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2013 (9) TMI 116 - AT - Income TaxDisallowance and adding back of losses of 10A units while computing income - Held that - AO has considered the correspondence and documents of assessee with STPI and also information sought by AO from Director STPI and has held that both these units are merely an expansion of existing unit and not independent undertakings. Therefore, we consider it prudent to set aside the orders of authorities below and restore the matter to file of AO for the limited purpose to re-examine as to whether Unit Nos. II & III set up by assessee are independent units to the existing undertaking or merely an expansion of the existing undertaking in the light of principles laid down by Co-ordinate Bench decision in the case of Patni Computer Systems Ltd. Versus Deputy Commissioner of Income-tax, Circle-4 2011 (6) TMI 500 - ITAT PUNE and also in the light of letters including letter dt. 10.12.2008 issued by Director STPI and also on the basis of such evidences as may be filed by assessee after giving due opportunity of hearing. With these directions, the matter stands restored to AO - Decided in favour of assessee. Transfer pricing adjustment - Held that - net profit margin is to be considered qua the comparable uncontrolled transaction or number of such uncontrolled transactions. Uncontrolled transaction has been defined in Rule 10A(a) to mean a transaction between enterprises other than associate enterprises, whether resident or non-resident . Rule 10B(1)(e) in juxtaposition to Rule 10A(a). The position which emerges is that in applying the TNMM, net profit margin realized from a comparable uncontrolled transaction is to be taken into consideration. The conditions thus envisaged for making a case as comparable for this purpose, should not only be comparable but also have uncontrolled transaction. These twin conditions need to be cumulatively satisfied. If such other case is only comparable but has controlled transaction or vice-versa, it shall fall outside the ambit of list of comparable cases - TPO suggested to make adjustment only by comparing the rate of commission paid to AE on First Notice and no case has been brought on record that commission paid by assessee to AE @ 15% is excessive. Further we observe that Ld. CIT(A) has held that similar issue was also considered in the preceding assessment year 2004-05 and similar adjustment made were not agreed to and it was held that assessee s transaction with AE in respect of commission was at Arm s Length - Decided in favour of assessee.
Issues Involved:
1. Disallowance of deduction claimed under Section 10A for Unit II and Unit III. 2. Disallowance of expenditure under Section 14A. 3. Addition on account of Transfer Pricing adjustment under Section 92CA(3). Issue-wise Detailed Analysis: 1. Disallowance of Deduction Claimed under Section 10A for Unit II and Unit III: The assessee claimed deductions under Section 10A for two units, Unit II and Unit III, engaged in IT-enabled services. The Assessing Officer (AO) disallowed the claims stating that these units were merely expansions of an existing unit and not new undertakings. The AO referenced correspondence with the Software Technology Parks of India (STPI) which indicated that the units were not considered separate entities under the STP scheme but rather expanded locations of an initial unit. Upon appeal, the First Appellate Authority upheld the AO's decision, stating that adding capital, machinery, and manpower did not suffice to qualify as new undertakings. The assessee argued that the units were independent, maintained separate books, and had distinct sets of employees and technologies. The Tribunal found merit in the assessee's argument that the AO had not adequately examined whether the units were independent or expansions. Consequently, the Tribunal set aside the orders of the authorities below and remanded the matter to the AO for re-examination, directing the AO to assess whether Unit II and Unit III were independent or merely expansions of the existing undertaking, in light of the principles laid down in the case of Patni Computers Ltd. 2. Disallowance of Expenditure under Section 14A: The AO applied Rule 8D to disallow expenditure related to earning exempt income under Section 14A. The First Appellate Authority noted that Rule 8D was not applicable for the assessment year in question, based on the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT. The CIT(A) directed the AO to disallow direct expenses related to exempt income, make a prorate disallowance of interest, exclude interest disallowed under Section 36(1)(iii), and reasonably disallow indirect expenses at 0.5% of the value of assets generating exempt income. The Tribunal modified the CIT(A)'s order, directing the AO to re-examine the issue afresh based on the evidence provided by the assessee, without being restricted to the guidelines laid by the CIT(A). 3. Addition on Account of Transfer Pricing Adjustment under Section 92CA(3): The AO made an addition of Rs. 1,49,16,166/- based on the Transfer Pricing Officer's (TPO) recommendation, who found a discrepancy in the commission rates paid to associated enterprises (AEs). The TPO compared the 15% commission paid to AETNA with the 12% commission paid to First Notice, another AE, and suggested an adjustment. The First Appellate Authority observed that the TPO had erroneously compared controlled transactions, which goes against Transfer Pricing principles. The CIT(A) noted that the assessee followed the Transactional Net Margin Method (TNMM), which showed a higher profit margin than comparable companies. The CIT(A) thus deleted the addition, finding the transactions at arm's length. The Tribunal upheld the CIT(A)'s decision, noting that the TPO had not provided any comparable uncontrolled transaction to justify the adjustment. The Tribunal emphasized that Section 92 and Rule 10B require the comparison to be with uncontrolled transactions, which was not done in this case. Therefore, the Tribunal confirmed the CIT(A)'s order and rejected the department's grounds. Conclusion: - The Tribunal remanded the issue of deduction under Section 10A for re-examination by the AO. - The Tribunal directed the AO to re-examine the disallowance under Section 14A afresh. - The Tribunal upheld the CIT(A)'s deletion of the Transfer Pricing adjustment, confirming that the transactions were at arm's length.
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