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2011 (12) TMI 161 - AT - Income Tax100% EOU software development sale of software to its subsidiary company - computation of Arm Length Price in respect of interest free loans given to its wholly owned subsidiary in USA - Revenue charging notional interest on the loan TNMM method vs CUP method - deduction u/s 10(B) assessee claiming positive income of profitable units as deduction & carrying forward the loss of other units Held that - The international transaction of interest free loan to the AE is an independent transaction requiring determination of ALP. Since neither the assessee nor TPO/AO and CIT(A) have examined the applicability of CUP method as the most appropriate method in order to determine ALP of the international transaction of interest free foreign currency loan to its subsidiary by the assessee the matter is restored to the file of the AO for fresh adjudication and to recompute the ALP of the aforesaid international transaction following CUP method. In respect of deduction u/s 10B order of CIT(A) providing total income arrived at by setting off loss of units against profits of other units allowed as deduction is set aside and matter is restored back to the file of the AO for deciding the issue afresh. - Decided in favor of assessee for statistical purposes.
Issues Involved:
1. Legality of the order passed by the Assessing Officer (AO) and Transfer Pricing Officer (TPO). 2. Determination of Arm's Length Price (ALP) for the interest-free loan to the associated enterprise (AE). 3. Computation of deduction under Section 10B of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Legality of the Order Passed by AO and TPO: The appellant challenged the legality of the order passed by the AO and TPO, arguing that the transaction between the appellant and its AE was not carried out at arm's length price and that the AO/TPO erred in charging notional interest on the loan given to the AE. The appellant also contended that the AO did not provide an opportunity to be heard before passing the order based on the ALP determined by the TPO. 2. Determination of ALP for Interest-Free Loan to AE: The appellant had provided an interest-free loan of USD 15,15,000 to its wholly-owned subsidiary in the USA. The TPO observed that extending interest-free loans to the AE was a separate transaction and merited a separate analysis. The TPO rejected the appellant's method of factoring notional interest with the software development function under the Transactional Net Margin Method (TNMM) and considered a notional interest of 10% as the ALP. Consequently, the AO added an amount of Rs. 31,51,259/- by way of notional interest to the total income of the appellant. On appeal, the CIT(A) upheld the findings of the AO/TPO, stating that the appellant was aware of the TPO's report and had sufficient opportunity to file objections. The CIT(A) also noted that the appellant failed to persuade the AO to reject the TPO's report and determine the ALP afresh. The CIT(A) concluded that the TPO was justified in determining the ALP after charging notional interest. The Tribunal, however, observed that the transaction of advancing an interest-free loan to the AE was an independent transaction requiring determination of ALP. The Tribunal referred to the decision in Perot Systems TSI (India) Ltd. v. Dy. CIT, where it was held that the Comparable Uncontrolled Price (CUP) method is the most appropriate method for determining ALP in such transactions. The Tribunal vacated the findings of the CIT(A) and restored the matter to the AO for fresh adjudication, directing the AO to recompute the ALP using the CUP method and considering various judicial pronouncements. 3. Computation of Deduction under Section 10B: The appellant claimed deduction under Section 10B of the Act on a unit-wise basis, while the AO computed the deduction on the total income of the appellant after setting off losses from other units. The CIT(A) upheld the AO's findings, stating that the deduction under Section 10B is allowable from the 'total income' of the assessee, which includes setting off losses from other units. The Tribunal referred to the decision of the Hon'ble Bombay High Court in Hindustan Unilever Ltd. v. Dy. CIT, where it was held that Section 10B provides for a deduction and not an exemption. The Tribunal noted that the lower authorities did not have the benefit of this view and set aside the order of the CIT(A), restoring the matter to the AO for fresh adjudication in accordance with law and various judicial pronouncements. Conclusion: The appeal was allowed for statistical purposes, with directions for fresh adjudication on the issues of ALP determination and computation of deduction under Section 10B, after allowing sufficient opportunity to the appellant.
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