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Dy. Commissioner of Income Tax, Circle 3 (1), New Delhi. Vs. Birla Soft India Ltd., 8 th Floor, Birla Towers, 25, Barakhamba Road, New Delhi.
May, 07th 2014
                       IN THE INCOME TAX APPELLATE TRIBUNAL
                            DELHI BENCHES : I : NEW DELHI

                   BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER
                                       AND
                        SHRI A.D. JAIN, JUDICIAL MEMBER

                                    ITA No.4713/Del/2011
                                  Assessment Year : 2005-06


Dy. Commissioner of Income Tax,               Vs.     Birla Soft India Ltd.,
Circle 3 (1),                                         8th Floor, Birla Towers,
New Delhi.                                            25, Barakhamba Road,
                                                      New Delhi.

                                                      PAN : AAACB2769E

  (Appellant)                                             (Respondent)


                  Assessee By                   :   Shri Ajay Vohra & Shri Neeraj
                                                    Jain, Advocates,&
                                                    Shri Puneet Chugh, CA
                  Department By                 :   Shri Peeyush Jain, CIT, DR


                                             ORDER

PER A.D. JAIN, JUDICIAL MEMBER:

      This is Department's appeal for AY 2005-06 against the order dated 26.08.2011
passed by the CIT (A)-XX, New Delhi, taking the following grounds

      "1.       The order of the Ld. CIT (A) is erroneous & contrary to facts & law.

      2.    On the facts and in the circumstances of the case and in law, learned CIT
      (Appeals) has erred in directing the A.O. to allow deduction u/s 10A in respect of
      GE-GDC STP Unit.

      3.     On the facts and in the circumstances of the case and in law, learned CIT
      (Appeals) has erred in directing the A.O. to allow the set off of losses arising out
      of STP units against the income from the STP units.
                                                                           ITA No.4713/Del/2011


       4.     On the facts and in the circumstances of the case and in law, learned CIT
       (Appeals) has erred in directing the A.O. to allow carry forward of unabsorbed
       losses and depreciation of STP unit.

       5.     On the facts and in the circumstances of the case and in law, learned CIT
       (Appeals) has erred in directing the A.O. to allow travelling expenses of
       Rs.11,07,62,619/-.

       5.1     The Ld. CIT (A) has inter-alia ignored the fact that in spite of being
       specifically required the assessee did not file bills/vouchers of travelling
       expenses exceeding Rs.1,00,000/- and that in the absence of the bills and
       vouchers the genuineness of the expenses cannot be accepted.

       6.     On the facts and in the circumstances of the case and in law, learned CIT
       (Appeals) has erred in directing the A.O. to treat the miscellaneous income in the
       shape of recovery of notice pay as income of the unit eligible for deduction u/s
       10A of the IT Act.

       7.     On the facts and in the circumstances of the case and in law, learned CIT
       (Appeals) has erred in deleting the addition of Rs.8,59,418/- made on account of
       excess claim of depreciation on computer peripherals.

       8.      On the facts and in the circumstances of the case and in law, learned CIT
       (Appeals) has erred in directing the A.O. to allow credit for taxes paid in
       Australia. Since this claim has not been examined by the AO, the CIT (A) should
       have held the claim may be allowed after examination of the same by the AO.

       9.       On the facts and in the circumstances of the case and in law, learned CIT
       (Appeals) has erred in deleting the addition of Rs.7,25,40,785/- made u/s 92 CA
       (3) of the IT Act on account of TP adjustments."

2.     As per the record, the assessee is engaged in the activities of software
development and related services. It is a 100% subsidiary of Birla Soft Enterprises,
India, which, in turn, is a 100% subsidiary of Birla Soft Inc., USA.            The assessee
provides customized software to its related parties. It does offshore, i.e., on site delivery
of the software also. It is paid at the cost plus agreed mark up and reimbursement of
overhead expenses by its AEs. It entered into the following international transactions:-

                                       Related           Unrelated              Total
NOIDA unit I      Revenue              67502710          10128297               81983020
                  Total Cost           151955943         43812111               193768054
                  Operating Profit     (84453233)        (33683814)             (113785034)
                  OP/TC                -55.58%           -76.88%                58.12%
GE-GDC            Revenue              446188705         75924401               522113106


                                               2
                                                                    ITA No.4713/Del/2011


NOIDA STP
                  Total Cost         334451977      86386255            420838232
                  Operating Profit   111736728      (10461854)          101274874
                  OP/T               33.41%         -12.11%             24.07%
NOIDA UNIT 2 Revenue                 184856979      18957315            210339132
                  Total Cost         185551703      33041904            218593607
                  Operating Profit   (694724)       (14084589)          (8254475)
                  OP/TC              -0.37%         -42.63%             -3.78%
Chennai           Revenue            171075757      64143704            26525l83
                  Total Cost         210078815      53680864            2637596791
                  Operating Profit   (39003058)     10462840            1491904
                  OP/TC              -18.57%        19.49%              0.57%
Non STP           Revenue            NIL            51775401            517754018
                  Total Cost         NIL            493678670           493678670
                  Operating Profit   NIL            2407538             2407538
                  OP/TC              NIL            4.88%               4.88%
Company as a      Revenue            869624151      686907736           1598448572
whole
                  Total Cost         882018439      710599803           1593597143
                  Operating Profit   (12414287)     (23692067)          4851429
                  OP/TC              -1.41%         -3.33%              0.30%


3.      The assessee benchmarked its international transactions using the Transactional
Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with operating
profit/operating cost (OP/OC) as the profit level indicator (PLI). It had related party
transactions as well as unrelated party transactions in the same line of business. As
such, internal TNMM was employed, i.e., margin on cost earned from the unrelated
party transactions was compared with the margin on cost earned from the related
parties. The TP documentation of the assessee concluded that the operating margin of
the assessee from software services to unrelated parties was 2.51%, whereas the


                                           3
                                                                     ITA No.4713/Del/2011


margin of the assessee from associated enterprises was 2.04% and the operating profit
earned by the assessee being, according to the assessee, within (-) 2.62% and 7.63%,
i.e., (+)/(-) 5% range, the transactions between the assessee and its AEs were
considered at arm's length, as per the Proviso to Section 92C (2) of the IT Act. The AO
made reference to the TPO for the year under consideration, i.e., AY 2005-06 to
determine the arm's length price u/s 92CA (3) of the IT Act in respect of international
transactions entered into by the assessee during the relevant financial year, i.e., FY
2004-05.

4.    Ground No.1 is general.

5.    Apropos Ground No.2, the assessee had initially set up an undertaking at 2nd
Floor, Block-III, Ganga Shopping Complex, Sector 29, Noida in the year 1995, vide
STPI Approval No.5 (7)/94/17/2260 dated 29th November, 1994. In the year 1999,
however, there came about changes in the equity holding structure of the assessee and
GE took equity participation in Birlasoft Inc, the parent company of the assessee. As a
result of GE picking up a stake in the ultimate parent company, aggressive business
plans were prepared for growth, as substantial business was expected from the
overseas affiliates of GE. For rendering software services to this new client base, a
new independent and integrated unit was proposed to be set up. Consequently, the
assessee applied for the registration of a new STP undertaking (the GE-GDC
undertaking) in November, 2000. The approval to this new unit was granted by Software
Technology Parks of India, an autonomous body under the Ministry of Information
Technology, Government of India on 4th December, 2000 vide approval No. Ref. No.
PCMG/PSE/05/025-STPN/518. On these facts, it was submitted by the assessee before
the AO that the new GE-GDC unit was a separate undertaking for the purpose of
deduction under Section 10A of the Act.        The AO has held that the new business
started by the assessee company was an extension of the existing business, since both
the units were situated in the same building and doing the same business, i.e. both the
units were producing software items and exporting the same. This order of the AO is
similar to the earlier order of the AO for the AY 2003-04. The finding of the AO for that
year was that the old and the new units were identical even as per the submission of the





                                           4
                                                                      ITA No.4713/Del/2011


assessee before the AO that the sitting capacity at the existing facility was limited and
therefore the assessee started the new unit to meet the increased client base. As such,
the AO came to the conclusion that it was an extension of the existing business.

6.    The Ld. CIT(A) directed the AO to give the benefit of Section 10A of the Act to
the GE-GDC Unit of the assessee.

7.    Aggrieved, the department has raised Ground No.2.

8.    The Ld. DR has contended that the ld. CIT (A) has erred in directing the AO to
allow deduction u/s 10A to the assessee in respect of its GE-GDC STP Unit; that the ld.
CIT (A) has failed to take into consideration that the new unit started by the assessee
was situated in the same building as housed the assessee's existing unit; that the ld.
CIT (A) also failed to appreciate that both the units were doing the same business; that
in this manner, the ld. CIT (A) failed to comprehend that the old unit and the new unit of
the assessee were identical and that as such, the new business started by the
assessee company was but an extension of its existing business.

9.    The ld. Counsel for the assessee, on the other hand, has placed strong reliance
on the impugned order . It has been contended that the issue stands squarely covered
in favour of the assessee in the assessee's own case, by the Tribunal orders for AYs
2003-04, 2006-07 and 2008-09. It has further been submitted that the department's
appeal on this very issue also stands dismissed by the Hon'ble Delhi High Court.
Copies of these orders have been placed on record.

10.   While coming to the conclusion that the new business of the assessee was only
an extension of its existing business, the AO followed the assessment order in the
assessee's case for AY 2003-04. It was held that since both the units were situated in
the same building and were doing the same business, i.e., production of software items
and export thereof, both the units were identical. However, for AY 2003-04, the matter
travelled upto the Tribunal and the Tribunal held that the first STP and the second STP
undertakings of the assessee were to be treated as separate undertakings in
accordance with the parameters laid down in Section 10A of the Act. A copy of the said
order has been placed at pages 557-578 of the assessee's paper book. Therein (APB

                                            5
                                                                       ITA No.4713/Del/2011


572-573, para 2.10), it was held that various judicial pronouncements, as relied on by
the assessee, had held that where a new undertaking has been formed with fresh
capital and investment with a motive to increase the production capacity and expand the
business, it cannot be said that the new undertaking was not a new industrial unit by
itself; and that establishment of a new industrial unit as a part of already existing
industrial establishment may result in an expansion of the industry, but if the only
established unit itself is an integrated unit in which new plant and machinery are put up
and the same itself, independently of the old unit, is capable of production of goods,
then it can be classified as a newly established industrial undertaking. On this basis, the
Tribunal held that even if a new unit was established by the assessee company as
expansion of its existing unit, substantial fresh capital having been invested in the said
unit and it was capable of doing business of its own, independent of the old unit, the
same was eligible to be treated as a newly established undertaking; and that therefore,
the CIT (A) was not correct in holding that both the units were liable to be treated as one
unit for the purpose of computing deduction u/s 10A of the Act.

11.   The aforesaid Tribunal decision for AY 2003-04 in the assessee's case was
followed by he Tribunal in the assessee's case for AY 2006-07. A copy of the Tribunal
order in the assessee's case for AY 2006-07 has been placed at APB 585-597. It is
reported as 136 TTJ 505 (Del). Therein (para 5.7, at page 512 of the report, as
contained at APB 589), the Tribunal followed its aforesaid order for AY 2003-04 and
again decided the issue in favour of the assessee, holding that the new unit of the
assessee was to be treated as separate and independent unit for the purpose of
computing deduction u/s 10A of the Act. The AO was directed to allow deduction u/s
10A in respect of the assessee's new unit set up at Third Floor, Block-3, Sector 29,
Noida. It is the aforesaid two Tribunal orders in the assessee's own case, i.e., for AYs
2003-04 and 2006-07, which have been followed by the CIT (A) in allowing the
assessee's ground of appeal in this regard and directing the AO to give the benefit of
Section 10A of the Act to the GE-GDC STP Unit of the assessee.

12.   Before us, the ld. Counsel for the assessee has placed further reliance on the
Tribunal orders in the assessee's case for AYs 2007-08 and 2008-09. The order for AY


                                            6
                                                                         ITA No.4713/Del/2011


2007-08 is at APB 598-617, whereas that for AY 2008-09 is to be found at APB 624-
632.

13.    In the order for AY 2007-08, the Tribunal, in para 8 (APB 611) of the order, has,
following the Tribunal order (supra) for AY 2006-07, held that the Tribunal, for AY 2006-
07, had accepted the assessee's claim and had held that the new unit was to be treated
as a separate and independent unit for the purpose of computing deduction u/s 10A of
the Act, following the ITAT order for AY 2003-04; that the facts obtaining for AY 2007-08
were similar to the facts and circumstances in the preceding assessment years; that the
revenue had not placed any material before the Tribunal for taking a different view in the
matter for the year under consideration (AY 2007-08); and that therefore, the claim of
the assessee u/s 10A of the Act was being allowed.

14.    In the order for AY 2007-08, vide paras 19 and 20 (APB -629), the Tribunal has,
following the aforesaid Tribunal order for AY 2006-07, held that the GEDC-STP Unit,
situated at Third Floor, Block 3, Sector 29, Noida, was to be treated as a separate unit,
and, accordingly, deduction u/s 10A of the Act was allowable.

15.    In the `Chart on the Issues' dated 13.03.2014 filed before us by the assessee, the
assessee has contended that vide order dated 06.01.2011 (APB 618), passed in ITA
No.71/2010, the Hon'ble Delhi High Court has dismissed the department's appeal on
the aforesaid issue. However, a perusal of the said High Court order shows that it does
not deal with this issue at all. The order reads as follows:-

       "In this appeal, following question of law is proposed:-

       Whether ITAT was correct in law in allowing depreciation to the assessee at the
       higher rate of 60% on computer accessories and peripherals?

       This issue stands decided against the Revenue and in favour of the assessee by
       a judgment of this Court in ITA 1266/2010, dated 31st August, 2010 categorically
       holding that the depreciation on computer accessories and peripherals would be
       admissible at the rate of 60%.

       This appeal is accordingly dismissed."

16.    Be that as it may, for AYs 2003-04 and 2006-07 to 2008-09, this issue stands
decided in favour of the assessee by the afore-noted Tribunal orders. The CIT (A) has


                                                7
                                                                          ITA No.4713/Del/2011


followed the Tribunal orders for AYs 2003-04 and 2006-07. Before us, the obtaining
facts have not been shown to be any different from, besides AYs 2003-04 and 2006-07,
AYs 2007-08 and 2008-09 also. Therefore, finding no error therein, the order of the ld.
CIT (A) in this regard is upheld. Ground No.2 is, accordingly rejected.

17.     Ground Nos.3 and 4 relate to the action of the ld. CIT (A) in directing the AO to
allow the set off of losses arising out of the assessee's STP unit against the income
from its non-STP units (mistakenly typed as `STP Units' in Ground No.3) and in directing
the AO to allow carry forward of unabsorbed losses and depreciation of the assessee's
STP units.

18.     As per the record, during the previous year relevant to the assessment year
under consideration, the assessee was engaged in the activities of software
development and related services. The software services were being carried out from its
undertakings at Noida and Chennai set up in accordance with the Software Technology
Park ('STP') Scheme notified by the Government of India, Ministry of Commerce and
Industry and branch offices in Australia and Singapore (hereinafter referred to as `Non
STPI undertakings'). The assessee company has incurred business loss amounting to
Rs 152,333,790 in its various STP and Non STP undertakings. The details of the losses
incurred have been given as under:

(i)     Noida-I (first STP Undertaking)           -     Rs. (104,937,372)

(ii)    Noida- II (STP undertaking)               -      Rs. (31,826,734)

(iii)   Chennai (STP Undertaking)                 -       Rs. (6,383,402)

(iv)    Singapore (Non-STP undertaking)           -       Rs. (9,186,282)

19.     The AO did not allow the carry forward and set off of losses arising out of the
business operations of 10A units from the income from non 10A units. While doing so,
the AO has relied on the order dated 13.04.07 of the ITAT in the assessee's own case
for the AY 1999-2000 in ITA No. 838/Del/2003.

20.     The AO has observed as follows:


                                            8
                                                                           ITA No.4713/Del/2011


       "The assessee's unit under question is entitled to 'tax holiday' by way of
       deduction u/s 10A. Had the assessee co. been generating profits from such unit,
       it would have been entitled for such 'tax holiday' by way of deduction u/s 10A. It
       is thus clear that profits and gains from such unit would have been exempt from
       tax. However in the case of instant assessee co., losses are suffered in respect
       of such unit, which is entitled for deduction u/s 10A of the act. As stated above,
       as per the provisions of IT Act, loss from such source/ unit, which is exempt from
       tax cannot be set off against income chargeable to tax.....

              On the same observations and findings the assessee's claim of carry
       forward of losses of undertaking claiming the exemption u/s 10A is rejected and
       the claim of Rs. 53,732,227 of business loss and Rs. 42,927,772 of the
       unabsorbed depreciation is disallowed from being carry forwarded."

21.    While holding that the assessee should be allowed to set off the losses arising
out of its STP units against the income of its non-STP units and allowing the assessee
to carry forward unabsorbed losses and depreciation of its STP units, the CIT (A)
followed the Tribunal orders of the assessee for AYs 2003-04 and 2006-07.

22.    In this regard, the department has challenged the action of the ld. CIT (A) and
has contended that the ld. CIT (A) has failed to take into consideration the categorical
finding recorded by the AO that had the assessee company been generating profits
from its STP Unit, this unit would have been entitled for a tax holiday by way of
deduction u/s 10A and the profits and gains from such units would have been exempt
from tax, but since the STP Unit of the assessee had suffered losses, the losses from
such unit could not be set off against income chargeable to tax; and that the same was
the position with regard to the claim of carry forward of unabsorbed depreciation.

23.    The ld. Counsel for the assessee, on the other hand, has submitted that this
issue is covered in favour of the assessee by the Tribunal orders for AYs 2006-07 to
2008-09 (supra). It has been further contended that moreover, recently, the CBDT, vide
Circular No.7/2013 dated 16.07.2013, clarified that irrespective of their continued
placement in Chapter III, Sections 10A and 10B of the Act, as substituted by Finance
Act, 2000, provide for deduction of profits and gains derived from the export of articles
or things or computer software; that tax benefit u/s 10B of the Act is in the nature of
deduction; that income/loss from various sources, i.e., eligible and ineligible units, under
the same head have to be aggregated in accordance with the provisions of Section 70



                                               9
                                                                         ITA No.4713/Del/2011


of the Act; and that therefore, loss from ineligible unit would have to be set off against
the profits of the non-eligible unit.

24.    In this regard, it is seen that the AO, while deciding this issue against the
assessee, relied on the Tribunal order for AY 99-00. Section 10A of the Act was
modified by the Finance Act, 2000. The pre-amended Section stated that `any profits
and gains derived by an assessee from an industrial undertaking to which this Section
applies shall not be included in the total income of the assessee.' This provision stands
changed by the aforesaid amendment, w.e.f. 01.04.2001. Section 10A(1) now states
that `subject to the provisions of this Section, a deduction of such profits and gains as
are derived by an undertaking from the export of articles or things or computer software
for a period of ten consecutive assessment years beginning from the assessment year
relevant to the previous year in which the undertaking begins to manufacture or produce
such articles or things or computer software, as the case may be, shall be allowed from
the total income of the assessee........" (emphasis supplied).

25.    In the assessee's case for AY 99-00, vide its order dated 13.04.07 (relevant
portion produced in the assessment order at pages 5 and 6 thereof), in ITA
No.838/Del/2003, the Tribunal had held that as per Section 10A (1) of the Act, any
profits and gains derived from an industrial undertaking, to which this Section applies,
shall not be included in the total income of the assessee; that thus, the profits of the
eligible industrial undertaking did not form part of the total income at all; that it did not
enter the computation provision; that thus, what was to be computed was the profits of
the eligible industrial undertaking and not the resultant business income after set off of
loss in other activities; and that the loss from other business activities should not be set
off against profits derived from eligible industrial undertaking.

26.    Evidently, since the aforesaid order of the Tribunal was for AY 99-00, it pertained
to the pre-amended provisions of Section 10A of the Act. The assessment year at hand
is AY 2005-06. Undisputedly, it is the amended provision of Section 10A of the Act
which apply hereto and not the erstwhile provisions. Therefore, as rightly contended on
behalf of the assessee, the said Tribunal order for AY 99-00 is not applicable for the
year under consideration.

                                             10
                                                                       ITA No.4713/Del/2011


27.   For AY 2006-07, the Tribunal (APB 589 & 590), restored the matter to the file of
the AO for fresh adjudication by treating the provisions of Section 10A of the Act to be in
the nature of a deduction provision and not an exemption provision. While doing so, the
Tribunal followed the decisions in `Mindtree Consulting (P) Ltd. vs. ACIT' 102 TTJ
(Bangalore) 691, `Honeywell International (India) (P) Ltd. vs. DCIT', 108 TTJ (Del) 924,
Naveen Bharat Industry vs. DCIT', 90 ITD 1 (Mum) TM, `Hindustan Unilever vs. DCIT
and Another' 325 ITR 102 (Bom) and `Scientific Atlanta India Technology (P) ltd. vs.
ACIT', 37 DTR (Chennai) (Trib) (SB) 46. For AY 2007-08, the Tribunal followed (APB
613-614) its order for AY 2006-07, noting that for that year, even the DRT had referred
to the ITAT decision for AY 2006-07 and remanded the matter to the AO for fresh
adjudication with similar directions as issued for AY 2006-07.

28.   For AY 2008-09, the Tribunal (APB 631, para 26), followed the Tribunal orders
for AYs 2006-07 and 2007-08 in restoring the issue to the file of the AO for fresh
adjudication.

29.   Further, in `Sovika Infotek Ltd. vs. ITO', 23 SOT 271 (Mum), it has been held that
the assessee is entitled to set off the loss incurred in a Section 10B undertaking against
the other incomes earned by him. There is no dispute that the provisions of Section 10B
are in pari materia with those of Section 10A of the Act. Further, in `A.V. Thomas
Leather and Allied Products Ltd.' 2009 TIOL 434 ITAT (Madras), the Chennai Bench of
the Tribunal took the same view of the matter while relying on `Honeywell International
India (P) Ltd. vs. DCIT' (supra), `Mindtree Consulting (P) Ltd. vs. ACIT' (supra) and
`Naveen Bharat Industries Ltd. vs. DCIT' (supra).

30.   The facts remaining the same for the year under consideration also, there is no
reason for us to differ from the action of the CIT (A) in directing the AO to recompute the
total income of the assessee after allowing the set off of the losses arising out of the
STP units of the assessee against the income of its non-STP undertakings and to allow
carry forward of unabsorbed losses and depreciation as per law. Therefore, Ground
Nos.3 and 4 are rejected.




                                            11
                                                                     ITA No.4713/Del/2011


31.    Ground No.5 is against the action of the CIT (A) in directing the AO to allow
travel expenses of Rs.11,07,62,619/-.

32.    For the year, the assessee claimed travelling expenses to the tune of
Rs.23,20,33,587/-. The AO noted that for AY 2004-05, such expense was of
Rs.12,12,70,968/- and that therefore, there was an increase of close to 100%. The
assessee, vide reply dated 24.09.2008, submitted the details for the last four years, as
follows:-

       F.Y.                      Amount (Rs.)
       04-05                     232033587/-
       03-04                     121270968/-
       02-03                     2052812/-
       01-02                     2890097/-
33.    Vide reply dated 31.10.08, the assessee submitted details of travelling advances
for the last five years along with comparison to the total revenue for that year, as
follows:-

       F.Y.                      Amount (Rs.)         Turnover (Rs.)
       04-05                     114000667            1580856777
       03-04                     9758868              1688939505
       02-03                     18185256             1062840865
       01-02                     19758868             326492064
       00-01                      6905578             149401616
34.    The assessee also submitted, as noted at page 11 of the assessment order, the
details of foreign travel expenses of more than Rs.1 lac. The AO observed that no other
details were provided by the assessee, nor any justification for such a huge increase in
the expenses was provided; that besides, even bills and vouchers pertaining to
travelling expenses of more than Rs.1 lac, which were specifically asked for, were also
not filed. From this, the AO observed that the assessee had failed to discharge its onus
to substantiate the claim of the expenses and to justify the same. The travelling
expenditure in excess of the amount claimed in the earlier year was disallowed by the


                                           12
                                                                               ITA No.4713/Del/2011


AO as such, also for the reason that the turnover of the assessee company had
decreased in comparison to the earlier year.

35.   The ld. CIT (A), while directing the AO to delete the addition, held that the
disallowance made was purely ad hoc; that the assessee had produced books of
account before the AO, which books were audited; and that there was nothing on record
to show that the AO had asked the assessee for further evidence to justify the claim of
expenses. Besides, the ld. CIT (A) followed the Tribunal order in the assessee's case
for AY 2006-07 in this regard.

36.   The ld. DR has challenged the CIT (A)'s action, alleging that the CIT (A) ignored
the fact that in spite of being specifically required to do so, the assessee did not file
bills/vouchers for travelling expenses exceeding Rs.1 lac and that in the absence
thereof, the genuineness of the expenses was rightly not accepted by the AO.

37.   The ld. Counsel for the assessee, on the other hand, has placed strong reliance
on the impugned order.

38.   Here, the observations of the AO with regard to the assessee not having
produced the relevant documentary evidence in the shape of bills/vouchers concerning
the travelling expenses claimed, have been found by the ld. CIT (A) to be incorrect. This
finding of the ld. CIT (A) has not been successfully refuted before us by the department.
Therefore, there is nothing for us to differ from the CIT (A)'s conclusion that the
assessee had, in fact, produced the concerned evidence before the AO. On merit, the
Tribunal (APB 591), for AY 2006-07, observed as follows:-

      "At this stage, it is pertinent to note the settled proposition that when once an
      outlay is made for the purpose of the business, it need not turn out to be
      profitable. It is a mistake to suppose that any deductible expenditure must not
      only be incurred for the purpose of business or trade but must also be profitably
      laid out. The deductible expenditure incurred for the purpose of business does
      not require the presence of a receipt on the credit side to justify deduction of an
      expense. It is not as if the expenditure should be co-related to profits or turnover
      and it is deductible only if profit is made or turnover is increased. It is well-settled
      that expenditure wholly and exclusively for the purpose of business cannot be
      disallowed merely because the assessee's income or the turnover would be very
      much reduced thereby. In the present case, the AO has not brought any material

                                                13
                                                                            ITA No.4713/Del/2011


        or evidence on record to show and establish that the travelling expenses incurred
        by the assessee during the year under consideration have not been expended for
        the purpose of assessee's business or have not been incurred in the course of
        carrying of any business activity of the assessee. In the light of the discussions
        made above, we delete the disallowance of traveling expenses made by the AO.
        In other words, this issue is decided in favour of the assessee."

39.     The facts for the year under consideration remaining the same as that before the
Tribunal for AY 2006-07, we uphold the CIT (A)'s order on this ground and reject ground
No.5.

40.     As per ground No.6, the ld. CIT (A) has erred in directing the AO to treat the
miscellaneous income earned by the assessee in the shape of recovery of notice pay as
income of its unit eligible for deduction u/s 10A of the Act.

41.     The AO asked the assessee to show as to why the said income should not be
treated as income from other sources and be included for the computation of deduction
u/s 10A of the Act. The assessee, vide reply dated 28.08.08, stated that the
miscellaneous income consisted of notice pay recovered from its employees, which
income was incidental to the software export and hence, it formed part of the normal
business profit and loss account of the assessee. However, the AO treated the
miscellaneous income as income from other sources.

42.     The ld. CIT (A) relied on the Tribunal decision in the assessee's case for AY
2006-07 and gave the impugned direction to the AO.

43.     The ld. DR has contended that the ld. CIT (A) has failed to consider that the
miscellaneous income of the assessee was not of the same nature as interest income
and was rightly treated by the AO as income from other sources.

44.     The ld. Counsel for the assessee has placed reliance on the impugned order.
Reliance has also been placed on the Tribunal orders for AY 2007-08 and 2008-09.

45.     For AY 2006-07 (APB 590, para 7.3), the Tribunal, following the Delhi ITAT
decision in the case of `Jubilant Empro (P) Ltd. vs. DCIT', (2007) TIOL 458 Del, held
that the amount received by the assessee towards notice period was to be treated as
income derived from the eligible undertaking and that deduction u/s 10A of the Act shall
                                               14
                                                                       ITA No.4713/Del/2011


be allowed accordingly. The CIT (A) followed this order to hold that the miscellaneous
income should be treated as income from business.

46.    For AY 2007-08 (APB 616, para 18), the ITAT decision for AY 2006-07 was
followed by the Tribunal. For AY 2008-09 (APB 631-632), a similar view was taken by
the Tribunal.

47.    Here again, the facts for the year under consideration remain the same as those
present in the earlier years. In accordance with the Tribunal orders for those years
(supra), we hold that the amount received by the assessee towards notice period is to
be treated as income derived from the eligible undertaking and deduction u/s 10A of the
Act is to be allowed accordingly. The finding of the ld. CIT (A) to this effect is,
accordingly, upheld. Ground No.6 is rejected.

48.    Ground No.7 challenges the action of the ld. CIT (A) in deleting the addition of
Rs. 8,59,418/- made on account of excess claim of depreciation on computer
peripherals. The CIT (A) followed the Tribunal order for AY 2006-07 in the assessee's
case and deleted the addition. The Tribunal, for AY 2006-07 had followed the decision
dated 31.8.10 of the Hon'ble Delhi High Court in the case of `CIT vs. BSES Rajadhani
Power Ltd.' in ITA No.1266/2010, wherein it was held that the Tribunal had rightly
allowed depreciation on computer peripherals at 60%.

49.    Finding no infirmity in the CIT (A)'s order in this regard also, Ground No.7 is also
rejected.

50.    As per Ground No.8, the ld. CIT (A) has erred in directing the AO to allow credit
for taxes paid for assessee in Australia.

51.    The assessee had paid taxes amounting to Rs.59,71,754/- in Australia in respect
of profits earned by its Branch Office situated in Australia. Out of this amount, a credit
of Rs.12,61,811/-, corresponding to the income-tax liability of the assessee, was
claimed in accordance with Section 90 of the Act, read with para 4 of Article XXIV of the
DTAA between India and Australia. The AO asked the assessee to justify its claim.



                                            15
                                                                            ITA No.4713/Del/2011


However, the AO rejected the claim of the assessee and disallowed the credit of taxes
paid in Australia against the Indian tax liability of the assessee company.

52.    The CIT (A) has observed as follows:-

      "The aforesaid claim of Rs 1,261,811 made by the appellant was duly allowed by
      the Ld. AO in his assessment order. However, AO failed to take cognizance of the
      fact that after taking into consideration 'he additions made in the assessment
      order, the taxable income of the appellant, had increased and therefore the Ld.
      AO should have granted an enhanced credit of the taxes paid in Australia.

      In view of the above, there seems to be no dispute in principal between the AO
      and the appellant about the credit, of taxes paid in Australia by the appellant. The
      AO is directed to give credit to the taxes paid as per the DTAA between India and
      Australia.

53.    The ld. DR has contended that while wrongly directing the AO to allow the credit
for taxes paid in Australia, the ld. CIT (A) has failed to consider that this claim had not
been examined by the AO and once this was so, the ld. CIT (A) ought to have remitted
the issue to the file of the AO, to be allowed after examination by the AO.

54.    The ld. Counsel for the assessee, on the other hand, has contended that the AO
failed to appreciate the fact that after taking into consideration the addition made in the
assessment order, the taxable income of the assessee has increased and, therefore,
the assessee is to be granted enhanced credit of taxes paid in Australia.

55.    Here, we find that indeed, considering the additions made, the taxable income of
the assessee has increased. As such, enhanced credit of taxes paid in Australia needs
to be granted to the assessee. As such, the CIT (A) has rightly remitted the matter to
the file of the AO to allow this claim of the assessee on examination. Ground No.8
stands rejected.

56.    Ground No.9 states that the ld. CIT (A) has erred in deleting the addition of
Rs.7,25,40,785/- made u/s 92CA (3) of the Act, on account of transfer pricing
adjustment. In this matter, the facts as per the record are that the assessee company is
engaged in software development and related services to its Associated Enterprises
(AEs). The assessee is a 100% subsidiary of Birlasoft Enterprises India which, in turn, is
a 100% subsidiary of Birlasoft Inc., USA. The assessee provides customized software


                                               16
                                                                       ITA No.4713/Del/2011


to its related parties. It does offshore, i.e. on site delivery of the software also. The
assessee is paid at the cost plus agreed markup and reimbursement of over head
expenses by its AEs. The company entered into the following international transactions:

   S. No.     Description of transaction      Method      Value (in Rs.)
   1.         Software development and TNMM               86,42,08,521/-
              related services
   2.         Reimbursement                of -           3,71,44,544/-
              expenses paid
   3.         Reimbursement                of -           7,67,535/-
              expenses received


56.1    The assessee benchmarked its international transaction using the Transactional
Net Margin Method (TNMM) as the most appropriate method with Operating Profit/
Operating Cost (OP/OC) as the Profit Level Indicator (PLI). It had related party as well
as unrelated party transactions under the same line of business. Therefore, internal
TNMM was employed, i.e., margin on cost earned from the unrelated party transactions
was compared with the margin on cost earned from the related parties. The TP
documentation of the assessee concluded that the operating margin of the assessee
from software services to unrelated parties was 2.51%, whereas the margin of the
assessee from associated enterprises was 2.04% and since the operating profit, which
the assessee earns was within -2.62% and 7.63% (i.e., +/- 5% range), the transaction
between the assessee and its associated enterprise had been considered to be at arm's
length. In other words, on comparison, the assessee found that the international
transactions fell within the proviso to section 92C(2) of the IT Act and, therefore,
maintained that its transactions are at arm's length.

56.2. Neither there is any dispute about the most appropriate method used by the
assessee, nor on the PLI. However, the TPO did not accept the comparison at the entity
level. The assessee had various STPI units. The TPO asked for Form No. 56F in
respect of each of the units and also to provide unit-wise details of related and unrelated



                                             17
                                                                  ITA No.4713/Del/2011


party transactions, which were submitted by the assessee on 08.10.2008 to the TPO, as
below:

                                   Related        Unrelated      Total
     NOIDA        Revenue          67502710       10128297       81983020
     unit I
                  Total Cost       151955943      43812111       193768054
                  Operating        (84453233)     (33683814)     (113785034)
                  Profit
                  OP/TC            -55.58%        -76.88%        58.12%
     GE-GDC       Revenue          446188705      75924401       522113106
     NOIDA
     STP
                  Total Cost       334451977      86386255       420838232
                  Operating        111736728      (10461854)     101274874
                  Profit
                  OP/T             33.41%         -12.11%        24.07%
     NOIDA        Revenue          184856979      18957315       210339132
     UNIT 2
                  Total Cost       185551703      33041904       218593607
                  Operating        (694724)       (14084589)     (8254475)
                  Profit
                  OP/TC            -0.37%         -42.63%        -3.78%
     Chennai      Revenue          171075757      64143704       26525l83
                  Total Cost       210078815      53680864       2637596791
                  Operating        (39003058)     10462840       1491904
                  Profit
                  OP/TC            -18.57%        19.49%         0.57%
     Non STP      Revenue          NIL            51775401       517754018
                  Total Cost       NIL            493678670      493678670
                  Operating        NIL            2407538        2407538


                                         18
                                                                       ITA No.4713/Del/2011


                    Profit
                    OP/TC              NIL              4.88%        4.88%
       Company      Revenue            869624151        686907736    1598448572
       as a whole
                    Total Cost         882018439        710599803    1593597143
                    Operating          (12414287)       (23692067)   4851429
                    Profit
                    OP/TC              -1.41%           -3.33%       0.30%


56.3   The TPO observed that the international transactions of the assessee were
emanating from three STP units, which had distinct identity and were easily
distinguishable, both, in the form of functions, and financials, and that merely because
all of them were into an activity of providing software services, only on this account, the
transactions from each one of them did not become 'closely linked'. According to the
TPO, the assessee was not able to distinguish between the functional profile of related
and unrelated party products, so as to justify losses in the unrelated segment and profits
in the related segment. Moreover, according to the TPO the assessee was not able to
furnish complete and credible information about related and unrelated accounts.
Therefore, the results of each STP unit were benchmarked by the TPO without
segregating them between related and unrelated parties.

56.4. In this way, the TPO compared the margin, i.e. OP/TC of each unit
independently. He compared the margin of unrelated transaction with the related party
transactions of each unit separately. The OP/TC earned by the Chennai unit in its
related party transaction was lower than the margin earned from unrelated party
transaction. The TPO held that the international transactions of other unit was at arm's
length, but made adjustment to the international transaction undertaken by the Chennai
unit, based on revised accounts of the Chennai unit, as submitted by the assessee. The
unrelated party transaction resulted into a margin of 19.47% as against -4.27% from the
related party transaction. As a result, the difference of Rs. 7,25,40,785/- was added to
the international transaction to bring it at arm's length.





                                              19
                                                                                        ITA No.4713/Del/2011


57.   In the impugned order, the ld. CIT (A) has observed:

      14.8. The TPO had benchmarked the international transaction unit wise
      instead of entity wise in the AY 2004-05. This matter had travelled to the
      Hon'ble ITAT and it pronounced its decision on 11.06.2011 deciding in
      favor of the appellant. For the AY 2006-07 also the appellant
      benchmarked its international transaction at the entity wise under TNMM
      using OP/TC as the PLI. Dispute Resolution Panel (DRP) concurred with
      the approach of the TPO who had done unit wise benchmarking. The
      matter travelled up to the ITAT and ITAT decided the matter through its
      pronouncement on 20.01.2011 deciding in favor of the appellant. It is
      important to note that on the issue of what should be the unit or level of
      comparison between related and unrelated transactions are common for
      the AY 2004-05, 2005-06 and 2006-07. The Hon'ble ITAT has decided this
      issue for both earlier and subsequent assessment years. The issues are
      identical. The contention of the appellant is that the related party
      transactions should be aggregated at the entity level and in the same way
      the transactions with unrelated party also should be aggregated at the
      entity level and then the resultant PLI should be compared. Whereas, the
      contention of the TPO is that each unit of the appellant company should
      be benchmarked separately based on the unit's transactions with related
      and unrelated parties. There are no dispute on other issues like most
      appropriate method and PLI to be used.
      ...................................................................................................
      ...................................................................................................
      14.10. I have examined the issues carefully after going through the record.
      I am of the view that the TPO has not done any separate evaluation of the
      unit wise assets employed, functions performed and risk undertaken.
      There is no distinguishable feature in the facts or nature of the controversy
      as compared to the past assessment year i.e. 2004-05 or the next
      assessment year i.e. 2006-07. The Hon'ble ITAT in both the years has
      held that the segments as created by the appellant are acceptable even
      though there are not to be maintained by the appellant as such under
      accounting standards. Allocations of the costs are based on rational
      principles. Wisdom of the higher authorities are available in the form of the
      two above mentioned judgments of the Hon'ble ITAT in the earlier as well
      as next assessment years in the case of the assessee itself. Therefore,
      respectfully following the decisions of the Hon'ble ITAT and also for the
      reasons mentioned above, I come to the conclusion that the
      benchmarking should be based on the aggregation at the entity level and
      not at the unit level. As the PLI of the international transaction falls within
      +/-5% as computed by the appellant, the benefit of proviso to section
      92C(2) is available to the appellant. Therefore, this ground of the appellant
      is allowed. The AO/ TPO is directed to delete the adjustment made to
      international transaction."

                                                      20
                                                                     ITA No.4713/Del/2011


58.   Thus, the CIT (A) observed that whereas the TPO had benchmarked the
international transaction unitwise, instead of entitywise, for AYs 2004-05 and 2006-07,
the Tribunal, for both these years, had decided this issue in favour of the assessee,
holding that the benchmarking of the international transactions had to be done
entitywise. He, following the said Tribunal orders, directed the AO/TPO to delete the
adjustment made to the international transactions. While doing so, he also observed
that the TPO had not done any separate evaluation of the unitwise assets employed
and functions performed and risks undertaken.

59.   The ld. DR has contended that the ld. CIT (A) has erred in deleting the addition
correctly made by the AO; that the assessee is into software services; that the assessee
has four units, all of which have different profitability; that the assessee employed the
TNMM, whereas the TPO went unitwise; that external comparables were used
(reference made to the Tribunal order for AY 2004-05 at APB 583-584, 587, 593 and
594). It has been contended that there, internal benchmarking was not done. It has also
been contended that the analysis done this year, as compared to that in AY 2004-05, is
different, inasmuch as for the year under consideration, the analysis is superior. It has
been contended that this was never done by the TPO in AYs 2004-05 and 2006-07.

60.   On the other hand, the ld. Counsel for the assessee has placed reliance on the
impugned order and it has been contended that as in the earlier two years, i.e., AYs
2004-05 and 2006-07, for the year at hand also, the profit of each of the STP units of
the assessee cannot be evaluated separately and independently of one another; that
the Tribunal orders for AYs 2004-05 and 2006-07 have been relied on by the Tribunal
for AYs 2007-08 and 2008-09 too, holding that the assessee was justified in undertaking
internal benchmarking analysis for determining the arm's length price. Contending that
Rule 10B (e) of the Rules provides that preference shall be given to internally
comparable uncontrolled transactions vis-à-vis externally comparable uncontrolled
transactions, reliance has been placed on the Third Member decision dated 13.7.12 of
the Mumbai Tribunal in the case of `Technimont ICB Pvt. Ltd. vs. ACIT' (copy at APB
635-654), rendered in ITA Nos. 4608 and 5085/Mum/2010. Reliance has also been
placed on:


                                           21
                                                                            ITA No.4713/Del/2011


      i)        `Destination of the World vs. DCIT', rendered by the Delhi Bench of the
                Tribunal in ITA No.5534/Del/2010, order dated 08.07.11 (copy at APB 655-
                675);
      ii)       `Interra Information Technologies India (P) Ltd. vs. DCIT', rendered by the
                Delhi Bench of the Tribunal in ITA No.5568 & 5680/Del/2011 (copy at APB
                676-729);
      iii)      `Honeywell India Ltd. vs. ACIT', rendered by the Chennai bench of the
                Tribunal in ITA No.2152/Mds/2011, order dated 12.12.13 (copy at APB 737-
                764); and
      iv)       `Lummus Technology Heat Transfer B.V. vs. DCIT', rendered by the Delhi
                Bench of the Tribunal in ITA No.6227/Del/12, order dated 21.02.14 (copy at
                APB 730-736)

61.          Having considered the rival contentions in the light of the material placed on
record qua this issue, we find that during the year, the assessee had entered into
international transactions of software development and related services with its
associated enterprises (AE's), i.e., Birla Soft Inc., USA and Birla Soft (UK) Ltd. It applied
the TNMM for benchmarking the international transactions of provision of software
development services as the most appropriate method, with OP/OC as the profit level
indicator (PLI). It aggregated the margin from the provision of software development
services from all its STP units. The TPO, however, benchmarked each of the STP units
on a stand alone basis. The assessee considered its international transactions to be at
arm's length, taking the operating profit margin earned from the services rendered to its
AEs, computed at 2.04%, rather than the operating profit margin earned by it from
rendering of services to unrelated parties, computed at 2.51%, to be within the safe
harbour range of (+)/(-) 5%. The TPO, however, considered the related margin of the
assessee's Chennai STP unit at (-) 4.27%, arriving at an arm's length margin of
30.26%, thus making an addition of Rs. 7,25,40,785/-. Therefore, the TPO did not
accept the comparison at the entity level, observing that the three STP units of the
assessee, to which the international transactions of the assessee were related, had
distinct identities. The TPO observed that the OP/TC earned by the assessee's Chennai


                                                 22
                                                                            ITA No.4713/Del/2011


Unit in its related party transaction [(-) 18.57%] was lower than the margin earned from
unrelated party transaction (19.49%).

62.   The CIT (A), however, disagreed with the TPO's conclusion that the
benchmarking ought to be based on the aggregation at the unit level and not at the
entity level, as contended by the assessee. For this, the ld. CIT (A) followed the Tribunal
decisions in the assessee's case for AYs 2004-05 (supra) and 2006-07 (supra).

63.   For the department, it has been contended before us that for AYs 2004-05 and
2006-07, external comparables were used and the analysis done for the year under
consideration is different from those years, inasmuch as such analysis for the year
under consideration is superior, which was not done for AYs 2004-05 and 2006-07.

64.   As noted by the ld. CIT (A), the relevant observations of the ITAT for AYs 2004-
05 and 2006-07 are as follows, respectively:-

      "ACIT vs. Birla Soft. Ltd. ITA No. 4001/Del/2009 AY, 2004-05

      "13.   The terms and conditions for rendering such services by each of STP unit
      was governed by one single agreement entered u to between Birla Soft India and
      Birla Soft Inc. US. The learned TPO has assured that functions, assets and risk
      undertaken by each of the STP Unit are distinct from each other and is
      comparable with the function, assets and risk undertaken by existing
      comparables. In other words, learned TPO has totally ignored the unity of the
      business, administrative control and unity of funds etc. The independent FAR
      analysis of each unit with existing comparables is practically not possible there is
      a common management, interlacing of the funds etc.

      14.     Thus, on due consideration of the order of the Learned CIT(Appeals), we
      are satisfied that Learned First Appellate Authority rightly did not concur with the
      conclusion of the TPO for segregating the each STP Unit and considering the
      result of each STP unit as a stand-alone for the purpose of determining the ALP
      relating to international transaction."

      Birlasoft (India) Ltd. vs. DCIT ITA No. 3839/ Del/2010 AY 2006-07

      ''17. In the light of the discussions made above we therefore, hold that the
      assessee was justified in undertaking internal bench marking analysis on
      standalone basis by placing on record working of operating profit margin from
      international transactions with AEs and transactions with unrelated parties
      undertaken in similar functional and economic scenario, and the same should be
      the basis for determination of arm's length, price in respect of international
      transactions undertaken with the associated enterprise. In the light of the facts of
      the present case as discussed above, we therefore, hold that the Transfer Pricing
      Officer had no mandate to have recourse to external comparables when, in the

                                              23
                                                                        ITA No.4713/Del/2011


      present case, internal comparables were available, which could be applied for
      determining the arm's length price of international transactions with AEs. We
      therefore, direct the Assessing Officer, Transfer Pricing Officer to determine
      arm's length price of international transactions with AEs by making internal
      comparison of the net margin earned by the assessee from the international
      transactions with associated enterprises and the profit earned by the assessee
      from the international transactions with unrelated parties. In this respect, the
      assessee has already given his working by allocating revenue and expenses to
      both the segmental and determined separate profitability."

65.   Evidently, therefore, for AYs 2004-05 and 2006-07 also, as for the year under
consideration presently, the TPO had not accepted the comparison at the entity level.
The Tribunal, however, for both these years, accepted the assessee's stand that the
related party transactions as well as the unrelated party transactions should be
aggregated at the entity level and then the resultant PLI should be compared.

66.   For AY 2006-07, it is noteworthy, the TPO had rejected the method of internal
comparison adopted by the assessee, for the reason that the assessee had not
maintained segmental accounts and had not reported segmental results in its audited
financial statements. The Tribunal, however, held that the Guidelines provided under
AS-17, which is the Accounting Standard requiring reporting of financial information or
result about the different types of products and services that the concerned business
segment produces, were not applicable to the assessee's case, since the assessee
company was providing the same software related services to both, its AEs and
unrelated parties, and so, the lack of segmental reporting could not be made a basis for
rejecting the assessee's method of computing the ALP by way of internal comparison
made between the transactions and AE's unrelated parties.

67.   The above is not the issue before us. However, despite thereof, the fact remains
that for AY 2006-07, the Tribunal held that the assessee was justified in undertaking
internal benchmarking analysis on a stand alone basis by placing on record the working
of the operating profit margin from international transactions with its AEs and
transactions with unrelated parties, undertaken in a similar functional and economic
scenario, and that the same ought to be the basis for determination of the arm's length
price in respect of the international transactions undertaken by the assessee with its
associated enterprises.


                                            24
                                                                      ITA No.4713/Del/2011


68.    For AY 2004-05, while deciding in favour of the assessee, the Tribunal found
that there was no significant functional difference in the software development and
maintenance services rendered by the assessee to its related and unrelated parties.
The services rendered by the STP units of the assessee were rendered to the same
AEs of the assessee, i.e., Birla Soft Inc. and Birla Soft UK, on a continuing basis (the
position remains the same for the year under consideration also). It was observed that
there was unity of business, administrative control and funds, etc., in each of the STP
units of the assessee, and that because of such commonness of management and
interlacing of funds, etc., or software development services, it was not practically
possible to carry out an independent FAR analysis of each unit with the existing
comparables. It remains undisputed that the position, as above, remains the same for
the year under consideration also. The Tribunal orders for the earlier years have not
been shown to have been upset, or even stayed, on appeal. Therefore, since there
continues to be unity of business and administrative control and interlacing of funds
amongst the units of the assessee company, for this year also, it is not possible to carry
out an independent FAR analysis of each unit with existing comparables. The assessee
had provided various kinds of software related services, such as software development
services, software maintenance and repair services and quality testing services, etc.,
from each of its STP units located in Noida and Chennai. These services were rendered
to the same two AEs of the assessee. It was a single agreement qua each of the
assessee's AEs, which governed the terms and conditions thereof, as well as the
consideration for the rendering of such services. The services were provided on a
continuous basis from each of the STP units of the assessee company. Therefore, the
assessee is correct in contending that such services are of the same or similar nature
amongst all three of its STP units, inter se, and they should be combined and evaluated
by adopting a combined transaction approach, rather than employing the unitwise
approach, as adopted by the TPO.

69.   In `Technimont ICB Pvt. Ltd.' (supra) (authored by one of us ­ the ld. AM, sitting
as Third Member), it has been held in this regard that Rule 10B (e)(ii) of the Income-tax
Rules provides that the net profit margin realized by the enterprise or by an unrelated
enterprise, from a comparable uncontrolled transaction, or a number of such

                                           25
                                                                         ITA No.4713/Del/2011


transactions, is computed having regard to the same base, as is referred to in Rule 10B
(e) (i), with reference to cost incurred, or sales effected, or assets employed, or to be
employed; that in Clause (ii) of the said Rule, reference is made to internal and external
comparables; that as per this Rule, what is to be compared is profit from a comparable
uncontrolled transaction; that the word `comparable' may encompass internal
comparable or external comparable; that the Rule provides that preference is to be
given to internally comparable uncontrolled transactions vis-à-vis externally comparable
uncontrolled transactions; that this is so, because the Rule refers first to the net profit
margin realized by the enterprise (internal) from a comparable uncontrolled transaction
and thereafter, it talks of new profit margin realized by an unrelated enterprise (external)
from a comparable uncontrolled transaction; that thus, where a potential comparable is
available in the shape of an uncontrolled transaction of the same assessee, it is likely to
have a higher degree of comparability vis-à-vis comparables identified amongst the
uncontrolled transactions of third parties; that the underlying object behind computing
the ALP of an international transaction is to find out the profits which such enterprise
would have earned, if the transaction had been with some third party, instead of the
related party; that when data is available showing profit margin of that enterprise itself
from a third party, it is always safe and advisable to have recourse to such internal
comparable case; that the reason for this I,s that various factors having bearing on the
quality of output, assets employed, input cost, etc., continue to remain, by and large the
same in the case of an internal comparable; that the effect of difference due to such
inherent factors on the comparison made with the third parties gets neutralized when
comparison is made with internal comparables; and that therefore, an internally
comparable uncontrolled transaction is more noteworthy than an externally comparable
uncontrolled transaction.

70.    In `Destination of the World Pvt. Ltd.' (supra), it has been held, inter alia, that the
OECD Guidelines mention that net margin of the tax payer from the controlled
transactions should be established with reference to the net margin which the same tax
payer earns in comparable uncontrolled transactions; that where this is not possible, the
net margin that would have been earned in comparable transactions by an independent
enterprise, may serve as a guide; that thus, these Guidelines suggest preference for

                                             26
                                                                        ITA No.4713/Del/2011


internal comparables and reference has to be made to the result of independent
enterprises only when the former course of action is not possible; that in the case of
Birla Soft (India) Ltd., in ITA No.3839/Del/00, it has been clearly held that the assessee
was justified in undertaking internal comparison on a stand alone basis, by placing on
record the working of operative profit margin from international transactions with AEs
and transactions with uncontrolled parties, undertaken in a similar functional and
economic scenario; that such an internal comparison is valid in all the methods; and that
therefore, the attempt should be to determine arm's length price of controlled
transactions on comparing the same with internal uncontrolled transactions undertaken
in the same or similar economic scenario.

71.    In view of the above, we hold that the assessee is right in contending that since
the profit of each of the STP units of the assessee company cannot be evaluated
separately and independently of one another, they cannot be segregated and the
approach of the TPO in considering the result of each STP unit, on a stand alone basis,
for the purpose of determining the ALP relating to the assessee's international
transactions, was incorrect. The action of the CIT (A) in accepting this contention of the
assessee is hereby upheld and confirmed. The ld. CIT (A), in our considered opinion,
for the above discussion, has rightly concluded that the benchmarking of the
transactions should be based on the aggregation at the entity level and not at the unit
level. This finding of the ld. CIT (A) is endorsed. Accordingly, Ground No.9 is rejected.

72.    In the result, the appeal filed by the department is partly allowed, as indicated.

       The order pronounced in the open court on 06.05.2014.

                 Sd/-                                                    Sd/-

          [R.S. SYAL]                                               [A.D. JAIN]
      ACCOUNTANT MEMBER                                          JUDICIAL MEMBER


Dated, 06.05.2014.

dk




                                             27
                              ITA No.4713/Del/2011




Copy forwarded to:

   1.   Appellant
   2.   Respondent
   3.   CIT
   4.   CIT (A)
   5.   DR, ITAT

                          AR, ITAT, NEW DELHI.




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