2013 (11) TMI 417 - AT - Income Tax

Tribunal directs ALP re-computation, STPI losses set-off, notice pay as business income

Birla Soft (India) Ltd. Versus Deputy Commissioner of Income-tax, Circle - 3 (1), New Delhi

The Tribunal allowed the appeal, directing the AO/TPO to re-compute the ALP using internal comparables, treat the GE-GDC unit as a separate unit for ... Transfer pricing adjustments - selection of internal comparables - Held that:- The assessee was justified in undertaking internal bench marking analysis on stand alone basis by placing on record working of operating profit margin from international transactions with AEs and transactions with unrelated parties undertaken in similar functional and economic scenario, and the same should be the basis for determination of arm's length price in respect of international transactions undertaken with the associated enterprise. It was further concluded that the TPO had no mandate to have recourse to external comparables when in the present case, internal comparables were available, which could be applied for determining the arm's length price of international transactions with AEs. - Decision in Assistant Commissioner of Income-tax, Circle 3(1), New Delhi Versus Birla Soft Ltd. [2011 (1) TMI 406 - ITAT, DELHI] followed - matter restored before AO - Decided in favor of assessee. Deduction / Exemption u/s 11A - AO was of the opinion that this new unit was not altogether different unit but it was the extension of the existing unit as both the units were situated in the same building and doing same business. - Held that:- G-GDC STP unit situated at third floor, Sector 29, Noida is to be treated as separate unit and, accordingly, deduction u/s 10A was allowable. Deduction is available under section 10A - Losses of STP units to be set off against income from other units on the ground that STP units were exempt u/s 10A of the Act while profits of non STP units were taxable as normal business income – Held that:- Reliance has been placed upon the case of Hindustan Unilever Ltd. v. DCIT [2010 (4) TMI 206 - BOMBAY HIGH COURT], wherein it has been held that the losses of the unit eligible for deduction u/s 10B of the Act were held allowable to be set off against profits of the business – Further, reliance has been placed upon the Special Bench decision of ITAT, Bench 'C' Chennai (SB) in the case of M/s Scientific Atlanta India Technology Pvt. Ltd. vs. ACIT [2010 (2) TMI 658 - ITAT, CHENNAI], where it has been held that even though sec. 10A falls under Chapter III, it has been mentioned in the section itself that what is to be given is only a deduction and not exemption after amendment made with effect from 1st April, 2001. It was further held therein that the intention of this legislature w.e.f. 1st April, 2001 was to give only deduction and not exclusion from total income – In the instant case, matter restored to the file of A.O. for his fresh computation by treating the provisions of sec. 10A to be in the nature of deduction provision and not exemption – Appeal allowed for statistical purpose - Decided in favor of Assessee. Deduction u/s 10A for the income earned during the notice period – Sum of ₹ 35,52,781/- was received by assessee on account of notice pay and deduction u/s 10A was claimed – Held that:- amount received towards notice period is to be treated as income derived from the eligible undertaking and deduction u/s 10A shall be allowed accordingly - Assessee was entitled for deduction u/s 10A in respect of amount received on account of Notice Pay – Decided in favor of Assessee. Issues Involved:1. Internal Benchmarking and Arm's Length Price (ALP) Determination.2. Deduction under Section 10A for GE-GDC STPI Unit.3. Set-off of Losses of STPI Units against Non-STPI Units.4. Classification of Miscellaneous Income as Business Income or Income from Other Sources.Detailed Analysis:1. Internal Benchmarking and Arm's Length Price (ALP) Determination:The assessee, a 100% subsidiary of an Indian company, which is itself a subsidiary of a US company, engaged in software development, had filed a return declaring a loss but was subjected to transfer pricing adjustments. The AO/DRP disregarded the internal benchmarking undertaken by the appellant for determining the ALP of international transactions applying TNMM due to various reasons including lack of segmental accounts. The TPO rejected internal TNMM and instead used external comparables, determining the ALP with an OP/OC% margin of 20.17%. The Tribunal, referring to the assessee's own case for previous years and other relevant case laws, held that internal comparables should be preferred over external comparables if available. The Tribunal restored the matter to the AO/TPO to determine the ALP by making an internal comparison of profitability from international transactions with AEs and unrelated parties, following the principles laid out in previous judgments.2. Deduction under Section 10A for GE-GDC STPI Unit:The AO denied the deduction claimed under Section 10A for the GE-GDC unit, treating it as an extension of an existing unit. The Tribunal, following its own decisions in the assessee's previous years, held that the new unit should be treated as a separate and independent unit for the purpose of computing deduction under Section 10A. The Tribunal directed the AO to allow the deduction accordingly, treating the new unit as a separate entity.3. Set-off of Losses of STPI Units against Non-STPI Units:The AO disallowed the set-off of losses of STPI units against the profits of non-STPI units, treating Section 10A as an exemption provision. The Tribunal, following its own decisions and other relevant case laws, held that Section 10A is a deduction provision and not an exemption provision. The Tribunal restored the matter to the AO for fresh computation, treating the provisions of Section 10A as a deduction provision and allowing the set-off of losses accordingly.4. Classification of Miscellaneous Income as Business Income or Income from Other Sources:The AO treated the miscellaneous income received on account of notice pay as income from other sources and not business income, thereby denying the deduction under Section 10A. The Tribunal, following its own decision in the assessee's previous years, held that the amount received towards notice period is to be treated as income derived from the eligible undertaking. The Tribunal directed the AO to allow the deduction under Section 10A in respect of the amount received on account of notice pay.Conclusion:The Tribunal allowed the appeal for statistical purposes, directing the AO/TPO to re-compute the ALP using internal comparables, treat the GE-GDC unit as a separate unit for Section 10A deduction, allow the set-off of losses of STPI units against non-STPI units, and classify the notice pay as business income for Section 10A deduction. The stay petition filed by the assessee was dismissed as infructuous.