Miscellaneous income including scrap sales and tool development eligible for section 10B deduction for export undertakings

ITAT Delhi allowed the assessee's appeal regarding deduction under section 10B for 100% export oriented undertakings (EOUs). The tribunal held that miscellaneous income including scrap sales, tool development income, seating facility receipts, and sundries written back are eligible for deduction under section 10B as they constitute profits derived by the undertaking in the ordinary course of business. Following judicial precedents including Hewlett Packard Global Soft Ltd., the tribunal directed the AO to recompute deductions under section 10B(4). Additionally, the tribunal deleted transfer pricing adjustments on interest receipts from associated enterprises, finding the EURIBOR-based interest rates to be at arm's length.

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Issues Involved:
1. Validity of the Assessment Order.
2. Reduction of Deduction u/s 10B.
3. Adjustment to Income for International Transactions.
4. Levy of Interest u/s 234B, 234C, and 234D.
5. Initiation of Penalty Proceedings u/s 271(1)(c).

Summary:

1. Validity of the Assessment Order:
The assessee argued that the Assessment Order passed pursuant to the directions of the DRP was vitiated as the DRP did not consider the submissions made by the appellant and confirmed the addition made by the AO/TPO to the appellant's income.

2. Reduction of Deduction u/s 10B:
The AO reduced the eligible deduction u/s 10B by Rs. 56,13,895 based on the assumption that miscellaneous income/other income, including scrap sales, tool development income, seating facility, and sundry write-back, were not "derived from" the eligible undertakings. The Tribunal held that:
- Scrap sales should be included in the total turnover for deduction purposes as per the Tribunal's earlier decision in the assessee's case for AY 2004-05.
- Tool development income and seating facility income were derived from the ordinary course of business and were eligible for 100% deduction u/s 10B.
- Sundries written back, representing expenses claimed in earlier years, should be treated as income of the EOU and eligible for deduction u/s 10B.

3. Adjustment to Income for International Transactions:
The TPO made an adjustment of Rs. 8,09,277 to the income by substituting the arm's length rate of six months Euribor/LIBOR+205 bps with SBI prime lending rate + 300 basis points, resulting in an arm's length interest rate of 14.88%. The Tribunal observed that:
- The issue was previously decided in favor of the assessee for AY 2007-08 and 2008-09, where the Tribunal set aside the matter to the TPO, who later accepted the assessee's benchmarking analysis.
- The interest rates arrived at by the assessee using EURIBOR were at arm's length, and no further TP adjustment was required. The addition of Rs. 8,09,277 was deleted.

4. Levy of Interest u/s 234B, 234C, and 234D:
The Tribunal noted that the levy of interest u/s 234B, 234C, and 234D was consequential in nature.

5. Initiation of Penalty Proceedings u/s 271(1)(c):
The Tribunal found the initiation of penalty proceedings u/s 271(1)(c) to be premature and did not adjudicate on this ground.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, with directions to the AO to recompute the deductions and make necessary amendments to the assessment.

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