2011 (1) TMI 406 - AT - Income Tax

Dispute Resolution Penal (DRP) - Addition - Deduction u/s 10A - The new STP Unit was treated by the assessee to be an independent unit for the purpose of exemption claimed u/s 10A of the Act - Held that where a new undertaking has been formed with fresh capital and investment with a motive to increase the production capacity and expand its business, then it cannot be said that the new undertaking was not the new industrial unit by itself - Tribunal has taken a view that new unit cannot be treated to be as one and same unit with the existing unit for the purpose of computing deduction u/s. 10A of the Act - Decided in the favour of the assessee whether profit of STP Unit of Rs. 1,38,883 is liable to be set off against the loss of STP units of Rs. 22,65,96,783 - Hon ble Bombay High Court in the case of Hindustan Unilever Ltd. v. DCIT 325 ITR 102, wherein the losses of the unit eligible for deduction u/s 10B of the Act were held allowable to be set off against profits of the business - Appeal is allowed by way of remand Regarding miscellaneous income as part of business income - ITAT, Delhi Bench in the case of Jubilant Empro (P.) Ltd. v. DCIT in ITA No. 107/Del/2007 - Held that the notice period pay was to be considered as income derived by the eligible undertaking and as such, notice period pay would go to reduce the expenses on account of salary and the real nature of the transaction will not have any affect on the income derived by the assessee from the eligible undertaking - Appeal is allowed by way of remand Regarding travelling expense - In the details, unit-wise details of travelling and conveyance expenses have been furnished - It is well settled that expenditure wholly and exclusively for the purpose of business cannot be disallowed merely because the assessee s income or the turnover would be very much reduced thereby - In the present case, the Assessing Officer has not brought any material or evidence on record to show and establish that the travelling expenses incurred by the assessee during the year under consideration have not been expended for the purpose of assessee s business or has not been incurred in the course of carrying of any business activity of the assessee - Decided in the favour of the assessee Regarding depreciation on computer peripheral at 60% - This issue is now squarely covered by the decision of jurisdictional Delhi High Court in the case of CIT v. BSES Rajdhani Powers Ltd. In ITA 1266/2010, dated 31st August, 2010, where it has been held that the Tribunal has rightly allowed depreciation on computer peripherals at 60% Regarding disallowance of Rs. 1,04,102 being the payment towards Provident Fund deposited beyond due date - In the course of hearing of this appeal, it was pointed out by the learned counsel for the assessee that the aforesaid sum of Rs. 1,04,102 was already disallowed voluntarily by the assessee in the return of income itself and therefore, no further disallowance is called for - Decided in the favour of the assessee by way of remand Regarding Transfer Pricing Adjustment - TNMM method - whether internal comparables relied upon by the assessee are to be preferred over the comparable uncontrolled companies selected by the revenue authorities for the purpose of determining Arm s Length Price in respect of international transactions entered into by the assessee company with its Associated Enterprises - In the present case, the assessee has determined separate profitability in respect of its transaction with AEs and unrelated party on scientific basis considering defined allocation keys - Held that the assessee was justified in undertaking-internal bench marking analysis on stand alone basis by placing on record working of operating profit margin from international transactions with AEs and transactions with unrelated parties undertaken in similar functional and economic scenario, and the same should be the basis for determination of arm s length price in respect of international transaction undertaken with the associated enterprise - In the result, this appeal filed by the assessed is partly allowed

Issues Involved:

1. General grounds for appeal.
2. Disallowance of deduction under section 10A.
3. Set-off of profit of STPI Unit against the loss of other units/income.
4. Treatment of miscellaneous income for deduction under section 10A.
5. Disallowance of traveling expenses.
6. Depreciation on computer peripherals.
7. Disallowance of delayed payment towards EPF.
8. Transfer Pricing Adjustment.

Detailed Analysis:

1. General Grounds for Appeal:
The first ground was general and required no adjudication as other grounds covered the additions made by the Assessing Officer (AO).

2. Disallowance of Deduction under Section 10A:
The assessee claimed deduction under section 10A for a new unit (GE-GDC) set up on the 3rd floor, separate from an existing unit on the 2nd floor. The AO treated the new unit as an extension of the existing unit, not eligible for separate deduction. The tribunal referenced a prior decision (AY 2003-04) where it was held that the new unit was independent and eligible for deduction. Following this, the tribunal allowed the deduction for the new unit, treating it as separate and independent.

3. Set-off of Profit of STPI Unit Against Loss of Other Units/Income:
The AO disallowed the set-off of profit from STPI Unit against losses from other units, treating section 10A as an exemption provision. The assessee cited various judicial decisions, including a Special Bench decision and a Bombay High Court ruling, which treated section 10A as a deduction provision. The tribunal restored the matter to the AO for fresh computation, treating section 10A as a deduction provision, allowing the set-off.

4. Treatment of Miscellaneous Income for Deduction under Section 10A:
The AO treated miscellaneous income (notice pay from employees) as income from other sources, disallowing the deduction under section 10A. The assessee argued that it reduced salary costs and should be treated as business income. The tribunal, referencing a similar case (Jubilant Empro (P.) Ltd.), held that such income should be treated as derived from the eligible undertaking, allowing the deduction under section 10A.

5. Disallowance of Traveling Expenses:
The AO disallowed Rs. 14.07 crores in traveling expenses, citing an increase compared to the previous year without a corresponding increase in turnover. The tribunal found the AO's comparison incorrect as turnover had increased. The tribunal noted detailed submissions by the assessee, including unit-wise expenses and the absence of specific defects pointed out by the AO. The tribunal deleted the disallowance, holding the expenses were for business purposes.

6. Depreciation on Computer Peripherals:
The AO allowed depreciation at 15% instead of the claimed 60%. The tribunal referenced a jurisdictional High Court decision (CIT v. BSES Rajdhani Powers Ltd.), which allowed 60% depreciation on computer peripherals. Following this, the tribunal directed the AO to allow 60% depreciation.

7. Disallowance of Delayed Payment Towards EPF:
The AO disallowed Rs. 1,04,102 for delayed EPF payment. The assessee clarified that this amount was already disallowed in the return. The tribunal restored the matter to the AO to verify this and, if correct, not to make further disallowance.

8. Transfer Pricing Adjustment:
The AO made an adjustment of Rs. 45,15,21,255 to the income based on the Transfer Pricing Officer's (TPO) order, rejecting internal benchmarking by the assessee. The tribunal noted the assessee's method of internal comparison was consistent with OECD guidelines and previous years' practice. The tribunal restored the matter to the AO/TPO to determine the arm's length price using internal comparables, directing them to provide a reasonable opportunity to the assessee and verify the correctness of the workings.

Conclusion:
The appeal was partly allowed, directing the AO/TPO to reassess certain issues and allowing specific claims based on judicial precedents and detailed submissions by the assessee.

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