Tribunal partially allows assessee's appeal, provides specific directions on transfer pricing, royalty income, and foreign tax credit.

The Tribunal partly allowed the appeal by the assessee, directing the AO to make adjustments and verifications as per its findings. The issues were adjudicated on merits, with the legal issue on the validity of the draft assessment order left open. The Tribunal made specific directions on transfer pricing adjustments, exclusion of royalty income, treatment of foreign currency expenses, foreign tax credit, and disallowance under section 14A. The judgment was pronounced on November 11, 2022.

---

---

Issues Involved:
1. Validity of draft assessment order.
2. Transfer Pricing (TP) adjustment on Corporate Guarantee.
3. Exclusion of royalty income from profits eligible for deduction under sections 10A/10AA.
4. Reduction of expenses incurred in foreign currency from export turnover while computing deduction under sections 10A/10AA.
5. Foreign Tax Credit.
6. Levy of interest under section 234B.
7. Disallowance under section 14A.
8. General grounds and prayer regarding various additions/disallowances.

Issue-Wise Detailed Analysis:

1. Validity of Draft Assessment Order:
The assessee raised objections regarding the validity of the draft assessment order. However, during the hearing, it was submitted that if the issues are considered on merits and adjudicated, the legal issue raised can be left open. Thus, the Tribunal focused on the merits of the case.

2. Transfer Pricing Adjustment on Corporate Guarantee:
The TPO initially made a TP adjustment at 2% without considering any comparable unrelated transactions. The DRP directed the AO to adopt the rate at 0.92%. The Tribunal noted that the judiciary has consistently held that the arm's length price of a corporate guarantee transaction ranges between 0.20% to 0.5%. The Tribunal directed the AO to apply the rate of 0.50% on the closing balance of the corporate guarantee as of 31.03.2011.

3. Exclusion of Royalty Income from Profits Eligible for Deduction Under Sections 10A/10AA:
The AO excluded royalty income from the profits eligible for deduction under sections 10A/10AA, relying on the Supreme Court decision in Engineering Analysis Centre of Excellence (P.) Ltd vs. CIT. The Tribunal, however, followed the Karnataka High Court decision in the assessee's own case, which held that royalty income from licensing software products should be considered as profits of business of eligible units for the purposes of providing deduction under sections 10A and 10AA.

4. Reduction of Expenses Incurred in Foreign Currency from Export Turnover While Computing Deduction Under Sections 10A/10AA:
The AO excluded expenses incurred in foreign currency from the export turnover of the 10A units. The Tribunal noted that the definition of export turnover under section 10A does not warrant exclusion of expenses incurred in foreign currency attributable to rendering of services in connection with the development of computer software. The Tribunal directed the AO to delete the deduction made in the export turnover and total turnover.

5. Foreign Tax Credit:
The AO made an addition stating that the computation of income should begin with the figure constituting profit before tax. The Tribunal found merit in the argument that the addition made by the AO was incorrect and remitted the issue back to the AO to verify and delete the addition.

6. Levy of Interest Under Section 234B:
This ground was considered consequential and did not warrant separate adjudication.

7. Disallowance Under Section 14A:
The Tribunal directed the AO to verify whether the investment in joint ventures which had not yielded any dividend income for the year under consideration and exclude the same for the purpose of computation of average value of investments under section 14A.

8. General Grounds and Prayer Regarding Various Additions/Disallowances:
Grounds No. 1 and 8 were general in nature and did not warrant separate adjudication.

Conclusion:
The Tribunal adjudicated the issues on merits, partly allowing the appeal by the assessee. The Tribunal directed the AO to make necessary adjustments and verifications as per the Tribunal's findings. The legal issue regarding the validity of the draft assessment order was left open.

Pronouncement:
The judgment was pronounced in the open court on the 11th day of November, 2022.

---