2010 (6) TMI 635 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility of foreign exchange rate difference gain for deduction under section 80HHC.
2. Deletion of additions made under section 92CA(3) related to transfer pricing adjustments.
3. Netting of interest on fixed deposits against interest expenditure on borrowed funds while computing deduction under section 80HHC.

Issue-wise Detailed Analysis:

1. Eligibility of Foreign Exchange Rate Difference Gain for Deduction under Section 80HHC:
- Ground: The revenue contended that the CIT(A) erred in directing the Assessing Officer (AO) to consider foreign exchange rate difference gain as eligible for deduction under section 80HHC without it forming part of the export turnover for the assessment year.
- Decision: Both parties agreed that the issue should be referred back to the AO for fresh adjudication in light of the Special Bench decision in Asstt. CIT v. Prakash L. Saha. The Tribunal restored the issue to the AO for fresh adjudication, allowing the ground for statistical purposes.

2. Deletion of Additions Made under Section 92CA(3) Related to Transfer Pricing Adjustments:
- Ground: The revenue argued that the CIT(A) erred in deleting the additions made under section 92CA(3) as per the Transfer Pricing Officer's (TPO) order.
- Facts: The assessee firm engaged in the diamond business had shown export sales and claimed deductions under section 80HHC. The TPO had enhanced the total income based on adjustments to the value of international transactions.
- CIT(A) Decision: The CIT(A) directed the AO to delete the additions, noting that the inclusion of certain trading results distorted the operating profit margin. The profit margin within the range stipulated in section 92C(2) led to the deletion of the adjustment.
- Tribunal's Analysis: The Tribunal found the facts similar to the case of Starlite and noted that the arguments were not considered by the lower authorities. The Tribunal restored the matter to the AO for fresh adjudication, directing the AO to consider the arguments and decide the issue in accordance with the law, allowing the ground for statistical purposes.

3. Netting of Interest on Fixed Deposits Against Interest Expenditure on Borrowed Funds While Computing Deduction under Section 80HHC:
- Ground: The revenue contended that the CIT(A) erred in allowing the netting of interest on fixed deposits against interest expenditure on borrowed funds, citing various court decisions that such netting is not permissible.
- Decision: Both parties agreed that the issue should be restored to the AO for fresh adjudication in light of the jurisdictional High Court decision in CIT v. Asian Star Co. Ltd. The Tribunal restored the issue to the AO for fresh adjudication, directing the AO to also consider the applicability of section 57(iii) and decide the issue afresh in accordance with the law, allowing the ground for statistical purposes.

Conclusion:
In all four appeals, the Tribunal restored the matters to the AO for fresh adjudication on the issues of foreign exchange rate difference gain, transfer pricing adjustments, and netting of interest. The appeals were allowed for statistical purposes, emphasizing the need for a thorough re-examination of the facts and applicable legal principles.