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2012 (5) TMI 421 - AT - Income TaxTransfer pricing adjustment to ALP - travelling cost of seconded persons to AEs - Held that - When the assessee had segregated the off-shore and on-site activities naturally all the revenues relating to on-site activity were earned by the AEs. Hence all costs incurred for the purposes of on-site activities should be borne by the AEs. The purposes of travel of the secondees from India to the respective locations of AEs were to render on-site services hence TPO was justified in making adjustment to ALP for such cost incurred and not recovered by assessee from its AEs Decided in favor of Revenue. Dis-allowance of legal fees paid to Baker & Mckinsey expenditure incurred in connection with incorporation of the subsidiary company in Belgium Assessee submitted that it considered it as a genuine business expenditure and had not recovered the same from the AE Held that - In view of the aforesaid confession it is held that TPO rightly made adjustment contending the same is not a business expenditure and was in the nature of international transaction and a capital expenditure of the subsidiary company off-shore therefore to be recovered from AE Decided in favor of Revenue. Exemption u/s 10A Held that - It has been decided in assessee s own case in earlier AYs that that it is not necessary that separate books of accounts should be maintained in respect of new unit even if new unit is formed for the expansion of assessee s business the same is eligible and unit established by the side of old unit is also eligible for exemption u/s 10A Unit-107 eligible Decided in favor of assessee Dis-allowance of loans and advance written off Held that - On similar issue Tribunal had allowed such loss as trading loss u/s 28 in AY 01-02. Same view followed Decided in favor of assessee. Foreign taxes dis-allowance u/s 40(a)(ii) - Held that - Under Section 40(a)(ii) Indian Income-tax which is a tax levied on the profits and gains chargeable under the Act is not deductible. On the other hand all other taxes levied in foreign countries whether on profits or gains or otherwise are deductible under the provisions of s. 37 and payment of such taxes does not amount to application of income Decided in favor of assessee. Compensation received for rendering human resource support services CIT(A) deleted the addition made - Held that - Secondee-provider is not akin to recruitment-service provider or that secondment is different from recruitment . There was no legal basis for the impugned upward adjustment and deletion made is upheld Decided in favor of assessee. Income from the building owned by the appellant and leased out on rent to group concern - Revenue contending the same to be business income - Held that - CIT(A) was justified in treating lease rental income from the building owned by the appellant and leased out on rent to a group concern as income from house property and entitling assessee for deduction permissible u/s 24 of the Act Decided in favor of assessee. Re-computation of Deduction u/s 80HHE - Held that - CIT(A) rightly held for re-computation of deduction u/s 80HHE on ground that profits of new units are eligible for exemption u/s 10A the balance 10% profits in respect of same are eligible for computation of deduction u/s 80HHE. Interest expenses on advances to the employees TPO had worked out the upward adjustment on account of interest cost not recovered from the AEs for settling advance given to the AEs.- Held that - TPO rightly made adjustment on ground that it has been established that the persons seconded were being sent for the benefit of AEs the advances given to such seconded persons carried an interest cost which should have been recovered from the AEs Decided in favor of revenue Depreciation on a building given on lease to group concern Held that - CIT(A) rightly dis-allowed depreciation since the same is not used for assessee s business or profession. Also it is undisputed that assessee had let-out sizeable portion of its premises non-temporarily Decided against the assessee. Adjustment to ALP towards interest on excess credit period granted to AE CIT(A) deleted the addition made - Held that Issue is covered in favor of assessee hence deletion made is upheld. Matter related to exclusion of exchange fluctuation gain and other income for granting exemption u/s 10A and recalculating deduction u/s 80HHE dis-allowance u/s 14A is remitted back to the file of the AO for fresh consideration.
Issues Involved:
1. Traveling expenses of seconded employees. 2. Disallowance of legal fees paid to Baker & McKinsey. 3. Exemption of income under Section 10A. 4. Exclusion of exchange fluctuation gain and other income for exemption under Section 10A. 5. Recalculation of deduction under Section 80HHE. 6. Loans and advances written off. 7. Deduction of Belgium tax under Section 37(1). 8. Disallowance under Section 14A. 9. Addition for human resource support services under Section 92. 10. Miscellaneous income for deduction under Section 80HHE. 11. Depreciation on leased assets. 12. Interest on advances to employees. 13. Treatment of rental income under 'house property'. 14. Interest on excess credit period granted to AE. Detailed Analysis: I. ITA No.1821/A/05 - A Y 2002-03 - By the assessee: 1. Traveling expenses of seconded employees: The Tribunal upheld the disallowance of Rs.1,32,52,859/- on the grounds that the travel costs for seconded employees should be borne by the AEs since the revenues relating to on-site activities were earned by the AEs. The assessee's argument that seconding employees leads to long-term benefits was not accepted. 2. Disallowance of legal fees paid to Baker & McKinsey: The Tribunal agreed with the TPO and CIT (A) that the legal fees of Rs.5,61,000/- paid for incorporation expenses of the subsidiary in Belgium should have been recovered from the AE and treated as costs recoverable in accordance with the arm's length principle. II. ITA No.1883/A/05 - A Y 2002-03 - By the Revenue: 1. Exemption under Section 10A: The Tribunal upheld the CIT (A)'s decision to grant exemption of Rs.9,99,70,054/- under Section 10A for Unit No.107, following earlier Tribunal decisions in the assessee's own case. 2. Exclusion of exchange fluctuation gain and other income for exemption under Section 10A: The Tribunal remitted the issue back to the AO to ascertain the nature of the gain and to take appropriate action, following earlier Tribunal decisions. 3. Recalculation of deduction under Section 80HHE: The Tribunal remitted the issue back to the AO for fresh consideration, following earlier Tribunal decisions. 4. Deletion of disallowance of loans/advances written off: The Tribunal upheld the CIT (A)'s decision to allow the write-off of Rs.1.33 lakhs as business loss, following earlier Tribunal decisions. 5. Deduction of Belgium tax under Section 37(1): The Tribunal upheld the CIT (A)'s decision to allow the deduction of Rs.42,57,297/- paid as Belgium tax under Section 37(1), following judicial precedents that foreign taxes are deductible under Section 37. 6. Disallowance under Section 14A: The Tribunal remitted the issue back to the AO for re-computation in light of Section 14A(2)(3) read with Rule 8D, following earlier Tribunal decisions. 7. Addition for human resource support services under Section 92: The Tribunal upheld the CIT (A)'s decision to delete the addition of Rs.2,34,50,000/-, agreeing that the secondment of employees provided long-term benefits and was not akin to recruitment services. III. ITA No.2274/A/06 - A Y 2003-04 - By the assessee: 1. Miscellaneous income for deduction under Section 80HHE: The Tribunal remitted the issue back to the AO to recalculate the deduction under Section 80HHE, following judicial precedents. 2. Traveling expenses of seconded employees: The Tribunal upheld the disallowance of Rs.1,26,88,612/- for the same reasons as in the AY 2002-03. IV. ITA No.2341/A/06 - A Y 2003-04 - By the Revenue: 1. Exemption under Section 10A: The Tribunal upheld the CIT (A)'s decision to grant exemption of Rs.10,24,63,557/- under Section 10A for Unit No.107, following earlier Tribunal decisions. 2. Exchange fluctuation gain for new units for exemption under Section 10A: The Tribunal remitted the issue back to the AO to ascertain the nature of the gain and take appropriate action. 3. Deletion of disallowance for STP Unit, Pune on profit of sale of assets: The Tribunal remitted the issue back to the AO for verification and to take corrective steps if warranted. 4. Miscellaneous income for calculating exemption under Section 10A: The Tribunal upheld the CIT (A)'s decision to exclude the miscellaneous income of Rs.4,72,563/- from business profits for calculating exemption under Section 10A. 5. Treatment of rental income under 'house property': The Tribunal upheld the CIT (A)'s decision to treat rental income as 'house property' income and allow deductions under Section 24, but not allow depreciation. 6. Re-computation of deduction under Section 80HHE: The Tribunal upheld the CIT (A)'s decision to re-compute the deduction under Section 80HHE, including the balance 10% profits of eligible units. 7. Deletion of addition for human resource management function: The Tribunal upheld the CIT (A)'s decision to delete the addition of Rs.5,05,80,750/-. 8. Deletion of disallowance of interest expenses on advances to employees: The Tribunal reversed the CIT (A)'s decision and upheld the AO's addition of Rs.9,77,598/-. V. ITA No.2042/A/07 - A Y 2004-05 - By the assessee: 1. Depreciation on leased assets: The Tribunal upheld the disallowance of Rs.41,41,761/- for depreciation on leased assets, agreeing with the AO and CIT (A) that the assets were not used for the assessee's business purposes. 2. Traveling expenses of seconded employees: The Tribunal upheld the disallowance of Rs.1,67,98,984/- for the same reasons as in the AY 2002-03. VI. ITA No.2541/A/07 - A Y 2004-05 - By the Revenue: 1. Exemption under Section 10A: The Tribunal upheld the CIT (A)'s decision to grant exemption of Rs.1,38,81,683/- under Section 10A for Unit No.107. 2. Exchange fluctuation gain for new units for exemption under Section 10A: The Tribunal remitted the issue back to the AO to ascertain the nature of the gain and take appropriate action. 3. Disallowance of interest expenses related to exempted income under Section 14A: The Tribunal remitted the issue back to the AO for re-computation in light of Section 14A(2)(3) read with Rule 8D. 4. Restricting disallowance of administrative expenses related to exempted dividend income under Section 14A: The Tribunal remitted the issue back to the AO for re-computation in light of Section 14A(2)(3) read with Rule 8D. 5. Treatment of rental income under 'house property': The Tribunal upheld the CIT (A)'s decision to treat rental income as 'house property' income and allow deductions under Section 24, but not allow depreciation. 6. Adjustment for human resources management services: The Tribunal upheld the CIT (A)'s decision to delete the adjustment of Rs.5.9 crores. 7. Deletion of addition for non-charging of interest on advances to employees: The Tribunal upheld the AO's addition of Rs.7.55 lakhs. 8. Deletion of addition for interest on excess credit period granted to AE: The Tribunal upheld the CIT (A)'s decision to delete the addition of Rs.51.79 lakhs. Conclusion: - The assessee's appeals for AY 2002-03 and 2004-05 are dismissed. - The assessee's appeal for AY 2003-04 is partly allowed. - The Revenue's appeals for AY 2002-03, 2003-04, and 2004-05 are partly allowed.
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