Tribunal decision: Deduction, disallowance, transfer pricing adjustments clarified

The Tribunal allowed the assessee's appeal regarding the deduction under section 10A on interest income, disallowance under section 14A, and transfer pricing adjustments. The Tribunal upheld the CIT(A)'s decision on the deduction under section 10A without adjusting losses from other units and computation including telecommunication expenses. However, issues related to transfer pricing adjustments on delayed receivables and interest undercharged on loans to AEs were remanded for fresh examination. The Tribunal partly allowed the assessee's appeal and partly allowed the revenue's appeal, providing proper opportunities for the assessee to be heard.

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Issues Involved:
1. Deduction under section 10A on interest income.
2. Disallowance under section 14A in respect of exempt income.
3. Transfer pricing adjustment in respect of revenue received.
4. Deduction under section 10A without adjusting loss of other eligible units.
5. Computation of deduction under section 10A without deducting telecommunication expenses.
6. Transfer pricing adjustment on delayed receivables.
7. Transfer pricing adjustment on interest undercharged on loans to AEs.

Summary:

1. Deduction under section 10A on interest income:
The assessee appealed against the denial of deduction under section 10A on interest income. The Tribunal referenced its own decision in the assessee's case for A.Y. 2003-04, where it was held that interest income from temporary parking of surplus funds is eligible for deduction under section 10A. Consistent with this view, the Tribunal reversed the CIT(A)'s order and directed the AO to allow the deduction.

2. Disallowance under section 14A in respect of exempt income:
The assessee contested the disallowance made under section 14A. The Tribunal noted that Rule 8D does not apply to A.Y. 2006-07 as per the Bombay High Court's decision in Godrej Boyce Mfg Co Ltd. However, since the assessee earned exempt income, a portion of expenditure needed to be disallowed. Following the Bombay High Court's decision in Godrej Agrovet Limited, the Tribunal directed the AO to restrict the disallowance to 2% of the exempt income.

3. Transfer pricing adjustment in respect of revenue received:
The Tribunal found that the TPO's approach of selecting foreign AEs as tested parties and using undisclosed Indian comparables was against transfer pricing provisions and natural justice. The CIT(A) correctly rejected this approach and selected 11 comparable companies, whose average margin was 22.53%, within the tolerance limit of 5%. Thus, the Tribunal held that no transfer pricing adjustment was required and deleted the addition of Rs. 7.88 crores.

4. Deduction under section 10A without adjusting loss of other eligible units:
The Revenue's appeal on this issue was dismissed. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in CIT vs. Yokogawa India Ltd, which stated that deduction under section 10A should be computed undertaking-wise without adjusting losses from other units.

5. Computation of deduction under section 10A without deducting telecommunication expenses:
The Tribunal agreed with the CIT(A) that telecommunication charges should be deducted from both "Export turnover" and "Total turnover" while computing deduction under section 10A, following the Supreme Court's decision in CIT vs. HCL Technologies Ltd.

6. Transfer pricing adjustment on delayed receivables:
The Tribunal found that the TPO's method of computing interest on delayed receivables using average quarterly balances was incorrect. They noted that the AEs remitted money with significant delays after realization from their debtors. The issue was remanded to the AO/TPO for fresh examination, allowing computation of interest on individual bills after accepted credit periods.

7. Transfer pricing adjustment on interest undercharged on loans to AEs:
The Tribunal observed that neither the assessee nor the TPO substantiated their stand properly regarding the ALP of interest on loans to AEs. The issue was remanded to the AO/TPO for re-examination, considering the LIBOR rate plus appropriate points to determine the market rate.

Conclusion:
The appeal of the assessee was partly allowed, and the appeal of the revenue was treated as partly allowed. The Tribunal directed proper opportunities for the assessee to be heard. The judgment was pronounced on 23.6.2023.

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