TMI Blog2011 (6) TMI 500X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 92B(1) so as to require adjustment for ascertaining the ALP. Therefore, the consequential addition by the AO is untenable - Decided in favor of the assessee. Disallowance of consultancy expenses under Transfer Pricing - Held that:- There is nothing to suggest that the assignments by McKinsey & Co. were carried out on the basis of any arrangement or agreement between the assessee and the Associated Enterprises. There is also no material to show that any tangible and concrete benefit has accrued to the Associated Enterprises as a result of the expenditure incurred by the assessee in obtaining consultancy from McKinsey & Co. Assertion by the TPO appears to be based on a mere presumption. Adjustment set aside - Decided in favor of the assessee Manner of computation of deduction under section 80HHE - AO made certain changes which inter-alia included inclusion of the turnover of the Japan and Australia branches as a part of the 'total turnover' - Held that:- As decided in ITO v. Servion Global Solutions Ltd. [2007 (6) TMI 273 - ITAT MADRAS-C] Definitions of "export turnover" and "total turnover" contained in section 80HHE and explained that the same provided that what is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant to adjudicate the claim of the assessee. As per the amended provisions, states that credit is allowable in relation to the taxes paid in country outside India while computing "assessed tax" for the purposes of section 234B(1). Case of CIT v. Apar Industries Ltd. [2010 (4) TMI 151 - BOMBAY HIGH COURT] has interpreted the said amendment as clarificatory in nature so as to have a retrospective application even for assessment years prior to 1.4.2007 - remit this aspect to AO to re-compute the interest in accordance with aforesaid discussion and as per law - assessee succeeds for statistical purposes. - IT APPEAL NOS. 426 & 1131 (PUNE) OF 2006 AND 42 & 687 (PUNE) OF 2007 - - - Dated:- 30-6-2011 - I.C. SUDHIR, G.S. PANNU, JJ. For the Appellant: Shri S.N. Inamdar For the Respondent: Shri V. Anandraj ORDER G.S. Pannu, Accountant Member The captioned four cross-appeals, two by the assessee and two by the Revenue pertaining to same assessee, were heard together and are being disposed off by a consolidated order for the sake of convenience and brevity. 2. In ITA No 426/PN/06 pertaining to the assessment year 2002-03, the assessee has raised the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,80,87,334 Sigma 2,29,07,934 Millennium Park 3,75,53,361 Total 20,45,14,874 3. In the first Ground, dispute relates to the action of the Assessing Officer in adding back losses suffered by the section 10A eligible units while computing income of the assessee under the normal provisions of the Act. 4. In this connection, it was a common point between the parties that similar issue has been adjudicated by the Pune Bench of the Tribunal in assessee's own case for the immediately preceding assessment year 2001-02 vide ITA No 274/PN/2005 dated 29.5.2009 in favour of the assessee. Apart therefrom, it has been pointed out by the learned representative for the assessee that the issue has also been dealt with by the Hon'ble jurisdictional High Court in the case of Hindustan Unilever Ltd. v. Dy. CIT [2010] 191 Taxman 119/325 ITR 102 (Bom.) affirming the stand of the assessee. 5. In the above background, we find ample merit in the Ground of appeal raised by the assessee. The Assessing Officer, while computing the income did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being dealt with together. 7. In brief, the facts are that the assessee is engaged in the business of providing software services for various entities abroad and such services are provided off-shore as well as on-site. The Assessing Officer noted international transactions with Associated Enterprises on account of software development services provided by the assessee and consultancy services availed, etc. Accordingly, a reference under section 92CA(1) of the Act was made to the Transfer Pricing Officer (in short the TPO ) to determine the arm's length price (ALP) of the international transactions. In determining the ALP certain adjustments were made by the TPO and the specific adjustment which is in dispute before us is on account of interest chargeable on excess period of credit allowed by the assessee to the Associated Enterprises. As per the Revenue, considering the significant cost incurred by the assessee the extension of the credit to the Associated Enterprises beyond the period of credit contracted for, could not be regarded as an action at arm's length. On this score, Revenue contends that a sum of ₹ 3.99 Crores was to be construed as the arm's len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the Associated Enterprises as cost of funds, on an arm's length principle. As a result, out of the total addition of ₹ 3.99,00,000/- made by the Assessing Officer, an addition of ₹ 64,14,387/- has been sustained and the balance of ₹ 3,34,85,613/- has been deleted by the Commissioner of Income-tax (Appeals) 9. In this background, the rival submissions have been heard. As per the learned Counsel for the assessee, the lower authorities have misdirected themselves in considering the terms of credit as an international transaction within the meaning of section 92B(1) of the Act. It has been pointed out that non-charging of interest on balances outstanding for services provided cannot constitute an international transaction and in this regard, reliance was placed on the decision of the Mumbai Bench of the Tribunal in the case of Nimbus Communications Ltd. v. Asstt. CIT [2011] 43 SOT 695/9 taxmann.com 26 a copy of which has been placed on record. It has also been submitted that element of interest comes in only with respect to an indebtedness created out of a loan transaction and in the instant case the indebtedness in question has arisen against provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder; and, there is no interest cost relatable to the credit period other than that identified by the Commissioner of Income-tax (Appeals). It was reiterated that this aspect of the matter would be relevant only in case, the action of allowing extended credit period to the Associated Enterprises is considered as falling within the meaning of the expression international transaction as contained in section 92B(1) of the Act. 12. We have carefully considered the rival submissions. As the aforesaid discussion would show the dispute before us is limited to the determination of arm's length price with respect to a single element, i.e. the interest relatable to the extended credit period allowed to the Associated Enterprises. Notably during the year under consideration, assessee had international transactions with Associated Enterprises and on this count, the Associated Enterprises had some outstandings due to the assessee. Such outstandings were overdue and no interest was charged by the assessee on such amounts. The TPO has considered non-charging of interest as a transaction requiring adjustment to determine the arm's length price, because according to him, the normal p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stments can be made. The factum of payment has to be considered vis- -vis terms of payment set out in the transaction arrangement, and not in isolation with the commercial terms on which transaction in respect of which payment is, according to the revenue authorities, delayed. In any event, even when an ALP is made in respect excessive credit period allowed under the CUP method, stated by the TPO, the comparable has to be dues recoverable from a debtor and not a borrower. It appears that the TPO has adopted interest @ 2.19% LIBOR on balances which exceed 30 days, but LIBOR rate is relevant only in the case of lending or borrowing of funds, and not in the case of commercial overdues. Even assuming that the continuing debit balances of associated enterprises can be treated as 'international transactions' under section 92B, the right course of applying the CUP method, in the case of non charging of interest on overdue balances, would have been by comparing this not charging of interest with other cases in which he assessee has charged interest on overuse with independent enterprises (internal CUP) or with the cases in which other enterprises have charged interest, in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nology Services (ETS) the object was to develop the growth strategy and business model for the assessee's Embedded software business. As per the TPO, this assignment also extended over the working of the Associated Enterprises. Thirdly, with regard to the report relating to Developing robust business unit strategies, as per TPO, the said report did not cover the Associated Enterprises. As per the TPO, the business of the assessee and the Associated Enterprises was closely linked; while the assessee performed the software development in the offshore centres, the Associated Enterprises took care of the on-site services. Thus, as per the TPO, the growth of the assessee could not be divorced from the growth of the Associated Enterprises and vice-versa. According to the TPO, changes proposed in the study conducted by McKinsey Co would also give benefits to the Associated Enterprises and thus an arm's length allocation of cost of consultancy expenses paid to McKinsey Co was required to be made. For the above reasons, 30% of the cost relating to the first and second assignment amounting to ₹ 1,33,31,525/- was allocated towards the benefits accruing to the Associated Ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin was higher than the comparable cases, and therefore, no separate adjustment was required to be made on account of consultancy charges paid to M/s Mc Kinsey Co. 17. The Commissioner of Income-tax (Appeals) dis-agreed with the submissions put-forth by the assessee as, according to him, the studies conducted by M/s McKinsey Co. were in relation to business processes and business activities common to the assessee and the Associated Enterprises and, therefore, it was in fitness of things that a part of the expenditure was allocated. Since the same had not been done by the assessee, the Commissioner of Income-tax (Appeals) upheld the inference of the TPO and thereby sustained the addition of ₹ 1,08,78,008/- on this count. Not being satisfied with the order of the Commissioner of Income-tax (Appeals), assessee is in further appeal before us. 18. Before us, the first and the foremost plea set-up by the assessee is that the impugned transaction does not fall within the definition of international transaction as per section 92B(1) of the Act and, therefore, the entire case built up by the TPO is legally untenable. Apart therefrom, the arguments taken before the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement or arrangement between two or more Associated Enterprises for apportionment of cost incurred in connection with a benefit, service or facility provided to any one or more of such Enterprises. The aforesaid position is amply clear on a bare reading of section 92B(1) of the Act. Notably, in this context we have carefully perused the order of the TPO and do not find any assertion therein that there existed any agreement or arrangement between the assessee and its Associated Enterprises to incur the cost on the studies conducted by McKinsey Co. In fact, there is nothing to suggest that the assignments by McKinsey Co. were carried out on the basis of any arrangement or agreement between the assessee and the Associated Enterprises. In this context, we also find that other than asserting that the benefits received by the Associated Enterprises are specific and identifiable benefits , the TPO has not given any basis to infer the same. There is no material or evidence to support the aforesaid assertion by the TPO and, therefore, the same is based on a mere presumption. Even otherwise, in our view, the study reports furnished by McKinsey Co. may have a potential use for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of their expenditure with the expenditure incurred by the assessee company in this regard. If such a comparison would justify an adjustment in the impugned international transaction , only then the TPO's action can be upheld. In the present case, no such exercise has been carried out and, therefore, on this count also we find the approach of the TPO untenable. 22. For all the above reasons, we hold that the action of the TPO in making adjustment to the income of the assessee on account of consultancy charges paid to McKinsey Co is based on no evidence and is untenable and is, therefore, set aside. Accordingly, the order of the Commissioner of Income-tax (Appeals) is set aside and the Assessing Officer is directed to delete the impugned addition. Thus, Ground No. 3 of the assessee is allowed. 23. Insofar as Ground Nos 4 5 regarding computation of deduction under section 80HHE of the Act with respect to netting of interest and reduction of expenditure in foreign exchange from total turnover and export turnover, are concerned the same have not been pressed before us and are, accordingly, dismissed as withdrawn. 24. Insofar as Ground No 6 is concerned, the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal referred to the parity of reasoning laid down by the Hon'ble Supreme Court in the case of CIT v. Lakshmi Machine Works [2007] 160 Taxman 404/290 ITR 667 and opined that for the purposes of section 10A of the Act, the expenditure incurred in foreign currency was liable to be excluded from the figure of export turnover as well as from the figure of total turnover although the exclusion from the total turnover was not specifically contained in section 10A of the Act. In coming to such conclusion, it took into consideration the definitions of export turnover and total turnover contained in section 80HHE and explained that the same provided that what is excluded from the export turnover is also liable to be excluded from the total turnover. The said findings of our co-ordinate Bench have not been controverted before us on the basis of any other judicial authority. In the absence of any decision to the contrary, following the principles of consistency, we hold that the assessee is justified in contending that if the turnover of Japan and Australia branches has been reduced from the export turnover by the Revenue, the same is also excludible from the figure of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner of Income-tax (Appeals) erred in not adjudicating the Ground, inasmuch as to ensure completeness and finality of proceedings it is imperative that the stated Grounds raised by the assessee ought to have been adjudicated on merits also. Therefore, we set aside the order of the Commissioner of Income-tax (Appeals) on this aspect and restore the matter back to his file to adjudicate the Grounds raised by the assessee regarding computation of book profits u/s 115JB and adjustments made thereunder in accordance with law, of-course after allowing a reasonable opportunity of being heard to the assessee. Thus, on Ground No. 7 assessee succeeds for statistical purposes. 30. The last Ground in this appeal relates to the disallowance and adding back of the losses of section 10A eligible units while computing book profits for the purposes of section 115JB of the Act. 31. On this aspect, the learned Counsel for the assessee submitted that the Tribunal in the assessee's own case for the assessment year 2001-02 vide its order in ITA No 274/PN/05 ( supra ) has remitted the issue back to the file of the Commissioner of Income-tax (Appeals) for adjudication on merits. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld units. Aggrieved with the aforesaid stand of the Assessing Officer, assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals). 36. In appeal, assessee contended that the action of the Assessing Officer was bad in law and on facts. It was pointed out that all the three undertakings have been established in Software Technology Park and are registered with the STPI; it was asserted that all the three units satisfied the prescribed conditions under section 10A(2) of the Act. In respect of all the three units, it was submitted that they were separate and distinct from the existing undertakings. It was pointed out that the new units are located at locations different from their corresponding old units; that there are substantial investments in land, building and machinery in all the three units as distinct from the old units. It was also submitted that there are separate permission for Custom Bonded Warehouses and also separate Shop Establishment Licenses for the three units. The Commissioner of Income-tax (Appeals) has since considered the submissions of the assessee. As per the Commissioner of Income-tax (Appeals), the assessee fulfilled all the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g expands his existing business, which he certainly does, would not, on that score, deprive him of the benefit u/s 15C. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a ne and identifiable undertaking separate and distinct from the existing business. Since the provisions of law as contained in section 15C(2)(i) and 10A(2)(ii) (iii) are in effect and in substance in pari materia as regards the point in issue involved in this appeal, I am of the considered view that the ratio of Hon'ble Supreme Court decision in case of Textile Machinery Corporation Ltd. quoted supra which has been followed with respect in several decisions, applies to the law as contained in section 10A(2)(ii) and (iii) of the Income-tax Act, 1961. In view of the foregoing discussion, taking into account the submission of the appellant and material on record, it is held that the three units at Chinchwad, Akruti and Millennium Business Park fulfill the condition laid down u/s 10A(2) of the Income-tax Act, 1961 and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its. In this context, the Assessing Officer noted that the assessee had treated three units, namely, Chinchwad Unit, Akruti Unit and Millennium Business Park unit as separate independent units for the purposes of deduction under section 10A of the Act. The Assessing Officer noted that approval received from STPL for Chinchwad unit reflected it as an expansion of Software Conversion unit. Similarly, approval for Akruti unit and Millennium Business Park unit reflected them as expansions of Sigma unit and TTC unit respectively. On this singular basis, the Assessing Officer treated the three units as mere expansions and not independent units. As a result thereof, the eligibility period for claim of deduction under section 10A was also reckoned from the first year of the eligibility of the corresponding old units. The Commissioner of Income-tax (Appeals) has, however, appreciated the plea of the assessee and has held that the three units fulfilled the conditions laid down under section 10A(2) of the Act and are accordingly eligible for the claim of benefits under section 10A independent of the old units. 40. Section 10A of the Act provides for a deduction in respect of profits and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clear that the land allotted for the new unit is plot #624/1 and 2, and 625 to 627 whereas the existing plant was in plot 3 602. The production of 12 Hydroxy Stearic Acid is authorized by the letter dt 27th January 1995 which states that the Government has taken note of assessee's wish to manufacture Hydroxy Stearic Acid also by way of forward integration and amended the letter of permission to include 12 Hydroxy Stearic Acid of 12,000 MT in the very next sentence. It is observed that Govt also approves of your request for the import of additional capital goods worth ₹ 550 lakhs for the project . That clearly demonstrates that the production of Hydroxy Stearic Acid of 12,000 MT was viewed by the Government as an independent project. It was not a case for purchase of addition capital goods for the existing project. The assessee is irrespective of the number of units, is one of artificial juridical person. Therefore, a combined permission, which involves setting up for different units, is quite in order. The fact of amendment of earlier permission or of grant of separate permissions, is not really relevant. What is really to be examined is whether the units are indepen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en India and Sweden the entire profit of the Sweden branch office was liable to be taxed in India as well as in Sweden. If the assessee was to pay any income-tax in Sweden it would be entitled to claim credit as per the DTAA for such taxes paid in Sweden. As per the assessee, it was resident in India and hence the profit of Sweden branch was taxable in India and, therefore, the loss of the branch was also liable to be considered for set off against the other business income. The Commissioner of Income-tax (Appeals) has considered this aspect and held that assessee was entitled to set off the loss arising out of its Sweden branch against other business income declared. In coming to such conclusion, apart from other reasons, the Commissioner of Income-tax (Appeals) followed the decision of his predecessor for the immediately preceding assessment year in respect of the losses of the Japan Branch on similar facts. Against the aforesaid decision, Revenue is in appeal before us. 44. Before us, it was a common point between the parties that the order of the Commissioner of Income-tax (Appeals) on a similar aspect in the immediately preceding assessment year 2001-02 has been affirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ground No. 4 relating to addition/disallowance of professional fees under Transfer Pricing is similar to Ground No. 3 raised by the assessee in its appeal for the assessment year 2002-03. Therefore, for the detailed reasoning given therein, we hereby set aside the order of the Commissioner of Income-tax (Appeals) and direct the TPO to delete the addition made on account of consultancy charges. The assessee thus succeeds on this Ground of appeal. 52. In Ground No 5, the dispute relates to manner of computation of deduction under section 80HHE of the Act. The Assessing Officer noted that in the computation of deduction under section 80HHE, the assessee had considered 10% of the profit of the business of the undertakings covered under section 10A of the Act as eligible for the claim of deduction under section 80HHE of the Act. The Assessing Officer has denied such a claim of the assessee. It was explained that for the assessment year 2003-04 as per the proviso inserted by Finance Act 2002 deduction under section 10A of the Act was restricted to 90% of the profits and gains derived by an undertaking from export of computer software. In other words, 10% of such profits and gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there was no statutory prescription to support the case of the Revenue. Following discussion in the order of the Hon'ble High Court is relevant: 5. The very statutory provision prescribing a prohibition in respect of the deductions in relation to the profits and gains itself, has not specifically included section 80HHC. Apparently, it therefore would only mean that there was no prohibition for claiming any deduction u/s 80HHC while applying the benefits provided u/s 10A of the Act. If that is the statutory prescription, by which the assessee was entitled to claim a benefit u/s 80HHC in relation to the profits and gains while invoking section 10A, it will have to be concluded that the assessment order in having allowed such a deduction of the remaining 10 per cent of the profits earned by the assessee, was not erroneous. In any event, having regard to such a statutory prescription available for the assessee to claim the benefit u/s 80HHC in respect of the profits earned from section 10A of the Act, there is absolutely no scope for the Assessing Authority to have invoked section 154 of the Act, in order to state that, that can be considered as an error apparent, inasmuc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the same in accordance with law after allowing a reasonable opportunity of being heard to the assessee. For the reasons given therein, we hold so and restore this Ground to the file of the Commissioner of Income-tax (Appeals) with similar directions. Thus, on this Ground assessee succeed for statistical purposes. 60. The last Ground in the appeal of the assessee is with regard to the manner of charging interest under section 234B of the Act. The grievance of the assessee is that interest under section 234B of the Act has been charged without allowing credit available under DTAA of taxes paid in USA, Australia and New Zealand. 61. On this aspect, we find that the insertion of Explanation 1 below section 234B(1) by the Finance Act, 2006 with effect from 1.4.2007 is relevant to adjudicate the claim of the assessee. As per the amended provisions, credit is allowable in relation to the taxes paid in country outside India while computing assessed tax for the purposes of section 234B(1) of the Act. The Hon'ble Bombay High Court in the case of CIT v. Apar Industries Ltd. [2010] 190 Taxman 353/323 ITR 411 has interpreted the said amendment as clarificatory in nature so ..... X X X X Extracts X X X X X X X X Extracts X X X X
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