2011 (6) TMI 500 - AT - Income Tax

Tribunal Grants Assessee Relief: Set-off Losses, Excludes Branch Turnover, Confirms Deductions

The Tribunal allowed the assessee's appeals on various grounds, including the set-off of losses from 10A eligible units against normal business income, ... Deduction under section 10A - characterisation as deduction (not exemption) and entitlement to set-off of losses of 10A units against normal business income - International transaction - scope of expression in section 92B(1) and non-inclusion of mere extension of credit / continuing debit balance as an international transaction - Transfer Pricing - requirement of proper comparability and real transactions for ALP adjustments in respect of extended credit and notional interest - Allocation/apportionment of shared costs among associated enterprises - necessity of a mutual agreement/arrangement and tangible, identifiable benefit for apportionment - Transactional Net Margin Method (TNMM) - inclusion of operating costs and need for specific comparables when making separate cost allocations - Deduction under section 80HHE - treatment of export turnover and total turnover; exclusion of foreign branch turnover from total turnover where excluded from export turnover - Computation of book profits under section 115JB - requirement of adjudication on merits and remand where not decided for finality - Treatment of branch office losses under DTAA - taxation residency, taxing right and set-off of branch losses against other business incomeDeduction under section 10A - characterisation as deduction (not exemption) and entitlement to set-off of losses of 10A units against normal business income - Addition of losses of section 10A eligible units while computing income under normal provisions and while computing book profits under section 115JB - HELD THAT: - The Tribunal held that, having regard to the amended statutory scheme applicable for the assessment year, the benefit under section 10A is to be understood as a deduction of profits and gains and not an exemption which would preclude set off. Consequently, losses incurred by undertakings eligible under section 10A could be set off against the assessee's normal business income when computing income under the normal provisions. The Tribunal applied the ratio of the High Court decision considered pari materia to section 10B and concluded that the Assessing Officer's addition was unsustainable. Separately, issues of adding back such losses for computation of book profits under section 115JB were not adjudicated by the Commissioner (CIT(A)) and, for completeness and finality, the Tribunal remitted those specific grounds back to the CIT(A) for fresh adjudication on merits after affording opportunity to the assessee. [Paras 5, 31]Set aside the addition in respect of losses of section 10A units for computation under normal provisions; remitted related book profit adjustment issues under section 115JB to the CIT(A) for fresh adjudication.International transaction - scope of expression in section 92B(1) and non-inclusion of mere extension of credit / continuing debit balance as an international transaction - Transfer Pricing - requirement of proper comparability and real transactions for ALP adjustments in respect of extended credit and notional interest - Whether non charging of interest / extension of credit to Associated Enterprises constituted an 'international transaction' warranting an arm's length adjustment and whether the addition on account of notional interest is sustainable - HELD THAT: - Relying on the Tribunal's coordinate bench precedent, the Tribunal held that a continuing debit balance or extension of credit by itself is not an 'international transaction' under section 92B(1) but is a consequence of underlying commercial transactions; the terms of payment must be viewed in the context of the commercial transaction and comparability exercises must be carried out. The TPO's notional application of an external lending rate (LIBOR) without establishing lending/borr owing comparability, and without comparing with internal or external CUPs, was unsustainable. On these grounds the Tribunal found the TPO/AO's adjustment (and the partial sustainment by CIT(A)) untenable and deleted the entire addition relating to interest on extended credit. [Paras 12, 13]Deleted the entire Transfer Pricing addition relating to interest on extended credit; Revenue's cross ground sustaining part of the addition dismissed.Allocation/apportionment of shared costs among associated enterprises - necessity of a mutual agreement/arrangement and tangible, identifiable benefit for apportionment - Transactional Net Margin Method (TNMM) - inclusion of operating costs and need for specific comparables when making separate cost allocations - Validity of TPO's apportionment of consultancy costs paid to McKinsey & Co. to Associated Enterprises and consequential Transfer Pricing adjustment - HELD THAT: - The Tribunal analyzed whether the cost apportionment fell within Chapter X. It observed that apportionment under section 92B(1) presupposes a 'mutual agreement or arrangement' for allocation or contribution of cost; no such agreement or arrangement was shown. Further, even assuming benefit to Associated Enterprises, the TPO failed to determine ALP by applying appropriate comparability (internal/external CUP or other relevant comparables) and did not demonstrate tangible, concrete benefit to the Associated Enterprises to justify the apportionment. Also, since the assessee's TNMM computation already included operating costs and still showed higher margins, no separate allocation was justified. On these bases the Tribunal found the TPO's adjustment unsupported by evidence. [Paras 20, 21, 22]Set aside the TPO's apportionment and directed deletion of the addition in respect of consultancy charges.Deduction under section 80HHE - treatment of export turnover and total turnover; exclusion of foreign branch turnover from total turnover where excluded from export turnover - Whether turnover of Japan and Australia branches excluded from 'export turnover' must also be excluded from 'total turnover' for computing deduction under section 80HHE - HELD THAT: - Following a coordinate bench decision (Servion) and principles of consistency, the Tribunal interpreted the definitions in section 80HHE to hold that items excludible from 'export turnover' are likewise excludible from 'total turnover' for the purpose of computing the deduction. The Tribunal rejected the Assessing Officer's inclusion of branch turnover in total turnover where it had been excluded from export turnover, and directed recomputation of the deduction accordingly. [Paras 27]Assessee's contention accepted; directed Assessing Officer to recompute deduction under section 80HHE excluding the Japan and Australia branch turnover from total turnover where excluded from export turnover.Computation of book profits under section 115JB - requirement of adjudication on merits and remand for fresh consideration - Whether grounds relating to computation of book profits under section 115JB which were treated as 'academic' by CIT(A) must be adjudicated on merits - HELD THAT: - The Tribunal held that for completeness and finality the CIT(A) ought to have adjudicated the grounds on merits rather than dismissing them as academic because the normal provisions assessment was higher. The Tribunal therefore set aside the CIT(A)'s non adjudication and remitted the disputed grounds back to the CIT(A) for fresh consideration and decision on merits after affording reasonable opportunity to the assessee. [Paras 28, 29, 31, 58, 59]Matter remitted to the CIT(A) for adjudication on merits in accordance with law; restoration for statistical purposes.Treatment of branch office losses under DTAA - taxation residency, taxing right and set-off of branch losses against other business income - Whether loss of Sweden branch office is allowable for set off against other business income in India - HELD THAT: - For assessment year 2002 03 the Tribunal affirmed the CIT(A)'s conclusion allowing set off of the Sweden branch loss against other business income, relying on the applicable DTAA provisions and precedent in the assessee's immediately preceding year. For assessment year 2003 04, the Tribunal followed the reasoning already applied and decided the Revenue's appeal on that year against the assessee (i.e., the result differed as per the separate treatment in 2003 04 appeals filed by Revenue): the text records affirmation for 2002 03 and, for 2003 04 Revenue's Ground No.3 was decided against the assessee following the same analysis. [Paras 43, 44, 65]2002 03: Assessee succeeds - Sweden branch loss allowed for set off; Revenue appeal dismissed. 2003 04: Issue decided against the assessee following the Tribunal's treatment for that year.Final Conclusion: The Tribunal partly allowed the assessee's appeals for assessment years 2002 03 and 2003 04: losses of section 10A units were to be allowed for set off against normal income (with related book profit issues remitted to CIT(A)); Transfer Pricing additions relating to extended credit interest and consultancy cost apportionment were deleted; deduction under section 80HHE was to be recomputed by excluding specified foreign branch turnover from total turnover where excluded from export turnover; Sweden branch loss was allowed for set off for 2002 03 (Revenue failed) while the corresponding issue in 2003 04 was decided against the assessee as recorded; matters remanded to the CIT(A) were restored for adjudication on merits. Issues Involved:1. Disallowance and adding back of losses of 10A units while computing income as per normal computation.2. Addition/disallowance on account of interest under Transfer Pricing.3. Addition/disallowance on account of consultancy expenses under Transfer Pricing.4. Netting interest received against interest payment while reducing 90% of interest received from business income for section 80HHE.5. Reducing expenditure in foreign exchange for the SEEPZ unit from total and export turnover while computing deduction u/s 80HHE.6. Reducing turnover of Japan and Australia Branches only from export turnover and not from total turnover.7. Computation of book profit and adjustments made thereunder.8. Disallowance and adding back of losses of 10A units while computing book profit u/s 115JA.9. Determining the status of new units as independent or expansions for 10A eligibility.10. Set-off of losses of Sweden Branch office against other business income.11. Manner of charging interest under section 234B.Detailed Analysis:1. Disallowance and Adding Back of Losses of 10A Units:The Tribunal found merit in the assessee's appeal regarding the set-off of losses from 10A eligible units against normal business income. The Tribunal referenced previous decisions, including the Pune Bench's ruling and the High Court's decision in Hindustan Unilever Ltd., affirming that section 10A provides for a deduction, not an exemption, thus allowing the set-off of losses.2. Addition/Disallowance on Account of Interest Under Transfer Pricing:The Tribunal addressed the addition of Rs. 64,14,387 sustained by the CIT(A) out of Rs. 3.99 crores made by the AO for interest on excess credit allowed to Associated Enterprises. The Tribunal concluded that the extension of credit to Associated Enterprises beyond the stipulated period did not constitute an 'international transaction' under section 92B(1), thus directing the deletion of the addition.3. Addition/Disallowance on Account of Consultancy Expenses Under Transfer Pricing:The Tribunal examined the TPO's adjustment related to consultancy expenses paid to McKinsey & Co. The Tribunal found no evidence of a mutual agreement or arrangement between the assessee and its Associated Enterprises for the apportionment of costs. The Tribunal directed the deletion of the adjustment, holding that the TPO's action was based on no evidence.4. Netting Interest Received Against Interest Payment:The Tribunal noted that this ground was not pressed by the assessee and thus dismissed it as withdrawn.5. Reducing Expenditure in Foreign Exchange for SEEPZ Unit:Similarly, the Tribunal noted that this ground was not pressed by the assessee and dismissed it as withdrawn.6. Reducing Turnover of Japan and Australia Branches:The Tribunal agreed with the assessee that if the turnover of Japan and Australia branches was excluded from the 'export turnover,' it should also be excluded from the 'total turnover' for computing deduction under section 80HHE. The Tribunal directed the AO to re-compute the deduction accordingly.7. Computation of Book Profit and Adjustments:The Tribunal noted that the CIT(A) had dismissed this ground as academic since the assessee was taxed under the normal provisions. The Tribunal remitted the matter back to the CIT(A) for adjudication on merits to ensure completeness and finality of proceedings.8. Disallowance and Adding Back of Losses of 10A Units While Computing Book Profit:The Tribunal remitted this issue back to the CIT(A) for adjudication on merits, following the precedent set in the assessee's case for the previous assessment year.9. Determining the Status of New Units:The Tribunal upheld the CIT(A)'s decision that the three units at Chinchwad, Akruti, and Millennium Business Park were new and independent units, not mere expansions of existing units. The Tribunal found that the units fulfilled the conditions under section 10A(2) and were eligible for deduction under section 10A.10. Set-Off of Losses of Sweden Branch Office:The Tribunal affirmed the CIT(A)'s decision allowing the set-off of losses from the Sweden branch against other business income, following the Tribunal's decision for the previous assessment year.11. Manner of Charging Interest Under Section 234B:The Tribunal directed the AO to re-compute the interest chargeable under section 234B, considering the Explanation 1 below section 234B(1) and the Bombay High Court's decision in Apar Industries Ltd., which allows credit for taxes paid in foreign countries.Conclusion:The Tribunal allowed the assessee's appeals on most grounds, remitted some issues back to the CIT(A) for further adjudication, and dismissed the Revenue's appeals, thereby providing relief to the assessee on several contested points.