TMI Blog2011 (12) TMI 161X X X X Extracts X X X X X X X X Extracts X X X X ..... other units allowed as deduction is set aside and matter is restored back to the file of the AO for deciding the issue afresh. - Decided in favor of assessee for statistical purposes. - IT APPEAL NO. 3647 (DELHI) OF 2007 - - - Dated:- 9-12-2011 - I.P. BANSAL, A.N. PAHUJA, JJ. Abhishek Gupta for the Appellant. Ms. Geetmala Mohanany for the Respondent. ORDER A.N. Pahuja, Accountant Member This appeal filed by the assessee on 14th August, 2007 against an order dated 23rd May, 2007 of ld. CIT(A)-VI, New Delhi, raises the following grounds:- "1. "The order passed by the Ld. Assessing Officer and the Ld. Transfer Pricing Officer is bad in law and on the facts and circumstances of the case. 2. The ld. Assessing Officer/ld. Transfer Pricing Officer has erred in law and on the facts and circumstances of the case in: (a) holding that the transaction between the appellant and its associated enterprise has not been carried out at arm's length price. The said conclusion has been arrived at, ignoring the principle of commercial expediency. (b) Charging notional interest on the loan given by the appellant to its wholly owned subsidiary in USA (i.e. Aithen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 18.03.2005 accepted the Arm Length Price (ALP) in respect of international transactions relating to sale of software. However, in respect of interest free loan of USD 15,15,000/- (Rs. 7,39,16,850), the TPO observed as under:- "The assessee has during the year given periodic interest free loans to its AE totaling to USD 1,51,5,000 corresponding to Rs. 73,916,850. The assessee has claimed that these loans advanced to the subsidiary were for the purpose of funding the operatins and expansions of business. The arguments put forth by the assessee for not charging any interest can be summarized as:- (i) The loan has been granted by the assessee to promote its own business interests as the assessee is getting all its business revenue from the transactions entered into with the Associated Enterprise. (ii) The amount of interest is already included into the cost of software development costs charged to the AE. (iii) Considering the nature of transaction between the assessee and the AE, there is no data available in the public domain which could be comparable to the transactions between these entities. Accordingly, the assessee has inferred that no external comparable Uncont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment for its growth and expansion plans. Being a 100% holding, further investment for its growth and expansion plans. Being a 100% holding company, it was the onus of the assessee to invest money in the subsidiary. It could have either invested the same in the form of capital contribution or given it as a loan as per RBI approval. The assessee has further argued that investment in the form of capital may not return back while the loan amount will come back to India once the subsidiary has funds available. It was also claimed that the loan to the AE had been funded from an amount received from a Singapore based venture capital fund as investment in the assessee company and did not bear any cost to the assessee. Determination of Arm's Length Price of Interest on loan to subsidiary The arguments put forth by the assessee were examined. The claim regarding catalyzing the business by infusing funds, in whatever form is not refuted. The expansion of business is liable to devolve fruitfully on the assessee as well as the subsidiary entity. In the light of the same, it is not clear as to why the interest on the funds infused in the form of a loan would have to be forgone by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest @ 10% of the loan of Rs. 7,39,16,850/- (USD15,15,000. 4.On an appeal, the ld. CIT(A) upheld the findings of AO/TPO in the following terms:- "2.3 I have considered the arguments of ld. AR and gone through the observations of the AO. My findings on the issue of addition of Rs. 31,51,250/- u/s 92(c)(4) of the I.T. Act are as under: (i) The appellant had advanced Rs. 7,39,16,850/- as interest free loan to its AE situated in USA. The AO has charged the notional interest @ 10% against such interest free loan as to determine arm's length price and consequently he made the addition of Rs. 31,51,259/-. (ii) The ld. AR has objected the aforesaid addition on the ground that the AO did not provide opportunity to the assessee before making addition on the report given by the TPO. The ld. AR relied on the Delhi High Court decision in Sony India Pvt. Ltd. (supra). On going through the said decision containing in para 25(e), I find that the Hon'ble Jurisdictional High Court has observed, "the AO is not bound to accept the ALP as determined by the TPO. He can always be persuaded by the assessee at that stage to reject the TPO's report and proceed to still determine the ALP by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee after receipt of the TPO's report before finalizing the assessment", yet, there was no finding about the consequences, in case the AO has failed to provide specific opportunity, though the opportunity was provided impliedly in this case with reference to TPO's report. Thus, it is very difficult to annul the assessment only on the ground that the AO did not provide specific opportunity on receipt of TPO's report to the assessee before making the addition with reference to arm's length price, though, the appellant had appeared before the AO twice after the receipt of TPO's report dated 18.03.05 and before completion of assessment vide order dated 29.03.05. (viii) Further, the provision relating to assessment of arm's length price as contained in Chapter X are new provision and it was the first year of such a special provision. Moreover, there was no specific provision and judicial precedent for providing the specific opportunity with reference to the TPO's report by the AO. In the light of these facts and circumstances of the case, I hold that there is no need to interfere with the assessment order merely on the ground that no specific opportunity with reference to TPO's rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in US after paying the due taxes in India. (xii) In respect of argument about 100% income deductible in India u/s 10B and payment of taxes by its AE situated in U.S. is also not tenable. The appellant is required to determine the arm's length price as per provision contained in Chapter X of I.T. Act, 1961 and pay the taxes thereon. It is immaterial, whether appellant income was fully deductible u/s 10B and it did not prevent the TPO/AO to determine the assessee's ALP. Moreover, as per first provision to clause 4 of sec. 92C, no deduction u/s 10B shall be provided against the enhanced income by way of determination of ALP. Moreover, the charging of notional interest while determining the ALP is permissible as the Transfer Pricing Provision is different than the normal provision relating to determination of income. Considering the fact of the case, I hold that the TPO was justified to determine the arm's length price of the appellant after charging the notional interest @ 10% against the interest free loan advanced to its AE situated in US. Thus, Grounds No. 2 3 relating to Transfer Pricing are decided against the appellant." 5. The assessee is now in appeal before us agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . A major part of this share application money amounting to Rs. 32.61 crore remained invested in the form of FDRs as in the beginning of the financial year. At the end of the year, a major part of the FDR stood withdrawn which apparently was used to fund the interest free loan to the subsidiary. Accordingly, the TPO while rejecting the assessee's method considered a risk free return from the subsidiary, a notional interest of 10% on this loan as ALP amounting to Rs. 31,51,259/-. Consequently, this amount was added to the income and the ld. CIT(A) upheld the findings of the AO. Before us, the ld. DR relied upon a decision of a co-ordinate Bench in Perot Systems TSI (India) Ltd. v. Dy. CIT [2010] 37 SOT 358 (Delhi) where in the assessee granted interest-free loans to two of its wholly owned subsidiaries in Canada and Dubai. In its Transfer pricing study, the assessee adopted CUP method and justified the interest free loan on the basis that it had sufficient interest free funds. The TPO rejected the claim and computed notional interest at the rate of 14 percent, based on certain domestic borrowings of the assessee. On appeal, the Tribunal observed that the cost incurred by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... othetical arms length prices, at which these associated enterprises, but for their relationship, would have entered into the same transaction, are taken into account. Whether the funds are advanced out of interest bearing funds or interest free advances or are commercially expedient for the assessee or not, is wholly irrelevant in this context. The transaction in the present case is of lending money, in foreign currency, to its foreign subsidiary. The comparable transaction therefore should be of foreign currency lending by unrelated parties. The ld. AR relied on decision of Chennai Bench in Shiva Industries Holdings Ltd. (supra) and suggested to adopt LIBOR rates. However, we find that though Chennai Bench referred to LIBOR rates of 4.42%, since the assessee charged interest @ 6%, no further addition was made. 7.1 Since in the instant case, neither the assessee nor the TPO/AO and the ld. CIT(A) have examined the applicability of CUP method as the most appropriate method in order to determine ALP of the international transaction of interest free foreign currency loan to its subsidiary by the assessee, we consider it fair and appropriate to vacate the findings of the ld. CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Gurgaon and Canada unit. In the revised return the appellant had claimed deduction from the profit of first unit of Gurgaon and claimed carry forward losses from remaining 4 units. On the other hand, the AO has set off the losses of the remaining 4 units with the profit of first unit of Gurgaon and allowed the deduction on the balance profit of Rs. 1,76,25,879/-. (ii) I further find that all the units are deriving income from the software development and exporting the same. On going through the provisions of sec. 10B(1), it is evident that the deduction under this section shall be allowed "from the total income of the assessee". (iii) I further find that the phrase 'total income' has been defined u/s 2(45) of the I.T. Act, which reads as under: "That the total income means the total amount of income rendering in sec. 5 computed in the manner laid down in this Act." Further on going through the provisions of sec. 5(1), I find that "the total income includes of income from whatever source derived". (iv) Considering the provisions of sections 10B(1), 2(45) and 5(1) of the I.T. Act, I find that the deduction u/s 10B is allowable against the 'total income' of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, on going through decision of the ITAT in IIS Infotech Ltd., (supra) I find that the question of allowability of exemption u/s 10B was disputed after amalgamation from export business while in the appellant case the facts are altogether different. Hence, the principle laid down in that case is also not applicable in the appellant's case. Considering the fact of the case and on going through the provisions of sections 10B(1), 2(45) and 5(1), I find that the deduction u/s 10B was allowable from the 'total income of the assessee', i.e. after setting off the losses from 4 units from the profit derived in one unit, i.e. first unit of Gurgaon. In this situation, the action of the AO for allowing the deduction from the 'net income' of Rs. 1,76,25,879/- is justified and the same is upheld. Thus, this ground of appeal is decided against the appellant." 10. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). At the outset, the ld. AR on behalf of the assessee invited our attention to the decision of Hon'ble Bombay High Court in the case of Hindustan Unilever Ltd. v. Dy. CIT [2010] 191 Taxman 119, wherein it was held that the assessee entitled to de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands provides for a deduction of such profits and gains as are derived by a hundred per cent Export Oriented Undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. Consequently, it is evident that the basis on which the assessment has sought to be reopened is belied by a plain reading of the provision. The AO was plainly in error in proceeding on the basis that because the income is exempted, the loss was not allowable. All the four units of the assessee were eligible under section 10B three units had returned a profit during the course of the assessment year, while the Crab Stick Unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income. In these circumstances, the basis on which the assessment is sought to be re-opened is contrary to the plain language of sec. 10B." 12. As regards decision relied upon by the ld. DR in the case of Petspin India Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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