2012 (5) TMI 627 - AT - Income Tax

Transfer pricing adjustment - A.E. -comparability - MAM - TNMM - Pre-operative expenses - eligible for deduction u/s 10-A - deduction u/s 10-B on interest earned from I.T. refund and housing loan given to employee being Non- business income - depreciation at the rate of 60% on computer peripherals and accessories - compensation received from landlord for delay in actual delivery of leased premises and related work facilities - rent expenses - pertaining to pre-operative period or post-operative period

Issues Involved:
1. Validity of orders passed by the Assessing Officer (AO) and Transfer Pricing Officer (TPO).
2. Addition to income under Chapter-X of the Income Tax Act, 1961.
3. Transfer pricing adjustments and comparability analysis.
4. Eligibility for deduction under Section 10A of the Income Tax Act.
5. Treatment of pre-operative expenses and compensation received from the landlord.
6. Deduction under Section 10B on interest earned from income tax refund and housing loan given to employees.
7. Depreciation on computer peripherals and accessories.
8. Application of the Proviso to Section 92C(2) of the Income Tax Act.

Detailed Analysis:

1. Validity of Orders Passed by AO and TPO:
The assessee contended that the orders passed by the AO and TPO were bad in law and void ab-initio due to material illegality and irregularity. However, this ground was of a general nature and did not require separate adjudication.

2. Addition to Income under Chapter-X:
The assessee challenged the addition of Rs. 15,92,72,896 under Chapter-X of the Income Tax Act. The grounds included the preconditions for reference to a TPO not being met, lack of necessity or expediency for such reference, and no opportunity being provided by the AO before referring the transfer pricing issues to the TPO. The assessee did not press ground No.2.1, and it was rejected. Ground No.2.2, which included various arguments related to the addition, was considered part of the main ground No.2 and did not require separate adjudication.

3. Transfer Pricing Adjustments and Comparability Analysis:
The Revenue challenged the relief allowed by the CIT(A) regarding transfer pricing adjustments. The CIT(A) had rejected certain comparables based on related party transactions and turnover filters. The Tribunal found that the CIT(A) had correctly applied the turnover filter of Rs. 5 crores and rejected the comparable Genesys International Corporation Limited due to substantial related party transactions. However, the issue related to Hinduja TMT was restored to the AO for re-adjudication.

4. Eligibility for Deduction under Section 10A:
The AO rejected the assessee's claim for exemption under Section 10A for the new AEGSC unit, stating it was formed by splitting up the existing business. The CIT(A) found that the new unit was not formed by splitting up the existing business and was eligible for deduction under Section 10A. The Tribunal upheld this finding, noting that the new unit had a different physical location, nature of activities, separate infrastructure, and fresh funds invested.

5. Treatment of Pre-operative Expenses and Compensation from Landlord:
The assessee received compensation from the landlord for delay in handing over leased premises. The AO added the entire compensation as income from other sources. The CIT(A) allowed relief for the portion reduced from rent debited to the profit & loss account. The Tribunal agreed with the assessee that the entire compensation should be credited against the rent paid, whether for pre-operative or post-operative periods, and deleted the addition of Rs. 1,62,60,000.

6. Deduction under Section 10B on Interest Earned:
The Tribunal, following its earlier decision, held that interest from income tax refund does not qualify for deduction under Section 10B. However, it upheld the CIT(A)'s finding that interest on housing loans to employees was for business purposes and had a direct nexus with interest paid and received.

7. Depreciation on Computer Peripherals and Accessories:
The Tribunal upheld the CIT(A)'s decision to allow depreciation at 60% on computer peripherals and accessories, following the jurisdictional High Court's ruling that such items form an integral part of the computer system.

8. Application of Proviso to Section 92C(2):
The issue was set aside to the AO/TPO to be re-adjudicated after the Finance Bill, 2012 comes into operation, as it proposed an amendment to Section 92C(2).

Conclusion:
Both the appeals were partly allowed, with specific issues being restored to the AO for re-adjudication and others being upheld or rejected based on the Tribunal's detailed analysis. The Tribunal's decision covered various aspects of transfer pricing adjustments, eligibility for tax deductions, and the treatment of specific expenses and income.

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