Income Tax Appellate Tribunal - Delhi
Birlasoft (India) Ltd., New Delhi vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I': NEW DELHI
BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER
&
SMT. DIVA SINGH, JUDICIAL MEMBER
ITA No. 284/Del/2013
Assessment Year: 2008-09
Birla Soft (India) Limited, DCIT,
(formerly Birlasoft Limited), Circle 3(1),
8th Floor, Birla Tower, Vs. New Delhi.
25th Barakhamba Road,
New Delhi.
PAN No. AAACB2769F
(Appellant) (Respondent)
&
Stay Application No. 129/Del/2013
(In ITA No. 284/Del/2013)
Assessment Year: 2008-09
Birla Soft (India) Limited, DCIT,
(formerly Birlasoft Limited), Circle 3(1),
8th Floor, Birla Tower, Vs. New Delhi.
25th Barakhamba Road,
New Delhi.
PAN No. AAACB2769F
(Appellant) (Respondent)
Appellant by: S/Sh. Ajay Vohra, Adv., Neeraj Jain, Adv.,
Abhishek Aggarwal, CA & Amit Katyal, CA
Respondent by: Sh. Peeyush Jain, CIT(DR)
ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 2
(India) Limited
ORDER
PER S.V. MEHROTRA, A.M.
This appeal has been filed by the assessee against the assessment order dated 28/09/2012 passed u/s 143(3) read with section 144C of the Income Tax Act in pursuance to the directions of the Dispute Resolution Panel u/s 144C dated 28/09/2012. This appeal is listed for hearing along with Stay No. 129/D/2013 filed by the assessee. We first proceed to decide the appeal.
2. The assessee is 100% subsidiary of M/s Birla Soft Enterprises Limited, India, which in turn is a 100% subsidiary of M/s Birla Soft Inc. USA.
In the relevant assessment year it was engaged in the business of software development and related services. The software related business was being carried out from the STP units and the exemption u/s 10A had been claimed. The assessee company had filed its return of income declaring loss of Rs. 12,29,14,677/-. As the assessee had entered into International Transactions in respect of software development and related services with the Associated Enterprise viz. Birla Soft Inc. USA (UK) Limited, the Assessing Officer made a reference u/s 92CA to Transfer Pricing Officer ("TPO"). On the basis of order u/s 92CA(3) passed by TPO the AO had issued draft assessment order against which assessee filed objections ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 3 (India) Limited before Dispute Resolution Panel ("DRP"), 1, New Delhi which issued directions u/s 144C(5) on 28th September, 2012. The Assessing Officer passed the order in conformity with the DRP's directions and determined the total various at Rs. 53,51,26,850/- as under:
COMPUTATION OF TOTAL INCOME:
Business Income Rs. 1,14,11,274/-
Add:
Adjustment on a/c of ALP Rs. 523,296,756/-
Income from Business Rs. 53,47,08,030/-
Add:
Income from House Property Rs. 418822/-
Income from other sources
Misc. Income on a/c of notice pay Rs. 3,552,781/-
Total Assessed Income Rs. 53,51,26,852/-
Rounded Off Rs. 53,51,26,850/-
3. Being aggrieved with the assessment order, the assessee is in appeal before us and has taken various grounds of appeal.
4. Ground nos. 2.1 to 2.14 read as under:
"2.1That the AO/DRP erred on facts and in law in disregarding the internal benchmarking undertaken by the appellant for determining the arm's length price of the international transactions applying TNMM on the ground that : i. The appellant did not maintain segmental accounts for the related and non related transactions and there was no segregation of these activities in the audited financials.ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 4
(India) Limited ii. In the segmental accounts prepared by the appellant, expenses which cannot be directly allocated are apportioned on the basis of respective turnover.
iii. The segmental accounts were made by allocation keys which were not substantiated by facts.
2.2 That the AO/DRP erred on facts and in law in holding that the internal comparability does not provide meaningful benchmarking, even after accepting that, FAR of the segments are identical and concurrent transactions of both the segments are homogeneous.
2.3 That the AO/TPO erred on facts and in law in disregarding the internal benchmarking undertaken by the appellant, without pointing out any error or mistake in the profitability summary in relation to revenue earned from AE and non AEs transaction worked out by the appellant. 2.4That the AO/DRP erred on facts and in law in evaluating the international transactions applying TNMM at entity level by comparing the net operating profit margin of the appellant with uncontrolled net operating profit margin of comparable uncontrolled enterprises.
2.5 That the AO/TPO erred on facts and in law in adopting incorrect filter, viz, companies whose onsite income is more than 75% of the export ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 5 (India) Limited revenues were excluded, even when the results of this filter is not in public domain.
2.6 That the AO/TPO erred on facts and in law in adopting incorrect filter, viz, software development service income less than one crore were excluded, without objectively applying this filter for eliminating both low and high turnover companies and accordingly, following companies with very high turnover have different scale of operations from the appellant shall be excluded from the final set of comparable companies:
a) Infosys Technologies Ltd.
b) Wipro Ltd.
2.7 That the AO/DRP erred on facts and in law in applying the additional filters of persistent losses and declining revenue for determining comparability analysis, which were unwarranted and against the intent of transfer pricing regulations.
2.8 That the AO/DRP erred on facts and in law in applying inconsistent approach by eliminating loss making companies without correspondingly eliminating super normal profit making companies.
2.9 That the AO/TPO erred on facts in law in applying inconsistent approach by eliminating company showing diminishing revenue and persistent loss making companies without eliminating following ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 6 (India) Limited companies having significantly growth rate and abnormal high margins:
S.No. Name OP/OC
1. Kals Information 41.94%
Systems Ltd.
2. Infosys Technologies 40.41%
Ltd.
2.10That AO/DRP erred on facts and in law in considering companies which are functionally incomparable to the appellant, for the purpose of benchmarking analysis.
2.11That the AO/TPO erred in relying upon the information obtained u/s 133(6) of the Act, without appreciating that such information was not available in the public domain and therefore, could not have been relied upon for the purpose of determining the arm's length price.
2.12 That the AO/TPO erred in law in not confronting the appellant with all information obtained u/s 133(6) of the Act prior to using such information for determination of arm's length price. 2.13That the AO/DRP erred on facts and in law in not appreciating that the associated enterprise has, in fact, incurred a loss from the international transactions and, therefore, no adjustment on account of the alleged difference in arm's length price was even otherwise warranted.
2.14That the AO/DRP erred on facts and in law in disregarding the risk immune profile of the appellant and rejecting the claim towards adjustment for differences in the risk profile of ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 7 (India) Limited the appellant vis-à-vis the comparable companies."
5. Brief facts apropos ground nos. 2.1 to 2.14 are that the assessee is a provider of software development services based in Noida. The assessee operates as an offshore software development service provider for associate parties abroad. The assessee has also set up GE-Capital Development Centre at Noida to develop software solutions for general electric. The assessee has also established one new unit in Hyderabad for software development services under STP Hyderabad. For the purpose of bench marking international transaction of provision of software development services, the assessee had adopted Transactional Net Margin Method (TNMM) as the most appropriate method with OP/OC % as the profit level indicator. The TPO noticed that the international transaction had been bench marked using internal TNMM as the most appropriate method. The transactions of the assessee company had been divided into two segments viz. one related party segment and second unrelated party segment. The margin in the related party segment had been computed using OP/OC at (-) 0.96%, whereas the margin in the unrelated margin segment had been computed at (-) 9.88%. Since the operating profit margin OP/OC% earned from rendering software development and related services to associated enterprises computed at (-) 0.96% was higher than operating profit margin OP/OC% earned from rendering software development and related services ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 8 (India) Limited to unrelated parties computed at (-)9.88%, the international transactions were considered to be at arm's length. The TPO noticed from the annual report that there were no segmental accounts with reference to related party and unrelated party. He noticed that the segmental reporting in the annual report was with reference to geographic location and different segments had been created viz. USA, Australia and others. He further noticed from the record that the revenue from USA was Rs. 2,313,140,745/-, whereas the revenue from the AE which was USA based was Rs. 2,205,794,233/-. He further noticed that the revenue from the AE which was UK based was Rs.
299,420,008/-, whereas there was no geographic segment for UK. He further noticed that the cost which were directly identifiable to the related and unrelated segments had been considered as directly allocable costs and the expenses which could not be directly allocated were based on the basis of sales earned by various units. He, therefore, concluded that the segments created by the assessee in the TP repot were artificial. He, therefore, rejected the internal TNMM as adopted in the transfer pricing report to bench mark the international transactions. The TPO, therefore, concluded that it would be more reasonable to examine the assessee on entity level and then determine the arm's length price for the international transactions. The TPO undertook a fresh search and external comparables and bench marked the operating profit margin (OP/OC%) of the assessee with the margin of final set of 18 comparable companies with OP/OC% of 21.85% and after making ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 9 (India) Limited working capital adjustment of 1.68% determined the arm's length margin at 20.17%.
6. Ld. Counsel submitted that in assessee's own case for A.Y. 2006-07 Tribunal vide its order dated 20.01.2011 in ITA No. 3839/Del/2010 contained at pages 280 to 299 of paper book observed in para 17 as under:
17. "In the light of the discussions made above, we therefore, hold that the assessee was justified in undertaking internal bench marking analysis on stand alone basis by placing on record working of operating profit margin from international transactions with AEs and transactions with unrelated parties undertaken in similar functional and economic scenario, and the same should be the basis for determination of arm's length price in respect of international transactions undertaken with the associated enterprise. In the light of the facts of the present case as discussed above, we therefore, hold that the Transfer Pricing Officer had no mandate to have recourse to external comparables when, in the present case, internal comparables were available, which could be applied for determining the arm's length price of international transactions with AEs. We, therefore, direct the AO/TPO to determine arm's length price of international transactions with AEs by making internal comparison of the net margin earned by the assessee from the international transactions with ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 10 (India) Limited associated enterprises and the profit earned by the assessee from the international transactions with unrelated parties. In this respect, the assessee has already given his working by allocating revenue and expenses to both the segmental and determined separate profitability. However, on perusal of the TPO's order, we find that the TPO has not undertaken any exercise to examine the correctness of the workings done by the assessee. We, therefore, restore this matter back to the file of the AO/TPO for fresh adjudication and for the purpose of determining the arm's length price in respect of the international transactions undertaken with the associated enterprise by making internal comparison of profitability from the international transactions with associated enterprise and profitability from the international transactions with unrelated parties after allocating respective revenues and expenses to both the segmental. The AO/TPO shall provide reasonable opportunity of being heard to the assessee. The assessee shall furnish all the details and particulars before the authorities below to enable them to make internal comparison of the profitability from the international transactions with associated enterprise and unrelated parties undertaken by the assessee in the similar functional and economic scenario. We order accordingly."ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 11
(India) Limited
7. Thus, the Tribunal has held that arm's length price of international transactions with AE's is to be determined by making internal comparison of profitability from the international transactions with associate enterprise and profitability from the international transactions with unrelated parties after allocating respective revenues and expenses to both the segmental.
8. Ld. Counsel pointed out that this issue is also covered by the decision in assessee's own case for A.Y. 2007-08 contained at pages 302 to 317 of paper book, wherein the decision for A.Y 2006-07 has been followed.
9. Ld. Counsel further pointed out that this issue is also covered by the decision of third member bench of the Mumbai Tribunal in the case of Technimount ICB Private Limited vs. ACIT (ITA NO. 4608 & 5085/Mum./2010) in which while explaining merit of clause (i) of Rule 10B(e) of the Act held that the rule itself provides that preference shall be given to internal comparable of un-controlled transactions vis-a-vis externally comparable uncontrolled transactions. It has been observed therein as under:
"10. Clause (i) of Rule 10B(e) stipulates that net profit margin from an international transaction with an AE is computed in relation to cost incurred or sales effected or assets employed etc. Clause (ii) is material for the present purpose. It provides that the net profit margin realized by the enterprise or by an ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 12 (India) Limited unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. The 'base' of this provision takes one back to clause (i) which refers to cost incurred or sales effected or assets employed or to be employed. On splitting clause (ii) into two parts, it divulges that the reference is made to internal and external comparables. One part of clause (ii) refers to 'the net profit margin realized by the enterprise..........from a comparable uncontrolled transaction' and the other part talks of 'the net profit margin realized.............by an uncontrolled enterprise from a comparable uncontrolled transaction'. It transpires that whereas the first part refers to the profit margin from internal comparable uncontrolled transactions, the second part refers to profit margin from an external comparable uncontrolled transaction. Thus, it is discernible that what is to be compared under this method is profit from a comparable uncontrolled transaction. The word 'comparable' may encompass internal comparable or external comparable. There is cue in the rule itself as to preference to be given to internal comparable uncontrolled transactions vis-à-vis externally comparable uncontrolled transactions. It is because the delegated legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 13 (India) Limited towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus, where potential comparable is available in the shape of an uncontrolled transaction of the same applicant, it is likely to have higher degree of comparability vis-à-vis comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain by and large same in case of an internal comparable.
The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable. Ex consequenti, it follows that an internal comparable uncontrolled transaction is more noteworthy vis-à-vis its counterpart, i.e., external comparable."
ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 14(India) Limited
10. He also placed reliance on following decisions:
i. UCB India (P) Ltd. vs. ACIT 30 SOT 95 (Mumbai); ii. Gharda Chemicals Limited vs. DCIT, 130 TTJ 556; iii. Destination of the World vs. DCIT [ITA No. 5534/Del/2010] iv. Interra Information Technologies India (P) Ltd. vs. DCIT (ITA No. 5568 & 5680/Del/2011).
11. Ld. Counsel further referred to pages 402 to 404 of paper book to demonstrate that the TPO has given effect to the Tribunal's order for A.Y. 2007-08 and after considering the segment accounts submitted by the assessee along with transfer pricing study and during the course of assessment proceedings, accepted the international transaction in relation to provision of software development services undertaken by the assessee to be at arm's length price.
12. We have considered the submissions of both the parties and have perused the record of the case.
13. We find that in A.Y. 2007-08 Tribunal has observed in para 4 as under:
4. "We have heard both the parties and gone through the facts of the case as also the aforesaid decision dated 20th January, 2011 of the ITAT for the A.Y. 2006-07.
We find that the ITAT in the preceding assessment year concluded that the assessee was justified in undertaking ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 15 (India) Limited internal bench marking analysis on stand alone basis by placing on record working of operating profit margin from international transactions with AEs and transactions with unrelated parties undertaken in similar functional and economic scenario, and the same should be the basis for determination of arm's length price in respect of international transactions undertaken with the associated enterprise. It was further concluded that the TPO had no mandate to have recourse to external comparables when in the present case, internal comparables were available, which could be applied for determining the arm's length price of international transactions with AEs. Accordingly, the ITAT directed the AO/TPO to determine arm's length price of international transactions with AEs by making internal comparison of the net margin earned by the assessee from the international transactions with associated enterprises and the profit earned by the assessee from the international transactions with unrelated parties. For this purpose, the ITAT restored the matter back to the file of the AO/TPO for fresh adjudication and for the purpose of determining the arm's length price in respect of the international transactions undertaken with the associated enterprise by making internal comparison of profitability from the international transactions with unrelated parties after allocating respective revenues and expenses to both the segmental. The AO/TPO were directed to provide reasonable opportunity of being heard to the assessee ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 16 (India) Limited while the assessee was directed to furnish all the details and particulars to enable the AO/TPO to make internal comparison of the profitability from the international transactions with associated enterprise and unrelated parties undertaken by the assessee in the similar functional and economic scenario."
14. There is no dispute that the facts and circumstances in the present assessment year are similar to the facts and circumstances as obtaining in the preceding assessment years. The revenue has not placed before us any material so as to enable us to take a different view in the matter. In view of these facts and circumstances, respectfully following the order for earlier assessment years noted above, we restore this matter to the file of AO/TPO with similar directions as have been given by the ITAT in the preceding assessment year.
15. In the result, all these grounds are allowed for statistical purposes.
16. Ground no. 3 reads as under:
3. That the AO/DRP erred on facts and in law in not allowing deduction of Rs. 2,55,56,639/-
claimed u/s 10A of the Act in respect of the 3rd floor GE-GDC STPI unit.
3.1 That the AO/DRP erred on facts and in law in holding that GE-GDC unit is not altogether different or new unit but an extension of an ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 17 (India) Limited existing STP unit as both the units are situated in the same building and doing the same business. 3.2 That the AO/DRP erred on facts and in law in not appreciating that GE-GDC was set up as an independent stand alone unit with substantial fresh investment of 8.42 crores and was separately registered with STPI and custom authority as a new undertaking for production of computer software."
17. Brief facts apropos ground no. 3 are that originally the assessee company had set up the STP unit at 2nd floor, Block 3, Sector 29, Noida and it was registered as STP unit in the year 1995. Thereafter assessee had set up a new STP unit at third floor, Block 3, Sector 29, Noida in the assessment year 2002-03.
18. The AO was of the opinion that this new unit was not altogether different unit but it was the extension of the existing unit as both the units were situated in the same building and doing same business. He, therefore, denied the deduction of Rs. 2,55,56,639/- claimed u/s 10A in respect of this unit known as GE- GDC situated at third floor, Sector 29, Noida and treated the sum of Rs. 2,77,04,118/- (i.e. disallowance of 10A deduction of Rs. 2,77,04,118/- and business profits pertaining to this unit Rs. 21,47,479/-, as shown by the assessee) as business profits of non STP units. At the outset, ld. Counsel for the assessee submitted that this issue ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 18 (India) Limited is covered in favour of assessee by the decision of Tribunal in assessee's own case for AY 2006-07 (ITA No.3839/Del/10; 2007-08) and also in respect of assessment years2003-04 in ITA Nos. 3821 and 3919/Del/2006.
He further pointed out that the departmental appeal on this issue has also been dismissed by the Hon'ble Delhi High Court vide ITA No. 71/2010.
19. Having heard both the parties, we find that Tribunal in para 5.6 of its order for A.Y. 2006-07 vide ITA No. 3839/Del/2010 dated 20/01/2011 has observed in para 5.6 & 5.7 as under:
5.6 "We have heard both the parties and carefully perused the orders of the authorities below.
The assessee company is engaged in the activities of software development and related services. The software related business is being carried out from the STP Unit and the exemption u/s 10A has been claimed. Originally, the assessee company had set up a STP Unit at 2nd Floor, Block-3, Sector-29, Noida and it was registered as STP Unit in the year of 1995. Thereafter, another new STP Unit was set up at 3rd Floor, Block-3, Sector 29, Noida in the assessment year 2002-03. The new STP Unit was treated by the assessee to an independent unit for the purpose of exemption claimed u/s 10A of the Act. However, the AO has not accepted the claim of the assessee by holding that the new unit is nothing but an extension of the existing unit and not entitled to separate deduction of exemption u/s 10A. We find that an ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 19 (India) Limited identical issue had arisen in the assessment year 2003-04 before the Tribunal where the Tribunal vide order dated 27.03.2009 in ITA Nos. 3821/Del/2006 and ITA Nos. 3919/Del/2006 has held and observed as under:
"2.9 We have considered the rival submissions and also perused the relevant material on record. It is observed that the claim of assessee for deduction u/s 10A in respect of profits derived from the new STP unit known as GE-GDC was disallowed by the Assessing Officer on the ground that the said unit was set up as a result of reconstruction of the existing business of the assessee company. In his impugned order, the ld.CIT(Appeals) however, held that the said new unit was not set up by the assessee company by way of reconstruction or splitting up of the unit already in existence. In its appeal by revenue against the said order of ld. CIT(Appeals), the decision so rendered by ld. CIT(Appeals) has not been challenged and the same, therefore, has become final. The ld. CIT(Appeals), however, further held that the establishment of a new unit by the assessee company was part of expansion of its existing unit and since both these units were entitled for deduction u/s 10A, the said deduction should ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 20 (India) Limited be computed on the combined profit of both these units treating the same as one unit.
He, however, has not given any reason whatsoever or has not referred to any provisions of the Act of support his conclusion that both the units should have been treated as one unit for the purpose of computing deduction u/s 10A.
2.10 At the time, of hearing before us, the ld. Counsel for the assessee has relied on the various judicial pronouncements wherein it was held that where a new undertaking has been formed with fresh capital and investment with a motive to increase the production capacity and expand its business, then it cannot be said that the new undertaking was not the new industrial unit by itself. It was also held that establishment of new industrial unit as a part of already existing industrial establishment may result in an extension of the industry, but if the newly established unit itself is an integrated unit in which new plant and machinery are put up and the same itself independently of the old unit capable of production of goods, then it can be classified as a newly established industrial undertaking. This makes it abundantly clear that even if the new unit ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 21 (India) Limited was established by the assessee company as expansion of its existing unit, a substantial fresh capital having been invested in the said unit and it was capable of doing business of its own independent of the old unit, the same was eligible to be treated as a newly established undertaking. In our opinion, the ld. CIT(Appeals) thus was not correct in holding that both the units were liable to be treated as one unit for the purpose of computing deduction u/s 10A." 5.7 From the said decision of Tribunal pertaining to the A.Y. 2003-04, it is clear that the Tribunal has taken a view that new unit cannot be treated to be as one and same unit with the existing unit for the purpose of computing deduction u/s 10A of the Act. Respectfully following the Tribunal's order passed in the assessment year 2003-04, we allow this ground raised by the assessee and hold that the new unit is to be treated as a separate and independent unit for the purpose of computing deduction u/s 10A of the Act. The AO shall allow the deduction u/s 10A in respect of the new unit set up at 3rd Floor, Block 3, Sector 29, Noida. Thus, this ground is decided in favour of the assessee."
20. Respectfully following the decision of Tribunal, we hold that G-GDC STP unit situated at third floor, Sector 29, Noida is to be treated as separate unit and, accordingly, deduction u/s 10A was allowable.
ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 22(India) Limited
21. In the result, this ground is dismissed.
22. Ground no. 4 reads as under:
4. "That the AO/DRP erred on facts and in law in not allowing loss of STPI units to be set off against the profit of non-STP units allegedly holding that loss from such source/unit, which is exempt from tax, cannot be set off against income chargeable to tax.
4.1 That the AO erred on facts and in law in not appreciating that section 10A of the Act is a deduction provision and the profits of the unit eligible for deduction u/s 10A of the Act would form part of income computed under the head 'profits and gains of business or profession'. 4.2 That the AO erred on facts and in law in setting off of losses of STP unit amounting to Rs.
11,16,82,144 against the profits of the eligible STP unit of Rs. 24,93,560, while allowing deduction u/s 10A of the Act.
4.3 That the AO erred on facts and in law in denying set off and carry forward of losses of eligible STP unit amounting to Rs. 10,91,88,584/-.
4.4 That the AO erred on facts and in law in not setting off of rental income of Rs. 4,18,822/- against the business profit of the appellant."
ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 23(India) Limited
23. Brief facts apropos ground no. 4 are that as noted earlier the software services were being carried out from assessee's undertakings at Noida, Banglore, Hyderabad and Chennai set up in accordance with the software technology park scheme notified by the Government of India, Ministry of Commerce and Industry and branch offices at Australia and Singapore (non STP units). The assessee company had incurred business losses amounting to Rs. 12,94,19,692/- in its various STP and non-STP units. It comprises of 11,16,82,144/- in respect of STP units and Rs. 1,77,37,548/-
in respect of non STP units. The details in regard to STP units and non STP units are as under:
STP Units S.No. STP Units Profit Loss
1. Sector-59, Noida 23,54,013 -
2. Chennai 1,39,547 -
3. Hyderabad - 24,46,542
4. Banglore - 67,98,329
5. Sector-63, Noida - 10,24,37,271 Total 24,93,560 11,16,82,144 Non-STP Units S.No. STP Units Profit Loss
1. Sector-59, Noida 2,77,04,118 -
2. Singapore - 1,16,13,139
3. Australia - 56,13,326
4. Bangalore - -
5. Other - 5,11,083
6. Prague 14,45,154 -
Total 2,91,49,272 1,7,37,548
24. The AO disallowed the losses of STP units to be set off against income from other units on the ground that STP units were exempt u/s 10A of the Act while profits of non STP units were taxable as normal business income.ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 24
(India) Limited
25. Ld. Counsel submitted that this issue has been decided in favour of the assessee by the decision of ITAT in assessee's own case for AY 2006- 07 and also for AY 2007-08. It was held in A.Y. 2006-07 vide ITA No. 3839/Del/2010 as under:
6.1 "The Assessing Officer has taken a view that the loss from STPI Unit, which is exempt from tax, cannot be set off against income chargeable to tax by observing that sec. 10A is an exemption provision and not a deduction provision.
6.2 In this connection, the ld. Counsel for the assesee has relied upon the following decision:
i. Mindtree Consulting (P) Ltd. vs. ACIT, 102 TTJ 691 = (2006-TIOL-164-ITAT-BANG) ii. Honeywell International India (P) Ltd. vs. DCIT (2008) 108 TTJ 924 (Del) = (2007-
TIOL-522-ITAT-DEL) iii. Navin Bharat Industries vs. ACIT,90 ITD 1 (Mum.) = (2004-TIOL-50-ITAT-MUM).
6.3 The ld. Counsel for the assessee has further placed reliance on the decision of the Hon'ble Bombay High Court in the case of Hindustan Unilever Ltd. vs. DCIT, 325 ITR 102= (2010- TIOL-239-HC-MUM-IT), wherein the losses of the unit eligible for deduction u/s 10B of the Act were held allowable to be set off against profits of the business. He further ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 25 (India) Limited placed reliance upon the recent Special Bench decision of ITAT, Bench'C' Chennai (SB) in the case of M/s Scientific Atlanta India Technology Pvt. Ltd. vs. ACIT, order being dated February 5, 2010 passed in ITA Nos.
229/Mds./2007, ITA No. 352/Mds./2008 & ITA No. 536/Mds./2007 = (2010-TIOL-69- ITAT-MAD-SB), pertaining to the assessment years 2003-04 & 2004-05, where it has been held that even though sec. 10A falls under Chapter III, it has been mentioned in the section itself that what is to be given is only a deduction and not exemption after amendment made with effect from 1st April, 2001. It was further held therein that the intention of this legislature w.e.f. 1st April, 2001 was to give only deduction and not exclusion from total income.
6.4 We have heard both the parties and have gone through the aforesaid decisions. Respectfully following the aforesaid decisions, we restore the matter back to the file of the AO for his fresh computation by treating the provisions of sec. 10A to be in the nature of deduction provision and not exemption. The AO shall re- compute the total income of the assessee in the light of the aforesaid decisions after providing reasonable opportunity of being heard to the assessee. The assessee shall ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 26 (India) Limited furnish a fresh computation of income to the AO in the light of the principles and propositions laid down in the cases referred to hereinabove. We order accordingly."
26. Respectfully following the decision of Tribunal (supra) we restore this issue to the file of AO with similar directions for fresh computation.
27. In the result, this ground is allowed for statistical purposes.
28. Ground no. 5 reads as under:
5. "That the AO/DRP erred on facts and in law in not regarding miscellaneous income as part of business income instead in treating the same as "income from other sources".
5.1 That the AO/DRP erred on facts and in law in not appreciating that miscellaneous income of Rs. 35,52,781/- represented amount received on account of notice pay, which is incidental to software export business and is to be considered as part of the income of the eligible undertaking."
29. Brief facts apropos ground no. 5 are that sum of Rs. 35,52,781/- was received by assessee on account of notice pay and deduction u/s 10A was claimed. The Assessing Officer denied the deduction on the ground that this was not derived by the assessee from export of computer software and ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 27 (India) Limited he treated the same as income from other sources and not business income.
30. Ld. DRP had confirmed the order of TPO on this count and, therefore, the AO rejected the assessee's claim.
31. Ld. Counsel for the assessee submitted that this issue is covered in favour of the assessee by the decision of Tribunal in assessee's cown case for AY 2006-07 vide ITA No. 3839/Del/2010 and also in AY 2007-08 vide ITA No. 4776/Del/2011.
32. Having heard both the parties, we find that the Tribunal in AY 2006- 07 vide ITA No. 3839/Del/2010 has observed in para 7.3 as under:
7.3 "We have heard both the parties and perused the material on record. In the course of hearing of this appeal, reliance was placed by the ld.
Counsel for the assessee upon the decision of ITAT, Delhi Bench in the case of Jubilant Empro (P) Ltd. vs. DCIT in ITA No. 107/Del/2007 = (2007-TIOL-458- ITAT-DEL). In the above referred case of Jubilant Empro (P) Ltd. pertaining to the A.Y. 2000-01, the assessee had recovered a sum of Rs. 4,95,070/- being notice period pay. This sum was recovered from the employees, who had left the services prior to the agreed period of rendering services with the assessee. The Tribunal relying upon the earlier decision of the ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 28 (India) Limited Tribunal pertaining to the assessment year 1999-2000 in the case of Jubilant Empro (P) Ltd. has held that the notice period was to be considered as income derived by the eligible undertaking and as such notice period pay would go to reduce the expenses on account of salary and the real nature of the transaction will not have any affect on the income derived by the assessee from the eligible undertaking. In the earlier decision the Tribunal had taken a view that because the assessee instead of crediting the notice period pay to the salary account and reducing the salary expenses, had shown the amount separately in the profit & loss account, that book entry by itself would not change the real nature of transaction and it was accordingly held that the recovery of notice pay represents income derived from the industrial undertaking. Respectfully following the decision of the coordinate Bench, we hold that the amount received towards notice period is to be treated as income derived from the eligible undertaking and deduction u/s 10A shall be allowed accordingly. The AO shall modify the assessment order in the light of this direction and allow the deduction u/s 10A in terms of this order."
33. Respectfully following the decision of Tribunal, we hold that assesee was entitled for deduction u/s 10A in respect of amount received on account of Notice Pay. In the result, this ground is allowed.
ITA No. 284/D/2013 & Stay Appl. No. 129/D/2013 - Birla Soft 29(India) Limited
34. As we have disposed off the assessee's appeal, the Stay Petition filed by the assessee has become infructuous and, accordingly dismissed.
35. In the result, the assessee's appeal is allowed for statistical purposes and stay petition is dismissed as infructuous.
Order pronounced in the open court on 26/04/2013 Sd/- Sd/-
(DIVA SINGH) (S.V. MEHROTRA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 26.04.2013
*Kavita
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, New Delhi.
TRUE COPY
By Order
ASSISTANT REGISTRAR