Tribunal directs reconsideration of notional interest issue & bifurcation of interest income for deduction.

The appeal was partly allowed for statistical purposes. The tribunal directed the Assessing Officer to reconsider the issue of notional interest and to allow deduction under Section 10A before setting off unabsorbed losses. The tribunal upheld the bifurcation of interest income, permitting deduction for interest on fixed deposits but not for interest on NSC and loans to employees.

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Issues Involved:
1. General grounds.
2. Disallowance under Section 14A.
3. Addition of notional interest for arm's length pricing under Section 92CA(3).
4. Set off of past-unabsorbed losses before calculating exemption under Section 10A.
5. Bifurcation of interest income for exemption under Section 10A.

Issue-wise Detailed Analysis:

1. General Grounds:
Ground Nos. 1 and 5 were general in nature and rejected due to the absence of any specific plea.

2. Disallowance under Section 14A:
Ground Nos. 2 to 2.4 pertained to the sustenance of disallowance under Section 14A of the Income Tax Act. The assessee's counsel chose not to press these grounds, and consequently, they were rejected.

3. Addition of Notional Interest for Arm's Length Pricing:
The issue revolved around the addition of Rs. 35,561/- as notional interest for arm's length pricing due to delayed realization of dues from an associated enterprise, Medusind Solutions Inc. The Transfer Pricing Officer (TPO) computed this interest based on the average MIBOR rate of 5.68%. The assessee contended that no interest was charged due to a mutual understanding with the AE and that it was a zero-debt company. However, the TPO deemed the delay abnormal and calculated the interest accordingly. The assessee argued that such adjustment did not constitute an international transaction under Section 92B of the Act. The tribunal noted that the amendment to Section 92B by the Finance Act, 2012, which included "receivable from the AE" as an international transaction, was applicable. The tribunal remanded the matter back to the Assessing Officer (A.O.) for fresh consideration in light of the new plea and the amendment.

4. Set Off of Past-Unabsorbed Losses:
Ground No. 4.1 addressed the issue of setting off past-unabsorbed losses before calculating the exemption under Section 10A. The A.O. had set off unabsorbed losses before allowing the deduction under Section 10A. The tribunal referred to the decision of the Hon'ble Bombay High Court in Black & Veatch Consulting (P.) Ltd., which held that the deduction under Section 10A should be given at the stage of computing the profits and gains of business, before the application of provisions of Section 72. Consequently, the tribunal directed the A.O. to allow the deduction under Section 10A before setting off the brought forward unabsorbed losses.

5. Bifurcation of Interest Income:
Ground No. 4.2 involved the bifurcation of interest income for the purpose of exemption under Section 10A. The A.O. had treated the entire interest income of Rs. 2,20,958/- as income from other sources, not eligible for deduction under Section 10A. The tribunal noted that interest on fixed deposits pledged with banks for margin money (Rs. 25,002/-) was eligible for deduction under Section 10A, following the precedent set in Jewelex International (P.) Ltd. However, interest on NSC (Rs. 248/-) and loans to employees (Rs. 135,583/-) were not considered business income and thus not eligible for deduction under Section 10A. The tribunal partly allowed the ground, permitting the deduction for interest on fixed deposits but not for the other interest incomes.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific directions for fresh consideration by the A.O. on the issue of notional interest and the allowance of deduction under Section 10A before setting off unabsorbed losses. The tribunal upheld the bifurcation of interest income, allowing deduction for interest on fixed deposits pledged with banks but not for interest on NSC and loans to employees.

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