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2023 (9) TMI 1307 - AT - Income TaxDeduction u/s 10A in respect of interest income earned by the assessee - CIT(A) allowed deduction in respect of interest income earned by the assessee from parking of surplus funds with banks - revenue is aggrieved by the decision of Ld CIT(A) in allowing deduction u/s 10A without setting off of loss incurred from other eligible units against profit of eligible units - HELD THAT:- As in assessee’s own case in A.Y. 2005-06 in the appeal of the revenue [2023 (1) TMI 1292 - ITAT MUMBAI] as held that the loss incurred in one unit need not be set off of against the profits of other units for the purpose of computing deduction u/s 10A of the Act in respect of profit earning units. We notice that, in this regard, the Coordinate Bench has followed the decision rendered in the case of Scientific Atlanta India [2010 (2) TMI 658 - ITAT, CHENNAI] wherein it was held that section 10A of the Act is a deduction section and not an exemption section. Further it was held that the deduction has to be computed “undertaking-wise”. The Hon’ble Supreme Court has held in the case of CIT vs. Yokogawa India Ltd [2016 (12) TMI 881 - SUPREME COURT] that the deduction u/s 10A of the Act should be computed at the stage before arriving at the Gross total income of the eligible undertaking. Thus we are of the view that the Ld CIT(A) was justified in holding that the losses incurred in other eligible units are not required to be set off against the profits of the undertaking against which the deduction u/s 10A was allowed. Computation of deduction u/s 10A - whether the telecommunication charges are required to be deducted from the “Export turnover” while computing deduction u/s 10A of the Act or not? - HELD THAT:- As relying on HCL Technologies Ltd [2018 (5) TMI 357 - SUPREME COURT] we direct the AO to compute the deduction u/s 10A of the Act by excluding telecommunication charges both from export turnover and total turnover while computing deduction u/s 10A of the Act. TP adjustment in respect of income - assessee selected itself as tested party and adopted TNM method as most appropriate method - Net Profit Margin was selected as Profit Level Indicator (PLI) and the assessee’s margin was 22% - assessee identified 43 companies, whose average margin was 9%. Accordingly, the assessee contended that its international transaction with AEs is at arms length - HELD THAT:- TPO, after holding that the foreign AEs should be taken as “tested parties” have selected three unknown Indian comparable companies. Accordingly, he has held that the assessee should have remunerated the AEs at Cost plus 10% margin. Admittedly, the above said approach of the TPO is against the Transfer pricing provisions and also in gross violation of principles of natural justice. Accordingly, we are of the view that the Ld CIT(A) was justified in rejecting the above said approach of TPO. Net profit margin declared by the assessee is 22%. We noticed that the average margin of 11 comparable companies selected by the Ld CIT(A) was 22.53%. Hence the difference in the margin rate falls within the tolerance limit of 5%, in which case, the international transactions of the assessee should be considered to be at arms length. Accordingly, no transfer pricing adjustment is called for. Accordingly, we modify the order passed by Ld CIT(A) on this issue and hold that no transfer pricing adjustment is called for. Accordingly, we delete the addition sustained by Ld CIT(A). Disallowance u/s 14A r.w.r. 8D - HELD THAT:- The year under consideration being A.Y. 2006-07, the provisions of Rule 8D will not apply to the year under consideration as per the decision rendered by Hon’ble Bombay High Court in the case of Godrej Boyce Mfg Co Ltd. [2010 (8) TMI 77 - BOMBAY HIGH COURT] Accordingly the tax authorities are not justified in applying provisions of rule 8D to the year under consideration. However, since the assessee has earned exempt income, a portion of expenditure needs to be disallowed in terms of section 14A of the Act. The Hon'ble Bombay High Court has upheld the disallowance of 2% of exempt income in the case of Godrej Agrovet Limited [2014 (8) TMI 457 - BOMBAY HIGH COURT]] Following the same, we direct the Assessing Officer to restrict the disallowance under section 14A to 2% of the exempt income. TP adjustment made in respect of delayed receivable from the AEs - TPO noticed that the assessee has received money from its AEs with considerable delay and accordingly made transfer pricing adjustment of Rs. 3.80 crores on account of delayed receivable by adopting interest at 6.87% on average quarterly balance due from AEs - HELD THAT:- We noticed that the AEs have remitted money to the assessee with delay ranging from 1 day to a period exceeding 1 year, after realization from their debtors. Hence the reasoning given by the Tribunal, as rightly pointed by Ld D.R, would not apply to the facts of the year under consideration. We also noticed that the TPO has computed the interest by taking average quarterly balances. In our view, the same is not correct method of computing interest on delayed receivables. Since the details of realization of individual bills are available, it will be possible for the assessee/TPO to compute interest individually after allowing accepted credit period. Thus we are of the view that this issue requires fresh examination at the end of the Assessing Officer/TPO. Accordingly we set aside the order passed by the learned CIT(A) on this issue and restore the same to this file for examining this issue afresh in the light of discussions made supra. TP Adjustment - loan given to AEs - TPO has arrived at ALP rate of interest for i flex America at 8.37% and for ISE Mauritius Company Mauritius at 11.75% - TPO took the view that the assessee has undercharged interest and accordingly made transfer pricing adjustment - HELD THAT:- We notice that, with regard to Mauritius subsidiary, no material has been furnished by the assessee to substantiate the ALP of interest charged. It is the submission of Ld A.R that the ALP of interest income should be determined by considering LIBOR rate, to which certain points are added to bring the same to market rate. We notice that the TPO has considered Prime Lending rate plus Guarantee charges, which according to Ld A.R is not correct. We agree with the contentions of Ld A.R on this point. Thus, we notice that both the parties have not substantiated their stand properly. Accordingly, we are of the view that this issue also requires examination at the end of AO/TPO. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO/TPO for examining this issue afresh.
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