Casio India Company Pvt. Ltd., New Delhi vs Assessee

This appeal by the assessee is directed against the final order

passed by the Assessing Officer (AO) on 28.9.2010 u/s 143(3) read with ITA No.4726/Del/2010 section 144C of the Income-tax Act, 1961 (hereinafter also called 'the

Act') in relation to the assessment year 2006-07.

2. The first issue raised in this appeal is against the addition on

account of transfer pricing adjustment towards Advertising, Marketing

and Promotion (AMP) expenses.

3. Briefly stated, the facts of the case are that the assessee, is a wholly

owned subsidiary of Casio Computer Company Limited, Japan. It

distributes watches and some other information products and other

related products of Casio, Japan in India. Certain international

transactions were reported by the assessee in Form No.3CEB. On a

reference made by the Assessing Officer (AO) to the Transfer Pricing

Officer (TPO), the latter accepted the declared international transaction

at arm's length price (ALP). However, the TPO proposed transfer

pricing adjustment of Rs.1,79,94,337/- on account of AMP expenses.

The assessee remained unsuccessful before the Dispute Resolution Panel

(DRP). This led to the making of addition of Rs.1.79 crore by the AO in

2 ITA No.4726/Del/2010

his final order. The assessee is aggrieved against the addition so made

by the AO.

4. We have heard the rival submissions and perused the relevant

material on record. Special Bench of the Tribunal in the case of LG

Electronics India Pvt. Ltd. Vs. ACIT (2013) 152 TTJ (Del) 273 (SB), by

its majority decision held, inter alia, that AMP is a transaction and also

an international transaction within the meaning of section 92B of the Act

and that the TPO has jurisdiction to compute the ALP of this

international transaction despite the same not having been specifically

referred to by the AO. On the question of determination of the ALP of

this international transaction, the Special bench approved the application

of bright line test for working out the amount of non-routine AMP

expenses and held that the ALP of AMP expenses should be determined

on Cost plus method by treating AMP transaction as a separate and

distinct from other international transactions. It was further held that the

selling expenses directly incurred in connection with the sales do not

lead to brand promotion and hence should not be brought within the

3 ITA No.4726/Del/2010

ambit of AMP expenses. The Special bench laid down certain

parameters to be taken into consideration for determining the ALP of

AMP expenses. In the ultimate analysis, the matter was sent back to the

TPO for undertaking the exercise afresh in the light of its directions.

5. Following the said order, various benches of the Tribunal decided

several cases involving AMP expenses, restoring the matter to the file of

AO/TPO for deciding this issue in conformity with the directions given

by the Special Bench in LG Electronics (supra). Several assessees as

well as the Revenue preferred their respective appeals before the

Hon'ble High Courts against the tribunal orders following the Special

bench order. A batch of such appeals led by Sony Ericson Mobile

Communications India Pvt. Ltd. Vs. CIT has been disposed of by Their

Lordships of the Hon'ble Delhi High Court, delivering judgment on 16th

March, 2015, upholding the majority view of Special Bench in LG

Electronics (supra) treating AMP as an international transaction and also

conferring jurisdiction in the TPO to determine the ALP of the

international transaction of AMP expenses. The Hon'ble High Court has

4 ITA No.4726/Del/2010

held, inter alia, that the international transaction of AMP expenses

should be bundled or aggregated with other international transaction

carried out by the assessee as a distributor, who either simply acts an

agent of manufacturer or purchases goods from the manufacturer for

resale at his own account. However, in the case of a manufacturer, the

import of raw material has been held to be an independent transaction of

marketing and distribution. In the case of a distributor, the Hon'ble

High Court held that where TNMM has been applied as the most

appropriate method, which method has not been disturbed by the TPO,

then, the international transactions of AMP and distribution activities

should be clubbed. It further held that for determining the ALP of such

transactions under a combined approach, only such comparables should

be chosen which conform to the AMP functions and other distribution

functions conducted by the assessee. If there is some difference in the

functions under these international transactions, including that of AMP,

between the assessee and the comparables, then, suitable adjustment

should be made to bring both the transactions at par. If probable

comparables are not performing similar functions as done by the 5 ITA No.4726/Del/2010

assessee and no adjustment is possible for bringing the international

transactions of the assessee in an aggregate manner at par with those

undertaken by the comparables, then, segregation should be done and

the international transaction of AMP spend should be separately

processed under the transfer pricing provisions for the purposes of

determining its ALP separately. In such determination of ALP of AMP

expenses in a segregated manner, proper set off on account of excess

purchase price adjustment should be allowed. The view taken by the

Tribunal in segregating routine and non-routine expenses on the basis of

bright line test has been set aside by the Hon'ble High Court. The view

taken by the Special Bench that the expenses concerned with the sales,

such as, rebates and discounts etc., should be excluded from the ambit of

AMP expenses, has been upheld.

6. We can summarize the relevant position emanating from the

judgment of the Hon'ble High Court, as under : -

AMP expense is an international transaction [Paras 52 & 53 of

the judgment] ;

6 ITA No.4726/Del/2010

The TPO has jurisdiction to determine the ALP of the

international transaction of AMP expenses [Para 50 of the

judgment];

Inter-connected international transactions can be aggregated and

section 92(3) does not prohibit the set-off [Paras 80 & 81];

AMP is a separate function. An external comparable should

perform similar AMP functions. [Paras 165 &166] ;

Bright line test cannot be applied to work out non-routine AMP

expenses for benchmarking [Para 194(x)];

ALP of AMP expenses should be determined preferably in a

bundled manner with the distribution activity [Paras 91, 121 &

others] ;

For determining the ALP of these transactions in a bundled

manner, suitable comparables having undertaken similar activities

of distribution of the products and also incurring of AMP

expenses, should be chosen [Paras 194(i), (ii), (viii) & others];

The choice of comparables cannot be restricted only to domestic

companies using any foreign brand [Para 120] ; 7 ITA No.4726/Del/2010

If no comparables having performed both the functions in a

similar manner are available, then, suitable adjustment should be

made to bring international transactions and comparable

transactions at par [Para 194 (iii)] ;

If adjustment is not possible or comparable is not available, then,

the TNMM on entity level should not be applied [Paras 100, 121,

194(iii) & (vi)] ;

In the above eventuality, international transaction of AMP should

be viewed in a de-bundled manner or separately [Paras 121&

194(xi)] ;

In separately determining the ALP of AMP expenses, the TPO is

free to choose any other suitable method including Cost plus

method [Para 194(xiii)];

In so making a TP adjustment on account of AMP expenses, a

proper set off/purchase price adjustment should be allowed from

the other transaction of distribution of the products [Para 93] ;

Selling expenses cannot be considered as part of AMP expenses

[Paras 175 & 176 of the judgment].

8 ITA No.4726/Del/2010

7. With the above background of the ratio decidendi of the judgment

of the Hon'ble jurisdictional High Court, let us examine the contention

put forth by the ld. AR in support of the deletion of addition. He

submitted that the assessee applied TNMM as the most appropriate

method. Since the profit margin declared by the assessee was

favourably comparable with the average margin of the comparables,

which fact has not been disputed by the TPO, then, no adjustment should

be made on account of AMP expenses because such expenses stand

subsumed in the overall operating profit. This was countered by the ld.

DR with reference to certain paras of the judgment in Sony Ericsson

(supra) not permitting the acceptance of such a wide proposition.

8. We are unable to accept the argument advanced on behalf of the

assessee for deletion of the addition towards AMP expenses on the plain

logic of the assessee's profit margin matching with those of

comparables. There is a basic fallacy in the argument of the ld. AR. It

is pertinent to note that the TPO examined and got satisfied with the

assessee's profit margin vis-à-vis the comparables only qua the

9 ITA No.4726/Del/2010

international transactions of distribution function. He determined the

ALP of AMP expenses by applying bright line test and in this process

simply compared the quantitative figures of AMP expenses incurred by

the assessee and comparables for working out the non-routine expenses.

He did not examine the AMP functions carried out by the assessee and

the comparables. As the bright line test primarily concentrates on the

quantitative aspects of the AMP expenses alone, it overlooks the

examination of the AMP functions carried out by the assessee on one

hand and the comparables on the other. Now, the Hon'ble High Court in

Sony Ericson Mobile (supra) has held that AMP expense is a separate

international transaction and also bright line test is not applicable for

determining the ALP of AMP expenses. The manner for the

determination of the ALP of the distribution activity and AMP activity

has also been set out by the Hon'ble High Court to be conducted, firstly,

in a bundled manner by considering the distribution and AMP functions

performed by the assessee as well as the probable comparables, and if

probable comparables having performed both the functions are not

available, then to determine the ALP of AMP expenses in a segregated 10 ITA No.4726/Del/2010

manner. As such, it becomes immensely important to separately examine

the distribution and AMP functions undertaken by the assessee as well as

probable comparables. It is vital to highlight the difference between the

AMP expenses and AMP functions. Whereas the AMP functions are the

means by which the AMP activity is performed, the AMP expenses are

the amount spent on the performance of such means (functions). To put

it simply, an examination of AMP functions carried out by the assessee

and the probable comparables is sine qua non in the process of

determination of the ALP of the international transaction of AMP spend,

either in a segregate or an aggregate manner. What Their Lordships have

held is to bundle the distribution activity with the AMP activity, being

two separate but connected international transactions, for the purposes of

determination of the ALP of both these international transactions in a

combined manner. The argument of the ld. AR, if taken to a logical

conclusion, will make the AMP spend as a non-international transaction,

which, in our considered opinion, is not appropriate. Once AMP

expense has been held to be an international transaction, it is, but,

natural that the functions performed by the assessee under such a 11 ITA No.4726/Del/2010

transaction need to be compared with similar functions performed by a

comparable case. If AMP functions performed by the assessee turn out

to be different from those performed by a probable comparable

company, then, an adjustment is required to be made so as to bring the

AMP functions performed by the assessee as well as the comparable, at

the same pedestal. If we concur with the contention of the ld. AR that

the addition on account transfer pricing adjustment of AMP expenses be

deleted without any examination of the AMP functions carried out by

the assessee as well as comparables, this will amount to snatching away

the tag of international transaction from AMP expenses, assigned by the

Hon'ble High Court. What Their Lordships have held in the judgment is

that the distribution activity and AMP expenses are two separate but

related international transactions. It is only for the purposes of

determining their ALP that these two should be aggregated. The process

of such aggregation does not take away the separate character of the

AMP transaction, albeit related. An analysis and examination of the

distribution and AMP functions carried out by the assessee must be

necessarily done in the first instance, which should be then compared 12 ITA No.4726/Del/2010

with similar functions performed by some probable comparables. If the

distribution and AMP functions performed by the assessee turn out to be

different from those performed by probable comparables, then, a

suitable adjustment should be made to the profits of the comparable so

as to counterbalance the effect of such differences. If however

differences exist in such functions, but no adjustment can be made, then,

such probable comparable should be dropped from the list of

comparables. If, in doing this exercise, there remains no company doing

comparable distribution and AMP functions, then, both the international

transactions are required to be segregated and then examined on

individual basis by finding out probable comparables doing such

separate functions similarly. For the international transaction of AMP

spend, this can be done by, firstly, seeing the AMP functions actually

performed by the assessee and then comparing it with the AMP

functions performed by a probable comparable. If both are found out to

be similar, then the matter ends and a comparable is found and one can

go ahead with determining the ALP of such a transaction. If the AMP

functions performed by the two entities are found to be different, then 13 ITA No.4726/Del/2010

adjustment is required to be made in the case of a probable comparable,

so as to make it uniform with the assessee. The assessee may have

possibly done, say, four different AMP functions as against the probable

comparable having done, say, only three. In such a scenario, again the

adjustment will be warranted. In another situation, the AMP functions

performed by the assessee and probable comparable may be similar but

with varying standards, which will also call for an adjustment. Crux of

the matter is that the AMP functions performed by the assessee must be

similar to those done by the comparable, in the same manner as such

functions are compared in any other international transaction. However,

in computing ALP of AMP spend, the adjustment or set off, if any,

available from the distribution function, should be made. The essence

of the judgment in the case of Sony Ericson Mobile (supra) is that the

two international transactions of Distribution and AMP should be

examined on the touchstone of transfer pricing provisions, but on an

aggregate basis. Determining the ALP of two transactions in an

aggregate manner postulates making a comparison of both the functions

of distribution and AMP carried out by the assessee with the 14 ITA No.4726/Del/2010

comparables, so that surplus from the distribution activity could be

adjusted against the deficit in the AMP activity. The Hon'ble High Court

has no where laid down that the AMP functions performed by the

assessee should not be compared with those performed by the

comparable parties. On the contrary, it turned down the contention

raised by the ld. AR urging for not treating AMP as a separate function,

which is apparent from the extraction from para 165 of the judgment :

`On behalf of the assessee, it was initially argued that the TPO cannot

account for or treat AMP as a function. This argument on behalf of the

assessee is flawed and fallacious for several reasons. There are inherent

flaws in the said argument'. It held vide para 165 of the judgment that :

`An external comparable should perform similar AMP functions.'

Thus it is manifest that comparison of AMP functions is vital which

cannot be dispensed with. Let us we go a step further with the

alternative prescription of the judgment that if ALP of both the

transactions of Distribution and AMP cannot be determined in a

combined manner, then the ALP of AMP function should be separately

done. The submission advanced by the assessee of considering the 15 ITA No.4726/Del/2010

profit on an entity level without making comparison of AMP functions

done by the assessee as well as the comparable, will render this

alternative approach incapable of compliance. Canvassing such a view

amounts to treating AMP spend as a non-international transaction, which

is patently incapable of acceptance.

9. Adverting to the facts of the instant case, we find that the TPO

accepted TNMM as the most appropriate method and did not make any

TP adjustment on account of the distribution activity carried out by the

assessee. He, however, espoused the AMP expense as a separate and

distinct. Treating the AMP spend as a separate international transaction,

he applied the Cost plus method and proposed the extant adjustment. In

doing so, he segregated routine AMP expenses incurred by the assessee

for his business from the non-routine AMP expenses by treating such

non-routine AMP expenses leading to the creation of marketing

intangible for its AE. This bifurcation of total AMP expenses was done

by applying bright line test. It is obvious that in the entire exercise

carried out by the TPO, he proceeded on an altogether different line in

16 ITA No.4726/Del/2010

examining the quantum of AMP expense for determining the value of

the international transaction of AMP, without looking at the AMP

functions carried out by the assessee and the comparables. Distinct

examination of AMP functions does not find place in this method of

computing the value or the ALP of AMP spend. Now, when we look at

the ratio laid down by the Hon'ble jurisdictional High Court, it becomes

crystal clear that the approach adopted by the TPO for determining ALP

of AMP expenses has been rendered incorrect. However, the fact

remains that as per the verdict of the Hon'ble High Court, AMP spend is

an international transaction, which is required to be processed under

Chapter X of the Act by taking into account the AMP functions

performed by the assessee and then comparing such functions with those

performed by comparable entities, though, firstly in a combined manner

with the distribution functions. We find no reference to the AMP

functions carried out by the assessee in the order of the TPO. As such,

there can be no question of making any comparison of the assessee's

AMP functions with those of the comparables. Going by the ratio in the

case of Sony Ericson Mobile (supra), it is mandatory to make a 17 ITA No.4726/Del/2010

comparison of the AMP functions performed by the assessee and

comparables and then making an adjustment, if any, due to differences

between the two, so that the AMP functions performed by the assessee

and comparable are brought to a similar platform. In fact, this is also the

prescription of Rule 10B(1)(e), which provides as under :-

` (e) transactional net margin method, by which,--

(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ;

(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ;

(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ;

(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ;

(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.'

18 ITA No.4726/Del/2010

10. A perusal of the sub-clause (iii) of this Rule divulges that net profit

margin under a comparable uncontrolled transaction as determined

under sub-clause (ii) should be: "adjusted to take into account the

differences, if any, between the international transaction and the

comparable uncontrolled transactions." It is only such adjusted net

profit margin in sub-clause (iii) of Rule 10B(1)(e) which is compared

with the net profit margin realized by the assessee as per the mandate of

sub-clause (iv) of Rule 10B(1)(e).

11. Sub-rule (2) of Rule 10B provides that 'for the purposes of sub-

rule (1)', the comparability of an international transaction with an

uncontrolled transaction shall be judged with reference to the following,

namely - (a) the specific characteristics of the property transferred or

services provided in either transaction ; (b) the functions performed,

taking into account assets employed or to be employed and the risks

assumed, by the respective parties to the transactions ; (c) the

contractual terms (whether or not such terms are formal or in writing) of

the transactions which lay down explicitly or implicitly how the

19 ITA No.4726/Del/2010

responsibilities, risks and benefits are to be divided between the

respective parties to the transactions ; (d) conditions prevailing in the

markets in which the respective parties to the transactions operate,

including the geographical location and size of the markets, the laws and

Government orders in force, costs of labour and capital in the markets,

overall economic development and level of competition and whether the

markets are wholesale or retail. Sub-rule (3) of Rule 10B stipulates that

an uncontrolled transaction shall be comparable to an international

transaction if (i) none of the differences, if any, between the

transactions being compared, or between the enterprises entering into

such transactions are likely to materially affect the price or cost charged

or paid in, or the profit arising from, such transactions in the open

market ; or (ii) reasonably accurate adjustments can be made to

eliminate the material effects of such differences.

12. On a comparative reading of sub-rules (1), (2) and (3) of Rule

10B, it becomes palpable that the international transaction and the

uncontrolled transaction with which comparison is sought to be made for

20 ITA No.4726/Del/2010

determining the ALP, in the first instance, must have overall similar

characteristics. It is vivid that if the goods/services are different, then

no effective comparison can be made. Once the goods/services under

both the transactions are broadly similar but there is a difference in them

because of certain specific characteristics; and/or the products/services

in both the transactions are identical, but still there are certain

differences due to the contractual terms or the geographical location,

etc., then, a reasonably accurate adjustment should be made for

eliminating the material effects of such differences so as to bring the

international transaction and the comparable uncontrolled transaction on

the same podium. If due to one reason or the other, no reasonable

accurate adjustment can be made due to such differences, then, such

uncontrolled transaction should not be considered as a comparable

transaction.

13. It is discernible that the prescription of Rule 10B is in complete

harmony with the ratio of the judgment in the case of Sony Ericson

Mobile (supra), to the effect that the AMP functions carried out by the

21 ITA No.4726/Del/2010

assessee are required to be necessarily compared with the AMP

functions carried out by a comparable entity in determining the AMP of

ALP expenses. Difference between the functions, if capable of

adjustment, should be given effect to in the profit rate of the comparable

and if such difference cannot be given effect to, then, the probable

comparable should be eliminated from the list of comparables. Going

further, if no proper comparable survives, then the TNMM should be

discarded and an alternative method, may be, Cost plus or any other

suitable method be applied for determining the ALP of AMP expenses.

14. At the cost of repetition, we summarize that the distribution and

AMP functions are two separate international activities, which need to

be compared with uncontrolled transactions. Because of their inter-

twinning, it is only for the purposes of determining their ALP that both

these transactions can be aggregated in the first instance, so that the

surplus from one could be adjusted against the deficit from the other in

an overall approach. It does not mean that because of aggregation, the

AMP expense transaction sheds its character of a separate international

22 ITA No.4726/Del/2010

transaction and hence the AMP functions should not be matched with

the AMP functions carried out by probable comparables. If suitable

comparables can be found having performed both distribution and AMP

functions, then, their ALP should be determined on aggregate basis. If,

however, there is some difference in the distribution or AMP functions

performed by the assessee vis-à-vis the probable comparables, then an

attempt should first be made to iron out such difference by making a

suitable adjustment to the profit margin of comparables. If such an

adjustment is not possible, then such probable comparable should be

eliminated. If, by making a comparative analysis of the distribution and

AMP functions jointly, there remains no comparable case performing

such distribution and AMP functions, then, the international transaction

of AMP should be segregated and its ALP be determined separately by

applying a suitable method. However, in so determining the ALP of

such an international transaction of AMP expenses on separate basis, a

proper set off, if any, available from the distribution activity, should be

allowed.

23 ITA No.4726/Del/2010

15. Coming back to the facts of the instant case, we find that no detail

of the AMP functions performed by the assessee is available on record.

Similarly, there is no reference in the order of the TPO to any AMP

functions performed by comparables. In fact, no such analysis or

comparison has been undertaken by the TPO because of his applying the

bright line test for determining the value of the international transaction

of AMP expense and then applying the cost plus method for determining

its ALP. The ld. AR also failed to draw our attention towards any

material divulging the AMP functions performed by the assessee as well

as comparables. As such, we are handicapped to determine the ALP of

AMP expenses at our end, either in a combined or a separate approach.

Under such circumstances, we set aside the impugned order and send the

matter back to the file of the TPO/AO for determining the ALP of the

international transaction of AMP spend afresh in accordance with the

manner laid down by the Hon'ble High Court in Sony Ericson Mobile

(supra). It is, however, made clear that the TPO/AO, while computing

adjustment, if any, on account of AMP expenses will not include Selling

24 ITA No.4726/Del/2010

expenses directly incurred in connection with sales in the overall base of

AMP expenses.

16. Another issue has been argued by the ld. AR about the computation

of the base of AMP expenses. It was argued that the assessee got subsidy

from its AEs on account of AMP expenses. It was ergo, urged that such

amount of subsidy should be reduced from total AMP expenses incurred

before the determination of the ALP of AMP expenses.

17. We are not convinced with the submission advanced on behalf

of the assessee. What the assessee is seeking is the reduction in the

amount of AMP expenses incurred for brand building with the

amount of subsidy or reimbursement received from the AEs. This

type of reduction at the stage of computation of the ALP of an

international transaction is not contemplated under the transfer

pricing legislation. On the contrary, such subsidy or reimbursement

goes to reduce the ALP necessitating the reduction in the amount of

addition to be made. What the law mandates is to determine the

25 ITA No.4726/Del/2010

ALP of an international transaction, which in the extant case is

AMP expenses. Incurring of AMP expenses by the assessee for its

AE is in the nature of service rendered for brand building on behalf

of the AE. Such rendering of service entails the incurring of costs by

the assessee. The costs so incurred with normal gross profit mark up

represents the amount which ought to have been recovered by the

assessee from its AE. If no amount is received from the AE, then the

entire amount incurred with the normal gross profit mark-up,

depicting the ALP of this international transaction, calls for

addition. If however some amount is received by the assessee from

its AE, then the ALP as reduced by such amount received, by

whatever name called as subsidy or reimbursement, gives the

amount of addition ot be made. The contention of the ld. AR for

reducing the amount of subsidy at the threshold before determining

the ALP would mean that to that extent, the assessee had not

rendered any service of brand building to its AE, which position

runs contrary to the reality. The fact that the assessee actually 26 ITA No.4726/Del/2010

rendered service by incurring the gross amount cannot be lost sight

of. It is this gross amount which requires to be suitably compensated

to the assessee with the normal profit mark-up. The contention

raised by the ld. AR, therefore, fails.

18. With the above observations, we send the matter back to the

TPO/AO for redetermination of the ALP of AMP expenses in

accordance with the above guidelines. Needless to say, the assessee will

be allowed a fresh opportunity of hearing in such fresh proceedings. Ex

consequenti, the issue raised about the TPO having no jurisdiction to

determine the ALP of AMP expenses, is dismissed following the

judgment in the case of Sony Ericsson Mobile (supra).

19. The second issue raised in this appeal is against the reduction in

the amount of deduction u/s 10A of the Act.

20. Succinctly, the assessee declared total turnover at

Rs.41,77,98,085/-, which included turnover of Rs.48,87,014/- with

respect to STP unit eligible for deduction u/s 10A. The remaining

turnover was in relation to non-STP unit. The AO observed that the 27 ITA No.4726/Del/2010

turnover of STP unit accounted for only 1.20% of total turnover,

whereas the assessee had declared 38% of total net profit as attributable

to the STP unit. The AO apportioned total expenses amounting to

Rs.2,84,56,217 incurred by the assessee between STP unit and non-STP

unit on the basis of the respective turnover in both the units. This

resulted in reduction in the amount of deduction u/s 10A to the tune of

Rs.1,12,072/-. The assessee remained unsuccessful before the DRP. In

the final assessment order, the AO made addition for such sum of

Rs.1,12,072/-.

21. We have heard the rival submissions and perused the relevant

material on record. There is no dispute on the fact that the assessee is

otherwise eligible for deduction u/s 10A in respect of income from STP

unit. It is equally undisputed that the assessee carried on business in

non-STP unit also. In such a scenario, when some total common

expenses are available without any bifurcation, then, such expenses are

required to be segregated between the STP and non-STP units on some

reasonable basis. The AO apportioned such expenses in the ratio of

28 ITA No.4726/Del/2010

turnover of STP and non-STP units. The assessee has no objection to

the apportionment of common expenses in the ratio of turnover of two

units. The only dispute is about the apportionment of certain STP unit

specific expenses. On a specific query, it was fairly admitted that there

were certain non-STP unit specific expenses as well, but the AO

aggregated all the specific and non-specific expenses and allocated them

in the ratio of turnover of STP and non-STP units. In our considered

opinion, this approach adopted by the AO is not correct. We, therefore,

set aside the impugned order on this issue and remit the matter to the file

of AO for a fresh determination of net profit eligible for deduction u/s

10A of the Act. In such a computation of net profit, the STP unit

specific expenses should be considered in the computation of STP unit

profit as such and the non-STP unit specific expenses should be

considered in the computation of profit of non-STP unit. The remaining

common expenses which are not specifically allocable either to the STP

or the non-STP units should be bifurcated in the ratio of turnover.

29 ITA No.4726/Del/2010

22. The last issue raised in this appeal is against the allowing of

depreciation on computer peripherals @ 15% as against 60% claimed by

the assessee.

23. We have considered the rival submissions and perused the relevant

material on record. It is observed that the assessee claimed depreciation

on computer peripherals @ 60% which was restricted by the AO to 15%.

We find that this issue is no more res integra in view of the judgment of

the Hon'ble jurisdictional High Court in CIT vs. BSES Yamuna Powers

Ltd. 2010-TIOL-636-HC-DEL-IT, in which it has been held that the

depreciation on computer peripherals should be allowed at 60% instead

of 15%. We, therefore, allow this ground.

24. In the result, the appeal is partly allowed.

The order pronounced in the open court on 26.06.2015.

Sd/- Sd/- [A.T. VARKEY] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER Dated, 26th June, 2015. dk 30 ITA No.4726/Del/2010

Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT

AR, ITAT, NEW DELHI.

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