TaxTMI 
TaxTMI 
2024 (3) TMI 1256
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion made by the Ld. Assessing Officer (AO)/ Ld. Transfer Pricing Officer (TPO) to the Appellant's income. 2. That on the facts of the case and in law, the Ld. AO/L4. DRP has erred in reducing the eligible deduction under section 10B of the Income Tax Act, 1961 (the Act') by la 56,13,895/-on the basis of incorrect assumptions, conjectures and in doing so have grossly erred in: 2.1 holding that Miscellaneous Income/other Income which comprises of Scrap sales, tool development income, seating facility, Sundry write back are not "derived from" the eligible undertakings. 2.2 not accepting that the entire profits of eligible undertakings to be considered for deduction u/s 10B of the Act in view of provision of section 10B(1) read with section 108(4) of the Act. 3. The Ld. DRP erred both on facts and in law in confirming the Ld. AO/TPO's action of making an adjustment of Rs. 8,09,277/- to the income of the Appellant by holding that the international transactions of the Appellant pertaining to receipt of interest on the loans given to its subsidiary do not satisfy the arm's length principle envisaged under the Act. In doing so the Ld. DR....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndia in 1986. It is engaged in the manufacturing of automotive electrical distribution systems. For AY 2010-11, it e-filed its return of income on 14.10.2010 declaring a total income of Rs. 225,49,25,870/-. The case was selected for scrutiny and thereafter was referred to the Ld. Transfer Pricing Officer ("TPO") for determining the Arm's Length Price ("ALP") of the International transactions entered into with its Associated Enterprises ("AE") during the relevant AY under consideration. 3.1 The details of the international transactions entered by the assessee with its AE during the AY 2010-11 are as under:- S.No. Description of the transactions Amount (Rs.) 1 Purchase of goods 809,184,336 2 Sale of goods 593,175,507 3 Purchase of fixed assets: 56,893,579 4 Payment of Royalty and Technical fee 85,829,562 5 Services received 53,346,601 6 Services rendered 1,103,658 7 Reimbursement of expenses paid 20,388,953 8 Receipt of Guarantee fee 4,209,878 9 Receipt of Interest on loans 546,809 10 Reimbursement of expenses received 1,886,087 3.2 The Ld. Assessing Officer ("AO") in the draft as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aneous income/ other income to the P&L Account of its EOUs: S. No. Other Income Bangalore Unit Amount (Rs.) Noida Unit Amount (Rs.) I Scrap Sales 27,71,440 21,40,908 II Tool development Income 21,20,015 - III Seating facility 1,80,000 - IV Sundries Written Back 21,764 - Total 50,93,219 21,40,908 5.1 The Ld. AR submitted that above incomes are generated out of the integral business activities of the EOUs and hence are eligible for deduction under section 10B of the Act. Scrap sales at Noida unit were generated during the process of manufacturing the rubber parts. Scrap was generated on cutting, scrapping and finishing. Bangalore unit was involved in manufacturing base for cooling fans placed in computers, primarily PCs and also in servers. Scrap at Bangalore unit was generated on account of drilling, shaving and scrapping of the metal for manufacturing fan base plates etc. The Ld. AR submitted that deduction of scrap sales under section 10B has to be allowed on proportionate basis i.e. in the proportion of export turnover to total turnover of the business of the EOUs. This view is supported by the deci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cluding the decision of the Hon'ble Delhi High Court in the case of Riviera Home Furnishing vs. ACIT (2016) 65 taxmann.com 287 (Del). In view of these decisions (supra) the reliance placed by the Ld. AO on the decisions of Chennai/ Mumbai Tribunal is no more a good law. 6. The Ld. DR strongly supported the order of the Ld. AO. The Ld. DR submitted that section 10B(1) of the Act clearly states that for claiming deduction under section 10B, two conditions have to be satisfied: (1) the assessee is required to be 100% export oriented unit and (2) the income is to be "derived from" export of articles or things or computer software. He argued that the miscellaneous income/ other income earned by the assessee has no correlation with exports and accordingly cannot be taken as derived from export. The income from scrap sales/ tool development/ seating facilities etc. is not even incidental to the export income and by no stretch of imagination can be treated as part of export income covered for section 10B deduction. He submitted that exemption provisions are to be strictly applied and interpreted. He relied on the decision of the Hon'ble Supreme Court in the case of Pr.CIT vs. Wipro Ltd.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... per sub-section (4) of Section 10B." 8.1 Respectfully following the decision of the Tribunal (supra), we hold that the impugned income on account of scrap sales earned by the assessee EOUs at Bangalore and Noida during AY 2010-11 is eligible for deduction under section 10B of the Act. Accordingly, we direct the Ld. AO to recompute the deduction allowable to the assessee under section 10B in accordance with the applicable provisions contained therein. 9. As regards tool development income and seating facility, we note that the said income has arisen from developing tools for manufacture of products for customers on the basis of orders received from them and subsequent recovery of costs from such customers and the seating facility income is earned in the course of tool development from the customer relating to monitoring of tool development specific to its product. This factual position is not controverted by the Ld. DR. Given the nature of these receipts / income, we tend to agree with the contention of the Ld. AR that these have been earned by the assessee in the process of manufacturing / production of goods at its EOUs. In our view, it thus arises in the ordinary course of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not be the income "derived from" such Undertakings doing such special business activity. 35. The Scheme of Deductions under Chapter VIA in Sections 80-HH, 80-HHC, 80- 1B, etc from the 'Gross Total Income of the Undertaking, which may arise from different specified activities in these provisions and other incomes may exclude interest income from the ambit of Deductions under these provisions, but exemption under Section 10-A and 10-B of the Act encompasses the entire income derived from the business of export of such eligible Undertakings including interest income derived from the temporary parking of funds by such Undertakings in Banks or even Staff loans. The dedicated nature of business or their special geographical locations in STPI or SEZs. etc. makes them a special category of assessees entitled to the incentive in the form of 100% Deduction under Section 10-A or 10-B of the Act, rather than it being a special character of income entitled to Deduction from Gross Total Income under Chapter VI-A under Section 80-HH, etc. The computation of income entitled to exemption under Section 10-A or 10-B of the Act is done at the prior stage of computation of Income from Prof....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed then it appears that literal construction would not be proper...." [II] In R.K. Garg v. Union of India [1982] 133 ITR 239/[1981] 7 Taxman 53, the Hon'ble Apex Court has held as under:- '8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, j, that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or straitjacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud (351 US 457:1 L Ed 2d 1485 (1957)) where Frankfurter, J.,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Undertaking engaged in the export of Articles as envisaged under Section 10-A or Section 10-B of the Act and cannot be taxed separately under Section 56 of the Act." 11.1 It was also held by the Hon'ble High Court that the analogy of Chapter VI deductions could not be telescoped or imported into section 10A or 10B of the Act. The words 'derived by an Undertaking' as appearing in section 10A or 10B are different from 'derived from' employed in section 80-HH etc. and therefore all profits and gains of the undertaking including any incidental income would be entitled to 100% exemption or deduction under section 10A and 10B of the Act. 11.2 The Hon'ble Karnataka High Court has also affirmed the view expressed by the first Division Bench of this Court in the case of Motorola India Electronics (P.) Ltd. (supra) wherein it was held that entire profits and gains of 100% Export Oriented Undertaking including any incidental income would be entitled to 100% exemption or deduction under sections 10A/10B and as such the entire profits derived from the business of the undertaking should be taken into consideration, while computing the eligible deduction under section 10B/10A of the Act....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Provided also that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub- section (1) of section 139. (4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking." By Finance Act, 2001, with effect from 01.04.2001, the present Sub-section (4) is substituted in the place of old Sub-section (4). No doubt Subsection 10(8) speaks about deduction of such profits and gains as derived from 100% EOU from the export of articles or things or computer software. Therefore, it excludes profit and gains from export of articles. But Sub-section (4) explains what is the profit derived from export of articles as mentioned in Sub-section (1). The substituted Sub- section (4) says that profits derived from export of articles or things or computer software shall be t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee and against the revenue. " 11.3 The decision in the case of Motorola India Electronics (P.) Ltd. (supra) has also been affirmed by another bench of Hon'ble Karnataka High Court in the case of Rajesh Exports Ltd. (supra) (copy of the decision at page 281 of the Case Law Paper Book refers) which has further been affirmed by the Hon'ble Apex Court in PCIT vs. Rajesh Exports Ltd. 12. Similar view has been taken by the Hon'ble Delhi High Court in the case of Riviera Home Furnishing (supra) by observing as under:- "15. In the considered view of the Court, the submissions made on behalf of the Revenue proceed on the basic misconception regarding the true purport of the provisions of Chapter VIA of the Act and on an incorrect understanding of Section 80A(4) of the Act. The opening words of Section 80A(4) read "Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter...... "What is sought to be underscored, therefore, is that Section 80A, and the other provisions in Chapter VIA, are independent of Sections 10A and 10B of the Act. It appears that the object of Section 80A(....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the profit of the business of the undertaking. If the ITAT was prepared to consider the deemed export draw back as eligible for deduction then there was no justification for excluding the freight subsidy. Even as regards the interest on FDR, the Court has been shown a note of the balance sheet of the Assessee [which was placed before the AO] which clearly states that "fixed deposit receipts (including accrued interest) valuing Rs. 15,05,875 are under lien with Bank of India for facilitating the letter of credit and bank guarantee facilities." In terms of the ratio of the decisions of this Court both in Hritnik Exports (P.) Ltd. (supra) and Universal Precision Screws (supra), the interest earned on such FDR ought to qualify for deduction under Section 10B of the Act." 13. The Ld. DR has relied on the decisions (supra) of the Hon'ble Supreme Court in the case of Pr.CIT vs. Wipro Ltd.; Saraf Exports; and Menon Impex (P.) Ltd. in support of its contention that the miscellaneous income / other income is not eligible for claim of exemption under section 10B of the Act the same being not derived from the export business of the assessee undertaking. In our humble and considered view, hi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fresh loan was given to MSSL Handels GmbH and it was the same loan which was given prior to FY 2009-10. However, the interest rate has been increased to 6% in the relevant AY as against 4.2% in the earlier years. 15.2 In order to establish the arm's length nature of the interest receipts during AY 2010-11 under consideration, the assessee applied CUP method to benchmark the interest income received from MSSL Handels GmbH. Further the credit rating of the borrower was determined using S&P Corporate Rating Criteria. Based on the implied credit rating obtained, a search for third party comparable loan agreements was undertaken using LPC Loan Connector data base. After carrying out appropriate adjustments (tenor and currency adjustment on the third party agreements), the following results were obtained (TP Report-Page 107 to 109 of Paper Book refers): Borrowing entity Credit Rating Rate of Interest (%) Arm's Length Rate MSSL Handels GmbH B- 6% (rate changed from 6 months EURIBOR + 200 basis points to 6% w.e.f 1.4.2008) 6 months Euribor + 205 bps or 4.995% 15.3 Based on the above, the Ld. AR submitted that since the interest income received by the asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lso placed reliance on the finding of the Ld. DRP on page 14 of its order wherein the Ld. DRP have followed the safe harbour rules as mandated by the CBDT. 16. We have heard the Ld. Representatives of the Parties and perused the records. We observe that the impugned issue has been decided in favour of the assessee by the co-ordinate Bench of this Tribunal in assessee's own case for AY 2007-08 (ITA No. 5718/Del/2013) and 2008-09 (ITA No. 375/Del/2013) vide its common order dated 01.04.2015 (copy at page 203 to 223 of the Paper Book) wherein the Tribunal while relying on the orders of the Mumbai Tribunal in the case of Hinduja Global Solutions Ltd. vs. ACIT (ITA No. 254/Mum/2013) and M/s. Bhandsali & Co. Vs. ACIT (ITA No. 825/Mum/214) set aside the impugned issue to the file of the Ld. TPO to be decided afresh on the basis of the finding of the Mumbai Tribunal in its aforementioned orders (supra). The relevant findings and observation of the Delhi Tribunal in its order (supra) is reproduced herein below for ready reference:- "17. Considering above submissions, we find that it is an undisputed fact that in the earlier assessment years 2005-06 and 2006-07, the interest rate....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... & Co. (supra), the Mumbai Bench of the ITAT has decided the issue as under vide para No. 5 of the order, the is as under: "We have carefully perused the orders of the authorities below. It is an admitted fact that the loan was given in the year 2005. It is also undisputed fact that interest rate charged as LIBOR plus 200 basis points have been accepted in completed assessments from AYs 2005-06 to 2008-09. Thus, by taking a different view on the same set of facts violates the rule of consistency. Secondly, the DRP erred in considering the loan as loan from India. The fact of the matter is that it was a foreign currency loan which was given abroad. Therefore the most appropriate method is taking the LIBOR as correct benchmark. A similar view has been taken by the Tribunal in the case of Hinduja Global Solution Ltd. 145 ITD 361. Considering the past history and the decision of the Tribunal (supra), we find that the benchmarking done by the assessee is correct and the AO is directed to delete the addition. Ground no.1 with its sub ground is allowed. 19. Thus in the interest of justice, we set aside the matter to the file of the learned TPO/Assessing Officer to decide....