2017 (11) TMI 2035 - AT - Income Tax

Tribunal allows partial appeal on set-off of losses, dismissing issues on trade receivables & interest rate.

M/s. Nuance Transcription Services India Pvt. Ltd. Versus Deputy Commissioner of Income-tax, Circle 5 (1) (1), Bengaluru

The tribunal partly allowed the appeal, permitting the set-off of losses between STPI units but dismissing issues regarding trade receivables treatment as ... TP Adjustment - outstanding receivable from Associated Enterprises exceeding 6 months, thus par take character of the loan - as per TPO non-charging of interest requires ALP adjustment and applying the yield rate on B rate Bonds @ 13.46% on the outstanding debts exceeding 6 months suggested - whether transaction of allowing excess period of credit to Associated Enterprises without charging any interest during such credit period would amount to International Transaction within the meaning of section 92B? - HELD THAT:- Transaction of receivables from Associated Enterprises is International Transaction and not charging interest for a period exceeding 6 months requires ALP adjustment. Therefore the grounds of appeal filed by the Assessee are dismissed. Deduction u/s 10A - reducing loss of Hyderabad unit against Chennai unit - HELD THAT:- This issue is no longer res integra, as it is covered by the decision of CIT vs. Yokogawa India Ltd. [2016 (12) TMI 881 - SUPREME COURT] wherein it was held that deduction u/s 10A is qua the eligible under taking of the assessee standing on its own without reference to other eligible units or undertakings of the Assessee. Benefit of deduction u/s 10A is given to the undertaking and the deduction u/s 10A would be prior to the exercise to be undertaken under chapter IV for arriving at the total income of the Assessee. Issues Involved:1. Set-off of losses of one STPI unit against profits of another STPI unit before computing exemption under section 10A.2. Treatment of trade receivables from Associated Enterprises as an international transaction and re-characterizing the same as a loan.3. Adoption of 13.46% as the rate of interest on outstanding receivables.4. Procedural fairness in the reference made by the AO to the TPO.5. Deduction of expenditure incurred in foreign currency from export turnover.Issue-wise Detailed Analysis:1. Set-off of Losses of One STPI Unit Against Profits of Another STPI Unit:The AO's action of setting off losses of the Hyderabad STPI unit against the profits of the Chennai STPI unit before computing the exemption under section 10A was challenged. The appellate tribunal referred to the Supreme Court's decision in CIT vs. Yokogawa India Ltd., which clarified that the deduction under section 10A is specific to the eligible undertaking and should be computed independently of other units. The tribunal concluded that the AO's method was incorrect, and the grounds of appeal concerning this issue were allowed.2. Treatment of Trade Receivables as an International Transaction:The AO, supported by the TPO, treated the outstanding trade receivables from Associated Enterprises as an international transaction, requiring an ALP adjustment due to non-charging of interest. The tribunal referred to the Explanation (i)(c) to Section 92B, inserted by the Finance Act 2012, which includes receivables as an international transaction. The tribunal upheld the AO's and TPO's position, confirming that the outstanding receivables constituted an international transaction, and the ALP adjustment was necessary. The grounds of appeal related to this issue were dismissed.3. Adoption of 13.46% as the Rate of Interest:The assessee challenged the adoption of 13.46% as the rate of interest on the outstanding receivables as excessive and unreasonable. The tribunal noted that this ground was not raised before the lower authorities and did not emanate from their orders. Consequently, the tribunal dismissed this ground of appeal.4. Procedural Fairness in the Reference to TPO:The assessee contended that the reference made by the AO to the TPO was void ab initio and violated the principles of natural justice, as the AO failed to provide a copy of the approval granted by the Commissioner of Income-tax and did not afford an opportunity for a hearing. However, this ground was not pressed during the hearing and was dismissed as not pressed.5. Deduction of Expenditure Incurred in Foreign Currency:The AO reduced the expenditure incurred in foreign currency on foreign travel, insurance, and telecommunication charges only from the export turnover while computing the deduction under section 10A. The DRP directed that such expenditure should be reduced from both the export turnover and the total turnover, following the jurisdictional High Court's decision in CIT vs. Tata Elxsi. The tribunal did not specifically address this issue in the final judgment, implying agreement with the DRP's direction.Conclusion:The appeal filed by the assessee was partly allowed. The tribunal allowed the grounds related to the set-off of losses between STPI units but dismissed the grounds concerning the treatment of trade receivables as an international transaction, the adoption of the interest rate, and procedural fairness in the reference to the TPO. The tribunal's decision was pronounced in the open court on 28th November 2017.