TMI Blog2012 (3) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... me tax refund should be adjusted against interest paid on overdraft facility as according section 57(iii) only such expenditure (not being in the nature of capital expenditure) can be allowed if it is laid down or expanded wholly and exclusively for the purpose of making or earning of such income. Payment of Income tax cannot be said to be made for earning of interest, hence the case of the assessee will also be out of the purview of section 57(iii). - Decided against the assessee. Interest under section 234-B of the Act is not to be calculated on tax on the total income determined under regular assessment under section 143(3) of the Act - Held that :- interest on Income Tax refund of ₹ 15,229,404 is to be netted off against the interest payment of ₹ 18,509,964 and since the interest received by the appellant is less than the interest expense for the year under appeal, no part of the interest on Income Tax refund of ₹ 15,229,404 is to be excluded while computing profits of business eligible for deduction under section 10-B of the Act. - IT Appeal Nos. 1338 & 1512 (Delhi) of 2009 - - - Dated:- 13-1-2012 - G. D. Agrawal And I. P. Bansal, JJ. Geetmala Mah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nity to the Appellant to undertake a fresh search and identity additional comparable companies based on data that became available only after the specified date / due date; (h) Failing to make appropriate adjustments for differences in depreciation, marketing functions, product liability risks and credit risks undertaken by the Appellant vis- -vis the comparable companies; (i) Not giving due cognizance to the fact that the international prices charged by the Appellant have been accepted and certified by the Software Technology Park of India ( STPI ), which is the Government / RBI designated competent technical authority to deal with the appropriateness of the price charged; (j) Not adjudicating on the argument that final assessment should be having regard to ALP and not based thereon; 3. That the ld. CIT (Appeals) has erred in law in not applying the Proviso to section 92-C(2) of the Act and has failed to allow the Appellant an option for the downward variation of 5 per cent in determining the arm's length price; 4. That the ld. CIT (Appeals) has erred both on facts and in law, in not adjudicating on the excessive computation of interest under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B by over-looking the decision of the Hon'ble Apex Court in case of CIT v. Pandian Chemicals Ltd. 276 ITR 278 wherein the Hon'ble Court has clearly held that the phrase 'derived from' has restricted meaning and only incomes which have a direct and proximate nexus with the business can be held to eligible for deduction under section 10-B. 4. Return of income in the present case was filed at NIL on 31st October, 2002. The assessee company is engaged in the business of Global Business Processing and support and is operating as a hundred per cent export oriented unit. During the year assessee has entered into international transaction with its associate enterprises. Reference was made by the assessing officer under section 92-CA(1) in respect of international transaction entered into by the assessee. The Transfer Pricing Officer [TPO] vide order dated 18th February, 2005 has determined Arm's Length Price of the international transaction and has arrived at an adjustment of ₹ 15,25,35,626/-, which has been added by the assessing officer to the income of the assessee. Apart from the afore-mentioned sum the assessing officer has made an addition of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les at 16.20 per cent against un-adjusted OP / TC at 16.82 per cent and such findings are recorded in para 20 of his order and for the sake of convenience, the same is reproduced below :- S.No. Companies Name Un-adjusted OP / TC Mar 02. Adjusted OP / TC. Mar 02. 1. Ace Software Exports Ltd. 17.63 per cent 14.50 per cent. 2. Allsec Technologies Ltd. 12.15 per cent 13.91 per cent. 3. Genesys International Corpn. Ltd. 39.48 per cent 34.99 per cent. 4. Max Healthscribe Ltd. 6.89 per cent 8.21 per cent. 5. MCS Limited. 7.96 per cent 9.38 per cent. Average [OP / TC] 16.82 per cent 16.20 per cent. 7. Thereafter the ld. CIT (Appeals) has taken the cost of provisions of services of the assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s set up on July 29, 2002 and these were pre-operative expenses incurred prior to setting up of AEGSC unit and it was pleaded that they are not claimed in the impugned assessment year and are shown in the balance sheet as pre-operative expenses. It has been held by the ld. CIT (Appeals) that the question of allowability of pre-operative expenses arise from the assessment order passed for the assessment year 2003-04 and the question of allowability, therefore, does not arise for the impugned assessment year and, therefore, the ld. CIT (Appeals) observed that the grievance of the assessee cannot be addressed at this stage and the same shall be taken care at the time of adjudication of this ground at the appellate proceedings for assessment year 2003-04. Therefore, he declined to adjudicate the additional ground taken by the assessee. In the aforementioned manner, the ld. CIT (Appeals) has disposed of the appeal filed by the assessee. 12. The assessee in this appeal has agitated the additions, which have been upheld by the ld. CIT (Appeals) and the Department is in its appeal is agitating the additions which have been deleted by the ld. CIT (Appeals). 13.1 Before proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ched out 9 comparables out of which further three companies were rejected on the ground that they were having significant related party transactions (RPT) and the resultant six companies were identified as under :- 1. Ace Software Exports Ltd. 2. Allsec Technologies Ltd. 3. Genesys International Corpn. Ltd. 4. Karvy Consultants Ltd. 5. Max Healthscribe Ltd. 6. MCS Limited. 13.4 The arithmetic mean of the adjusted margin OP / TC of the above comparable was 18 per cent and by applying this operative margin to assessee's cost based arms length price of the international transaction was determined by the Ld. TPO at ₹ 1,44,67,69,073/- against the price taken by the assessee at ₹ 1,29,42,33,447/- and in this manner the adjustment of ₹ 15,25,35,626/- was made by the TPO. 14. Before the TPO the assessee in working out OP / TC of comparables sought the following adjustments. 1. Working capital adjustment; 2. Depreciation adjustment; 3. Marketing function adjustment; 4. Product liability risk adjustment; 5. Credit risk adjustments. 14.1 However, TPO gave benefit of working capital adjustment only and after givi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. AR that according to the three filters adopted by TPO the case of Genesys International Corporation Ltd. will not fall and Genesys International Corporation Ltd. has to be excluded on the basis of criteria adopted by the TPO. In this regard he referred to para Nos. 7.1 and 7.3 of the TPO's order. In para No. 7.1 the TPO has described the three filters and in para No. 7.3 the acceptable comparables have been defined with the relevant figures. It will be relevant to reproduce the relevant portion of para Nos. 7.1 and 7.3 of the order of the TPO as follows :- 7.1 To narrow down the list of the comparables further, following filters were applied to eliminate the companies which are not comparable to the assessee company in terms of functions, assets employed or scale of operations. (i) Turnover 5 crores : the turnover of the assessee is 129 crores therefore companies with turnover less than 5 crores were eliminated because of huge difference in the scale of economies; (ii) Net profit Assets / Sales 150 per cent : the disproportionately high assets to sales ratio indicates either under utilization of capacity or a start-up company or presence of idle / non-prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Referring to the above table it is the case of the learned AR that Genesys International Corporation Ltd. should be excluded from the comparables as its Dep/TC is 18.56% which exceeds the limit set out in the filters applied by TPO. He submitted that if Genesys International Corporation Ltd. is excluded from comparables, then, the difference in the ALP will be within the tolerance limit of + 5%. He submitted that if Genesys is excluded the mean margin of remaining four comparables will be 8.91% against margin of the assessee of 5.56% as computed by the TPO. The difference will be less than 5%. He has submitted the chart which is as follows:- American Express (India) Private Limited [AEIPL] Appeals Nos. 1338 Del/2009 1512/Del 2009 for AY 2002-03 Comparable Companies selected by TPO after applying three filters. Margins as per TPO Margins computed by CIT (A) Ace Software Export Ltd. 19.15 14.50 Allsec Technologies Ltd. 10.04 13.91 Genesys International Corpn. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessee. The assessee had never raised this issue of depreciation / total cost before the TPO or the ld. CIT (Appeals). According to the ld. Sr. DR analyzing from various angles, M/s. Genesys International Corporation Ltd. is one of the most appropriate comparables and the same should be retained in the list of comparables. Thus, the ld. Sr. DR vehemently objected to the submissions of the ld. AR. She has also submitted following chart and calculation to show as to how the difference of mean margin of the assessee with the comparable will be exceeding 5 per cent and the said calculation is reproduced below :- Financials of American Express India Private Limited : Margins used by CIT (A). Margins used By TPO. Summary of American Express Margins for AY 2002-03 [Amount in Rs.] Associated Enterprises Unrelated Entities Total Reference Income from Exports 1,293,143,177 1,090,270 1,294,233,447 P 2 of CIT's Order. 1,294,233,447 Provision for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.1,298,720,459 Price charged by the assessee @ 5.56 per cent (B) Rs. 1,294,233,447 Adjustment : (A + B) ₹ 72,840,720 19. Thus, it was pleaded by the learned DR that firstly Genesys should not be excluded from comparable and secondly even if Genesys is excluded still the difference in the margin of the assessee and comparables will exceed 5% as per calculation arrived at by CIT (A). Therefore, she submitted that assessee's ground on this issue should be dismissed. 20. We have carefully considered the rival submissions in the light of material placed before us. In our opinion, the claim of the ld. AR for exclusion of Genesys International Corporation Ltd. is a right claim. The TPO had applied three filters which have already been reproduced above. The figures relating to depreciation / total cost are also mentioned in the order of the TPO. When a filter is imposed by the TPO himself, no deviation can be made to that filter. We find no force in the argument of the ld. Sr. DR that at this stage the assessee canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he issue and if two comparables, namely, Genesys International Corpn. Ltd. and Karvy Consultants Ltd. are excluded, then, the average mean margin of these comparables, as per calculations of TPO, would come to 8.78% and the average mean margin of the assessee as computed by the TPO will be 5.56%. The net result would be that the difference will be within tolerance limit 5% and the assessee will be entitled to have the benefit of proviso to 90C(2). However, these figures are required to be verified by the Assessing Officer. We, therefore, direct that the Assessing Officer should examine the mean margin of left out comparables and of the assessee with reference to the figures adopted by the TPO. If the remaining difference as computed as per our directions, between these two remains less than 5%, then, the benefit of proviso to Section 92C(2) will be given to the assessee and no addition will be called for. We direct accordingly. With these observations the ground relating to TP issue in respect of both the appeals is decided and is considered to be allowed for statistical purposes. The assessing officer will adjudicate the issue in accordance with the directions given to him. This w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest earned on Income tax refund is linked to the business of the assessee. Section 10-B does not require that profit is to be derived from the business. Sections 80-HHC and 10-B are pari materia and are distinguishable from 80-HH / 80-I. Therefore, it was claimed that the netting should be provided. The assessing officer did not accept such claim of the assessee and held that whole of the interest received by the assessee on Income tax refund amounting to ₹ 1,64,62,391/- is assessable as income of the assessee under the head 'Income from other sources'. 23.2 Before the ld. CIT (Appeals) it was the submission of the assessee that assessee was assessed to Income tax from assessment year 1996-97 onwards and had claimed deduction under section 80-HHC / 10-B of the Act which was denied by the Department, therefore, resulted in Income tax demand of ₹ 5,59,39,098/- which was paid during the pendency of the appeals. During financial year 2001-02 the assessee's appeal for assessment year 1996-97 was allowed vide order dated 7th January, 2002. Consequently in financial year 2002-03 refund of ₹ 8,07,92,340/- was received including the interest of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing decisions :- ( i ) Sham Progetti SPA v. Addl. CIT [1981] 132 ITR 70/[1982] 10 Taxman 86 (Delhi); ( ii ) Infotech Enterprises Ltd. v. Jt. CIT [2003] 85 ITD 325 (Hyd.); ( iii ) Honda Siel Power Products Ltd. v. Dy. CIT [2001] 77 ITD 123 (Delhi); ( iv ) CIT v. N. S. C. Shoes [2002] 258 ITR 749/[2003] 133 Taxman 307 (Mad.); ( v ) CIT v. Paramount Premises (P.) Ltd. [1991] 190 ITR 259 (Bom.); ( vi ) CIT v. Tirupati Woollen Mills Ltd. [1992] 193 ITR 252 (Cal.); ( vii ) CIT v. Tamil Nadu Dairy Development Corpn. Ltd. [1995] 216 ITR 535/[1996] 87 Taxman 1 (Mad.); ( viii ) CIT v. Madras Refineries Ltd. [1997] 228 ITR 354 (Mad.); ( ix ) CIT v. Punit Commercial Ltd. [2000] 245 ITR 550/[2001] 116 Taxman 191 (Bom.); ( x ) Letherage v. ITO [2003] 86 ITD 482 (Luck.); ( xi ) Asstt. CIT v. Khambhata Family Trust [1998] 67 ITD 411 (Ahd.); ( xii ) Wolkmen India Ltd. v. Dy. CIT [1999] 65 TTJ 68 (JP). 23.6 It was claimed that section 80-HHC and 10-B are pari materia and they are different from 80-HH and 80-I. Reference was made to the decision of Tribunal in the case of Asstt. CIT v. Motorola India Elect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separately. In the net analysis the interest expenses is much more than the interest received. The assessee is borrowing for the purpose of its EOU business. Only for certain short duration when funds are available it is placed in short term deposit on which interest is earned. The AO held that interest is not income derived by the assessee from business of data processing and export thereof. In view of the decision of Hon'ble Supreme Court in Sterling Foods v. CIT 237 ITR 579, since there is no direct nexus between the business and the interest receipt, such interest income is not incidental to business and hence to be taxed under the head 'Income from other sources' and deduction under section 10-B cannot be allowed in respect of such interest receipt. The ld. CIT (Appeals) confirmed the same. 27. The learned counsel for the assessee Shri Pawan Kumar submitted that the fact remains that the interest was earned out of business funds. At times the assessee was borrowing huge sum from the bank and paid interest thereon. Thus the interest income is to be taxed under the head 'profits and gains of business'. Though the income may not be directly treated as de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the business of the assessee. Therefore, the character of interest received by the assessee on Income tax refund cannot be linked with the business of the assessee and it will retain its character of income from other sources. Therefore, the ld. CIT (Appeals) is wrong in holding that the interest earned by the assessee on Income tax refund has a colour of income from business. If the same cannot be related to the business of the assessee then netting off cannot be granted as there is no inextricable link between the earning of the interest and payment of interest. We also do not find force in the contention of the assessee that since the payment of tax was made out of overdraft facility, therefore, interest receipt on income tax refund should be adjusted against interest paid on overdraft facility as according section 57(iii) only such expenditure (not being in the nature of capital expenditure) can be allowed if it is laid down or expanded wholly and exclusively for the purpose of making or earning of such income. Payment of Income tax cannot be said to be made for earning of interest, hence the case of the assessee will also be out of the purview of section 57(iii). 26. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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