2011 (5) TMI 509 - AT - Income Tax

Tax Tribunal decision: Loss adjustment, export turnover deduction, transfer pricing rules clarified

The Tribunal allowed the appeal of the assessee in a tax case involving adjustment of loss from a 10A unit against profits of other units, deduction of ... Deduction under section 10A - Adjustment of loss of 10A unit against profit of other units - Held that:- Prior to assessment year 2001-02 when section 10A was an exemption provision, section 10(6) provided restriction on set off and carried forward of business loss and unabsorbed depreciation - However subsequently, section 10(6) was amended by Finance Act 2003 with effect from assessment year 2001-02 and such restriction was withdrawn which was consistent with the new scheme of section 10A which is a deduction provision and not exemption provision from assessment year 2001-02 - Therefore the loss from 10A unit has to be adjusted against taxable profits of other units after deduction under section 10A has been allowed in respect of each eligible unit - As in Hindustan Unilever Ltd. (2010 (4) TMI 206 - BOMBAY HIGH COURT) in which it was held that deduction has to be allowed in respect of three eligible units and loss of the fourth 10A unit has to be set off against the normal business income - allow the claim of the assessee. Deduction of data line cost from export turnover - the data line cost being the telecommunication expenses have been excluded by the Assessing Officer from the export turnover - case of the assessee that the telecommunication expenses had been incurred in the business of software development at the software undertakings of the assessee in India- Held that:- Claim of assessee has not been controverted by the AO by placing any material on record. The expenses incurred on development of software in India cannot be considered as expenses attributable to the delivery of computer software outside India. Therefore such expenses cannot be excluded from the export turnover and in case these are excluded, these have to be excluded from total turnover also following the judgment Gem Plus Jewellery India Ltd. (2010 (6) TMI 65 - BOMBAY HIGH COURT) and Sak Soft Ltd. (2009 (3) TMI 243 - ITAT MADRAS-D) - hold that these expenses are not to be excluded from the export turnover. Transfer pricing adjustment - Held that:- The computation filed by the assessee before us prima facie, shows that the price charged by the assessee was within 5 per cent variation of the mean ALP and in such a case, no addition is required to be made - Therefore direct the Assessing Officer to recomputed the TP adjustment after allowing the benefit of plus/minus 5 per cent variation from the mean ALP and make addition only, if the price charged by the assessee is beyond the 5 per cent variation allowed under law. Issues Involved:1. Adjustment of loss from 10A unit against the profits of other units.2. Deduction of data line cost from export turnover while computing deduction under section 10A.3. Transfer pricing adjustment.Issue-wise Detailed Analysis:1. Adjustment of Loss from 10A Unit Against the Profits of Other Units:The primary issue is whether the loss from a 10A unit can be adjusted against the taxable profits of other units. The assessee had four 10A units and one non-10A unit. The assessee set off the loss from the Kolkata 10A unit against the profits of other units after claiming deductions under section 10A. The Assessing Officer contended that since income from a 10A unit was exempt, the loss should be ignored or adjusted against the profit of another 10A unit before allowing the deduction under section 10A. The Tribunal noted that post-amendment from assessment year 2001-02, section 10A is no longer an exemption provision but allows only a deduction from total income. The Tribunal referenced the judgments of the Hon'ble High Court of Mumbai in Hindustan Unilever Ltd. and the Tribunal in Honeywell International (India) (P.) Ltd., which supported the view that the loss from a 10A unit should be adjusted against the taxable profits of other units after allowing the deduction under section 10A for each eligible unit. Thus, the Tribunal set aside the order of the Additional CIT and allowed the claim of the assessee.2. Deduction of Data Line Cost from Export Turnover:The second issue concerns whether data line costs should be deducted from export turnover while computing deduction under section 10A. The assessee argued that the telecommunication expenses were incurred for software development in India and were not attributable to the delivery of computer software outside India. The Assessing Officer excluded these expenses from the export turnover but did not deduct them from the total turnover. The Tribunal referred to the provisions of Explanation 2(iv) of section 10A and the judgments in CIT v. Gem Plus Jewellery India Ltd. and Sak Soft Ltd., concluding that telecommunication expenses incurred in India for software development should not be excluded from the export turnover. The Tribunal held that these expenses are not attributable to the delivery of computer software outside India and set aside the order of the Assessing Officer.3. Transfer Pricing Adjustment:The third issue involves the transfer pricing adjustment amounting to Rs. 18,46,75,062. The TPO used the TNMM method and selected 20 comparables, determining an arithmetic mean margin of 19.26%. The DRP directed the exclusion of Accel Transmatics Ltd. from the comparables, resulting in a revised arithmetic mean margin of 18.03%. The Assessing Officer computed the arm's length price based on this margin, leading to the transfer pricing adjustment. The assessee argued that the price charged was within the permissible 5% variation from the arm's length price, and thus no adjustment was necessary. The Tribunal found that the Assessing Officer did not consider the 5% variation allowed under the law. The Tribunal directed the Assessing Officer to recompute the transfer pricing adjustment, allowing the 5% variation and making an addition only if the price charged by the assessee exceeded this margin. The Assessing Officer was instructed to provide an opportunity for hearing to the assessee if any discrepancies were found in the computation.Conclusion:The appeal of the assessee is allowed, with the Tribunal setting aside the orders of the Additional CIT and the Assessing Officer on all three issues, directing the necessary adjustments and recomputations as per the Tribunal's detailed analysis and legal precedents.