Arms length 14.38% mark-up applies to related ITES sales; s.10A deduction before unabsorbed depreciation; s.115JB book profits per Companies Act

ITAT Mumbai (AT) held that the arm's-length mark-up of 14.38% determined for 96% of related ITES transactions applies to the remaining 4% as no factual distinction exists. The tribunal directed deduction under s.10A to be allowed before setting off brought-forward unabsorbed depreciation. Interest on bank deposits was held to be business income for tax purposes and must be included in total turnover so s.10A deduction is applied proportionately. For MAT under s.115JB, book profits are to be computed per Schedule VI of the Companies Act, not by applying Income-tax Act adjustments.

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Issues Involved:
1. Addition to income by re-computing the arm's length price (ALP) of international transactions.
2. Setting off unabsorbed depreciation against exempt income under Section 10A.
3. Taxability of interest income on deposits and its eligibility for deduction under Section 10A.
4. Computation of book profit under Section 115JB.
5. Deduction of business expenditure disallowed as prior period expenditure.

Issue-wise Detailed Analysis:

1. Addition to Income by Re-computing the ALP of International Transactions:
The assessee challenged the addition of Rs. 39,30,43,000 to its income by re-computing the ALP for ITES provided to its AE, JP Morgan Chase & Co., US (JPMC). The assessee accepted the MAP conclusion for Rs. 37,65,35,194 at an arm's length mark-up of 14.38%, revising the grounds of appeal to cover only the remaining Rs. 1,65,07,806. The Tribunal noted that no distinction was made between US and non-US transactions by lower authorities and decided that the same mark-up of 14.38% should be applied to the remaining 4% transactions. Thus, the assessee received partial relief.

2. Setting Off Unabsorbed Depreciation Against Exempt Income Under Section 10A:
The assessee contested the setting off of unabsorbed depreciation of Rs. 2,29,59,653 against exempt income under Section 10A. The Tribunal referred to its order for A.Y. 2005-06 and the decision of the Hon'ble Bombay High Court in CIT vs. Black And Veatch Consulting Pvt. Ltd., which held that deduction under Section 10A should be allowed before setting off brought forward business loss and unabsorbed depreciation. The Tribunal directed the AO to allow the deduction under Section 10A before setting off unabsorbed depreciation.

3. Taxability of Interest Income on Deposits and Its Eligibility for Deduction Under Section 10A:
The assessee argued that interest income on deposits should be taxed under "profits and gains of business or profession" and be eligible for deduction under Section 10A. The Tribunal referred to its orders for A.Ys. 2004-05 and 2005-06, and the Hon'ble Karnataka High Court's decision in CIT vs. Motorola India Electronics (P) Ltd., which supported the assessee's claim. The Tribunal held that interest income should be treated as business income and eligible for deduction under Section 10A, proportionately computed as per sub-section (4) of Section 10A.

4. Computation of Book Profit Under Section 115JB:
The assessee claimed that book profit under Section 115JB should be computed by reducing interest income on deposits to which Section 10A applies. The Tribunal referred to its order for A.Y. 2005-06 and decisions in Moser Baer India Ltd. vs. DCIT and Ajanta Pharma Ltd. vs. CIT, which held that for computing book profit under Section 115JB, income should be computed as per the Companies Act, not the Income Tax Act. The Tribunal directed the AO to follow this principle.

5. Deduction of Business Expenditure Disallowed as Prior Period Expenditure:
The assessee contended that business expenditure disallowed as prior period expenditure for A.Y. 2007-08 should be allowed notionally for A.Y. 2006-07. The Tribunal noted that the DRP had already directed the AO to examine and allow such expenditure if it qualified under Section 37. The Tribunal reinforced this direction, asking the AO to re-examine the issue and adjudicate after granting the assessee a proper hearing.

Conclusion:
The appeals were partly allowed, providing relief to the assessee on several grounds, including the re-computation of ALP, setting off unabsorbed depreciation, taxability and deduction of interest income, and computation of book profit. The Tribunal directed the AO to follow its orders and the DRP's directions for proper adjudication.

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