[aaykarbhavan] Loss making co. couldn't be excluded from comparables if it reported profits in immediately preceding year

IT/ILT: A company cannot be rejected as a comparable as persistently loss making, if it reported operating profit in immediately preceding year

IT/ILT: For transfer pricing analysis, data for financial year in which international transaction takes place is to be taken, and multi year data is taken only for analyzing project life cycles, business cycles etc.

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[2013] 37 taxmann.com 306 (Delhi - Trib.)

IN THE ITAT DELHI BENCH 'F'

Qualcomm India (P.) Ltd.

v.

Assistant Commissioner of Income-tax, Circle -14(1), New Delhi*

I. C. SUDHIR, JUDICIAL MEMBER 
AND T.S. KAPOOR, ACCOUNTANT MEMBER

IT APPEAL NO. 5239 (DELHI) OF 2010
[ASSESSMENT YEAR 2006-07]

JUNE  10, 2013 

Section 92C of the Income-tax Act, 1961, read with rules 10B and 10D of the Income-tax Rules, 1962 - Transfer pricing - Computation of arm's length price [Comparables and adjustments] - Assessment year 2006-07 - Whether, a company cannot be rejected as a comparable as persistently loss making, if it reported an operating profit in immediately preceding year - Held, yes - Whether, filter for related party transactions should be taken at 15 per cent as per decision in case of Soni India (P.) Ltd. v. CBDT [2007] 288 ITR 52/[2006] 157 Taxman 125 (Delhi) - Held, yes - Whether, where 97 per cent revenues of a company were from comparable activity, it could not be rejected as a comparable - Held, yes - Whether, where a company had negative net worth on account of huge brought forward losses of earlier years, it could not be rejected as a comparable - Held, yes - Whether, where a company held substantial Intellectual Property Rights and its functions were different from those performed by assessee, it could not be taken as a comparable - Held, yes - Whether as per rules 10B(4) and 10D(4), data for financial year in which international transaction takes place is to be taken, and multi-year data is taken only for analyzing project life cycles, business cycles etc. - Held, yes [Para 67] [Partly in favour of assessee]

FACTS

 

■		The assessee-company, engaged in the business of software development and providing marketing services, was a captive service provider to its AEs. The assessee applied Transactional Net Margin Method and selected sixteen comparables for benchmarking its international transactions. The Transfer Pricing Officer (TPO) rejected 6 comparables and included two other comparables. The assessee-company challenged the same, and also appealed for making adjustments on account of working capital and risk. However, the TPO rejected the assessee's contentions and made transfer pricing adjustment, which was confirmed by the Dispute Resolution Panel.
■		On assessee's appeal:

HELD

 

On rejection of 'M'

■		The TPO had rejected 'M' as a comparable company on the basis that the company was a persistently loss making company, as companies incurring operating losses for at least 3 preceding years are considered as persistently loss making. [Para 20]
■		There is substance in the contention of the assessee that only because in the financial year 2004-05, 'M' had incurred operating loss, it cannot be held that the company was having persistent loss, specially if it had reported operating profit in financial year 2005-06. The TPO rejected 'M' as comparable on the basis that it was a persistently loss making company for the last 3 preceding years which was disputed by the assessee. Thus the matter is set aside to the file of the TPO to verify the correctness of the above submission of the assessee that 'M' had earned operating profit during the year and if it is found correct then it is to be included as a comparable company in determining the ALP. [Para 22]

On rejection of 'A'

■

The TPO rejected 'A' as a comparable on the basis that it was functionally different to the assessee. The TPO observed that 'A' was engaged in SAP and remote infrastructure management software applications, as against design work on embodied software, DSP and integrated circuit hardware design and systems and also for the reasons that sales of 'A' was only Rs. 6.21 crores against sales of Rs. 125 crores to the assessee. However, the TPO in the assessment year 2007-08, accepted that 'A' was a comparable in the light of identical functions. The profit and loss account of the 'A' shows break up of the sales of the company towards exports of software services, towards domestic software services and towards sale of product. Under these circumstances, there is substance in the contention of the assessee that 'A' should have been accepted as comparable to bench mark the international transaction of the assessee also because in the assessment year 2007-08, the TPO himself had accepted the company as comparable. Accordingly the TPO is directed to accept 'A' as comparable to determine the arms length price of the assessee. [Para 26]

On rejection of 'A' software and 'K'

■		The TPO rejected these two companies on the basis of applying related party transaction filter of 15 per cent. [Para 27]
■		The TPO stated that the very fact that 'A' software had related party transactions, to the extent of 17.26 per cent of the total sales, being more than 15 per cent, makes it non-comparable to the assessee in the light of the decision of the Tribunal in the case of Sony India (P.) Ltd. v. Dy. CIT[2008] 114 ITD 448 (Delhi) where upper limit of 15 per cent of related party transactions had been accepted within which limit the transactions cannot be held to be significant to annul the profitability of comparable. However, the TPO in assessment year 2007-08 had accepted 'A' software as a comparable, where the related party transactions were 22.99 per cent being less than 25 per cent and accepting the assessee's contention that receipts and payments on account of reimbursement should not be considered while computing RPT. In the year under consideration, the RPT is marginally in excess of threshold limit of 15 per cent adopted by the TPO even if receipt and payment on account of reimbursement is excluded as done in assessment year 2007-08 by the TPO. Thus it is found that RPT ratio is not so excessive so as to reject 'A' software as comparable on this account. Therefore, 'A' software is accepted as a comparable to determine ALP in the assessee's case in the year. [Para 29]
■		Regarding 'K' it is not in dispute that threshold limit of 15 per cent for RPT has been considered to be reasonable as per co-ordinate Bench of the Tribunal in the case of Sony India (P.) Ltd. (supra), which was followed. Therefore, respectfully following the order of the Co-ordinate Bench of the Tribunal in the case of Sony India (P.) Ltd. (supra), the order of the TPO in rejecting 'K' as comparable is upheld. [Para 30]

On rejection of 'V'

■		The TPO rejected 'V' as a comparable for functional incomparability. On perusal of the profit and loss account for the financial year 2005-06, it was noticed that 'V' derived more than 97 per cent of the operating revenues from the export of software services. [Para 31]
■		There is substance in the contention of the assessee that 'V' is functionally comparable to the assessee, since more than 97 per cent of the revenue is from comparable activity. The TPO is accordingly directed to take it into account for determination of ALP in the case of the assessee. [Para 32]

On rejection of 'R'

■		The TPO rejected 'R' as a comparable company on the basis that the company had negative net worth for the financial years 2003-04 to 2005-06.
■		There is substance in the contentions of the assessee that negative net worth cannot be a criteria for evaluating the current profitability of the comparable as the negative net worth is on account of huge brought forward losses of earlier years. On perusal of the profit and loss account of the Company. for the assessment year under consideration, it is found that during the year, the company exported computer software and was engaged in computer software development (domestic) and computer software maintenance. Hence, the company has more than 99 per cent of the total revenue from comparable activity of software development services. The Assessing Officer/TPO was thus not justified in rejecting 'R' as comparable. While setting aside this action of the Assessing Officer/TPO, they are directed to consider 'R' as comparable for financial year 2005-06 to determine ALP in the case of assessee. [Para 33]

On inclusion of 'AJ' and 'A - CERC'

■		On perusal of the details of fixed assets schedule of 'AJ' there is substance in the contention of the assessee that functions performed by 'AJ' were different from the function performed by the assessee, as it held substantial Intellectual Property Rights, and hence, comparability of the said company is required to be reconsidered as comparable to the assessee for financial year 2005-06 after verifying the facts and hearing the assessee in this regard. [Para 33]
■		On perusal of Annual report of 'A - CERC', there is substance in the contention of the assessee that 'A - CERC' had limited export earnings from software development activity. Therefore, it cannot be considered as comparable for financial year 2005-06. A fresh consideration on the comparability of this company is also required to be made after verification of the above submission of the assessee and after hearing the assessee in this regard. [Para 35]

Regarding working capital and risk adjustment

■

The issue regarding working capital adjustment and risk adjustment depend upon the fact and circumstances of each case. But at the same time, these factors are equally important to consider while selecting comparable companies. In the present case, the assessee was engaged in the business of software development and providing marketing services. Hence, there is no dispute that appropriate adjustment to account for difference in working capital employed by the assessee vis-a-vis the comparable companies for software development services was required to be considered. Similarly, making of suitable adjustments to account for differences in the risk profile of the assessee vis-a-vis the comparable companies for software development services was also required to be considered. These adjustments on account of working capital and risk were to be made after analyzing the case of the assessee, since it depended upon the facts of the case of the assessee. The request for such adjustments cannot be summarily rejected unless some analysis of the case of the assessee is made vis-à-vis comparable companies. Thus the matter is set aside to the file of the TPO/Assessing Officer to consider these aspects of adjustment while deciding the issue afresh vis-a-vis the comparable companies in the business of software development so that reasonably accurate adjustment, if any, can be made as per Indian Transfer Pricing Law (i.e. rule 10B (3)(iii)) on account of risk and working capital. [Para 41]

On using multi-year data

■

The provisions of rule 10B(4) are unambiguous and mandatory, particularly in view of the use of word 'shall' and not 'may'. Rule 10B(4) prescribes that the data to be maintained by the taxpayer should be contemporaneous and should exist latest by the specified date. The rule 10D(4), is thus, not directly on the issue of data to be used in comparability analysis. Even if a broader view is taken and both the Rules are read together it would simply mean that the current year's data (as per rule 10D(4)) as existing by the specified date should be used. The provisions of rule 10D(4) are applicable to the taxpayers regarding maintenance of the documents. The rule does not in any way restrict the powers of the TPO to determine ALP as per the information and documents available with him at the time of TP proceedings. Thus, as per rule 10D(4), the data pertaining to the financial year in which the international transactions are entered into by the taxpayers alone should be used for computation of mean ALP. If the earlier years data show economic circumstances in which comparable may be rejected, and if suitable adjustments can be made for the difference in economic conditions, then suitable adjustment is to be made to the price or margins earned by the comparable company. The crux of using earlier year data as per the Indian Income-tax Rules is only for the purpose of analysis like project life cycles, business cycle etc. and how the economic circumstances affected either way the taxpayer or the comparable. The OECD has laid down a clear guideline that use of multiple year data does not necessarily imply that multiple year averages be used for the purpose of benchmarking. The view of the OECD has persuasive value in the context of India, since India, is an observer member of the OECD. In this regard rule 10B(4) is absolutely clear and it provides for the use of the data for the financial year in which international transaction has taken place. What is important is to justify that the price charged by the taxpayer is at arms length. If the price charged by the taxpayer in its international transaction is at arms length, it should be justifiable even if the TPO takes the data which was not available at the time of preparation of TP documents. The issue relating to use of current year data is now well settled in view of the decision of the Special Bench of Bangalore Tribunal in the case of Aztec Software & Technology Services Ltd. v. Dy. CIT [2007] 107 ITD 141/15 SOT 49/162 Taxman 119, reaffirmed by the Delhi Bench of the Tribunal in the cases of Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 101/18 SOT 76 (Delhi) and Customer Services India (P.) Ltd. v. Asstt. CIT [2009] 30 SOT 486 (Delhi). Thus, there is no infirmity in the action of the authorities below in rejecting the claim of the assessee in the use of multiple year data for the purposes of computation of operating margins of other comparable companies. [Para 50]

CASE REVIEW

 

Soni India (P.) Ltd. v. CBDT [2007] 288 ITR 52/[2006] 157 Taxman 125 (Delhi) (para 30) followed.

CASES REFERRED TO

 

Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 101/18 SOT 76 (Delhi) (para 16), Soni India (P.) Ltd. v. CBDT [2007] 288 ITR 52/[2006] 157 Taxman 125 (Delhi) (para 16), Philips Software Centre (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 226 (Bang.) (para 41), E-Gain Communication (P.) Ltd. v. ITO [2009] 118 ITD 243/[2008] 23 SOT 385 (Pune) (para 41), Sony India (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448 (Delhi) (para 41), Schefenacker Motherson Ltd. v. ITO [2009] 123 TTJ (Delhi) 509 (para 41), Aztec Software & Technology Services Ltd. v. Dy. CIT [2007] 107 ITD 141/15 SOT 49/162 Taxman 119 (Bang.)(SB) (para 41), Customer Services India (P.) Ltd. v. Asstt. CIT [2009] 30 SOT 486 (Delhi) (para 46), Honeywell Automation India Ltd. v. Dy. CIT [I.T. Appeal No. 4(PN) of 2008, dated 10-2-2009] (para 46), Asstt. CIT v. UE Trade Corpn. (India) (P.) Ltd. [2011] 44 SOT 457/9 taxmann.com 75 (Delhi)(SB) (para 51), SAP Labs India (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 156/[2010] 8 taxmann.com 207 (Bang.) (para 51), Cummins India Ltd. v. Dy. CIT [2011] 45 SOT 78 (Pune)(URO) (para 51), Asstt. CIT v.Toshiba India (P.) Ltd. [I.T. Appeal No. 3175 (Delhi) of 2007, dated 27-11-2009] (para 51), Global Vantedge (P.) Ltd. v. Dy. CIT [2010] 37 SOT 1 (Delhi) (para 52.2), Marubeni India (P.) Ltd. v. Addl. CIT [2013] 33 taxmann.com 687 (Delhi) (para 52.2), K. Govindan & Sons v. CIT [2001] 247 ITR 192/114 Taxman 94 (SC) (para 54), CIT v. Shelly Products [2003] 261 ITR 367/129 Taxman 271 (SC) (para 54), ST Microelectronics (P.) Ltd. v. CIT [2013] 33 taxmann.com 688 (Delhi) (para 55), Electrobug Technologies Ltd. v. Asstt. CIT [2010] 37 SOT 270 (Delhi) (para 55),Asstt.CIT v. SDRC India (P.) Ltd. [IT Appeal No. 477 (Delhi) of 2006, dated 6-3-2009] (para 55), ITO v. Zydus Altana Healthcare (P.) Ltd.[2011] 44 SOT 132 (Mum.) (para 55), Tecnimount ICB (P.) Ltd. v. Asstt. CIT [2011] 11 taxmann.com 49 (Mum.) (para 55), Asstt. CIT v. MSS India (P.) Ltd. [2009] 32 SOT 132 (Pune)(URO) (para 55), IHG IT Services (India) (P.) Ltd. v. ITO [2013] 33 taxmann.com 1 (Delhi) (para 56),Piagio Vehicle (P.) Ltd. v. Dy. CIT [2012] 53 SOT 253 (URO)/26 taxmann.com 260 (Pune) (para 56), Navin Bharat Industries Ltd. v. Dy. CIT[2004] 90 ITD 1 (Mum.)(TM) (para 58), KPIT Cummins Infosystems (Bangalore) (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 529 (Bang.) (para 58),Mind Tree Consulting (P.) Ltd. v. Asstt. CIT [2006] 102 TTJ (Bang.) 691 (para 58), Honeywell International (India) (P.) Ltd. v. Dy. CIT [2008] 26 SOT 503 (Delhi) (para 58), Dy. CIT v. A.V. Thomas Leather & Allied Products Ltd. [IT Appeal No. 1021 (Mds) of 2008, dated 20-3-2009] (para 58), Scientific Atlanta India Technology (P.) Ltd. v. Asstt. CIT [2010] 38 SOT 252 (Chennai) (para 58), CIT v. Himatasingike Seide Ltd.[2006] 286 ITR 255/156 Taxman 151 (Kar.) (para 59), Asstt. CIT v. Yokogawa India Ltd. [2002] 13 SOT 470 (Bang.) (para 59), Changepond Technologies (P.) Ltd. v. Asstt. CIT [2008] 22 SOT 220 (Chennai) (para 59) and CIT v. Yogagawa India Ltd. [2012] 341 ITR 385/21 taxmann.com 154 (Kar.) (para 61).

Manoneet Dalal for the Appellant. Pyush Jain for the Respondent.

ORDER

 

I. C. Sudhir, Judicial Member - The assessee has questioned order of the authorities below on the following grounds:—

"1.		The AO /DRP has erred in confirming the order passed u/s 92CA (3) of the Act making an addition of Rs. 131,923,213/- to the total income of the Appellant on account of adjustment in the arm's length price of the international transaction entered by the Appellant with its associated enterprises during the previous year pertaining to assessment year 2006-07.
2.		The DRP has erred in concurring with findings of the AO/TPO and disregarding the economic analysis undertaken by the Appellant for establishing the arm's length price of the international transactions related to the provision of software development services without appropriate justification.
3.		The TPO/AO has erred in determining the arm's length margin/price using only financial year 2005-06 data which was not available to the Appellant at the time of complying with the Transfer Pricing document requirements. Further, the TPO has erred in using single year data pertaining to financial year 2005-06 as against multiple year data used by the Appellant.
4.		The TPO/AO has erred in law and on facts, in applying certain filters and not undertaking an objective comparative analysis for selection of comparable companies. In arriving at the arm's length price of the international transactions entered by the Appellant with its associated enterprises, the TPO and the AO have erred in rejecting certain comparables identified by the Appellant on the following factors

•		Related party transaction greater than 15% of operating revenues (as against the related party filter of 25% used by the Appellant);
•		Functional dissimilarity;
•		Consistent loss making companies; and
•		Diminishing revenues.

5.		The TPO/AO has erred in law and on facts, in adding two comparables in ascertaining arm's length price, on the basis of the transfer pricing assessment of assessment year 2005-06.
6.		The TPO/AO has erred by not making appropriate adjustments to account for differences in working capital employed by the Appellant vis-à-vis the comparable companies for software development services.
7.		The TPO/AO has erred by not making suitable adjustment to account for differences in the risk profile of the Appellant vis-à-vis the comparable companies for software development services.
8.		The TPO/AO has erred in not providing the benefit of the arm's length range as provided under proviso to Section 92C(2) of Act for the purpose of computing the arm's length price for international transactions entered into by the Appellant with its associated enterprises during the financial year 2005-06.
9.		The DRP has erred in concurring with findings of the AO in not allowing set off of losses of the Bangalore unit, which is registered under the Software Technology Parks of India scheme (STPI unit) with the profits of the Mumbai unit, which is a non-STPI unit in accordance with the provisions of the Act.
10.		The AO erred, in law, and in facts, in granting short credit for the taxes paid and tax deducted at source ('TDS') available to the Appellant while issuing demand notice for Rs. 61,569,632/-
11.		The AO has erred, in law, and in facts, in levying interest of Rs. 21,667,235/- under Section 234B of the Act.
12.		The AO has erred in law on initiation of penalty proceedings under Section 271(1) (C) of the Act."

2. We have heard and considered the argument advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.

GROUND NOS. 1 TO 8(Transfer Pricing Issue)

3. Ground Nos. 1 to 8 involve the issues regarding addition of Rs. 13,19,23,213/- to the total income of the assessee on account of adjustment in the Arm's Length Price of the international transactions entered into by the assessee with its Associated Enterprises (AE) during the previous year pertaining to the A.Y 2006-07.

4. The relevant facts are that the assessee company is engaged in the business of Software Development and providing marketing services. The assessee is a captive service provider and is engaged in the business of running Software Design and Development Services (Software Services) and business support services to its AEs. The assessee has been operating through the following units:-

(a)		Hyderabad Unit; the Software Development Services are rendered through its development Centre in Hyderabad which is registered under the Software Technology Parks (STPI) scheme of Government of India as a 100% Export Oriented Unit (EOU). The Development Centre, Hyderabad is engaged in the carrying out design, development and testing for enhancement and improvement of Qualcomm existing products and development of new products. The Development Centre at Hyderabad is engaged in providing software services to its AEs.
(b)		Mumbai & New Delhi Units; the assessee renders business support services to its associated enterprises through these units i.e. Mumbai & New Delhi.
(c)		Bangalore Unit; pursuant to the merger of Qualcomm Bangalore Design Centre Private Limited and Spike Technologies India Private Limited with the assessee w.e.f 1st April, 2005, the assessee also has a STPI Unit in Bangalore. It is engaged inn providing software services to its AEs. The Bangalore Unit is involved in the Design & Development of CDMA chipsets using advanced technology and processors in accomplishing these tasks.

5. During the relevant period, the assessee had international transactions with its AEs, namely Qualcomm Global Trading Inc & Qualcomm Incorporated. These international transactions with AEs are as under:-

Sr. No.	Nature of transaction	Amount in Rs.
1.	Provision of software services through its Hyderabad Unit	70,59,53,567/-
2.	Provision of software services through its Bangalore unit	54,41,46,469/-
3.	Provision of business support services through its Mumbai and New Delhi unit	19,61,93,628/-

6. During the year, the assessee filed its return of income for the assessment year under consideration on 29/11/2006 declaring "NIL" income under the normal provisions and a book profit of Rs. 1,23,26,782/- u/s 115JB of the Act. Subsequently, pursuant to the scheme of amalgamation approved by the Hon'ble High Courts of Delhi and Karnataka, the two companies namely:—

(i)		Qualcomm Bag Design Centre Pvt Ltd. &
(ii)		Spike Technologies India Pvt. Ltd. got merged with the assessee company. As the merger was made effective from 1/4/2005, the assessee company filed revised return of income on 14/3/2008 declaring total income at Rs. 3,30,694/-. The return was initially processed u/s 143(1) of the Act. Thereafter assessee's case was selected for scrutiny and a notice to this effect u/s 143(2) of the Act was issued and served upon the assessee. In compliance to various notices, the assessee appeared and filed various replies and documents before the AO. The A.O after discussing the matter with the Authorized Representative of the assessee ultimately framed the assessment u/s 143(3)/144 C of the Act vide order dated 20/10/2010 determining assessee's total income at Rs. 12,02,79,306/-.

7. For the purpose of determining the Arms Length Price (ALP) of its international transactions with its AEs, the assessee had undertaken a Transfer Pricing (TP) study. Based on the TP study, the assessee claimed that the price received by the assessee in respect of its international transaction with its AEs is at arms length. In the TP study, the assessee was selected as the tested party and Transaction Net Margin Method (TNMM) was applied as the most appropriate method to determine the ALP. The assessee used available data updated till 25th August 2006, to select comparable companies. It was the assessee's case that as financial data for the F.Y 2005-06 was not available in all comparable cases, the assessee considered financial data of F.Y 2003-04 along with the data for F.Y 2004-05, wherever available. The assessee selected 36 comparables for the software services with weighted average operating profit/operating cost of 12.06%. The A.O referred the matter u/s 92CA (1) of the Act to the Transfer Pricing Officer (TPO) for determination of ALP of the international transactions entered by the assessee with its AEs.

8. The Ld. TPO examined the transfer pricing study submitted by the assessee. However, he did not concur with the analysis undertaken by the assessee. The Ld. TPO was of the view that in determining arms length price of international transaction of the assessee, the financial information of comparable companies pertaining to the current financial year 2005-06 should be used, since it is contemporacious as in accordance with the requirements under Rule 10B(4) of the Rules. The Ld. TPO also rejected certain comparable companies identified by the assessee on the following factors:

(i)		Functional dissimilarities.
(ii)		Related party transaction greater than 15% of operating revenues.
(iii)		Consistent loss making companies, &
(iv)		On account of diminishing revenues.

9. The Ld. TPO also identified new comparables for determining ALP. In the light of fresh economic analysis and identifying certain comparable companies, the Ld. TPO computed the average net margin at 12.63% of operating cost as against 9.12% as computed by the assessee. Accordingly, the ALP in respect of software design and development services rendered by the assessee were re-determined by the Ld. TPO at Rs. 1,38,20,25,471/- as against Rs. 1,25,01,02,257/- determined by the assessee. The Ld. TPO thus, made an addition of Rs. 13,19,23,214/- to the international price declared by the assessee in respect of it international transactions with its associate enterprise in respect of software design and development services. Relying on the TPO order, the A.O determined the ALP of the international transaction of the assessee at greater value than the ALP determined by the assessee, resulting in an addition of Rs. 13,19,23,214/-.

10. The A.O then made a draft assessment, a copy of which was given to the assessee. The assessee filed objection against ALP determined by the AO/TPO before the Ld. DRP. After considering the assessee's objection, TPO's order and other materials on record the Ld. DRP held as under:-

(i)		That the Ld. TPO has rejected various comparables identified by the assessee after detailed discussion in Para No-7 on Page 10 to 15 of his order and in fact, the TPO has also accepted assessee's submission and not included certain comparables in the financial analysis.
(ii)		That the Ld. TPO has rejected the comparables identified by the assessee after applying various filter such as:

(a)		persisting loss making company
(b)		comparables having related party transaction above 15%
(c)		functional dissimilarity and
(d)		declined in sales etc.

11. In the light of the view taken by the Ld. DRP and the detailed reasoning given by the TPO in para Nos. 5, 6 & 7 of his order, the Ld. DRP did not find any reason to interfere with the order of the TPO/AO.

12. The next objection of the assessee to the TPO's approach and in using the data which was not available to the assessee at the time of conducting the transfer pricing study by the assessee, was also rejected by the Ld. DRP.

13. The Ld. DRP also rejected the assessee's objection in not allowing benefit of +/- 5 % while determining the ALP.

14. The Ld. DRP also rejected the assessee's claim to use Multiple Year Data for the purpose of computing operating margins and comparable companies. The Ld. DRP upheld the order of the TPO in selecting the current years data only.

15. In the light of the order of the Ld. DRP, the AO then passed final order by making addition of Rs. 13,19,23,215/- on account of ALP in respect of transactions of software development segment entered into by the assessee with its associate enterprise. This action of the authorities below has been questioned by the assessee on the above grounds of its appeal before the Tribunal.

16. In support of the grounds, the Ld. A.R submitted that the compatibility analysis undertaken by the assessee was based on well accepted TP principle and in absence of any information to the contrary, it was inappropriate to reject the comparability analysis which was undertaken by the assessee in accordance with the provisions of the Act read with Rules. He submitted that as per Circular No. 14 of 2001 of the CBDT read with Section 92C (3), the primary onus is on the tax payer to determine ALP in accordance with Rules and to substantiate the sale with the prescribed documentation. Where such onus is discharged by the assessee and the data used for determining the Arm's Length Price is reliable and correct, there can be no intervention by the Assessing Officer. In support, he placed reliance on the decision of Delhi Bench of the Tribunal in the case of Mentor Graphics (Noida) (P.) Ltd. v.Dy. CIT [2007] 109 ITD 101/18 SOT 76. He referred further the CBDT Circular No. 12 dated 23rd August 2001 expressing the similar view. The Ld. A.R submitted further that in the case of Soni India (P.) Ltd. v. CBDT [2007] 288 ITR 52/[2006] 157 Taxman 125 (Delhi) it has been held that acceptance of Arm's Length Price declared by the assessee is the rule and its rejection is the exception posited on the presence of the factors enumerated in Clause (a) to (d) of Section 92C (3) of the Act. The Ld. A.R accordingly submitted that the Ld. T.P.O should have accepted the assessee's analysis since it was in accordance with law and it was undertaken by an external agency. Thus, the Ld. A.O/T.P.O had no reason nor have they recorded reasons to belief that the transactions were not at the Arm's Length.

17. On the issue of use of single year data pertaining to financial year 2005-06 as against multiple year data used by the assessee, the Ld. A.R referred provisions laid down under Rule 10B (4) to support his contention that data relating to period not being more than 2 years prior to such financial year may also be considered if such data reveals facts which could have an inference on the determination of the transfer prices in relation to the transactions being compared. He submitted further that by press note dated 22/8/2001, tax payers have been allowed the use of multiple year data pertaining to comparable transactions in determining the Arm's Length Price. The Ld. A.R submitted further that Rule 10D (4) provides that transfer pricing documentation, as far as possible, be contemporaneous and should exceed latest by the due date for filing of income tax return. Thus, it is obvious that all the companies do not publish the financial results by the due date and hence use of financial data only for the financial year 2005-06 was practically not possible. In such circumstances use of multiple year and contemporaneous data available by the prescribed date should have been allowed.

18. On the issue of application of certain filters raised in Ground No.4 of the appeal, the Ld. A.R submitted that the Ld. T.P.O has rejected certain comparables identified by the assessee on the factors that related party transaction is greater than 15% of operating revenues, there was functional dissimilarity, consistent loss making companies were there and they were having diminishing revenues.

19. We thus proceed to decide whether comparables selected by the assessee vis a vis the TPO are proper and justified to benchmark the international transactions entered into by the assessee with its AEs during the relevant period. In this case, the assessee initially selected a set of 36 comparables in its TP study reports. However, before us, it was submitted by the assessee that 20 comparables out of 36 comparables were rightly excluded for consideration. IT was submitted that it was accepted by both the assessee and the TPO that 20 comparables identified by both the parties are not to be considered to benchmark the international transactions in question. This leaves 16 comparables for consideration. Out of remaining 16 comparables selected by the assessee, the TPO has accepted 10 comparables and rejected the balance 6 comparables on one reason or the other. The Ld. AR has submitted that the TPO was not justified in rejecting the following 6 comparables :—

		A. Melstar Information Technology Ltd. (Melstar)
		B. Akshay Software Ltd. (Akshay Software)
		C. Aztec Software Pvt. Ltd. (Aztec)
		D. KPIT Cummins invoke systems Ltd. (KPIT)
		E. VJIL Consulting Ltd. & (VJIL)
		F. R.S. Software (India) Ltd. (R.S. Software)

Melstar Information Technology Ltd.

20. Regarding loss making companies, the Ld. A.R submitted that the Ld. T.P.O has rejected Melstar Information Technology Ltd. as Comparable Company on the basis that the Company is persistent loss making company. He submitted that the companies incurring operating losses for at last 3 preceding years are considered as persistently loss making and, therefore, have not been considered as comparable for the purpose of TP by the assessee. The Ld. A.R submitted that final set of comparables does not include persistent loss making companies and hence there is no requirement of any rejection of any comparable. He pointed out that for the financial year 2004-05, Melstar has incurred operating loss whereas for F.Y 2005-06 it has reported operating profit. The fact that the company had profits during F.Y 2005-06 is evident from the profit and loss account of the company made available at Page No. 89 of the paper book volume-2.

21. Ld. D.R on the other hand tried to justify the action of the Ld. T.P.O in rejecting the Melstar as a comparable company since it was having persistent loss. He submitted that before the Ld. DRP the assessee has not raised objection on deepening loss of the comparables.

22. Considering the above submissions, we find substance in the contention of the Ld. A.R that only because in the F.Y 2004-05 Melstar had incurred operating loss, it cannot be held that the company was having persistent loss specially even it has reported operating profit in F.Y 2005-06. The T.P.O has rejected Melstar as comparable on the basis that it was persistently a loss making company for the last 3 preceding years which has been disputed by the Ld. AR before us. We thus set aside the matter to the file of the Ld. TPO to verify the correctness of the above submission of the assessee that Melstar had earned operating profit during the year and if it is found correct then include it as a comparable company in determining the A.L.P. The same is thus rejected as comparable.

B. Akshay Software Ltd. (Akshay Software).

23. In its show cause notice, the Ld. T.P.O proposed to reject Akshay Software on the basis of applying related party transaction filter of 15%. In its order the Ld. T.P.O has however, rejected the company on the basis of functional dissimilarity.

24. The contention of the Ld. A.R remained that the Ld. T.P.O has rejected the company on the basis of functional dissimilarity without providing any opportunity of being heard to the assessee. He submitted that the Akshay Software is also engaged in Software services with miniscule revenue from sale of products. He referred Page No. 90 of the paper book volume 2 i.e. profit and loss account of the company in support. The Ld. A.R submitted that Akshay Software is functionally comparable to the assessee and has to be considered as comparable. He pointed out that Ld. T.P.O himself in the assessment year 2007-08 has accepted Akshay Software as comparable in the light of identical functions.

25. The Ld. D.R on the other hand tried to justify the action of the Ld. T.P.O in rejecting Akshay Software as comparable. He submitted that the company is functionally different to the assessee. It is engaged in SAP and remote infrastructure management (RIM) software applications while the assessee is into design work on embedded software, DSP and integrated circuit hardware design and systems.

26. On perusal of the order of the Ld. T.P.O, we find that the Ld. T.P.O has rejected Akshay Software as a comparable to the assessee for determining the assessee's ALP on the basis that the Akshay Software is functionally different to the assessee. He has observed that Akshay Software is engaged in SAP and remote infrastructure management software applications, as against design work on embodied software, DSP an integrated circuit hardware design and systems and also for the reasons that sales of Akshay Software is only Rs. 6.21 crores against sales of Rs. 125 crores to the assessee. We, however, find that the Ld. T.P.O in the assessment year 2007-08 as it is clear from the TPO order for the said assessment year made available at Page No-69 of the paper book volume 3, has accepted that Akshay Software is comparable in the light of identical functions. On perusal of profit and loss account of the Akshay Software, we find that schedule-12 of it shows break up of the sales of the company as Rs. 4,97,88,191 towards exports of Software services, Rs. 1,17,29,263/- towards domestic software services and Rs. 6,30,000/- towards sale of product. Under these circumstances, we find substance in the contention of the Ld. A.R that Akshay Software should have been accepted as comparable to bench mark the international transaction of the assessee also because in the assessment year 2007-08, the Ld. T.P.O himself has accepted the company as comparable. We accordingly direct the Ld. T.P.O to accept Akshay Software as comparable to determine the Arms Length Price of the assessee.

C. Aztec Software Pvt. Ltd. & D. K.P.I.T Cummins Invoke Systems Ltd (Kpt).

27. The Ld. T.P.O has rejected these two companies on the basis of applying related party transaction filter of 15% in view of decision of the Tribunal, Delhi Bench in the case of Soni India (P.) Ltd. (supra). The contention of the Ld. A.R remained that the application of 'Nil' related party transaction filter may curtail the sample size of the comparables and this may not give a substantial and fair base for computation of ALP. The Act does not provide specifically as to what percentage of related party transactions have material effect on the overall margins. However, some guidance may be taken from the definition of A.E in Section 92A (2) (a) of the Act, wherein it is prescribed that one enterprise holding 26% shares in other enterprise can be considered as an A.E. He submitted that as the provisions of Section 92A (2) (a) are from the TP Chapter itself, a limit of 25% may be considered more reasonable to be applied on the threshold for the related party transactions. The threshold of 25% is also recognized statistically as being a threshold for removal of extreme in the calculations of statistically disbursal. It was submitted that interquartile range (IQR) is a widely employed statistical tool that incorporates the distance between the first and 3rd quartiles IQR is not affected by outliers or extreme values and incorporations 25% as the breakeven point. It was submitted that even as per OEC guidelines, it is accentuated that large number of similar entities should be taken to make comparison broad based. Accordingly, companies having related party transactions in access of 25% have been rejected as being comparable. The Ld. AR submitted that the decision of the Tribunal in the case of Soni India (P.) Ltd. (supra) is not helpful to the revenue in the present case since ruling of the Tribunal are fact specific, hence cannot be applied to the case of the assessee. The term "significant" may vary from company to company and from industry to industry especially in the present case as the software industry is widely different from the functioning and characteristics as regards risk, assts and functions when compared to a manufacturing industry. He pointed out that the Ld. TPO for the A.Y 2005-06 had proposed to reject certain comparables on the basis of considerable related party transaction. Against which the assessee had made detailed submission regarding the use of the related party transaction filter of 25% on 8/7/2008 and the same was accepted by the Ld. T.P.O. He submitted further that the Ld. T.P.O even for the A.Y 2007-08 had issued a notice to show cause why the related party transaction filter of 15% cannot be used. The assessee made detail submission in this regard on 27/8/2010 and the same was accepted by the Ld. T.P.O. In view of these submissions the Ld. A.R requested that the A.O/ T.P.O may be directed to re-work the ALP by selecting companies having transactions with related parties up to 25%.

28. The Ld. D.R on the other hand placed reliance on the orders of the authorities below and cited decision of the Delhi Bench of the Tribunal in the case of Sony India (P.) Ltd. (supra) in support that the comparables having related party transactions more than 15% makes them not comparable to the assessee.

29. Having gone through the orders of the authorities below, we find that regarding the assessee's claim to accept Aztec Software as comparable, the Ld. T.P.O has stated that the very fact that Aztec Software has related party transactions to the extent of 17.26 % of the total sales being more than 15% makes it non-comparable to the assessee in the light of the decision of the Tribunal in the case of Soni India (P.) Ltd. (supra) where upper limit of 15% of related party transactions has been accepted within which limit the transactions cannot be held to be significant to annul the profitability of comparable. However, the Ld. T.P.O in A.Y 2007-08 has accepted Aztec Software as comparable, where the related party transactions are 22.99% being less than 25% and accepting the assessee's contention that receipts and payments on account of reimbursement should not be considered while computing RPT. In the year under consideration, the RPT is marginally in access of the threshold limit of 15% adopted by the T.P.O even if receipt and payment on account of reimbursement is excluded as done in A.Y 2007-08 by the Ld. T.P.O. We thus find that RPT ratio is not excessive so as to reject the Aztec Software as comparable on this account. We, therefore, accept Aztec Software as comparable to determine ALP in the assessee's case in the year. The A.O/TPO is accordingly directed to accept Aztec Software as comparable for determination of ALP in the case of the assessee for the year.

30. So far as KPIT is concerned, the Ld. TPO has rejected it as comparable for the reason that it has related party transactions more than 15% in view of the decision of the Tribunal in the case of Soni India (P.) Ltd. (supra). During the course of hearing, it was admitted by the Ld. Counsel for the assessee that RPT are more than 15% but he has submitted that the threshold limit of 25% is more reasonable to be applied for the related party transactions. He submitted further that decision of the Tribunal in the case of Soni India (P.) Ltd. (supra) cannot be applied as there the issue has not been discussed in detail keeping in view the various angles/factors in the said decision. We find that it is not in dispute that threshold limit of 15% for RPT has been considered to be reasonable as per Co-ordinate Bench of the Tribunal in the case of Soni India (P.) Ltd. (supra), which is to be followed. We, therefore, respectfully following the order of the Co-ordinate Bench of the Tribunal in the case of Soni India (P.) Ltd. (supra) uphold the order of the TPO in rejecting KPIT as comparable.

E. Vjil Consulting Ltd. (VJIL)

31. The action of the Ld. TPO in rejecting VJIL has been objected by the assessee. The Ld. A.R submitted that VJIL is functionally comparable to the assessee and has to be considered as such while determining the ALP. He submitted that VJIL is an I.T Consulting Software Development and Outsourcing Services Provider Headquartered in India. The Company is engaged in development of applications and systems software, student training. However, on perusal of the profit and loss account for the financial year 2005-06 it was noticed that VJIL has derived more than 97% of the operating revenues from the export of software services. It is evident from the management discussion and analysis and profit and loss account of the company. It was submitted that during the asstt. year 2006-07 the sales of the company is Rs. 15.38 crores and revenue from exports of software is Rs. 14.94 crores and balance of Rs. 43.91 lakhs appears to be from training and domestic operations. In support the Ld. AR referred Page Nos. 18 and 42 of paper book No. III. (i.e. the annual report of the company for the asstt. year 2006-07).

32. Considering the above submissions we find substance in the contention of the Ld. AR that VJIL is functionally comparable to the assessee since more than 97% of the revenue is from comparable activity. We accordingly direct the A.O/T.P.O to take it into account for determination of ALP in the case of the assessee.

F. R.S. Software(India) Ltd. (R.S. Software)

33. The Ld. T.P.O. rejected R.S. Software as a comparable company on the basis that the company has negative net worth for the financial years 2003- 04 to 2005-06. The Ld. A.R. submitted that for financial year 2005-06, R.S. Software (India) had reported an operating profit from computer software development services, especially maintenance activities hence is functionally similar to the assessee. The same is evident from the profit and loss account of the company made available at Page No. 95 of the paper book volume (ii). It was submitted further that negative net worth cannot be a criteria for evaluating the current profitability of the comparable as the negative net worth is on account of brought forward losses of earlier years, which are not relevant for the purpose of comparison. The adoption of negative net worth criteria for rejection of functionally comparable companies is not acceptable as it would be unjust and uncalled for. Based on the provisions of the Income Tax Rule 1962, comparables for the Provision of Software services would have to be companies which provide same or similar services as the assessee and are comparable in terms of functions performed risk assumed and assets utilized. Hence for the purpose of determining the comparables, the assessee had considered functions performed, risk assumed and assets utilized for the international transaction and has not and cannot be considered the debit balance of profit and loss account which is on account of brought forward losses of earlier years as a criteria for rejection. He submitted further that the company having more than 99% of the total revenue from comparable activity of software development services. The Ld. DR on the contrary reiterated the observations made by the Ld. TPO about the company. We find substance in the above contentions of the Ld. AR that negative net worth cannot be a criteria for evaluating the current profitability of the comparable as the negative net worth is on account of huge brought forward losses of earlier years. On perusal of the profit and loss account of the Co. for the asstt. year under consideration, we find that during the year the company has made exports of computer software development with Rs. 87,31,45,219/-computer software development (domestic) worth Rs. 4,11,26,112/- and from computer software maintenance and others at Rs. 14,35,833/-. Hence we find that the company has more than 99% of the total revenue from comparable activity of software development services. The Ld. A.O/TPO was thus not justified in rejecting R.S. Software as comparable. While setting aside this action of the A.O/T.P.O we direct them to consider R.S. Software as comparable for F.Y. 2005-06 to determine ALP in the case of assessee.

34. Besides above, the Ld. A.R has also objected the addition of two comparables in ascertaining ALP on the basis of the transfer pricing assessment for the F.Y 2005-06. These comparables are Aftek Infosis Ltd (Aftek Infosis) and Asian CERC Information Technology Ltd (Segmental) (Asian CERC). The Ld. A.R submitted that for the F.Ys. 2003-04, 2004-05 and 2005-06 the functions performed by Aftek Infosis were different from the function performed by the assessee for the F.Ys 2003-04, 2004-05 and 2005- 06. Aftek Infosis Ltd holds substantial Intellectual Property Rights (IPR), indicating product focused operations. In support, he referred page no. 96 of the paper book -ii i.e. copy of the fixed asset schedule of annual report for F.Ys 2004-05 & 2005-06 of Aftek Infosis. The Ld. A.O/T.P.O was thus not justified in considering Aftek Infosis as comparable for F.Y 2005-06. The Ld. DR on the other hand tried to justify the action of Ld. TPO.

35. On perusal of the details of fixed assets schedule of Aftek we prima facie find substance in the contention of the Ld. A.R that functions performed by Aftek Infosis were different from the function performed by the assessee, hence comparability of the said company is required to be reconsidered as comparable to the assessee for F.Y 2005-06 by the Ld. TPO after verifying the above facts and hearing the assessee in this regard. It is ordered accordingly.

36. Regarding Asian CERC, the Ld. A.R submitted that in the F.Ys 2003-04 & 2004-05 the company had limited export earnings from software development activity, which is evident from the annual report of the company made available at page no. 97 of the paper book-ii. On the other hand 100% of the assessee's revenue is earned from exporting income. Since there is a complete difference in the selling segment of both the companies, the degree of risk (e.g. "foreign exchange gain/loss)" and function performed by both the companies would also be different, submitted the Ld. A.R. The Ld. DR however tried to justify the order of the Ld. TPO.

37. On perusal of Annual report for the year of the company we prima facie find substance in the contention of the Ld. A.R that based on the aforesaid reasons Asian CERC cannot be considered as comparable for F.Y 2005-06. We are thus of the view that a fresh consideration on the comparability of this company is also required to be made after verification of the above submission of the Ld. AR and after haring the assessee in this regard.

38. In view of the above findings on the said comparables selected by the parties, we direct the Ld. A.O/T.P.O to rework the ALP of the assessee after affording opportunity of being heard to the assessee in this regard.

39. In Ground Nos. 6 & 7, the appellant has questioned the action of the Ld. TPO/AO in not making a proper adjustment to account for differences in working capital employed by the assessee vis-à-vis the comparable companies for software development services and by not making suitable adjustment to account for differences in the risk profile of the assessee vis-à-vis the comparable companies for software development services.

40. On the issue of risk adjustment should also be analysed while comparing the case of the assessee with comparable companies, the Ld. AR referred Rule 10B (1) (e), Rule 10B (1)(e)(iii) of the I.T. Rules 1962. He submitted that Rule 10 B (1)(e) defines the "TNMM" whereas Rule 10B(1)(e)(iii) provides that an adjustment should be made to the profit margins of independent comparable companies to take into account the differences in functions and risks. International commentary on TP also recognize adjustments which must be made to account for differences between controlled and uncontrolled situations that would significantly affect the price charged or return required by independent enterprises. Therefore in no event can unadjusted industry average returns themselves establish arm's length conditions. He submitted that one of the principal elements for TP purposes is the analysis of risks assumed by the respective parties. In the open market in theory, the assumption of increased risk is normally compensated by an increase in the expected return. Accordingly controlled and uncontrolled transactions are comparables only when adjustments with respect to significant differences between them in the risks assumed is made. The Ld. AR submitted that it has been mentioned by the assessee in its TP report that it functions under a limited risk environment with most of the risk being assumed by its AEs. The comparables selected for the analysis include companies, which have fairly diversified areas of specialization perform additional functions viz. marketing etc. and bear more risk occurring to any third party independent service provider. In view of limited functions performed and limited risks borne by the assessee it can be characterized as a contract service provider operating in a "risk mitigated environment" viz a viz the comparable companies who perform "entrepreneurial risk taking functions" and therefore bear "entrepreneurial risks". He submitted that it is an established theory that rewards follow risks and therefore companies that bear entrepreneurial risks" are rewarded with more profits for the additional risks borne by them. In this regard he referred page nos. 145 to 148 of the paper book volume I for summary of the key risks identified by the assessee which are borne by the comparables companies vis-a-vis the assessee who is insulated from these risks. He submitted further that the assessee bears lesser business risk than independent comparable companies due to the nature of its revenue model. It is guaranteed profits by way of a mark-up on costs incurred regardless of its success or failure. The assessee has been providing services to its AE over the years and has been growing year on year and making profits, irrespective of the performance of IT industry in India. He submitted that while the assessee does not bear any risk of incurring losses due to under utilization of capacity or insufficient business from its AEs as it is compensated on cost basis, the independent companies have to bear the vagaries of the economic and business factors that are prevailing in the industry and thus would incur losses or earn profits based on market conditions.

41. On the issue of working capital adjustment to accounts for difference in working capital employed by the assessee vis a vis. the comparables companies, the contention of the Ld. AR remained that appropriate adjustment is required to be made to factor the difference in the working capital employed to improve the reliability of the results. He submitted that the adjustment ensure that the absolute level of the relevant balance sheet items are normalized by measuring them against the total cost. He submitted that the working capital adjustment is the most common adjustment applied world wide by tax payers and by several business commentators. Asset intensity or balance sheet adjustments are intended to account for the fact that the amount of capital used in a business affect its economic profit. It was pointed out that the assessee vide its submissions dated 27.7.2009 and 11.8.2009 had furnished the workings of the risk adjustment and working capital adjustment with detailed workings. He submitted that in the TP documentation maintained by the assessee, no risk adjustment was warranted since as per the comparables selected the international transactions were within arm's length range. Further, the request of the assessee for the risk adjustments, if warranted, during the assessment was rejected. Therefore, from a TP perspective it would be necessary to make adjustments for the risk like entrepreneurial risk, business risk and working capital risk by the comparable companies vis-à-vis the assessee so as to make the comparison between the margins earned by the comparable companies and the assessee. As a consequence the margin earned by the assessee would be comparatively lower or reflect the lower level of functions and risk. The Ld. AR also pointed out that in the subsequent asstt. year, the Ld. DRP has granted working capital adjustment. He placed reliance on the following decisions wherein it has been held that adjustments (including working capital adjustment) need to be made to the margins of the comparables to eliminate difference on account of different functions, assets and risks :

1.		Philips Software Centre (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 226 (Bang.)
2.		Mentor Graphics (Noida) (P.) Ltd. (supra)
3.		E-Gain Communication (P.) Ltd. v. ITO [2009] 118 ITD 243/[2008] 23 SOT 385 (Pune)
4.		Sony India (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448 (Delhi)
5.		Schefenacker Motherson Ltd. v. ITO [2009] 123 TTJ 509 (Delhi)

42. Ld. DR on the other hand tried to justify the orders of the authorities below on the issues of making of suitable adjustment to account for difference in the risk profile and for making of appropriate adjustment to account for differences in working capital employed by the assessee vis-a-vis the comparables companies for software development services. He submitted that the Ld. TPO has denied these claimed adjustment by the assessee after discussing these issues in detail. The Ld. DR submitted that interest as operating cost has been considered or not, is not clear. He contended that initially no such claims on account of risk and working capital adjustments were made by the assessee before the Ld. TPO. He submitted further that the decisions relied upon are having distinguishable facts are not helpful to the assessee on the issues.

43. Considering the above submissions we concur with the submission of the Ld. DR that the issue raised in ground No. 6 & 7 on account of working capital adjustment and risk adjustment depend upon the fact and circumstances of each case. But at the same time we are of the view that these factors are equally important to consider while selecting comparable companies. In the present case the assessee is engaged in the business of software development and providing marketing services, hence there is no dispute that appropriate adjustment to account for difference in working capital employed by the assessee vis. a vis. the comparable companies for software development services is required to be considered. Similarly making of suitable adjustments to account for differences in the risk profile of the assessee vis. a vis. the comparable companies for software development services is also required to be considered. Of course these adjustments on account of working capital and risk is to be made after analyzing the case of the assessee since it depends upon the facts of the case of the assessee. The request for such adjustments cannot be summarily rejected unless some analysis of the case of the assessee is made vis-a-vis comparables companies. We thus set aside the matter to the file of the Ld. TOP/AO to consider these aspect of adjustment while deciding the issue afresh vis-a-vis the comparable companies in the business of software development as discussed hereinabove in the present order of the Tribunal. It is needless to mention over here that while considering these aspects opportunity would be given to the assessee to present its case in this regard. The assessee is required to cooperate with the Ld. TPO in furnishing the details, break up, datas, etc. or any other necessary information to the satisfaction of the TPO so that reasonably accurate adjustment, if any, can be made as per Indian Transfer Pricing Law (i.e. Rule 10B (3)(iii)) on account of risk and working capital. Ground No. 6 & 7 are thus allowed for statistical purposes.

Ground No. 3

44. In the present case assessee has objected the rejection of the claim of the assessee in the use of multiple year data for the purposes of computation of operating margins of other comparable companies. This issue has been raised in ground No. 3 of the appeal.

45. In support of the grounds Ld. AR submitted that the provisions laid down under Rule 10B(4) of the I.T. Rules makes it clear that the data to be used in analyzing the comparability of an uncontrolled transaction as international transaction shall be the data relating to the financial year in which the international transaction has been entered into, provided that data relating to a period not being not more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of the transfer prices in relation to the transactions being compared. He submitted further that the fresh Government note dated 22.8.2001 provides that the tax payers have been allowed the use of multiple year data pertaining to comparable transactions in determining the arm's length price. Rule 10B (4) provides that transfer pricing documentation should, as far as possible, be contemporaneous and should exist latest by the due date for filing of income tax return i.e. 3.10.2006 for the financial year 2005-06. Thus it is obvious that all the companies do not publish the financial results by the due date and hence the use of financial data only for the financial year 2005-06 is practically not possible. Ld. AR accordingly tried to justify the use of multiple year and contemporaneous data available by the prescribed date to be allowed.

46. Ld. DR on the other hand tried to justify the use of current year data. He submitted that in the Rule 10B(4) the use of word "shall" implies that neither the tax payer nor the department had any choice regarding the use of relevant financial year data. The proviso to Rule 10B (4) says further that earlier period data may also be considered only if such earlier year data reveals certain facts which have an influence on the determination of transfer pricing in relation to the transactions being compared. This proviso does not say that earlier data may be considered in exclusion of current year's data. Hence when either the tax payer or the department takes earlier period's data, onus is on the taxpayer or department respectively to prove how the earlier year conditions have an influence on the profit of the relevant financial year. He pointed out that in the present case the tax payer has not given any details as to how earlier years data has an impact on the profits of the current financial year 2005-06 of the tax payer or that of the comparables and even if there is such an effect it has to be pointed out and adjustment has to be made to the profit margins of either the taxpayer or comparables in whose case or cases such effect is there and not the weighted or other average of three years profit margins. He submitted that objection of the taxpayer that as per rule 10D(4) data available latest by the date of filing of return can be used is misconceived. Use of current year data has provided in Rule 10B(4) is in not in contradiction with Rule 10D(4) which provides for the maintenance of contemporaneous documentation. Rule 10D(1) outlines the documents to be maintained by the taxpayer. As far the comparability analysis is concerned Rule 10B(4) is the relevant rule which prescribes that the 'data to be used in analyzing the comparability of an uncontrolled transaction shall be the data to be used in analyzing the comparability of an uncontrolled transactions shall be the date relating to the financial year in which international transaction has been entered into . Thus the only restriction on use of data in comparability analysis is that the data should pertain to the same financial year. He submitted further that under section 92D (1) of the Act, every person entering into an international transaction is required to keep and maintain such information and document in respect thereof as may be prescribed. Rule 10D(1) of the Rules, requires maintenance of a record of the analysis performed to evaluate comparability as well as a record of the analysis performed to evaluate comparability as well as a record of the actual working carried out for determining the ALP. Rule 10D(4) of the Rules, requires that the information and documentation to be maintained under Rule 10D(4) should be contemporaneous as far as possible and should exist latest by the due date of filing of the income-tax return. The Ld. DR submitted that the requirement of existence of information and documentation by the due date of filing of return does not override the provisions of Rule 10B(4) of the Rules regarding mandatory use of current financial year data for conducting comparability analysis. He submitted that Rule 10D(4) of the Rules suggests regarding mandatory use of current year financial year data for conducting comparability analysis. He submitted that Rule 10D(4) only speaks of documentation to be maintained by the taxpayer and mandates that such documentation should be ready latest by the prescribed date of filing of return of income. If such documentation is not maintained, the tax payer is liable for penalty . Thus rule cannot be cited in support of use of earlier year data for computation of ALP as Rule 10D(4) deals with maintenance of documentation and not comparability analysis which is governed by a specific provision namely Rule 10B(4). The TPO not only has the power but is also duty bound to determine ALP by using the current financial year data in the comparability analysis, even if such data was not available to the tax payer in the public database at the time of preparation of the TP Report. In support he placed reliance on the following decisions :-

1.		Aztec Software & Technology Services Ltd. v. Dy. CIT [2007] 107 ITD 141/15 SOT 49/162 Taxman 119 (Bang.)(SB)
2.		Mentor Graphics (Noida) (P.) Ltd. (supra)
3.		Customer Services India (P.) Ltd. v. Asstt. CIT [2009] 30 SOT 486 (Delhi)
4.		Honeywell Automation India Ltd. v. Dy. CIT [I.T. Appeal No. 4 (PN) of 2008, dated 10-2-2009].

47. The Ld. DR submitted further that the OECD guidelines also do not support the use of earlier year data as a statistical in the actual arithmetical computation of arm's length price. Such multiple year data could be used merely when such data explains certain trends in the current year. In support he referred para Nos. 1.49 and 1.50 of OECD guidelines 1995. He pointed out that these paragraphs have been renumbered as paras 3.76 and 3.77 in the revised chapter I-III as published by the OECD on 22.7.2010.

48. On the issue of non availability of current year data at the time of TP documentation, the Ld. DR submitted that the taxpayer has simply presumed certain facts without giving adequate supporting evidence. The taxpayer has produced no proof to show that the prowess or the capital line data basis do not upload the current year's company results before the expiry date. Also no evidence has been furnished by the taxpayer to show that it has made efforts to access the current year data either on data base. He should have looked for the availability of data from other sources also like accounts made available to the shareholders, stock exchange, registrar of the companies etc. Many of these companies have their own websites which the taxpayer could have accessed. Even quarter to quarter results are being published by many of these companies. The companies cannot be rejected as comparables merely because of his claim that the data was not uploaded by the data basis.

49. In the rejoinder the Ld. AR with assistance of some data tried to indicate the impact on the margin of the comparable companies considering various combinations of the comparable companies.

50. Considering the above submission we find that the provisions of Rule 10B (4) are unambiguous and mandatory particularly in view of the use of word 'shall' and not 'may'. Rule 10B(4) prescribes that the data to be maintained by the taxpayer should be contemporaneous and should exist latest by the specified date. The Rule 10D(4) is thus not directly on the issue of data to be used in comparability analysis. Even if a broader view is taken and both the Rules are read together it would simply mean that the current year's data (as per Rule 10(4) as existing by the specified date (Rule 10D(4) should be used. The provisions of Rule 10D (4) are applicable to the taxpayers regarding maintenance of the documents. The rule does not in any way restrict the powers of the TPO to determine ALP as per the information and documents available with him at the time of TP proceedings. Thus as per Rule 10D (4), the data pertaining to the financial year in which the international transactions are entered into by the taxpayers alone should be used for computation of mean ALP. If the earlier years data show that the economic circumstances in which comparable may be rejected and if suitable adjustments can be made for the difference in economic conditions, then suitable adjustment is to be made to the price or margins earned by the comparable company. The crux of using earlier year data as per the Indian Income Tax Rules is only for the purpose of analysis like project life cycles, business cycle etc. and how the economic circumstances affected either way the taxpayer or the comparable. The OECD has laid down a clear guideline that use of multiple year data does not necessarily imply that multiple year averages be used for the purpose of benchmarking. . The view of the OECD has persuasive value in the context of India since India is an observer member of the OECD. In this regard Rule 10B(4) is absolutely clear and it provides for the use of the data for the financial year in which international transaction has taken place. Any way what is important is to justify that the price charged by the taxpayer is on arms length. If the price charged by the tax payer in its international transaction is at arm's length , it should be justifiable even if the TPO takes the data which was not available at the time of preparation of TP documents. The issue relating to use of current year data is now well settled in view of the decision of the Special Bench of Bangalore Tribunal in the case of Aztec Software & Technology Services Ltd. (supra) reaffirmed by the Delhi Bench of the Tribunal in the cases of Mentor Graphics (Noida) (P.) Ltd. (supra) and Customer Services (India) (P.) Ltd. (supra). W thus do not find infirmity in the action of the authorities below in rejecting the claim of the assessee in the use of multiple year data for the purposes of computation of operating margins of other comparable companies. Ground No. 3 is thus rejected.

Ground No.8

51. The Contention of the assessee in support of ground No.8 remained that as per the proviso to section 92C(2) of the Act an assessee has the option of charging a price to its AEs which may vary from the ALP by plus / minus 5 %. Section 92C(3) further states that the ALP shall be determined by the AO in accordance with the sub sections (1) and (2) of section 92C. Therefore it should be appreciated that the Ld. TPO/AO is mandatorily required to calculate the ALP in accordance with section 92C(1) and 92C(2) of the Act. The Ld. AR also referred relevant extract from explanatory memorandum of Finance Bill 2002 and classification made in notes on clauses - Income Tax (Finance Bill 2002). He also referred CBDT circular No. 12(1) dated 23.8.2001 and placed reliance on the following decisions :-

Asstt. CIT v. UE Trade Corpn. (India) (P.) Ltd. [2011] 44 SOT 457/9 taxmann.com 75 (Delhi)(SB)

Sony India (P.) Ltd. (supra)

SAP Labs India (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 156/[2010] 8 taxmann.com 207 (Bang.)

Cummins India Ltd.'s case (supra)

Asstt. CIT v. Toshiba India (P.) Ltd. [I.T. Appeal No. 3175 (Delhi) of 2007, dated 27-11-2009].

52. The Ld. AR also cited recent decision of Delhi Bench of the Tribunal in the case of UE Trade Corpn. (India) (P) Ltd. (supra) holding that the proviso to section 92 C(2) of the Act is a substantive provision and would be applicable retrospectively only if it is specifically mentioned by the Legislature. In the Finance (No. 2) of the Act 2009, the amendment has been made applicable from 1.10.2009 and hence the new proviso is applicable from assessment year 2010-11 onwards only and not for the earlier years. He placed reliance in this regard on the decision of Bangalore Bench of the Tribunal in the case of SAP Labs India (P.) Ltd. (supra).

52.1 The Ld. DR on the other hand placed reliance on the order of the authorities below. He submitted that even prior to amendment of the proviso to section 92C by the Finance (No. 2) Bill 2009 +/-5% safe harbour was available to the taxpayer only if the value of the international transactions is within +/-5% from the arithmetical mean. If the taxpayer's value of its international transactions is beyond +/- 5% from arithmetical mean, the transfer pricing adjustment has to be made from the arithmetical mean of prices as determined by the most appropriate method.

52.2 He submitted that to avoid hardship to the assessee in the initial years of implementation of the T P provisions, the Govt. of India, through a Press Note issued by the Ministry of Finance on 22.8.2001 expressed its intention that no adjustments could be made if the transfer price adopted by the assessee was within band of +/- 5% of the ALP determined by the AO. The CBDT issued circular No. 12 on 23.8.2001 specified that the AO shall not make any adjustment to the price shown by the assessee if it is within the +/- 5% of the ALP determined by the AO. The CBDT issued circular No. 12 on 23.8.2001 specified that the AO shall not make any adjustment to the price shown by the assessee. It is within the +/-5% band. The effect of this circular was that the transfer price shown by the assessee was not to be disturbed if it was upto 5% less in case of receipts and upto 5% more in case of outgoings. Ld. DR submitted that the relaxation by way of this circular of the CBDT was not intended for those cases where the variations were substantial and exceeded the permissible tolerance band of + / - 5%. He submitted that the relaxation extended by the circular was in substance brought on to the statute by the Finance Act, 2002 by amending the proviso to section 92C(2) of the Act with retrospective effect from 1.4.2002 to provide for the tolerance band. The effect of this amendment is that there will be no TP adjustment in cases of marginal variation upto to +/-5% but substantial variations would result in appropriate TP adjustments. He submitted that the decision rule contained in the proviso to section 92C (2) of the Act containing tolerance band is akin to a similar decision rule of confidence intervals used in the statistical inference. There is no scope for any "standard deduction under this Rule . In other words, if the ALP falls outside the tolerance band TP adjustment would have to be made for the difference between the LP determined by the AO based on the arithmetical mean of prices and the price shown by the assessee. Ld. DR placed reliance on the following decisions :-

Global Vantedge (P.) Ltd. v. Dy. CIT [2010] 37 SOT 1 (Delhi)

Marubeni India (P.) Ltd. v. Addl. CIT [2013] 33 taxmann.com 687 (Delhi).

53. Ld. DR submitted further that to avoid any controversy the proviso to section 92C was proposed to be amended by the Finance (2) Bill 2009. After the amendment the TPO/AO has to take the arithmetic mean in cases where more than one price is determined by the most appropriate method. There is no question of making any other adjustment to this unless the case of the assessee falls in the second proviso.

54. The Ld. DR opposed the submission of the assessee that the amendment to the proviso of section 92 C will be applicable with prospective effect, as in para 37.5 of the CBDT circular No.05/2010 dated 3.6.2010 it has been made clear that the amendment is effective from 1.4.2009 and will accordingly apply in respect of assessment year 2009-10 and subsequent years. The Ld. DR submitted that the amendment made is clarificatory in nature hence it will be applicable retrospectively. In this regard, he placed reliance on the decision of Hon'ble Supreme Court in the case of K. Govindan & Sons v. CIT [2001] 247 ITR 192/114 Taxman 94 and in the case of CIT v. Shelly Products [2003] 261 ITR 367/129 Taxman 271 (SC).

55. In the rejoinder Ld. AR tried to distinguish the decisions relied upon by the Ld. DR from the facts of the present case to support his contention that these decisions are not helpful to the revenue. He submitted that in the case of ST Microelectronics (P.) Ltd. v. CIT [2013] 33 taxmann.com 688 (Delhi). The Tribunal has merely upheld the first appellate order without analyzing in detail on the issue as to whether the variation of +/-5% is available to assessee if the variation between the transaction price and the arms length price is more than 5%. Ld. AR submitted further that the Ld. DR has applied rule of confidence interval used in the statistical inference for the purpose of interpreting the proviso to section 92C(2) of the Act without appreciating that the rule for interpretation of statues does not provide for reference being made to the statistical theories. He submitted that proviso to section 92C(2) of the Act applicable for the assessment year 2006-07 under consideration makes it clear that where more than one price has been determined, then the arm's length price should be determined as (i) arithmetic mean of such prices, or (2) at option of assessee, + / - 5% of arithmetic mean of such prices. He submitted that the proviso to section 92 C (2) of the Act does not provide for any tolerance band and the arms length price can be determined by considering a variation of 5% to the arithmetic mean. He also cited the following decisions:—

Sr. No.	Hon'ble ITAT Bench	Ruling
1.	Delhi ITAT	• Electrobug Technologies Ltd. v. Asstt. CIT [2010] 37 SOT 270 • Customer Service India (P.) Ltd. (supra) • Global Vantedge (P.) Ltd. (supra) • Schefenacker Motherson Ltd. (supra) • Asstt. CIT v. SDRC India (P.) Ltd. [IT Appeal No. 477 (Delhi) of 2006, dated 6-3-2009] • Toshiba India (P.) Ltd. (supra)
2.	Benguluru Tribunal	• SAP Labs India (P.) Ltd. (supra) • Philips Software Centre (P.) Ltd. (supra)
3.	Mumbai Tribunal	• ITO v. Zydus Altana Healthcare (P.) Ltd. [2011] 44 SOT 132 (Mum.) • Tecnimount ICB (P.) Ltd. v. Asstt. CIT [2011] 11 taxmann.com 49 (Mum.)
4.	Pune Tribunal	• Asstt. CIT v. MSS India (P.) Ltd. [2009] 32 SOT 132 (Pune)(URO) • Cummins India Ltd's case (supra).

56. The issue raised in ground No. 8 is now fully covered by the decision of the Special Bench of the Tribunal in the case of IHG IT Services (India) (P.) Ltd. v. ITO [2013] 33 taxmann.com 1 (Delhi). In this case after discussing the history of section 92C(2) of I.T. Act as well as amendments made therein time to time and the decisions of Pune Bench in the case of Piagio Vehicle (P.) Ltd. v. Dy. CIT [2012] 53 SOT 253 (URO)/26 taxmann.com 260 (Pune) and Delhi Bench in the case of UE Trade Corpn. (India) (P.) Ltd. (supra) the Special Bench has come to the conclusion, summarized as under :—

"Before the amendment of section 92C(2) of the Income-tax Act, 1961, by the Finance (No.2) Act, 2009, with effect from October 1, 2009, the assessee had an option to claim the benefit of 5 per cent tolerance margin while determining the arm's length price. However, after the amendment by the Finance (No.2) Act, 2009 such benefit of 5 per cent. tolerance margin was restricted to cases where the variation between the arm's length price and the price at which the international transaction had actually taken place did not exceed 5 per cent. After the amendment to the second proviso to section 92C(2) by the Finance Act, 2012, with retrospective effect from April 1, 2002, there remains no ambiguity that the benefit of the tolerance margin is available only when the variation between the arm's length price as determined under section 92C(1) and the price at which the international transaction has actually been undertaken does not exceed the tolerance margin. Once it exceeds the tolerance margin, no benefit under the proviso would be available to the assessee and the arm's length price as determined under section 92C(1) shall be considered."

57. In the present case before us admittedly the difference between the arm's length price (the mean margin) determined by the TPO and the arms length price shown by the assessee, exceeds 5%, the tolerance margin, hence benefit of tolerance margin is not available to the assessee and thus the arms length price as determined u/s 92C(1) shall be considered. The issue is thus decided in favour of the revenue. The ground no. 8 involving the issue is thus rejected. In summary ground Nos. 1 and 2 being general in nature have not been adjudicated independently, ground Nos. 3 & 8 are rejected and ground nos. 4 to 7 are partly allowed.

Ground No. 9

58. It is regarding not allowing of set off of losses of the STPI Unit with the profits of the non-STPI Unit. In this regard Ld. AR referred the provisions laid down u/s 10A(1) of the Act prior to substitution by the Finance Act 2000 and after its amendment by Finance Act 2000. The Ld. AR submitted that post amendment the section 10A(1) provides that a deduction of such profits and gains of an undertaking shall be allowed from the total income of the assessee. He submitted that the use of word "deduction" would indicate that the income in question will first enter into the computation of total income and then the "deduction" as provided in the substituted section would be allowed. Further, proviso I to section 10A (1) states that where profits and gains from the eligible undertaking were not included in the computation of total income u/s 10A of the Act prior to its substitution, then the undertaking will be entitled to deduction under the new section 10A for the un-expired tax held period of 10 years. He pointed out referring to substituted section 10A that the proviso clearly refers to "income not included in computation of total income" while the amended section 10A, refers to a "deduction". Therefore, this indicate the conscious shift by the Legislature to provide for a "deduction" in the place of the erstwhile "exemption" of profits. The intention of Legislature was to specifically change the wording and to consciously use the term "deduction". Therefore this indicate the conscious shift by the legislature to provide for a "deduction" in the place of "exemption" of profits. The intention of the legislature was to specifically change the wording and to consciously use the term "deduction" throughout the amended section 10A. Hence in order to compute the benefit available under the provisions of section 10A of the Act, profits from the STP unit are required to be added to total income and then allowed as a deduction. As a corollary losses from the STP unit would also enter the computation of the total income and could be set-off against the profits of other businesses contended the Ld. AR. He submitted that post amendment section 10A (6)(ii) does not contain any specific condition to restrict the set off of losses during the tax holiday period itself. The restriction is applicable only for carry forward of losses u/s 72(1) or section 74(1) or section 74(3) of the Act for the losses pertaining to asstt. year 2000-01 and before. It also does not make any reference to sections 70 and 71 of the Act. In other words it does not state that the provisions of sections 70 and 71 of the Act would not apply on it. Ld. AR placed reliance on the decision of the third member Bench of the Tribunal in the case of Navin Bharat Industries Ltd. v. Dy. CIT [2004] 90 ITD 1 (Mum.)(TM). He submitted that section 10A of the Act does not prohibit intra-head set off of losses in the same financial year in which such losses are incurred and hence there is no restriction of setting off the losses of STPI unit against the profit of non-STPI unit. In support he also placed reliance on the following decisions :-

KPIT Cummins Infosystems (Bangalore) (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 529 (Bang.)

Mind Tree Consulting (P.) Ltd. v. Asstt. CIT [2006] 102 TTJ (Bang.) 691

Honeywell International (India) (P.) Ltd. v. Dy. CIT [2008] 26 SOT 503 (Delhi)

Dy. CIT v. A.V. Thomas Leather & Allied Products Ltd. [IT Appeal No. 1021 (Mds) of 2008, dated 20-3-2009]

Scientific Atlanta India Technology (P.) Ltd. v. Asstt. CIT [2010] 38 SOT 252 (Chennai).

59. Ld. DR on the other hand placed reliance in the order of the authorities below and cited following decisions in support :

1. CIT v. Himatasingike Seide Ltd. [2006] 286 ITR 255/156 Taxman 151 (Kar.)

2. Asstt. CIT v. Yokogawa India Ltd. [2002] 13 SOT 470 (Bang.)

3. Changepond Technologies (P.) Ltd. v. Asstt. CIT [2008] 22 SOT 220 (Chennai)

4. Global Vantedge (P.) Ltd. (supra).

60. We find that during the year the Hyderabad Unit of the assessee had earned profit of Rs. 14,90,62,148/- and the same was claimed as deduction u/s10A of the Act. However the Bangalore unit has suffered a loss and hence no deduction was claimed u/s 10A of the Act. In its return of income filed for the year, the assessee had set of the losses of Bangalore unit of Rs. 1,49,49,710/- with profit derived from Mumbai unit. The AO did not allow the set off of the losses of Bangalore Unit on the basis that income of STPI unit is exempt u/s 10A of the Act and hence cannot be adjusted with other income. During the year the assessee claimed set off of carry forward business losses amounting to Rs. 4,54,30,632/- pertaining to assessment year 1998-99 against the profits of the assessment year under consideration. The AO disallowed the set off on the ground that no documentary evidence of brought forward losses and its allowability were furnished during the course of assessment.

Ground No. 9

61. Having gone through the decisions relied upon by the parties we find that facts of the case of the assessee are distinguishable from the facts of the case before the Special Bench. The assessee has incurred losses in its STPL unit in the asstt. year 2006-07 under consideration and hence the question of claiming deduction u/s 10A of the Act while computing "total income of eligible undertaking" does not arise, whereas in the case of Scientific Atlanta India Technology (P.) Ltd. (supra) before the Special Bench the assessee had suffered loss in non-eligible unit and had claimed setting off those losses against the profits of the eligible unit while determining deduction u/s 10A of the Act. The special bench held that loss from non eligible unit can not be set off against the profit of the eligible unit while determining deduction u/s 10A of the Act. The said ratio of the special bench of the Tribunal has been upheld by the Hon'ble High Court in the case of CIT v. Yogagawa India Ltd. [2012] 341 ITR 385/21 taxmann.com 154 (Kar.) and others, a copy of this judgment dated 9.8.2011 has been made available on record. As per the decision of Hon'ble Karnataka High Court in that case, the total income of the eligible undertaking is to be ascertained / worked out after grant of deduction u/s 10A/10B of the Act and therefore what can be included in the total income of the assessee is net total income of the eligible unit after deduction u/s 10A of the Act. With the assistance of the following example the Ld. AR has tried to distinguish its case with the cases before the special bench and Hon'ble Karnataka High Court. The ruling of the Hon'ble Karnataka High Court is explained by way of the following example :-

Particulars	Unit A Eligible for 10A deduction	Unit B Non-eligible for 10A deduction	Total for the assessee
Taxable income / (loss) before deduction under section 10A	INR 10,00,000	INR (3,00,000)	INR 7,00,000
Less: Deduction under section 10A	INR 10,00,000	NA	INR 10,00,000
Taxable income/(loss) after deduction under section 10A	Nil	INR (3,00,000)	INR (3,00,000)
Losses to be carried forward	Nil	INR (3,00,000)	INR (3,00,000)

62. With the assistance of cited decisions by the Ld. AR including decision of third member bench of the Tribunal in the case of Navin Bharat Industries Ltd. (supra) the Ld. AR tried to submit that if the STPI unit has incurred losses then such loss is eligible to be set off against profits of non-STPI unit as per the provision of section 10A(6)(ii) of the Act. He submitted that before computing "total income of the assessee", total loss incurred in the eligible undertaking needs to be set off against the income from non-eligible undertaking as well as other income as per provisions of section 70-72 of the Act read with section 10A(6)(ii) of the Act. The effect of the revised provisions of section 10A of the Act and the decisions of the Tribunal cited by the AR has been explained with the help of following example :-

Particulars	Unit A Eligible for 10A deduction	Unit B Non-eligible for 10A deduction	Total for the assessee
Taxable income / (loss) before deduction under section 10A	INR (3,00,000)	INR 10,00,000	INR 7,00,000
Less: Deduction under section 10A	Nil	NA	Nil
Taxable income after deduction under section 10A	Nil	INR 10,00,000	INR 10,00,000
Less: Set off of loss of Unit A as per section 70 of the Act (i.e. intra head adjustment)	Nil	INR (3,00,000)	INR (3,00,000)
Taxable income/(loss) after adjustment of losses as per section 70 of the Act	Nil	INR 7,00,000	INR 7,00,000

63. We find that the facts of the case Navin Bharat Industries Ltd. (supra) before third member bench of the Tribunal relied upon by Ld. AR are almost similar to the facts of the case of the assessee. In that case also the assessee had claimed set off of loss in a section 10A undertaking against profits of other units. Such adjustment of loss was disallowed by the AO on the basis that profits of the unit being not taxable, loss could not be set off against other income. The Tribunal held that loss incurred in a unit entitled to benefit of section 10A can be set off against profits of other units and set off is not barred by the provisions of section 10A (4) (ii) and 14A. Similarly the Bangalore Bench of the Tribunal in the case of Mindtree Consulting (P.) Ltd. (supra) has held what is allowed u/s 10B as amended w.e.f. 1.4.2000 deduction and not exemption though the provision falls under chapter iii. Therefore, loss of unit eligible u/s 10B as amended w.e.f 1.4.2000 is available for set off under sections 70 and 71. Section 10B (6) (ii) restricts carry forward and set off of loss u/s 72 & 74 only and not intra head set off u/s 70 and u/s 71. The third member bench decision in the case of Navin Bharat IndustriesLtd. (supra) has been followed by the Bangalore Bench in this case. Similar view has been expressed also by the Delhi Bench of the Tribunal in the case of Honeywell International (India) (P.) Ltd. (supra). In that case also set off of losses of eligible unit of the assessee against the profits of the other unit was allowed. It was held that provisions of section 10A as substituted w.e.f 14.2001, provides for a deduction from income and not an exemptions under the scheme of the Act, the profits of the unit eligible for deduction u/s 10A form part of the income computed under the head "profits gains of business and profession" and deduction u/s 10A is required to be made at the stage of computing income. It was held that total income can be computed only after allowing intra head set off u/s 70 and u/s 71. Thus in case there is loss in the eligible undertaking such losses is to be set off against the profit of the other unit / business u/s 70. Respectfully following these decisions cited by the Ld. AR we are of the view that the authorities below were not justified in denying the claimed set off of loss in eligible unit against the profits of non eligible unit. We thus while setting aside the orders of the authorities below in this regard direct the AO to allow the claimed set off. Ground No. 9 is thus allowed.

Ground 10

64. In this ground action of the AO in granting short credit for the taxes paid and tax deducted at source available to the assessee while issuing demand notice for Rs. 6,15,69,632/- has been questioned. No arguments has however been advanced by the Ld. AR. against this ground during the course of hearing. The ground is thus rejected as not traced.

Ground No. 11

65. It is against levying of interest of Rs. 2,16,67,235/- u/s 234 of the Act which is consequential in nature. The ground thus need independent adjudication.

Ground No. 12

66. In this ground the assessee has questioned the AO in initiation of penalty proceedings u/s 271(1)(C) of the Act. We are of the view that it is a premature ground since penalty proceedings is independent proceedings. The ground thus does not need separate adjudication.

67. Consequently appeal is partly allowed.

P. SEN

---

 

Regards

Prarthana Jalan

__._,_.___

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