Tribunal directions: Deductions, expenses verification, comparables exclusion, transfer pricing adjustments

The Tribunal directed the AO to allow the deduction under Section 10A without setting off domestic losses, verify double deduction of expenses, disallow indirect administrative expenses under Section 14A, allow deduction of employees' contributions to PF and ESI, exclude certain companies from comparables, compute arm's length interest on share application money, and exclude certain expenses from turnover calculations. The Tribunal partly allowed the assessee's appeal, dismissing the revenue's appeal and providing directions for correct deduction computation and transfer pricing adjustments.

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Issues Involved:
1. Setting off losses of non-STPI unit against profits of STPI unit before allowing deduction under Section 10A.
2. Allocation of expenses between STPI and non-STPI units.
3. Disallowance under Section 14A of the Income Tax Act.
4. Disallowance of employees' contribution to PF and ESI under Section 36(1)(va) read with Section 43B(b).
5. Transfer Pricing adjustments and selection of comparables.
6. Computation of arm's length price on share application money remitted to the subsidiary.
7. Exclusion of telecommunication expenses and expenses incurred in foreign currency from export turnover and total turnover.

Detailed Analysis:

1. Setting off losses of non-STPI unit against profits of STPI unit before allowing deduction under Section 10A:
The assessee argued that the AO and DRP erred by setting off losses of non-STPI units with the profits of STPI units before allowing the deduction under Section 10A. The assessee relied on the decision in CIT v. Yokogawa India Ltd. (341 ITR 385) and CIT v. Aurigene Discovery Technologies Ltd. The Tribunal noted that the jurisdictional High Court in Yokogawa India Ltd. held that the income of the Section 10A unit should be excluded before arriving at the gross total income. The Tribunal directed the AO to allow the deduction under Section 10A without setting off the domestic losses.

2. Allocation of expenses between STPI and non-STPI units:
The assessee contended that certain expenses were charged twice against the STPI unit, reducing the profit eligible for deduction under Section 10A. The Tribunal directed the AO to verify the claim regarding the double deduction of certain expenses and make necessary adjustments.

3. Disallowance under Section 14A of the Income Tax Act:
The assessee argued that no expenditure was incurred for earning exempt income, thus Section 14A should not apply. The Tribunal upheld the disallowance of indirect administrative expenses but found no justification for disallowing interest expenditure under Section 14A, as there was a reduction in investment during the year and no specific finding of borrowed funds used for investment.

4. Disallowance of employees' contribution to PF and ESI under Section 36(1)(va) read with Section 43B(b):
The Tribunal followed the jurisdictional High Court's decision in CIT v. Sabari Enterprises (298 ITR 141) and Essae Teraoka (P.) Ltd. v. Dy. CIT (366 ITR 408), allowing the assessee's claim for deduction of employees' contribution to PF and ESI if paid before the due date for filing the return of income under Section 139(1).

5. Transfer Pricing adjustments and selection of comparables:
The assessee sought exclusion of certain companies from the set of comparables. The Tribunal directed the exclusion of Sasken Communication Technology Ltd., KALS Information Systems Ltd., and Bodhtree Consulting Ltd. from the set of comparables based on functional dissimilarity and turnover filters. The Tribunal also directed the AO to recompute the operating profit margins by considering foreign exchange gain/loss as operating in nature if arising from sale proceeds.

6. Computation of arm's length price on share application money remitted to the subsidiary:
The Tribunal held that the remittance of share application money to the subsidiary, pending allotment of shares, constituted an international transaction under Section 92B. The Tribunal directed the AO to recompute the arm's length interest using the LIBOR rate and for the period from the date of remittance till the end of the financial year.

7. Exclusion of telecommunication expenses and expenses incurred in foreign currency from export turnover and total turnover:
The Tribunal upheld the DRP's direction to exclude telecommunication expenses and expenses incurred in foreign currency from both export turnover and total turnover while computing the deduction under Section 10A, following the jurisdictional High Court's decision in CIT v. Tata Elxsi Ltd. (349 ITR 98).

Conclusion:
The Tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal, providing directions to the AO on various issues, including the correct computation of deductions and transfer pricing adjustments.

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