2011 (6) TMI 500 - AT - Income Tax

Disallowance and adding back of losses of 10A units while computing income - Held that - Subsequent to the amendment w.e.f. 1.4.2001 the provision provides for a deduction of such profits and gains as are derived by an undertaking from the export of articles or thing or computer software duly established in free trade zones etc. Consequently provision as applicable for the AY 02-03 under consideration is not in the nature of an exemption. Therefore the assessee was entitled to set-off of losses sustained by the 10A eligible units against the normal business income - Decided in favor of the assessee Disallowance of interest under Transfer Pricing - determination of arm s length price with respect to interest relatable to the extended credit period allowed to the Associated Enterprises - Held that - As relying on Nimbus Communications 2011 (1) TMI 68 - ITAT MUMBAI extension of credit to the Associated Enterprises beyond the stipulated credit period cannot be construed as an international transaction for the purposes of 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 excluded from the export turnover is also liable to be excluded from the total turnover. 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 total turnover for the purposes of computing deduction u/s 80HHE of the Act - Decided in favor of the assessee. Computation of book profits for the purposes of section 115JB and adjustments made thereunder - Held that - CIT(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 set aside the order of the CIT (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 - assessee succeeds for statistical purposes. Deduction u/s 10A - assessee contended that three units at Chinchwad Akruti and Millennium Business Park were new Units and not expansion of the existing units and therefore the period of eligibility of deduction u/s 10A is liable to be considered from the year of setting up of such units and not from the point of time when the original unit were set up - Held that - There is no prohibition that an expansion in the same line of business achieved by setting up a new independent unit would lead to denial of deduction u/s 10A. CIT (Appeals) rightly held that the three units are separate and independent production units and the same cannot be treated as mere expansions of the existing undertakings. Therefore the mere fact that the requisite permissions from STPI refer them as expansions of the existing units would not dis-entitle the assessee from the claim of deduction u/s 10A - Decided in favor of the assessee. Assessee is eligible for considering 10% of the profit of the business of the undertakings covered u/s 10A as eligible for the claim of deduction u/s 80HHE - Decided in favor of assessee. Charging interest under section 234B - assessee contested that interest has been charged without allowing credit available under DTAA of taxes paid in USA Australia and New Zealand - Held that - 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 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.

Summary

Issues Involved:
1. Disallowance and adding back of losses of 10A units while computing income as per normal computation.
2. Addition/disallowance on account of interest under Transfer Pricing.
3. Addition/disallowance on account of consultancy expenses under Transfer Pricing.
4. Netting interest received against interest payment while reducing 90% of interest received from business income for section 80HHE.
5. Reducing expenditure in foreign exchange for the SEEPZ unit from total and export turnover while computing deduction u/s 80HHE.
6. Reducing turnover of Japan and Australia Branches only from export turnover and not from total turnover.
7. Computation of book profit and adjustments made thereunder.
8. Disallowance and adding back of losses of 10A units while computing book profit u/s 115JA.
9. Determining the status of new units as independent or expansions for 10A eligibility.
10. Set-off of losses of Sweden Branch office against other business income.
11. Manner of charging interest under section 234B.

Detailed Analysis:

1. Disallowance and Adding Back of Losses of 10A Units:
The Tribunal found merit in the assessee's appeal regarding the set-off of losses from 10A eligible units against normal business income. The Tribunal referenced previous decisions, including the Pune Bench's ruling and the High Court's decision in Hindustan Unilever Ltd., affirming that section 10A provides for a deduction, not an exemption, thus allowing the set-off of losses.

2. Addition/Disallowance on Account of Interest Under Transfer Pricing:
The Tribunal addressed the addition of Rs. 64,14,387 sustained by the CIT(A) out of Rs. 3.99 crores made by the AO for interest on excess credit allowed to Associated Enterprises. The Tribunal concluded that the extension of credit to Associated Enterprises beyond the stipulated period did not constitute an "international transaction" under section 92B(1), thus directing the deletion of the addition.

3. Addition/Disallowance on Account of Consultancy Expenses Under Transfer Pricing:
The Tribunal examined the TPO's adjustment related to consultancy expenses paid to McKinsey & Co. The Tribunal found no evidence of a mutual agreement or arrangement between the assessee and its Associated Enterprises for the apportionment of costs. The Tribunal directed the deletion of the adjustment, holding that the TPO's action was based on no evidence.

4. Netting Interest Received Against Interest Payment:
The Tribunal noted that this ground was not pressed by the assessee and thus dismissed it as withdrawn.

5. Reducing Expenditure in Foreign Exchange for SEEPZ Unit:
Similarly, the Tribunal noted that this ground was not pressed by the assessee and dismissed it as withdrawn.

6. Reducing Turnover of Japan and Australia Branches:
The Tribunal agreed with the assessee that if the turnover of Japan and Australia branches was excluded from the "export turnover," it should also be excluded from the "total turnover" for computing deduction under section 80HHE. The Tribunal directed the AO to re-compute the deduction accordingly.

7. Computation of Book Profit and Adjustments:
The Tribunal noted that the CIT(A) had dismissed this ground as academic since the assessee was taxed under the normal provisions. The Tribunal remitted the matter back to the CIT(A) for adjudication on merits to ensure completeness and finality of proceedings.

8. Disallowance and Adding Back of Losses of 10A Units While Computing Book Profit:
The Tribunal remitted this issue back to the CIT(A) for adjudication on merits, following the precedent set in the assessee's case for the previous assessment year.

9. Determining the Status of New Units:
The Tribunal upheld the CIT(A)'s decision that the three units at Chinchwad, Akruti, and Millennium Business Park were new and independent units, not mere expansions of existing units. The Tribunal found that the units fulfilled the conditions under section 10A(2) and were eligible for deduction under section 10A.

10. Set-Off of Losses of Sweden Branch Office:
The Tribunal affirmed the CIT(A)'s decision allowing the set-off of losses from the Sweden branch against other business income, following the Tribunal's decision for the previous assessment year.

11. Manner of Charging Interest Under Section 234B:
The Tribunal directed the AO to re-compute the interest chargeable under section 234B, considering the Explanation 1 below section 234B(1) and the Bombay High Court's decision in Apar Industries Ltd., which allows credit for taxes paid in foreign countries.

Conclusion:
The Tribunal allowed the assessee's appeals on most grounds, remitted some issues back to the CIT(A) for further adjudication, and dismissed the Revenue's appeals, thereby providing relief to the assessee on several contested points.