TaxTMI 
TaxTMI 
2012 (3) TMI 728
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....e loss of Rs. 14,53,324/- to STP unit while computing deduction u/s 10A of the Act. a) Under the facts and circumstances of the case and in law, the ld. CIT(A) has erred in partly sustaining the disallowance at the rate of 3.39% of the total interest and foreign exchange loss, based on the proportionate turnover of the STP unit in relation to the total turnover of the appellant. b) The ld. CIT(A) has erred in both law and in facts of the case in partly sustaining the disallowance when there was clearly no nexus between the interest and foreign exchange loss expenses with the STP unit and accordingly, such disallowance is based on surmises and conjectures and deserves to be quashed." Revenue's appeal (ITA no. 3374/Del/10....
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....of turn over of STP at 3.39% of total turnover and fixed asset proportion at 10.5% of the total fixed assets of the company, AO thus arrived at an estimate of 7% of total expenses on account of interest and foreign exchange loss allocable to STP unit. Accordingly, an amount of Rs. 30,12,415/-was allocated to STP unit, which was reduced from its profit and accordingly the assessee's claim u/s 10A was reduced to this extent. 2.1. Aggrieved, assessee preferred first appeal, where the ld. CIT(Appeals) held that AO had not pointed out any nexus between STP unit's fund requirements and the ECB loan and held the disallowance to be ad hoc in nature. However, despite these observations, CIT(A) allocated expenses of 3.39% to STP unit profits and r....
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....of the above expenditure is excessive. 3.5. I am inclined to agree with the arguments of the Ld. AR to the extent that there has to be a reasonable basis for allocation of interest expenses and foreign exchange loss on ECB to allocate funds to the STP unit of the appellant. The AO has not pin pointed any exact nexus between STP unit's funds requirement and the ECB loan. The rate of 7% estimated by the AO to apportion interest expenses and foreign exchange loss on ECB to the STP unit is ad hoc and being so, cannot be sustained, particularly when no borrowings were used for setting up STP unit. 3.6. However, it cannot be ignored that the funds out of common profits pool of funds of the company are available to the STP unit. ....
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....-03-1999 Loans as on 31-03-2000 Loans as on 31-03-2001 Remarks 1. NCD and loan from banks 2,437,500 15,54,96,996 367,392,716 2. ECBs (interest free) - - - 467,900,000 NCDs and bank loan redeemed by issuing fresh ECBs in FY 2000- 01. 3. Bank overdraft 68,277,008 59,528,662 89,627,047 86,877,547 Total loans 68,277,008 59,528,662 89,627,047 554,777,547 (iii) From the above chart it is clear that borrowings were initially made by the assessee since F.Y. 1997-98 and 1998-99 i.e. prior to setting up of the STP unit, to finance its manufacturing and trading operations of photocopiers and fax machines, which were at the expanding st....
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....dence. CIT(A), while concluding, though accepted these facts, however, without assigning any reason or nexus, upheld attribution of interest on borrowings and foreign exchange fluctuation loss @ 3.39%. In our view, CIT(A)'s order itself becomes ad hoc, as without establishing nexus such disallowance cannot be made. In view thereof, we delete the allocation of these expenses @ 3.39% as made by the CIT(A). Ground is allowed. 6. In the result, assessee's appeal is allowed. Revenue's appeal: 7. Coming to revenue's appeal, ld. DR supported the order of AO on both the grounds raised. 8. On the other hand, learned counsel for the assessee, apropos ground no. 1, contends that employees' contribution to PF has been deposited by the asses....