2016 (2) TMI 1165 - AT - Income Tax

Tribunal ruling on deductions, transfer pricing, and disallowances under tax law

The Tribunal allowed the assessee's appeal regarding the computation of deduction under section 10A, directing that it should be calculated without ... Computation of deduction under section 10A - Held that:- The assessee is entitled to the deduction under section 10A of the Act at the stage when the profits and gains of each of the units are computed and there is no merit in adjusting the losses, if any, incurred by the assessee in any other unit, for computing the deduction under section 10A of the Act. Not allowing set off of unabsorbed depreciation and losses while computing the total income of the assessee - Held that:- As decided in assesse's own case [2015 (11) TMI 1522 - ITAT PUNE ] the assessee is entitled to the claim of deduction under section 10A of the Act before setting up of brought forward losses and unabsorbed depreciation. The deduction under section 10A of the Act is first allowed against the eligible profits and in case there are certain left over profits for the year under appeal, then the same are to be adjusted against the brought forward losses and unabsorbed depreciation / loss as claimed by the assessee in return of income. Accordingly, we direct the Assessing Officer to re-compute the deduction under section 10A of the Act. Adjustment with regard to the interest on loans to associate enterprises - Held that:- Hon’ble Bombay High Court in CIT Vs. Tata Autocomp Systems Ltd. (.2015 (4) TMI 681 - BOMBAY HIGH COURT) had also laid down similar proposition that the arm's length price in the case of loan advanced to associate enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received / consumed - Also in Varroc Engineering Pvt. Ltd. Vs. ACIT (2015 (3) TMI 111 - ITAT PUNE) had also laid down similar proposition and directed the Assessing Officer/TPO to verify the claim of the assessee vis-à-vis the borrowals of loans, which in turn, were advanced at LIBOR + rate to the associate enterprises, in case the advancement of loan to the associate enterprises is on LIBOR+ / WIBOR+ rates, then the said transaction with the associate enterprises is within arm's length price, otherwise, the TPO may re-compute the arm's length price of international transactions. Following the same parity of reasoning, we direct the Assessing Officer to compute the adjustment, if any, in the hands of assessee, after verifying the claim of the assessee. MAT -direction to exclude the disallowance made under section 14A of the Act, while computing the book profits u/s 115JB Issues Involved:1. Computation of deduction under section 10A of the Income Tax Act.2. Set-off of unabsorbed depreciation and losses.3. Transfer pricing adjustment related to interest on loans to associate enterprises.4. Disallowance under section 14A.5. Computation of book profits under section 115JB.6. Addition of provision for bad and doubtful debts while computing book profits under section 115JB.Detailed Analysis:1. Computation of Deduction under Section 10A:The assessee contended that the deduction under section 10A should be computed on the profits of each unit separately without setting off the losses of other units. The Tribunal referenced its own decision in the assessee's case for previous years and the Bombay High Court's ruling in CIT vs. Black & Veatch Consulting Pvt. Ltd., which held that the deduction under section 10A should be computed at the stage when the profits and gains of each unit are computed, without adjusting the losses of other units. The Tribunal allowed the assessee's appeal on this ground.2. Set-off of Unabsorbed Depreciation and Losses:The issue was whether the deduction under section 10A should be computed before setting off brought forward losses and unabsorbed depreciation. The Tribunal, following its earlier decisions and the Bombay High Court's judgment in CIT vs. Black & Veatch Consulting Pvt. Ltd., held that the deduction under section 10A should be computed before setting off brought forward losses and unabsorbed depreciation. The Tribunal directed the Assessing Officer to re-compute the deduction accordingly.3. Transfer Pricing Adjustment Related to Interest on Loans to Associate Enterprises:The TPO had proposed an adjustment based on the difference between the interest rate charged by the assessee (LIBOR/WIBOR) and the SBI Bank Prime Lending Rate (BPLR). The Tribunal, referencing its decision in Varroc Engineering Pvt. Ltd. vs. ACIT, held that for international transactions, the interest rate should be based on LIBOR rather than domestic BPLR rates. The Tribunal directed the Assessing Officer to verify if the loans were advanced at LIBOR+ rates and, if so, to accept the transactions as being at arm's length.4. Disallowance under Section 14A:The assessee did not press this issue, and thus, it was dismissed as not pressed.5. Computation of Book Profits under Section 115JB:The issue was whether disallowance under section 14A should be added back while computing book profits under section 115JB. The Tribunal, following its decision in Varroc Engineering Pvt. Ltd. vs. ACIT, held that no addition should be made on account of disallowance under section 14A while computing book profits under section 115JB. The Tribunal directed the Assessing Officer to exclude the disallowance made under section 14A while computing book profits.6. Addition of Provision for Bad and Doubtful Debts:The assessee conceded that this issue was decided against it due to a later amendment in the law. Consequently, the Tribunal dismissed this ground of appeal.Conclusion:The appeals were partly allowed, with the Tribunal providing specific directions to the Assessing Officer on the computation of deductions and adjustments as per the detailed analysis above.