2012 (12) TMI 592 - AT - Income Tax

Transfer Pricing Interest free advance to foreign associated enterprises Held that - As the TP adjustment is possible only in cases where comparable uncontrolled transactions entered into between two enterprises are established. Unless such an uncontrolled transaction is identified, no ALP adjustment is possible. The interest determined AO and confirmed by DRP is not an arms length rate determined in comparable uncontrolled transaction and therefore order be set aside in conformity with the Tribunal s findings in the assessee s own case for earlier years. In favour of assessee Disallowance of expenditure u/s 14A AO disallow 5% of the dividend as expense incurred in relation to earn exempt income AO argued that other expenses on corporate establishment should also be considered u/s 14A - Held that - The disallowance u/s. 14A of the Act in the present case is restricted only to indirect expenses. The Assessee s calculation is based on the time spent by the functionaries responsible for making investment of cash surpluses. Therefore, the quantum of disallowance estimated at 5% is on the higher side. An estimate of 2.5% of the dividend income in our view would be just, fair and reasonable. Issue partly allowed Set Off of losses STP units claim deduction u/s 10A Whether loss incurred by STP/SEZ unit is set off against income from Non STP/SEZ unit for same assessment year Held that - Following the decision of Tribunal in assessee s own case in favour of the assessee. Set-off of loss allowed. In favour of assessee Contribution to Trust - Payment of such contributions as deferred compensation to the employee-director who separated from the Company is a payment by the trust on behalf of the assessee and hence eligible for deduction u/s 37(1) Held that - As the specific prohibition in Sec.40A(9) and keeping in mind the principle that when there are specific provisions governing a deduction then the general deduction allowable u/s.37(1), cannot be invoked, the disallowance made by the Revenue authorities had to be sustained. In favour of revenue Alternative claim of the Assessee that in the event of the disallowance being sustained, the action of the AO in allocating the aforesaid expenses to the profits of the units eligible for deduction u/s.10A which had gone to reduce the profits eligible for deduction u/s.10A cannot be sustained. The AO is therefore directed to computed the enhanced profits on which eligible deduction u/s.10A should be allowed. In favour of assessee Allocation of common expense Expenses incurred by HO allocate to units which are eligible for deduction u/s.10A Held that - Following the decision in assessee s own case for earlier years that when direct expenses of rates and taxes were known in respect of unit whose income is deductible u/s 10A then otherwise allocation cannot be made. The allocation of common expenditure cannot be made on the basis of revenue generated. Hence, direct expenditure disallowed by the AO is confirmed and disallow of 20% of common expenditure. In favour of assessee Deduction u/s 10A - AO refused to allow deduction u/s.10A on profits generated by overseas software development - AO was of the view that the revenue generated by the above Software Development Centers abroad are included in the revenues shown by the STP / SEZ units Held that - The issue requires to be remitted back to the AO and accordingly do so with a direction to the AO to follow the decision of Tribunal. Issue remand back to AO Exclusion from income while allowing deduction u/s 10A - AO excluded interest income, income generated from sale of scrap and exchange fluctuation Held that - Following the decision in case of assessee s own case for earlier years that, as the amount received from the sale of scrap cannot be excluded for the purpose of computing deduction u/s 10A, foreign exchange gain due to fluctuation in the rate of rupee is to be included in the profit of the undertaking and is to be considered as eligible for deduction u/s 10A. And in respect of interest income AO has not treated the interest income as income from Other sources or has not held that such income does not belong to the undertaking to which section 10A is applicable. In favour of assessee Deduction u/s 10A Whether deemed export is also part of export sale for the purpose of calculating the deduction u/s 10A Held that - Following the decision in assessee s own case on identical issue and decided the issue against the assessee. In favour of revenue Computation of total turnover for claiming deduction u/s 10A AO excludes the Foreign taxes (VAT/GST) from the total turnover while computing deduction u/s.10A Held that - Following the decision in assessee s own case for earlier years that once this sum is not included in export turnover, then the same cannot be included in the total turnover. In favour of revenue

Summary

Issues Involved:
1. Transfer Pricing Adjustment on Interest-Free Loans
2. Disallowance under Section 14A
3. Set-Off of Losses of STP Units
4. Deferred Compensation Plan Deduction
5. Depreciation on Imported Software
6. Allocation of Corporate Expenses to Units
7. Deduction under Section 10A for Overseas Software Development
8. Exclusion of Income Items from Export Turnover under Section 10A
9. Credit for Foreign Taxes Paid
10. Alternative Claim under Section 80JJ
11. Levy of Interest under Sections 234B and 234D

Detailed Analysis:

1. Transfer Pricing Adjustment on Interest-Free Loans:
The Assessee challenged the addition of Rs.4,75,86,539/- as a Transfer Pricing adjustment for interest on advances given to Associated Enterprises (AEs). The Tribunal noted that the same issue was decided in favor of the Assessee in earlier years, where it was held that TP adjustments require comparable uncontrolled transactions. The Tribunal directed the AO to follow the directions given in earlier years, thus deciding Grounds 5 to 8 accordingly.

2. Disallowance under Section 14A:
The Assessee contested the disallowance of Rs.4,33,78,765 under Section 14A, arguing that only Rs.82,80,707 was the actual expenditure incurred in earning exempt income. The Tribunal found the AO's estimate of 5% on the higher side and deemed 2.5% as just and reasonable. Thus, Grounds 10 & 11 were partly allowed.

3. Set-Off of Losses of STP Units:
The Assessee argued for the set-off of losses from seven STP units against other business income. The Tribunal, following its earlier decision, directed the AO to allow the set-off as claimed by the Assessee. Grounds 12 to 16 were thus allowed.

4. Deferred Compensation Plan Deduction:
The Assessee claimed a deduction for deferred compensation paid to an employee, Mr. Vivek Paul, through a trust. The AO disallowed it, citing Section 40A(9). The Tribunal upheld the disallowance but directed the AO to recompute the enhanced profits eligible for deduction under Section 10A. Grounds 17 to 19 were allowed to this extent.

5. Depreciation on Imported Software:
The AO disallowed depreciation on imported software, citing Section 40(a)(ia). The Tribunal, following its earlier decisions, allowed the Assessee's claim. Grounds 20 to 23 were thus allowed.

6. Allocation of Corporate Expenses to Units:
The AO allocated corporate expenses to units eligible for deduction under Section 10A, reducing the profits. The Tribunal, following its earlier decisions, directed the AO to delete such allocations. Grounds 24 to 27 were allowed.

7. Deduction under Section 10A for Overseas Software Development:
The AO excluded profits from overseas software development centers from Section 10A deduction. The Tribunal remitted the issue back to the AO for reconsideration following earlier Tribunal decisions. Grounds 28 & 29 were remitted back.

8. Exclusion of Income Items from Export Turnover under Section 10A:
The AO excluded interest income, scrap sales, and exchange fluctuation from export turnover. The Tribunal, following earlier decisions, included these items in the export turnover. Grounds 30 to 37 were allowed.

9. Credit for Foreign Taxes Paid:
The Assessee claimed credit for foreign taxes paid. The Tribunal restored the matter to the CIT(A) for reconsideration following earlier Tribunal directions. Ground No.83 was remitted back.

10. Alternative Claim under Section 80JJ:
The Assessee raised an alternative claim under Section 80JJ if Section 10A deduction was not granted. Since Section 10A deduction was allowed, this ground became infructuous. Ground No.84 was dismissed.

11. Levy of Interest under Sections 234B and 234D:
The Assessee contested the levy of interest under Sections 234B and 234D. The Tribunal held that the charging of interest is consequential and directed the AO to recompute it while giving effect to the order. Grounds 85 to 88 were decided accordingly.

Conclusion:
The appeal of the Assessee is partly allowed, with directions given on various grounds based on earlier Tribunal decisions and specific findings.