RBI prescribed rate is to be adopted as CUP, it was submitted by the learned DR that what is prescribed by RBI is not a price. It was stated that it is only a ceiling on the rate and amount of remittance under different routes like approval route and automatic route that too is aimed at regulating and conserving foreign exchange. Hence, it is not a price. It was stated that when it is not a price, it cannot be treated as comparable uncontrolled price. Further, the learned DR fairly submitted that the TPO adjusted the royalty payment to Nil without doing a comparability analysis and bringing CUP on record. Therefore, it was prayed that the issue may be restored to the files of the TPO to benchmark the international transaction of payment of royalty properly. 4.6 We have heard rival submissions and perused the material on record. The assessee had entered into an inter IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 18 company sublicense agreement dated 1.4.2008 with PSC Management Partnership (PSC). As per this agreement, the assessee was granted a non exclusive, non transferable right and license, without the right to sublicense, to use the (a) "Perot Systems" name as a trade name and as part of its corporate name, (b) "Perot" surname as part of a domain name for its business and (c) the trademarks and service marks in connection with the licensed goods and services during the term of this agreement. In consideration, the assessee paid royalty of Rs.3.83 crore computed on the basis of 3% of its revenues from third party i.e., independent customers amounting to Rs. 129,88,01,587. The assessee aggregated the payment of royalty with other international transactions involving software development and related services to its AEs and a common analysis is carried out for the purpose of determination of ALP. This was for the reason that the payment of royalty was inextricably linked and is wholly necessary for provision of software development and related services. OECD TP guidelines were relied on by the assessee in support of the above analysis. 4.6.1 The TPO stated that out of total revenues of Rs. 433 crore, sales to AE stands at Rs. 303 crore. Hence, the TPO stated that brand name of Perot used by the assessee does not deserves a separate payment in the form of Royalty. The TPO also stated that the assessee has not justified how other companies under similar circumstances have paid royalty and no benchmarking analysis has been provided in this regard to IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 19 justify arms length nature of this transaction. The TPO determined the ALP of royalty paid at NIL for the reason that no independent party would have paid for royalty under similar circumstances. 4.6.2 The DRP held that the assessee should have separately analysed the transaction of payment of royalty. It was held that the combined approach i.e., aggregation of the royalty transaction with other international transactions is possible only when they cannot be evaluated on separate basis. The ALP of royalty paid was taken as NIL using CUP (comparable uncontrolled price) method as the most appropriate method. The decision of the Special Bench in the case of Azte Software & Technology Services Ltd v AClT [2007] 107 ITD 141 (Bang) (SB) was relied on by the DRP to conclude that the onus of benchmarking is on the assessee. It was held that since the assessee has not produced any comparable uncontrolled transaction, the only option left before the TPO is to either allow or disallow the entire payment. In the absence of anything to the contrary, the action of the TPO in determining the ALP of royalty at NIL was upheld. 4.6.3 We find neither the TPO nor the DRP has brought on record any CUP for the royalty payment. As per Rule 10B, in order to apply CUP method, identification of the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction or a number of such transactions is a pre-requisite. Thus, in order to determine ALP of royalty payment at NIL using CUP, the TPO IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 20 / DRP ought to have brought on record the CUP. In the absence of a CUP, ALP cannot be determined at NIL using the same CUP method. Thus, the determination of ALP of royalty payment as NIL using CUP method by the lower authorities is unsustainable and bad in law. 4.6.4 As regards the MAM for determination of ALP of royalty payment, rule 10B(l)(c) of the I.T.Rules deals with the determination of ALP as per TNMM (Transactional Net Margin Method). As per this Rule, the net profit margin from a comparable uncontrolled transaction is adjusted to take into account the differences between the international transactions and comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. This is compared with the net profit margin from the international transactions entered into with an AE. TNMM requires establishing comparability at a broad functional level, requiring comparison between net margins derived from the operation of the uncontrolled transactions and net margin derived in similar international transactions. Thus, TNMM removes the limitations of other methods and since the comparison is made at the net profit level, it is the only method where comparison is possible when there are differences in the transactions and further making reasonable adjustments to the comparable transaction is impossible. 4.6.5 The Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. v, CIT 374 IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 21 ITR 118 held that the TNMM is a preferred TP Method for determination of ALP of international transactions for its proficiency, convenience and reliability. Paras 89 and 90 thereof reads as under:- "89. The TNM Method has seen a transition from a disfavoured comparable method, to possibly the most appropriate Transfer Pricing method due to ease and flexibility of applying the compatibility criteria and enhanced availability of comparables. Net profit record/data is assessable and within reach. It is readily and easily available. entity-wise in the form of audited accounts. The TNM Method is a preferred transfer pricing arm's length principle for its proficiency, convenience and reliability. Ideally, in TNM Method preference should be given to internal or in-house comparables. In absence of internal comparables, the taxpayer can and would need to rely upon external comparables. i.e. comparable transactions by independent enterprises. For several reasons, database providers, it is apparent. have the requisite information and data of external comparables to enable comparability analysis of the controlled and uncontrolled transactions with necessary adjustment to obtain reliable results under TNM Method. This method also works to the benefit and advantage of the tax authorities in view of convenience and easier availability of data not only from third party providers, but on their own level. i.e. assessment records of other parties. 90. The strength of the TNM Method is that net profit indicators are less affected by transactional differences in comparison with some other methods. This method is more tolerant to functional differences between controlled and uncontrolled transactions in comparison with resort to gross profit margins." 4.6.6 Thus, in the absence of a comparable uncontrolled price (CUP) for the royalty payment on a stand alone basis. the said international transaction should necessarily be bundled with other international transactions and the net profit margin of all the international transactions should be compared with the adjusted net profit margin of the IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 22 comparable companies to arrive at the ALP. The application of TNMM by the assessee at the entity level for computation of ALP of all international transactions (including the royalty payment of Rs. 3.83 crore) is therefore permissible. 4.6.7 In the present-case. it is not in dispute that the royalty payment of Rs.3.83 crore is considered as an operating expenditure in computing the net profit margin of the software segment. [page 266 of PB 1] The Net operating profit ratio based on operating cost of the software segment is 33.37% and the same is higher than the average profit margin of 21.84% of the comparable companies. The TPO has accepted the ALP of the software segment. The margin of 33.37% is computed after factoring in the royalty payment of Rs. 3.83 crore. Thus, when the segment level profit margins are accepted by the TPO, it is impermissible to isolate the royalty payment and 'Separately evaluate the ALP of the same. The said view is fortified by the above decision of the Delhi High Court wherein it was held as under. “101. However. once the Assessing Officer /TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation / segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. it is factored in the net profit of the inter-linked transaction. This would he also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made all things get taken into account and stand reconciled when computing the net profit margin.Once the comparables pass the functional analysis test and IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 23 adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm’s length price. Then to make a comparison of a horizontal item without segregation would be impermissible.” 4.6.8 The co-ordinate bench in the case of JCIT v Toyota Kirloskar Motor P Ltd in ITA No. 2016/B/2018 & 1972/B/2018 decision dated 18.8.2021 relied on the above decision and rejected the separate computation of ALP of royalty payment by the revenue and held as under: "11.4 We have heard rival submissions and perused the material on record. The AO/TPO had made TP adjustment for shortfall in margins as well as royalty. The royalty adjustment has been made despite royalty being part of operating cost, although the royalty adjustment is held by the TPO as subsumed within the margin adjustment. We are of the view that once the net profit margin is tested on the touchstone of arm's length price, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arm's length......” 4.6.9 Similarly, the Delhi High Court in Maruti Suzuki India Ltd v CIT [2016] 381 ITR 117 at para 86 held as under:- “MSIL's higher operating margins 86. In Sony Ericsson Mobile Communications India (P.) Ltd. (supra) it was held that if an Indian entity has satisfied the TNMM i.e. the operating margins of the Indian enterprise are much higher than the operating margins of the comparable companies. no further separate adjustment for AMP expenditure was warranted. This is also in consonance with Rule 10B which mandates only arriving at the net profit by comparing the profit and loss account of the tested party with the comparable. As far as MSIL is concerned, its operating profit margin is 11.19% which is higher than that of the comparable companies whose profit margin is 4. 04%. Therefore. applying the TNMM method it must be stated that IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 24 there is no question of TP adjustment on account of AMP expenditure.” 4.6.10 The decisions of the Delhi High Court in Sony Erricsson and Maruti Suzuki are no doubt in the context of AMP expenditure. However the above rationale should equally apply to determination of ALP of royalty payment also. In view of the above, the TP adjustment of Rs.3,83,20,329 in respect of the royalty payment is liable to be deleted. As we have deleted the TP adjustment, the alternate contention of the assessee that the RBI prescribed rate should be regarded as CUP becomes academic and not adjudicated. Interest on outstanding dues from AEs (outstanding for more than six months) (grounds 2.1 to 2.6) 5. For the relevant assessment year, the assessee had an amount of Rs.12,47,94,000 receivable from the debtors being over dues for a period exceeding six months. The break-up of the debts outstanding for a period exceeding six months from the AEs and unrelated parties are as follows:- Particulars AE debtors Non-AE Total Debts outstanding for a period exceeding six months 10,86,19,000 1,61,73,000 12,47,94,000 The assessee did not charge any interest for the overdue receivable from its customers, both from AEs and third parties. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 25 5.1 The TPO treated the above debts outstanding for a period of more than six months in respect of transaction with assessee’s AEs as a deemed loan and applied CUP method to benchmark the transaction. The TPO had obtained details from CRISIL u/s 133(6) of the I.T.Act and applied interest rate of corporate bond rates as the ALP. The TPO on adhoc basis held that receivables due from AEs were deemed BBB rated loan that had a yield of 20% more than BBB rated corporate bonds for five years. On this basis, the TPO arrived at a rate of 17.22 % as the arm’s length interest rate chargeable for the relevant assessment year. The computation of arm’s length for the outstanding dues from the AEs (beyond six months) are as follows:- Particulars Annualized average yield for FY 2008-09 for BBB rated bonds as per CRISIL date (refer page 10 of TP order) 14.35 per cent Yield considered by the Ld.TPO to be 20 per cent more than the BBB rated bond 17.22 per cent Outstanding AE receivables exceeding six months Rs.10,86,19,000 ALP @ 17.22 per cent per annum on outstanding receivables exceeding six months. Rs.1,87,04,192 Price charged NIL Adjustment Rs.1,87,04,192 Accordingly, the TPO made an adjustment of Rs.1,87,04,192 as interest computation at 17.22% per annum on the outstanding receivables from the AEs. 5.2 The assessee being aggrieved by the adjustment proposed, filed its objections before the DRP. The gist of the findings of the DRP are as follows:- IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 26 (i) The DRP held that commercial expediency and business rational are irrelevant considerations and hence, the transaction has to be bench marked; The DRP disagreed with the Assessee that since no interest was charged from the non-AE transactions, no interest was chargeable to the AE transactions; (ii) The DRP held that once the principle of working capital adjustment is accepted, the fact that actual interest is not being charged from non-AE transactions would be irrelevant in the context of benchmarking the receivables from AE; (iii) In respect of the use of LIBOR rates, the DRP held that since the Assessee was situated in India, LIBOR rate could not be applied; (iv) The DRP further held that the use of LIBOR rate was appropriate in a case where loan was advanced by the assessee to the AE and was not appropriate for benchmarking the trade receivables; (v) The DRP considered the alternate submissions of the Assessee that if working capital adjustment is carried out in respect of the receivables from non-AE enterprise, its transactions would be at arm's length; 5.2 The DRP, after considering the submissions of the assessee, directed the AO / TPO to verify if the working capital adjusted margins of the assessee, corresponding to the IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 27 international transactions which are related to such transactions is better than that of the comparables, no adjustment on this ground should be made. 5.3 However, in the final assessment order, the AO / TPO confirmed the addition made in the TPO’s order by observing that the DRP has no power to set aside / remand the matter to the AO / TPO. Therefore, the adjustment of Rs.1,87,04,192 proposed in the draft assessment order towards interest on outstanding receivables exceeding six months was confirmed in the final assessment order. 5.4 Aggrieved, the assessee has raised this issue before the Tribunal. The gist of the submissions raised by the assessee are as follows:- (i) Section 92B(1) of the I.T.Act can have no application as an unpaid purchase price is not a loan. The unpaid purchase price is a consequence of the international transaction of rendering of software service. In this regard, reliance was placed on the order of the Tribunal in Nimbus Communications (9 taxmann.com 26) and Goldstar (65 SOT 259). (ii) The transaction of outstanding debtors cannot be treated as a separate international transaction and examined independently as it is inextricably linked to transaction of rendition of services. In this regard, the Hon’ble Delhi High Court in the case of Kusum IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 28 Healthcare Pvt. Ltd. (ITA No.765/2016) (page 1456-1460 of the case law compilation) has affirmed the said principle. (iii) Notwithstanding the above, the amendment to section 92B has been made by Finance Act, 2012 with prospective effect and hence cannot apply retrospectively for the subject A.Y. 2009-2010. (iv) Further, even if the amendment were to apply retrospectively, clause (c) can apply only in case where the agreement provides for charge of interest beyond the credit period which is not so, in the present case. (v) The AO / TPO grossly erred in law in not giving effect to the directions of the DRP, which is binding, thereby retaining the addition made in the TP order by observing that the DRP had no power to set aside / remand the matter to the AO / TPO. 5.5 The learned Departmental Representative strongly supported the order of the TPO. 5.6 We have heard rival submissions and perused the material on record. The DRP held that if the working capital adjusted margin of the assessee, corresponding to the interenational transactions which are related to such receivables, is better than that of the comparables, no separate adjustment is required to be carried out in this regard. The AO / TPO confirmed the impugned addition by IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 29 stating that the DRP has no power to set aside or give direction for further enquiry. It is an admitted position that the assessee has not charged interest from both AEs and non- AEs in respect of the outstanding receivables. Following data is relevant in this regard:- Particulars AE Non-AE Total Sales (Rs. In million) 3038 1300 4338 Debtors (Rs. In million) 235 132 367 Percentage of AE and Non-AE Revenues to Total Revenues 3038/4338% = 70 1300/4338% = 30 100 Percentage of Debtors to sales 7.74 10.15 8.46 5.7 From the above table, it is evident that sales to AE is more than sales to non-AEs. Hence, the debtors are more in AE as compared to non-AE. More importantly, percentage of debtors to sales is less in AE as compared to that of non-AE. No interest is charged from both AE and non-AE. The Hon’ble Rajasthan High Court in the case of PCIT v. Sharda Spuntex P Ltd. (2018) 93 taxmann.com 489 has held that when interest is not charged on non-AE debtors, there cannot be any occasion to make ALP adjustment for notional interest on delay in realization of trade debts from the AEs. The outstanding receivables from AE even though an international transaction, is a closely linked transaction to the international transaction of sales to AE. The receivables from AE arise due to sales to AE and hence it is closely linked transaction. The TPO has accepted the net profit margin of the software services segment. The net profit margin of the assessee in software segment is 33.18% which is higher than the net IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 30 profit margin of the 11 comparable companies selected by the TPO at 24.32%. 5.8 The NPM of the assessee was within arm’s length range even after working out the comparability adjustment on account of working capital. The working capital adjustment available to the assessee on comparison with all the comparable companies selected by the TPO would be (-)6.94 per cent (refer page 1350 to paper book Vol.1). Accordingly, the ALP margin post working capital works out to be 31.25 per cent which is lower than the margin of the assessee at 33.18 per cent (refer page 4 of TP order). Accordingly, the margin of the assessee includes the compensation for the credit period in connection with the delayed receivables and hence there is no need for a separate adjustment on account of interest should have been charged on debtors outstanding for more than six months. This is exactly in consonance with the direction of the DRP. The DRP has rightly held that if after working capital adjustment the margin of the assessee is within ALP range, no separate adjustment is required. Therefore, we fully endorse the directions of the DRP. Hence, the AO / TPO is directed to examine if the working capital adjusted margin of the assessee corresponding to the international transaction, which are related to such transaction is better than that of the comparables, no separate adjustment is required to be carried out in this regard. Accordingly, ground 2.1 to 2.6 are allowed for statistical purposes. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 31 Non-Transfer Pricing Issue (Denial of tax benefit u/s 10A of the I.T.Act (Ground 4.1 to 4.5 & Additional Ground 2) 6. Brief facts in relation to the above ground are as follows: The assessee is engaged in the business of development and export of computer software and provision of ITeS. The assessee’s units are set up in accordance with the STPI Scheme of the Government of India. The assessee has four units which are located as under:-:- (i) Tower I and II, Noida Sector 125 Towar III (ii) Noida Sector 125 (iii) Unit-1 (Bangalore) (iv) Unit-2 (Bangalore). 6.1 The assessee was eligible to claim tax holiday as per the provisions of section 10A of the I.T.Act in respect of two Units in Noida and Unit-2 in Bangalore. The Units in Noida had incurred a loss and hence, no tax benefit was claimed. Unit-1 in Bangalore had completed the tax holiday period in AY 2008-09. According to the assessee, the Unit-2 was set up and commenced operations in the month of December 2006 during the FY 2006-07 (AY 2007-08). The assessee claimed a total deduction of Rs.20,57,57,828 u/s 10A of the Act derived from the export turnover of the STPIs. 6.2 The Assessing Officer disallowed the claim of deduction under section 10A of the Act with respect of STPI Unit-2 Bangalore amounting to Rs 20,59,56,749. The AO, while disallowing the said claim, conducted an enquiry with the IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 32 STPI Authorities and based on the enquiry, the Ld. AO has observed as follows: (i) The assessee has not maintained separate softex forms for Unit 1 and 2; (ii) The agreement entered between the Assessee and its clients pursuant to which the services were rendered even from unit 2, were prior to the commencement of business operations of Unit-2. The AO however accepted that there were two agreements entered after commencement of business; (iii) The purchase order / agreement does not specify the particulars of the Unit; (iv) The enquiry with STPI Authorities had revealed that the softex forms were pertaining to Unit-l and not for Unit-2; (v) The invoices raised by Unit-l and Unit-2 were inseparable: (vi) The AO, therefore, concluded that the Unit-wise profit and loss account, and the Form 56F issued by independent Chartered Accountant was incorrect; (vii) The Ld. AO concluded that the profit of the Unit-2 was not genuine since the assessee had not maintained Unit-wise softex, bank account copies, purchase orders, invoices, etc; (viii) The AO therefore concluded that it was a clear cut case of splitting up or reconstruction of the business already in existence as per section 10A(2)(ii) of the Act; (ix) The AO also concluded that the invoices raised by the Assessee were not pertaining to any ITeS but rather were pertaining to several other services that did not qualify for tax benefit under section 10A of the Act. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 33 6.3 The assessee being aggrieved by the adjustment proposed in the DAO filed its objections before the DRP. The DRP upheld the order of the Ld. AO and confirmed the disallowance of claim of relief under section 10A of the Act with respect to Unit-2. Pursuant to the DRP’s directions, the final assessment order was passed incorporating the addition of Rs.20,59,56,749 proposed in the draft assessment order. 6.4 Being aggrieved by the final assessment order, the assessee has raised this issue before the Tribunal. The learned AR contended that the main allegation of the AO to deny the deduction u/s 10A of the Act for the new Bangalore Unit-2 is that the Unit was formed by Splitting up / reconstruction of the existing unit since the softex forms had the address of the Unit-1, based on information received from the STPI authorities. The learned AR submitted that the assessee has taken steps to rectify the errors in the softex forms, which had crept in inadvertently. Given that the STPI Authorities have corrected the errors / updated the address in the softex forms filed, the assessee is entitled to appropriate relief u/s 10A of the Act, which has been denied by the A.O. In this context, the learned AR placed reliance on the additional evidence submitted which is the letter dated 4 th November, 2019 issued by the STPI Authorities rectifying the error in the address mentioned in the softex forms submitted and certified for Unit-I which were supposed to be for Unit-2 for the assessment year 2009-2010 along with annexure of the list of softex certified by the STPI authorities. The learned IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 34 AR further submitted that the clients / customers had entered into contract or SoW with the assessee-company and not with individual STPI Unit, which is internal to the assessee-company. It was stated that the technical team thereafter determined the resource requirement and, accordingly, a project code was created mapping a particular SoW to a particular STPI Unit. Based on project codes, the assessee tracks the projects running from a particular STPI Unit at any given point of time to ensure that invoices are raised from that STPI unit from where the project work is performed. 6.4.1 As regards the contention of the AO that services rendered are not in the nature of software development, the learned AR contended that the services rendered by the assessee are covered within the ITeS services specified in Circular No.1/2013 issued by the Central Board of Direct Taxes. It was stated that the assessee had filed the relevant agreements before the AO as annexure-2 to the submission dated 25 th March, 2013. Sample copies of statement of work for specific projects have been filed before the AO vide submission dated 7 th February, 2013. 6.4.2 As regards the A.O.’s observation that Unit-2 of the assessee has been established by splitting and reconstruction of business, it was contended by the learned AR that Unit-1 was operating at optimal capacity and continued to do so, even post setting up of the Unit-2. The details of the seating capacity and actual utilization of both units are detailed in IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 35 page 766 to 770 of the paper book Vol.II. Further, the learned AR relied on the decision of the Hon’ble Karnataka High Court in the case of Fusion Software Engg (P) Ltd. reported in (2012) 18 taxmann.com 57 (Kar.) wherein the Hon’ble Court has held that non-maintenance of separate accounts regarding STP Units and other Units cannot be a ground to deny deduction u/s 10A of the Act, when the assessee is otherwise entitled to the deduction. The learned AR further placed reliance on the observations of the Hon’ble High Court that the AO can presume that a Unit has been split and reconstructed only when it is formed by transfer of more than 20 percent of the plant and machinery from the existing Unit which is not so in the present case. Reliance is also placed on the judgment of the Hon’ble Rajasthan High Court in the case of Sagun Gems (P) Ltd. reported in (2012) 253 CTR 614 (Raj.). 6.5 The learned Departmental Representative supported the orders of the Income Tax Authorities. 6.6 We heard the parties and perused the record. Before us, the Ld. A.R. has advanced his arguments to counter various deficiencies pointed out by the Assessing Officer in order to reject the claim for deduction u/s 10A of the Act in respect of profits derived from Unit-2 located in Bangalore. (a) The first reasoning given by the A.O. is that the agreement was entered by the assessee prior to commencement of its new unit-2. The Ld. A.R. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 36 submitted that the assessee enters into contract with various customers and execution of the work is carried out through various units of the assessee identifying the unit suitable to carry out the work. The Ld. A.R. submitted that it is an internal matter of the company as to how the work should be executed and the client is not concerned about the units/undertakings through which his work was executed. Accordingly, the Ld. A.R. submitted that the execution of work in Unit-2 in respect of contract entered with any of its clients should not be a reason to reject the deduction claimed u/s 10A of the Act. We find merit in the above said contentions. We notice that there is no bar in law to execute work from a new unit, so long as the condition of splitting up/reconstruction of the existing unit is not violated. Hence, we are of the view that the above said reasoning cannot be a ground to reject the claim for deduction u/s 10A of the Act. (b) The second reasoning given by the A.O. is that the unit No.2 is only a paper unit or it is a case of splitting up or reconstruction of the existing unit. Before us, the Ld. A.R. submitted that the A.O. has not brought any material on record in support of the above said reasoning. He submitted that the optimal capacity of unit-1 remains intact even after setting up of the second unit. In fact, the assessee has enhanced its capacity by creating new seating capacities in unit-2 and hence it cannot be said that it is not a new unit. He submitted IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 37 that there was no transfer of plant and machinery from unit 1 to unit 2. Accordingly, he submitted that there is no material or reason to believe that the new unit was set up by splitting up or on reconstruction of the existing unit. Before us, the assessee has filed details of seating capacity and other infrastructure facilities pertaining to Unit-1 & 2 in support of the contentions made before us. A perusal of the same would show that the capacity of Unit-1 remains intact. We notice that the AO has not examined this issue by considering factual aspects presented before us. Since the A.O. has not examined the details now furnished before us by the assessee, we restore those details to the file of the A.O. for examining them. (c) The next major mistake pointed out by the A.O. is that the Softex forms approved by STPI have reference of Unit-1 only and not unit-2. The Ld. A.R. submitted that various Softex forms issued by STPI authorities consisted of many mistakes. Hence the assessee has got majority of Softex forms corrected and the copies of those corrected forms have been given as additional evidence. He submitted that additional evidence furnished by the assessee is almost equivalent to 73%. He submitted that the assessee has claimed deduction u/s 10A in respect of the profits derived by Unit-2 only. The Ld. A.R further submitted that the assessee could not obtain corrected copies of all Softex forms. He further submitted that majority of the forms have been IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 38 furnished. He also submitted that more than 10 years have elapsed and there exists practical difficulty in getting all the forms corrected. Accordingly he prayed that the A.O. may be directed to take a liberal view on this issue. We notice that the assessee has furnished corrected Softex forms in respect of unit-2 as additional evidences before us and they constitute about 73% of the aggregate number of forms. These additional evidences require examination at the end of the A.O. Accordingly, we restore this issue to the file of the A.O. for examining the additional evidences furnished by the assessee. Considering the time period that has elapsed till date and the attached practical difficulties, we suggest that the A.O. may take a liberal view in respect of Softex forms. (d) The next deficiency pointed out by the A.O. is that the services rendered by the assessee are not in the nature of software development/ITES services. Before us, the Ld. A.R. placed his reliance on the circular No.1/2013 issued by CBDT and submitted that the services rendered by the assessee falls in the category of ITES services prescribed by the CBDT. We are of the view that the above said claim of the assessee needs to be examined at the end of the AO. Accordingly, we restore this issue also to the file of the A.O. to examine the services rendered by the assessee vis-à-vis the CBDT circular referred above. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 39 In view of the foregoing discussions, the deduction claimed by the assessee u/s 10A of the Act in respect of Unit- 2, Bangalore requires to be re-examined by the AO in the light of discussions made (supra). We order accordingly. Addition on account of Mark to Market (MTM) losses (ground 5.1 to 5.7) 7. Brief facts of the case are as follows:- The assessee had entered into forward contracts in foreign exchange to mitigate the risk of changes in foreign exchange rates associated with its accounts receivable denominated in "foreign" currencies. As per the accounting policy followed by the assessee, all losses arising due to change in fair value of such "forward contracts representing underlying assets / liabilities and which meet the tests for option accounting were recognized in the profit and loss account. In the case of currency options, changes in the fair value of option contracts resulting in losses were recognized in the profit and loss account. 7.1 For the financial year ended 31 st March, 2009 relevant to the AY 2009-10, the Assessee in its profit and loss account had debited an amount of Rs.68,42,74000 as MTM loss on forward and options contracts. The loss was due to the revaluation of contract value based on exchange rate as on March 31, 2009. The said loss was not on account of actual realization / termination of the contract before the end of FY, but was quantified in respect of outstanding forward and option contracts as at March 31, 2009, based on prevailing IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 40 forex rate as at March 31, 2009. The said amount of loss was distributed and debited against the STPI units of the assessee in the proportion of turnover of the Units (Refer page 309 of paper book Vol I for the basis of allocation). The assessee in the submission dated December 18,2012 filed before the AO had provided the details with respect to the MTM loss (refer page 253 of paper book Vol.I). 7.2 The A.O. proposed disallowance of MTM losses in draft assessment. The observations of the AO are summarized below:-  Since the loss was on account of foreign exchange derivative transaction, the Ld. AO classified the same as speculative loss as per section 43(5) of the Act;  The AO relied on Circular No 3/2010 issued by the Central Board of Direct Taxes ("CBDT") and held that the Assessee had failed to establish that it was an allowable expenditure;  The AO distinguished the decision of the Honourable Supreme Court ("SC") in the case of Woodward Governor India Private Limited (312 ITR 254) and held that the said case is not applicable to the facts of the case of the Assessee;  The AO further held that the decision of SC in State Bank of Travancore {158 ITR 102) was not applicable to the facts of the Assessee as the Assessee had entered into forward and options contract and the notional loss debited to the profit and loss account was speculative loss;  The AO observed that the AS has not come into effect to claim the effect of change in foreign exchange rates and MTM loss in particular;  The AO relied on the judgment of the Hon’ble Apex Court in the case of Joseph John reported in 67 ITR 74 (SC). The AO observed that the settlement dates were beyond AY 2009-10 and since the Assessee had not maintained separate IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 41 books of accounts for the forward contracts entered, the MTM loss was not allowable;  The AO also relied on the decision of the Andhra Pradesh High Court in the case of M G Brothers (154 ITR 695) and held that the forward contracts entered by the Assessee were speculative transaction as per section 43(5) of the Act and, hence, the loss arising from speculative transaction could not be settled against the income of the Assessee from its business;  The AO alleged that the Assessee had not furnished any forward contract agreement to verify the nature of business; 7.3 The Assessee being aggrieved by the adjustment proposed in the Draft Assessment Order filed its objections before the DRP. The DRP upheld the order of A.O. and confirmed the disallowance of claim of relief u/s 10A of the Act with respect of Unit-2. The DRP therefore rejected the objections of the assessee and confirmed the order of the Ld. AO. 7.4 Pursuant to the directions of the DRP, the AO confirmed the addition of Rs.68,42,73,980 proposed in the draft assessment order. 7.5 Being aggrieved, the Assessee has raised this issue before the Tribunal. The learned AR submitted that the foreign exchange losses arising on account of reinstatement of foreign currency assets and liabilities including inter-company balances, was in accordance with the requirements of AS-11. It was stated that MTM loss is on account of reinstatement of forward and option contracts with banks entered for the purpose of hedging the forex risk on receivables, and hence, IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 42 was a business loss and not speculative loss. The learned AR submitted that foreign exchange losses pertaining to unexpired forward and the hedge is backed by an underlying contract between two parties. Further, although the forward contract transactions were recorded along with other foreign currency transactions, the same were identifiable and were segregated by the assessee during the relevant assessment year. It was therefore submitted that the contention of the A.O. that no separate accounts are maintained is misplaced. It was further stated that the A.O. has failed to take note of the forward contract confirmation details from JP Morgan Bank, which were furnished before the A.O. vide submissions dated 07.02.2013 and the A.O. has erroneously held that no contracts / confirmations were produced. The learned AR submitted that the judgment of the Hon’ble Apex Court in the case of Woodward Governor India Private Limited (supra) squarely applies to the case of the assessee. Without prejudice to the above contention, it was submitted that even assuming that the disallowance of MTM losses is upheld, the forward contracts are entered for hedging underlying receivables for export and the same constitutes business income of the undertakings eligible for deduction u/s 10A of the Act. Therefore, it was submitted that deduction u/s 10A of the Act are to be recomputed considering the revised profits after disallowance (additional ground 1 raised in assessee’s appeal). 7.6 The learned Departmental Representative, on the other hand, submitted that the forward contract transactions were IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 43 not segregated by the assessee during the relevant assessment year and no separate accounts were maintained. Therefore, it was contended that necessarily this issue has to be remitted to the A.O. for de novo consideration. 7.7 We have heard rival submissions and perused the material on record. The learned AR during the course of hearing, had submitted that if MTM losses if disallowed, the same goes to increase the business income of the assessee and consequently, the assessee ought to be granted the enhanced benefit of deduction u/s 10A of the Act. We find that this issue has been considered in assessee’s own case in assessment year 2008-2009 in IT(TP)A No.3/Bang/2013 along with MP No.22/Bang/2017. The relevant finding of the Tribunal reads as follows:- “10.1 As regards eligibility of deduction under section 10A it is pertinent to note that if the forward contracts entered into by the assessee are fully backed by the export then the gain or loss on such forward contracts would be regarded as business income. Therefore, when the forward contracts are valued at mark to market, and fully backed by the export transactions then the gain or loss arising from such contracts would be in the nature of business income of the assessee. Consequently when all the undertaking are eligible for deduction under section 10A then the income from foreign exchange gain on forward contract is eligible for deduction under section 10A. Accordingly, so far as the income on account of gain on foreign exchange fluctuation on forward contracts which are fully backed by the export transactions the same is to be treated as income derived from industrial undertaking for the purpose of section 10A. The Honourable jurisdictional High Court in case of CIT Vs. Motorola India Electronics Private Limited 225 taxmann.com 11 (Kar.)) after considering the judgment of Honourable Supreme Court in case of Liberty India v. CIT (supra) has held in para 7 and 8 as under: “ 7. The submission of the appellant(s) [assessee(s)] in nutshell was that the amount of duty drawback/DEPB was intended to neutralize the incidence of duty on inputs consumed/utilized in the manufacture of exported goods resulting into increased profits derived from the business of the industrial undertaking which profits qualified for deduction under s. 80-IB. According to the appellant(s) since no excise duty/customs duty was payable on IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 44 raw materials consumed/utilized in manufacturing goods exported out of India, the duty paid stood refunded under s. 37(2)(xvia) of the Central Excise Act, 1944 and under s. 75 of the Customs Act, 1962 read with Customs, Central Excise Duties and Service-tax Drawback Rules, 1995. 8. On the nature of DEPB it was submitted that the amount of DEPB was granted under Exim Policy issued in terms of powers conferred under s. 5 of the Foreign Trade (Development and Regulation) Act, 1992. According to the appellant(s), the DEPB Scheme is a Duty Remission Scheme which allows drawback of import charges paid on inputs used in the export product. The object being to neutralize the incidence of customs duty on the import content of the export product by way of grant of duty credit. The DEPB benefit is freely transferable. Thus, according to the appellant(s), duty drawback/DEPB benefit received had to be credited against the cost of manufacture of goods/purchases debited to the P&L a/c. That, such credit was not an independent source of profit. In this connection reliance has been placed on AS-2 issued by ICAI on "Valuation of Inventories" which indicates that while determining cost of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition should be considered and that trade discounts, rebates, duty drawback and such other similar items have to be deducted in determining the cost of purchase. Placing reliance on AS-2, it was submitted that where excise duty paid was subsequently recoverable by way of drawback, the same would not form part of the manufacturing cost. It was submitted on behalf of the appellant(s) that payment of excise duty/customs duty on inputs consumed in manufacture of goods by an industrial undertaking eligible for deduction under s. 80-IB, was inextricably linked to the manufacturing operations of the eligible undertaking without which manufacturing operations cannot be undertaken, hence the duty, which was paid in the first instance and which had direct nexus to the manufacturing activity when received back, had first degree nexus with the industrial activity of the eligible undertaking and consequently the reimbursement of the said amount cannot be treated as income of the assessee(s) de hors the expense originally incurred by way of payment of duty. Consequently, according to the appellant(s), receipt of duty drawback/DEPB stood linked directly to the manufacture/ production of goods and therefore had to be regarded as profits derived from eligible undertaking qualifying for deduction under s. 80-IB of the 1961 Act. On behalf of the appellant(s) it was further submitted that this Court’s decision in Sterling Food (supra) dealt with availability of deduction under s. 80HH with respect to profit on sale of import entitlements. The said decision, according to the appellant, had no applicability to the issue under consideration for the reason that import entitlement/REP licence was granted by the Government on the basis of exports made; the same were granted gratuitously without antecedent cost having being incurred by the industrial undertaking, unlike duty drawback and DEPB, which had direct link to the costs incurred by such industrial undertaking by way of payment of customs/excise duty in respect of duty paid IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 45 inputs used in the manufacture of goods meant for export and in such circumstances, profit from sale of import entitlements/REP licence was in the nature of windfall and it was in those circumstances, that the apex Court held that source of profit on sale of import entitlements was not the industrial undertaking but the source was the Export Promotion Scheme. According to the appellant(s), in the case of sale of import entitlements/REP licence, the source was the scheme framed by Government of India whereas in the case of DEPB/duty drawback, the source was the fact of payment of duty in respect of inputs consumed/utilized in the manufacture of goods meant for export. That, but for such payments of duty on inputs used in the manufacture of goods meant for exports, industrial undertaking(s) would not be entitled to the benefit of duty drawback/DEPB, notwithstanding, the Export Promotion Scheme of the Government and, therefore, there was a direct and immediate nexus between payment of duty on such inputs and receipt of duty drawback/DEPB. In this connection reliance was placed on the judgment of the Gujarat High Court in the case of CIT vs. India Gelatine & Chemicals Ltd. (2005) 194 CTR (Guj) 492 : (2005) 275 ITR 284 (Guj). Lastly, it was submitted on behalf of the appellant(s) that there was no difference between Advance Licence Scheme and duty drawback/DEPB. In this connection it was urged that duty drawback regime required the industrial undertaking to pay in the first instance the duty on inputs and thereafter seek reimbursement on profit of goods manufactured using such duty paid inputs, having been exported. The industrial undertaking alternatively could avail of Advance Licence Scheme where under the industrial undertaking could import inputs to be used for manufacture of goods meant for export without payment of duty. In the case where the industrial undertaking enjoyed the benefit of Advance Licence Scheme, the profit as shown in P&L a/c was regarded as income derived from industrial undertaking entitled to deduction under s. 80-IB of the 1961 Act without any adjustment whereas when the same industrial undertaking when it opts for duty drawback is denied the benefit of deduction under s. 80-IB on the duty remitted.” In view of the facts and circumstances of the case when the AO has denied the deduction under section 10A in respect of the foreign exchange fluctuation gain on forward contracts for want of necessary details we set aside this issue to the record of the assessing officer for fresh adjudication in the light of the judgment of Honourable jurisdictional High Court in case of CIT versus Motorola India election private Limited and after verifying the amount of income arising on mark to market gain. 7.8 In view of the above order of the Tribunal in assessee’s own case for assessment year 2008-2008, we direct the A.O. to grant the benefit of deduction u/s 10A of the Act in respect of disallowance of MTM losses. It is ordered accordingly. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 46 Disallowance under section 40(a)(ia) of the Act (Ground No.6.1 to 6.6) 8. For the relevant assessment year 2009-2010, the statutory auditors of the Assessee in the tax audit report in Form 3CD had reported that the Assessee had complied with the provisions pertaining to taxes deducted at source. The AO in the draft assessment order proposed to disallow the following amounts under section 40(a)(ia) of the Act for non- deduction of taxes:- S No. Particulars Amount in (Rs.) Comments of AO Rent A 1. Car lease rental 26,64,719 The AO held that car lease rentals attract provisions of TDS 2. Lease rentals for office facilities 83,80,880 The AO disallowed the said amount for non- submission of the exemption certificate with respect to payments made to M/s.Roshini Enterprises. Travel and conveyance B 1. Upkeep and maintenance charges 81,22,520 The AO has observed that the assessee has not maintained party wise ledger account of maintenance charges, in absence of evidences, the AO has drawn adverse inference that TDS provisions are attracted on these payments. Repairs and Maintenance C 1. System software maintenance 42,03,535 The AO has concluded that TDS provisions are IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 47 attracted on these payments 2. Computer maintenance 33,15,740 Since no evidence was submitted by the assessee to support that the payment pertains to purchase of consumables, the AO has drawn adverse inference that TDS provisions are attracted on these payments. 3. Office equipment maintenance 94,41,474 -do- D Security charges 33,23,662 The AO has concluded that TDS provisions are attracted on these payments. E Recruitment and advertisement 46,84,269 The AO has conclude that TDS provisions are attracted on these payments. 8.1 Aggrieved, the assessee filed objection before the DRP. The DRP disposed of the assessee’s objection as under:-  The DRP directed the AO to verify the expenses and allow the expenses where TDS has been deducted as per the provisions of the Act;  The DRP dismissed the submission of the Assessee that the provisions of section 40(a)(ia) of the Act are not applicable in the case of such amounts that have already been paid during the year;  Further, in relation to the maintenance expenses, which were disallowed under section 37 of the Act, the DRP directed the Assessee to furnish evidences before the AO. The DRP also directed the AO to verify the evidence that the expenditure was for business purpose and allow the same accordingly;  The DRP further directed the AO to allocate the disallowance among all the units including the STPI units of the Assessee while computing the relief under section 10A of the Act; IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 48  The DRP accepted the contention of the Assessee that provisions of section 40(a)(ia) of the Act are not attracted for provisions that are created at the end of the year on the basis of an estimate, when the payee cannot be identified. 8.2 Pursuant to the direction of the DRP, the A.O. observed that the Assessee had not furnished any evidence in support of the expenditure incurred. The AO further observed that the details of the expenditure distributed and debited to the unit- wise profit and loss account were not submitted by the Assessee and as such, the AO was not able to allocate expenditure against various units. The AO confirmed the addition of Rs.4,41,36,799 proposed in the draft assessment order. 8.3 Being aggrieved, the assessee has preferred appeal before the ITAT. The gist of the AR’s submission are as follows:-  The assessee submits that as per clause 27(b) of the Tax Audit Report for the relevant assessment year, the assessee had not committed any default with respect to TDS provisions.  The assessee further submits that it had contended before the AO that due to significant transactions, it was not possible to provide a reconciliation at a transaction level. The assessee had however provided a broad reconciliation of the various expense codes, the nature of expenses and the corresponding tax withholding / reasons as to why tax withholding was not applicable on certain expenses. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 49  The assessee submits that the maintenance expenses were incurred in relation to the corporate apartments taken on lease for the purposes of accommodating employees / business associates. The maintenance charges were therefore in relation to the business of the assessee.  Alternatively, it was contended that if disallowance u/s 40(a)(ia) of the I.T.Act is upheld, the AO may be directed to allow the expenses over STPI units of the assessee, while computing relief u/s 10A of the Act. 8.4 The learned DR supported the orders of the Income Tax Authorities. 8.5 We have heard rival submissions and perused the material on record. The assessee has only provided a broad reconciliation of the various expenses codes, the nature of expenses and the corresponding tax withholding and in certain expenses reasons as to why tax withholding was not applicable. Therefore, the assessee admits that due to significant transaction, it is not possible to provide a reconciliation at transactional level. Therefore, we confirm the disallowance made u/s 40(a)(ia) of the Act. However, the A.O. is directed to allocate the expenses so disallowed over the STPI units of the assessee while computing the relief u/s 10A of the Act (The assessee shall provide a reasonable working to the A.O. as how the expenses so disallowed is attributable to each of the STPI units). Hence, ground No.6.6 is allowed for statistical purposes. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 50 Disallowance u/s 14A of the Act (Ground 7.1 to 7.3) 9. For the relevant assessment year 2009-2010, the assessee had earned dividend income of Rs.5,74,98,877 which was earned from investments made in mutual funds. According to the assessee, it does not maintain separate treasury department or any dedicated pool of employees to manage investments, and the investments were made by the Assessee as and when any Mutual Fund offer was made and the Assessee had surplus funds to make investment at that point of time. It was submitted that the assessee did not incur any brokerage charges, demat charges, etc with respect of its investments. According to the assessee, it incurred expenditure of Rs. 3,50,000 in relation to earning exempt income from investments held by it and the same was disallowed suo moto by the Assessee while determining the taxable income for the relevant assessment year 2009-2010. 9.1 The AO computed the disallowance under section 14A of the Act as follows in accordance with Rule 8D of the Income- tax Rules, 1962. Rule Amount in (Rs.) Amount in (Rs.) Rule 8D(2)(i) The amount of expenditure directly relating to income which does not form part of total income. The assessee has voluntarily disallowed an amount of Rs.3,50,000 u/s 14A of the Act 3,50,000 In a case where the IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 51 assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely A x B/C Rule 8D(2)(ii) Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year NIL B = the average value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and last day of the previous year. NA C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. A x B/C = NIL Rule 8D(2(iii) An amount equal to one- half percent of the average of the value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee on the first day and the last day of the previous year. 0.5 percent of Rs.54,80,40,500 Refer computation below 27,40,203 Total 30,90,202 Less : Amount suo moto disallowed by the assessee 3,50,000 Total disallowance u/s 14A of the Act 27,40,203 IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 52 Particulars Amount (Rs.) A Value as on April 2008 109,60,81,000 B Value as on March 31, 2009 NIL Average value 54,80,40,500 9.2 The assessee being aggrieved by the disallowance proposed in the draft assessment order, filed its objections before the DRP. The DRP upheld the order of the AO and confirmed the disallowance under section 14A of the Act. The DRP observed as follows:-  The DRP observed that investment decisions were complex in nature and a company was run by its Board of Directors and the business and investments were managed by the key management personnel, executives, etc for which experts were consulted;  The Assessee being a corporate entity required an administrative structure which incurred multifarious expenses including establishment, general and administrative expenses;  The DRP observed that the mandate of section 14A of the Act required the Assessee to maintain proper books of account in regard to the investments made from which income can arise which is tax exempt;  The DRP observed that the Assessee had not maintained separate accounts in regard to the investments, the income from which was exempt and hence, the claim of the Assessee of not incurring any expenditure in relation to the tax-free income was not supported by documentary evidence as mandated in section 14A(2)/(3) of the Act and hence the Assessee had not discharged the onus cast upon it; 9.3 Further, in relation to the alternate ground raised by the Assessee that even if notional expenditure is disallowed under section 14A of the Act, the Ld. AO should consider such disallowance in the computation of profits and gains from IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 53 Business and Profession ("PGBP"), the DRP held that exempt income is not income derived from business exports but arises from investments made by the Assessee. The DRP therefore dismissed the alternate ground of the Assessee. 9.4 Pursuant to DRP’s directions, the TO confirmed the addition of Rs.27,40,203 proposed in the draft assessment order. 9.5 Being aggrieved, the Assessee raised this issue before the Tribunal. The gist of submission of the learned AR are as follows:-  It is submitted that the assessee has not incurred any expenditure, other than Rs.3,50,000 which was suo moto disallowed by the assessee. The assessee had not incurred any other expenditure to earn dividend income.  The assessee further submits that it had not incurred any brokerage charges, demat charges, etc. in respect of its investments.  Some of the mutual fund investments are in growth funds.  The assessee therefore submits that dividend income is in the nature of passive / dormant income and there is neither any effort required to earn such income nor is there any expenditure incurred which has a direct nexus with earning such income. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 54 9.6 The learned DR supported the orders of the Income Tax Authorities. 9.7 We have heard rival submissions and perused the material on record. The amount of expenditure directly relating to income which does not form part of total income, was voluntarily disallowed by assessee [amounting to Rs.3,50,000 – Rule 8D(2)(i)]. There is no disallowance made by the A.O. invoking the provisions of section 14A r.w. Rule 8D(2)(ii). The disallowance made by the A.O. and confirmed by the DRP is sum of Rs.27,40,203 under Rule 8D(2)(iii). As per the order of Special Bench of the Tribunal in the case of Veerat Investments reported in (2017) 165 ITD 27 (SB) (Del.Trib.), only those investments, which have yielded exempt income has to be considered for the purpose of computing average value of investments for computing disallowance under Rule 8D. We direct the A.O. to compute disallowance accordingly. 9.8 Therefore, the ground 7 to 7.3 is restored to the files of the A.O. The A.O. is directed to follow the dictum laid down by the Special Bench order of the Tribunal in the case of Veerat Investments (supra). Short grant of TDS credit [ground No.8 (8.1)] 10. For the relevant assessment year 2009-2010, the Assessee had claimed TDS credit of Rs 1,78,59,370 in the return of income filed. The assessee had furnished before the IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 55 AO, TDS certificates provided to it by its vendors, and the same were verified by the AO. The AO however restricted the claim to Rs.1,19,13,873 10.1 Being aggrieved by the same, the assessee filed objections before the DRP. The DRP directed the AO to verify the facts and grant the credit for TDS. 10.2 Pursuant to the DRP’s direction, the A.O. passed final assessment order. The AO again restricted the claim of credit for TDS at Rs.1,19,13,873. 10.3 Being aggrieved by the same, the Assessee filed appeal before the Tribunal. The assessee prays to allow the credit for TDS as claimed in the return of income filed for the relevant assessment year 2009-2010 i.e., Rs 1,78,59,370. 10.4 The learned DR was duly heard. 10.5 The A.O. in the final assessment order, despite the directions of the DRP, without any discussion has granted TDS credit of only Rs.1,19,13,873 instead of Rs.1,78,59,370 claimed by the assessee. Therefore, we restore the issue raised in ground No.8 to the files of the A.O. 10.6 Therefore, ground No.8 is allowed for statistical purposes. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 56 IT(TP)A No.121/Bang/2014 (Department’s appeal) 11. The assessee, during the relevant assessment year, brought back 94,30,794 equity shares of Rs.2 each from Perot Systems TSI (Mauritius) Private Limited at a price of Rs.90 per share. The buyback price was backed up with two valuation reports of independent valuers - one by the statutory auditors i.e., PwC and another by an Independent Chartered Accountant Mr Chajjed Kedia. In view of these independent valuation reports, the assessee claimed that the transaction of buy back of shares are at arms length price. Before the TPO, the assessee claimed that the transfer pricing provisions are not applicable for buy back of shares in the absence of any income chargeable to tax arising in the hands of the assessee. Without prejudice, it was argued that the benchmarking by the TPO has to be in accordance with the most appropriate method. On merits, it was submitted that the valuation was done as per various methods viz., The Market Approach, Underlying Assets Approach, Price to earnings method and the Book Value Multiple. The above valuations determined the value of shares in the range of Rs. 90 to Rs. 100. The assessee referred to RBI Circular No. 16 dated 4.1 0.2004 in AP (DIR Series) which requires the valuation to be certified by two independent experts and the higher of the two valuations can be considered as the value for the purposes of transfer of shares by a non resident to a resident. The assessee argued that as per rule 10B(2)(d), the laws and Government orders in force is one of the criteria for comparability of an international IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 57 transaction with an uncontrolled transaction and hence the valuation carried out in accordance with the Exchange control norms is to be accepted for transfer pricing purposes. 11.1 The TPO rejected the argument that buyback of shares are not under the purview of transfer pricing relying on few AAR, ITAT rulings. The TPO computed the value of Rs. 31.17 per share by cherry picking figures from both valuation reports which lead to a TP adjustment of Rs. 55,48,13,611. The computation of the TPO was as under: EPS (as per Chhajed Kedia Report) 8.151 Average PE multiple of comparable IT companies (as per pwc report) 7.51 Discount PE multiple @40% as per Kedia Report 4.5 Per share value 36.67 If liquidity discount of 0.85 is applied as per PWC report (36.67*0.85) 31.17 Valu7e of 94,30,794 shares 29,39,57,849 Amount paid 84,87,71,460 TP Adjustment 55,48,13,611 11.2 The TPO further made a secondary adjustment with reference to TP adjustment made on buy back of shares. The TPO held that the assessee has paid for buyback from its internal accruals/reserves. Had it not been for this excess payment, the money would have remained with the taxpayer and it would have earned at least 17.22% interest. The TPO therefore made a TP adjustment of Rs. 3,98,07,877 for not charging interest in respect of excess amount paid to AE for buy back of shares. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 58 11.3 The DRP held that the valuation carried out by the TPO in his order is erroneous and in view of the range of valuations provided in the two independent valuation reports submitted by the assessee, the adjustment carried out by the TPO is required to be deleted. In coming to the above conclusion, the DRP held as under:- (i) The net asset value per share calculated as per PwC report was Rs.512.3 and that of Chajjed Kedia report was Rs.53; (ii) The value observed by the TPO (Rs.110.31) was actually the final valuation as per the RBI valuation approach using linkage on book value of the assessee’s share with the book value multiple of BSE Index; (iii) The TPO therefore confused himself with the net asset value per share as per the PwC report with the final valuation as per Chajjed Kedia Report. (iv) The Foreign Exchange Management (Transfer of issue of security by a person resident outside India) Regulations, 2000 issued vide Notification No.FEMA 20/2000 dated May 3, 2000 specifically provides the methodology for valuation of shares, which are not listed on the stock exchange; (v) The DRP observed that discounting factor of 40 per cent was required to be taken into account as per the said Regulation. The DRP further observed that the discounting factor takes into account the IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 59 illiquid nature of the stock of closely held company. The TPO therefore considering both – discounting factor and illiquidity discount was incorrect; (vi) The PwC report had determined the PE multiple to be 7.5 which was calculated as a ratio of enterprise value of EBITADA while the earnings per share considered by the TPO from the Chajjed Kedia report was calculated on the basis of earnings after tax (PAT). The DRP therefore held that the computation of the TPO was erroneous. 11.4 As the DRP deleted the TP addition on merits, the objection regarding non application of TP provision on these transactions was not adjudicated. Further, as the TP addition on buy back of shares was deleted, the DRP also deleted the TP addition of Rs.3,98,07,877 for not charging interest in respect of excess amount paid to AE for buy back of shares. 11.5 The Revenue being aggrieved, has raised this issue before the ITAT. The learned DR supported the TPO’s order and relied on the grounds. Further, the learned DR relied on the judgment of the Hon’ble jurisdictional High Court in the case of Fidelity Business Services India (P) Ltd. reported in 95 taxmann.com 253 (Karnataka) and contended that transaction would give rise to dividend income liable u/s 2(22)(e) of the I.T.Act. Therefore, the learned DR submitted that the issue raised in department’s appeal needs to be restored to the AO / TPO to determine the liability u/s 2(22)(e) of the I.T.Act. IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 60 11.6 The learned AR relied on the decisions of the DRP. 11.7 We have heard rival submissions and perused the material on record. The TPOs reasoning for rejection of two independent valuation reports have been rejected by the DRP on merits. The DRP has clearly brought out on record the various inconsistencies in the TPOs valuation. It is evident from the TPOs valuation that the TPO cherry picked the numbers and figures from different methods of valuation in both the valuation reports in the manner beneficial to revenue. The TPO has not explained the basis or rationale for adopting figures from different valuation reports. The assessee followed the valuation prescribed by RBI in AP (DIR Series) Circular No.16 dated 4.10.2004 for the purpose of determining the value of share buy back. The same is not disputed by the TPO. Further, the TPO has disturbed the independent valuation reports without bringing on record another independent valuation report to justify the addition. The TPOs valuation is also not as per the prescribed methods of determining the ALP. In view of the same. we affirm the findings of the DRP which deleted the TP addition of Rs.55,48,13,611 on buy back of shares. Consequently. deletion of the secondary TP adjustment of Rs. 3,98,07,877 by the DRP is also confirmed. 11.7.1 The assessee has raised the additional 'grounds in non applicability of transfer pricing provisions for the buy back of shares and the consequent secondary IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 61 adjustment of the notional interest. The assessee relied on the Bombay High Court decision in the case of Vodafone India Services P Ltd v Union of India [2014] 368 ITR 1 and other AAR rulings in support of the contention that the transaction of buy back of shares by the assessee is outside the purview of Indian TP regulations in the absence of any income chargeable to tax for the assessee arising out of such transactions. However, as the issue is decided in favour of the assessee on merits, we need not adjudicate the additional grounds. 11.7.2 The judgment relied on by the learned DR in the case of Fidelity Business Services India (P) Ltd. (supra) does not apply to the facts of the instant cases. In that case, the A.O. held that the buyback transaction give rise to dividend income, which is not the position adopted by the A.O. in the instant case. In appeal, the Tribunal had accepted the assessee’s contentions that the transaction has to be treated as one giving rise to capital gains and not as dividend. But it observed that it would be open to the revenue to ascertain the nature of the amount paid in excess of the fair market value. In the present case, it is not the stand of the A.O. that the excess paid is a loan but has been treated it as income without specifying under what provision of law he is so doing. The ground of appeal before the Tribunal also does not say so. Even assuming it is permissible to the revenue to raise this contention at this stage, having regard to the fact that the liability to pay to under section 2(22)(e) of the Act is IT(TP)A Nos.130 & 121/Bang/2014. M/s Dell International Services India Pvt.Ltd. 62 on the shareholder who is not a part to the present proceedings, we cannot issue such a direction. 12. In the result, the appeal of the assessee is partly allowed and the appeal of the Revenue is dismissed. Order pronounced on this 22 nd day of December, 2021. Sd/- (B.R.Baskaran) Sd/- (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore; Dated : 22 nd December, 2021. Devadas G* Copy to : 1. The Appellant. 2. The Respondent. 3. The CIT(A)-2, Bengaluru. 4. The Pr.CIT-3, Bengaluru. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore