TaxTMI 
TaxTMI 
2024 (3) TMI 1256
X X X X Extracts X X X X
X X X X Extracts X X X X
....ricing 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. DRP has grossly erred in agreeing the TPO's action of; 3.1. disregarding the ALP, a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....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 assessment order proposed an addition of Rs. 56,13,895/- on account of disallowance of exemption under section 10B of the Act with respect to miscellaneous incomes/other incomes/scrap sales and relying on the decision of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ity 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 decision of the coordinate bench of the Tribunal in assessee's own case for AY 2004-05 in ITA No. 3432/Del/2008). 5.2 Tool development income has arisen from developing tools for manufacture of products for customers on the basis of orders received from them and the subsequent recovery of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly 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. 140 taxmann.com 223 (SC); Saraf Exports vs. CIT (2023) 149 taxmann.com 145 (SC) and CIT vs. Menon Impex (P.) Ltd. (2003) 128 Taxman 11 (Mad) in support thereof. 7. In rebuttal, the Ld. AR submitted that all the decisions cited above which are relied upon by the Ld. DR are not applicable to t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....irect 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 the business carried out by the assessee i.e 100% export of goods manufactured by it in its export oriented undertaking at Bangalore, even though not as a direct result of export and is therefore eligible for 100% deduction under section 10B of the Act. 10. Sundries written back represent expenses claimed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 Profits and Gains of Business as per Sections 28 to 44 under Part-D of Chapter IV before 'Gross Total Income' as defined under Section 80- B(5) is computed and after which the consideration of various Deductions under Chapter VI-A in Section 80HH etc. comes into picture. Therefore analogy of Chapter VI Deductions cannot b....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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., said in his inimitable style: "In the utilities, tax and economic regulation cases, there are good reasons for judicial self- restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of econo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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, by applying the provisions of section 10B(4) of the Act. The relevant observation of the Hon'ble Karnataka High Court is reproduced hereunder: "7. Relying on these judgments, it was contended that the interest received or the consideration received from sale of import entitlement has no direct nexus with the profits and gains derived from the export of software and therefore, the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 the account which bares to the profits of the business of the undertaking and not the profits and gains from export of articles. Therefore, profits and gains derived from export of articles is different from the income derived from the profits of the business of the undertaking. The profits of the business of the undertaking includes the profits and gains from export of the articles as well as all other incidental incomes derived fro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lhi 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(4) was to ensure that a unit which has availed of the benefit under Section 10B will not be allowed to further claim relief under Section 801A or 801B read with Section 80A(4). The intention does not appear to be to deny relief under Section 10B(1) read with Section 10B(4) or to whittle down the ambit of those provisions as is sought to be suggested by Mr. Manchanda. Also, he is not right in contending that the decisions of the High Courts referred t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....k 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, his reliance on these decisions to the facts of the present case in hand is misplaced. The issue for consideration before the Hon'ble Apex Court in the case of Wipro Limited (supra) was whether a taxpayer can withdraw its claim of deduction under section 10B by filing a revised return or in the course of assessment which has no bearing on the facts of the present case. The Ld. DR has relied on this decision to support his contention that exemption provisions should be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ermined 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 assessee was at a higher effective interest rate than the interest rate for loan transactions entered into between unrelated entities during the same time period and in the same geographical region, the rate of 6% charged by the assessee from its AE is at arm's length. However the Ld. TPO recomputed the ALP of the impugned interest income by applying the actual Prime Lending Rate (PLR) of the State Bank of India for loans issued in India which has resulted into an adjustment of Rs. 8,09,277/- in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ers 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 rates have been accepted at arm's length. On an identical issue, the Mumbai Bench of the ITAT in the case Hinduja Global Solutions Ltd. vs. ACIT (supra) has given following findings. The relevant para No.17 thereof is being produced hereunder: "17. We have carefully considered the rival submissions and perused the record. The case of the assessee was that LIBOR as on 31/3/2008 was 2.49% against which the assessee has charged interest @ 6% p.a. In other words, interest charged by the assesses is much higher then the corresponding arm's length LIBOR even from an Indian transfer pric....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as 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 the issue afresh in view of the above findings of the ITAT in the cited cases after affording opportunity of being heard to the assessee. The ground Nos. 3, 4 and 5 are accordingly allowed for statistical purposes." 17. We have also perused the order(s) giving effect to the Tribunal's order (supra) passed by the Ld. TPO dated 20.10.2016 for AY 2007-08 and 2008- 09 pursuant to the above directions of the Tribunal in its order (supra). For both the AYs 2007-08 and 2008-09, the Ld. TPO accepted the benchmarking analysis undertaken by the assessee and held the interest rates arrived at by the assessee to be at arm's....