TaxTMI 
TaxTMI 
2011 (6) TMI 500
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.... 2,80,87,334 Sigma 2,29,07,934 Millennium Park 3,75,53,361 Total 20,45,14,874 2. The ld CIT(A) erred in confirming the addition/disallowance on account of interest of Rs. 64,14,387 under Transfer Pricing 3. The ld CIT(A) erred in confirming the addition/disallowance on account of consultancy expenses of Rs. 1,08,73,008 under Transfer Pricing 4. The ld CIT (A) erred in confirming the AO's decision of not netting interest received of Rs. 64,71,867/- against interest payment of Rs. 4,85,30,301/- while reducing 90% of interest received from business income for the purposes of section 80HHE. 5. The ld CIT(A) erred in confirming the AO's decision of reducing expenditure in foreign exchange of Rs. 6,83,03,142 for the SEEPZ unit from the total and export turnover while computing deduction u/s 80HHE. 6. The ld CIT(A) erred in confirming the AO's decision of reducing the turnover of Japan and Australia Branches only from the report turnover and not from the total turnover. 7. The ld CIT(A) erred in concluding that the various ground in respect of computation of book profit and adjustments made thereund....
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....e provision, as applicable for the assessment year under consideration, is not in the nature of an exemption. Therefore, the assessee was entitled to set-off of losses sustained by the 10A eligible units against the normal business income. In this view of the matter, we therefore find no reason to uphold the orders of the authorities below on the impugned aspect. As a result, we set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to allow set-off of the losses of the section 10A eligible units against the normal business income of the assessee while computing income as per normal provisions of the Act. As a result thereof, Ground of appeal No .1 raised by the assessee stands allowed. 6. In Ground of appeal No. 2, the assessee has contested an addition of Rs. 64,14,387/- sustained by the Commissioner of Income-tax (Appeals) out of a total addition of Rs. 3,99,00,000 made by the Assessing Officer in respect of adjustment as per Chapter X viz. Transfer Pricing on account of interest chargeable on excess period of credit allowed to the Associated Enterprises. In this connection, the Commissioner of Income-tax (Appeals) has allowed partial....
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.... the scheme of Chapter-X of the Act. This aspect has also been negated by the Commissioner of Income-tax (Appeals) on the plea that the concept of real income theory is not applicable in the context of the Scheme of assessment contained in Chapter-X of the Act. On facts, assessee had contended that it was not charging interest from non-related parties also in case of delay in recoveries and, therefore, the non-charging of interest from Associated Enterprises on recoveries beyond the stipulated period of credit would also not justify the impugned adjustment. The Commissioner of Income-tax (Appeals), however, differed with the assessee on this aspect also and held that considering the significant costs incurred by the assessee the extension of credit to the Associated Enterprises beyond the contracted period of credit could not be construed as an action at arm's length. However, the Commissioner of Income-tax (Appeals) partially agreed with the assessee and concluded that the adjustment was merited only with regard to the interest in respect of post shipment loans beyond 90 days because according to him that was the only real cost suffered by the assessee in providing credit faci....
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....eals) ought to have deleted the entire addition instead of allowing a partial relief. 10. On the other hand, the learned Departmental Representative, appearing for the Revenue, has defended the order of the Assessing Officer by placing reliance on the same. According to him, the Commissioner of Income-tax (Appeals) made no mistake in treating the element of extended credit period to the Associated Enterprises as a factor justifying adjustment for benchmarking the "international transaction". The reasoning taken by the Commissioner of Income-tax (Appeals) in this regard was reiterated before us, which we have already noted in para 8 above and, is therefore not being repeated for the sake of brevity. Even with regard to the relief allowed by the Commissioner of Income-tax (Appeals), it is submitted by the learned Departmental Representative that the benefit of the credit period of 90 days allowed by the Commissioner of Income-tax (Appeals) and also limiting the adjustment to the interest cost of post shipment loan alone is not justified, inasmuch as the assessee has incurred significant costs for extending the credit to the Associated Enterprises as brought out by the TPO. 11. ....
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....becomes due. Many factors, including terms of payment and normal business practices, influence the fact of payment in independent transaction which can be viewed on standalone basis. What can be examined on the touchstone of arm's length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into. The payment terms are an integral part of any commercial transaction, and the transaction value takes into account the terms of payment, such as permissible credit period, as well. The residuary clause in the definition of 'international transaction' i.e. any other transaction having a bearing on the profits, incomes, losses or assets of such enterprises, does not apply to a continuing debit balance, on the given facts of the case, for the elementary reason that there is nothing on record to show that as a result of not realizing the debts from associated enterprises, there has been any impact on profits, incomes, losses or assets of the assessee. In view of these discussions, in our considered view, a con....
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....tained by the Commissioner of Income-tax (Appeals) is liable to be deleted in toto, albeit on a different ground. In the result, the order of the Commissioner of Income-tax (Appeals) is set aside and the Assessing Officer is directed to delete the entire addition on this count. 14. Resultantly, Ground No. 2 in the appeal of the assessee is allowed, whereas Ground No. 4 in the cross appeal of the Revenue in ITA No 687/PN/06 is hereby dismissed. 15. In Ground No.3 the dispute relates to the adjustment made by the TPO on account of allocation of the cost of consultancy expenses amounting to Rs. 1,33,31,520/- while determining the ALP of the international transaction. In this connection, the relevant facts are that the assessee had paid a sum of Rs. 6.03 crores to McKinsey & Co for undertaking a study for the purpose of restructuring the assessee's organizational structure. The TPO noted that the said concern had carried out three assignments and such reports were examined by him. Firstly, with regard to the report relating to strengthening the assessee's business development and sales processes, as per the TPO, the same also related to the functioning of the subsidiary c....
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....parate adjustment on this expenditure was required to be made. It was also contended that Mc Kinsey & Co have not provided any direct service to the Associated Enterprises; and, that any effort to improve the sales activity would necessarily involve Associated Enterprises also but since no specific service had been provided by M/s McKinsey & Co for the Associated Enterprises, no adjustment on account of consultancy expenses was required to be made. It was also pointed out that assessee sells directly to end consumers also and such sales have increased in the succeeding years. It was also contended that allocating the cost of such studies to Associated Enterprises is also not required in view of the responsibilities shared and the roles performed by the assessee and the Associated Enterprises. In the alternative, it was contended that though there is no direct benefit to the Associated Enterprises, yet if one is to consider the indirect benefit, the same would not exceed 25% to 30% of the cost of the study. It was further argued that the net margin of the assessee was 40% as against the average net margin of 25% of the comparable cases covered in the review report. While calculating....
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....of the expenditure accrued to the assessee as well as the Associated Enterprises. Quite clearly, in such a situation, the transaction needs to be based on Arm's Length price in terms of section 92C of the Act. The Revenue has sought to justify the inclusion of such a transaction within the purview of Chapter-X on the strength of words "....... shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises....." present in section 92B(1) of the Act, which explains the meaning of an "international transaction". Of-course, the learned Counsel for the assessee has submitted that the impugned transaction does not fall within the meaning of "international transaction" as contained in section 92B(1) of the Act. This aspect argued by the assessee is not being dealt with by us at this stage and shall be taken up a little later. Continuing further with the justification made out by the Revenue to include such transaction within the purvi....
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....enefit has accrued to the Associated Enterprises as a result of the expenditure incurred by the assessee in obtaining consultancy from McKinsey & Co. Therefore, under these facts and circumstances, in our opinion, the order passed by the TPO on this aspect is based on no evidence and the same is liable to be set aside qua the impugned adjustment. 21. Apart therefrom, even if we go along with the Revenue and accept the proposition that certain benefits accrued to the Associated Enterprises and, therefore, the Associated Enterprises were liable to compensate the assessee in terms of the above transaction, it was indeed imperative for the TPO to determine the ALP in respect of such "international transaction" made by the assessee company, by taking into consideration all the rights obtained and obligations incurred by the two entities, including the advantages obtained by the foreign Associated Enterprises. It goes without saying that in order to ascertain whether the expenses incurred by the assessee company, which is an Associated Enterprise of the foreign subsidiaries, on the consultancy charges paid to McKinsey & Co. are more than what a similarly situated and comparable indepe....
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.... 25. Before us, the learned Counsel for the assessee relied upon the decision of the Chennai Bench of the Tribunal in the case of ITO v. Servion Global Solutions Ltd. [2008] 115 ITD 95 (Chennai) for the proposition that an element which is excludible from the "export turnover" should also be excluded from the "total turnover" for the purposes of computing deduction under section 80HHE of the Act. It is contended that following the said proposition the turnover of Japan and Australia branches should also be excluded from the "total turnover" for the purposes of computing deduction u/s 80HHE of the Act. 26. On the other hand, the learned CIT-Departmental Representative appearing for the Revenue has defended the action of the lower authorities by adopting the same reasoning which has been taken note of by us in para 22 above and is therefore not repeated for the sake of brevity. 27. We have carefully considered the rival submissions and also perused the decision of the Chennai Bench of the Tribunal in the case of Servion Global Solutions Ltd. (supra) relied upon by the assessee before us. In the case of Servion Global Solutions Ltd. (supra), the Tribunal has noted the definitio....
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....section 115JB was re-worked at Rs. 13,59,89,629/-. Since the income as per the normal provisions was higher, the final assessment was made at Rs. 17,66,62,260/-. Apart from challenging various additions/disallowances made in the course of computing income as per the normal provisions, the assessee also challenged the determination of the income under section 115JB at a figure higher than that returned. The adjustments made in computing book profits under section 115JB were challenged before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) has elaborately noted the submissions put-forth by the assessee in this regard. However, the said disputes have not been determined by the Commissioner of Income-tax (Appeals) on the ground that the same were academic in nature since assessee has been ultimately taxed as per the normal provisions of the Act. For this reason, the Commissioner of Income-tax (Appeals) proceeded to hold that the said Ground raised by the assessee was not liable to be entertained and was accordingly dismissed. 29. Before us, it was a common point between the parties that the impugned Ground be remitted back to the file of the Com....
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....f deduction under section 10A of the Act is liable to be considered from the year of setting up of such units and not from the point of time when the original unit were set up. 35. Briefly stated the facts are that during the course of assessment proceedings, the Assessing Officer held that the three section 10A eligible units at Chinchwad, Akruti and Millennium Business Park were not new units but only expansion of the existing units. As per the Assessing Officer, Chinchwad Unit was an expansion of Software and Conversion Unit; Akruti unit was considered as expansion of Sigma Unit and Millennium Business Park unit was considered as expansion of TTC unit. The Assessing Officer treated the aforesaid units as mere expansions of the existing units on the basis of the approval letters received from the Software Technology Park of India (in short "STPI"). Accordingly, the Assessing Officer noted that the profitability of the aforesaid three units was liable to be combined with that of the corresponding old units. Similarly, the Assessing Officer also concluded that the eligible period for deduction under section 10A of the Act with respect to the said three units would also be reckon....
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....ect matter of appeal, are not formed by the transfer of machinery or plant previously used for any purpose. In fact all the three units are having their own plant and machinery having substantial investment and substantial turnover and are located in different premises, as is clear from the material on record. The only point to be seen in the present case is whether the three units can be said to be formed by splitting up or reconstruction of business already in existence and in this regard respectfully following the ratio decidendi of Hon'ble Supreme Court decision in the case of Textile Machinery Corporation Ltd v CIT quoted supra, I am of the considered view that it cannot be said that the three units are formed by the splitting up or reconstruction of business already in existence. It may also be mentioned that the Hon'ble Supreme Court held that benefit of section 15C shall be applicable even in case of expansion of business and the relevant portion of decision of Hon'ble Supreme Court in the case of Textile Machinery Corporation as contained in page 203 & 204 in 107 ITR is reproduced as under: "There is great scope of expansion of trade & industry. The fact tha....
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....ointed out that it is not a case of expansion of an existing unit, but certainly a case of expansion of the business of the company and the same cannot lead to denial of deduction under section 10A, especially when the three units otherwise fulfil the conditions prescribed under section 10A of the Act. The learned Counsel has also referred to the decision of the Mumbai Bench of the Tribunal in the case of Jayant Agro Organics Ltd Akhandanad v. Jt.CIT [IT Appeal No. 5439 (Mum.) of 2001, dated 3.3.2006] wherein similar argument set up by the Revenue was not found cogent to deny the claim of deduction under section 10A of the Act. 39. In the above background, we have carefully considered the rival submissions. Notably, the assessee is a company engaged in the business of development and export of computer software. It has been explained before the lower authorities that the business of the assessee is on an increasing scale. It has expanded its business by establishing new undertakings at different locations. It is explained that the turnover of the company has substantially increased over a period of time with the increase in the number of employees, etc. as also number of locatio....
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....l as the turnover of each unit and on such factual analysis, it has been concluded that the three units are separate and distinct from the existing units referred by the Assessing Officer. On these factual aspects, we find that there is no cogent material brought out by the Revenue to negate the findings of the Commissioner of Income-tax (Appeals). 41. The only plea of the Revenue is that in the approvals granted by the STPI, the three units have been referred to as an expansion of the corresponding old units. The moot question is as to whether such a plea of the Revenue is potent to effect the assessee's entitlement for deduction under section 10A of the Act. Similar plea of the Revenue in the context of section 10B of the Act was a subject matter of consideration by our coordinate Bench in the case of Jayant Agro Organics Ltd. Akhandanad (supra) wherein following discussion is worthy of notice: "8. Revenue has vehemently contended that there is no independent Government approval of the new unit and all that the Government has permitted is enhancement in capacity of the existing unit. As evident from the land allotment letter dated 19th July, 1995 issued by the Gujarat I....
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....hat the three units are separate and independent production units and the same cannot be treated as mere expansions of the existing undertakings. Therefore, the mere fact that the requisite permissions from STPI refer them as expansions of the existing units, would not dis-entitle the assessee from the claim of deduction under section 10A of the Act. In this view of the matter, we find no error in the approach of the Commissioner of Income-tax (Appeals) in having allowed the claim of assessee for the benefits under section 10A of the Act on the three units treating the same as independent units. Thus, Ground Nos 1 & 2 of the appeal of the Revenue are dismissed. 43. In the appeal of the Revenue, Ground No. 3 is in respect of the losses of Sweden Branch office which has been disallowed and added back while computing the income of the assessee. In this regard, the brief facts are that the assessee company has a branch office at Sweden which incurred a loss for the assessment year under consideration. The said loss was not allowed to be set off against other business income by the Assessing Officer. The plea of the assessee was that in terms of para 1 of Article 7 of Double Taxation....
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....f the losses of the section 10A eligible units against the normal business income of the assessee while computing income as per normal provisions of the Act. On the parity of reasoning, we hereby set aside the order of the Commissioner of Income-tax (Appeals) with similar directions to the Assessing Officer. As a result, Ground of Appeal No 1 raised by the assessee is allowed. 49. Ground No. 2 relating to disallowance of loss of new Vashi IIP unit was not pressed by the learned Counsel for the assessee at the time of hearing and, therefore, the same stands dismissed. 50. Ground No. 3 relates to an addition of Rs. 62,81,020/- sustained by the Commissioner of Income-tax (Appeals) out of the addition made by the Assessing Officer in respect of adjustment as per Chapter-X, viz. Transfer Pricing on account of interest chargeable on excess period of credit allowed to the Associated Enterprises. Similar Ground has been considered by us in assessee's appeal for the assessment year 2002-03 and for the detailed reasons given therein, we hereby delete the addition partially sustained by the Commissioner of Income-tax (Appeals). Resultantly, assessee succeeds on this Ground of Appeal....
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....fits provided under section 10A of the Act. On the same parity of reasoning, it is submitted that the plea of the assessee be allowed. 54. On the other hand, the learned Departmental Representative has reiterated that the lower authorities made no mistake in denying the claim because the assessee had opted for the claim of deduction under section 10A of the Act and in relation to such profits and gains no further benefit could be allowed under any provisions of the Act. 55. We have carefully considered the rival submissions. We have also carefully perused the judgment of the Hon'ble Madras High Court in the case of Ambatture Clothing Ltd (supra). In the case before the Hon'ble High Court, assessee had claimed the benefits under section 10A/10B of the Act, apart from claiming deduction under section 80HHC of the Act for the remaining 10% of the profits, which were to suffer tax applying the provisions of section 10A/10B of the Act. According to the Revenue, claim made under section 80HHC of the Act in respect of the remaining 10% of the profits amounted to double deduction, which was impermissible. The Hon'ble High Court examined the said aspect and held that there....
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....ng Officer is directed to re-compute the deduction under section 80HHE of the Act accordingly. Thus, on this Ground, assessee succeeds. 58. Ground No 8 relates to the computation of book profits for the purposes of section 115JB and adjustments made thereunder. This Ground is similar to Ground No. 7 raised in assessee's appeal for the assessment year 2002-03, wherein we have restored the issue to the file of the Commissioner of Income-tax (Appeals) to adjudicate the same in accordance with law after allowing a reasonable opportunity of being heard to the assessee. For the reasons given therein, we hold so and restore this Ground to the file of the Commissioner of Income-tax (Appeals) with similar directions. Thus, on this Ground assessee succeed for statistical purposes. 59. Ground No. 9 relates to the disallowance and adding back of the losses of section 10A eligible units while computing books profits for the purposes of section 115JB of the Act. This Ground is similar to Ground No. 8 raised in assessee's appeal for the assessment year 2002-03, wherein we have restored the issue to the file of the Commissioner of Income-tax (Appeals) to adjudicate the same in accord....