2013 (10) TMI 293 - HC - Income Tax

Whether on the facts and circumstances of the case and in law, the Tribunal did not err in failing to appreciate that as per the provisions of Section 80HHE, profits of any branch, office, warehouse or any other establishment of the assessee situated outside India are to be reduced from export turnover of the business and not from total turnover? - Appeal admitted on this issue. International transaction or not - Consultancy charges - Held that - dispute relates to allocation of consultancy charges paid by the respondent-assessee to M/s. McKinsey & Co. on the ground that there was an arrangement between the respondent-assessee and its Associated Enterprises and on that basis, the Revenue sought to justify the inclusion of consultancy charges paid to M/s. McKinsey & Co. as an international transaction. The Tribunal held that there was no material to support the conclusion that there was an arrangement between the respondent-assessee and its Associated Enterprises and the entire case is based on mere presumption. Therefore, the Tribunal concluded that the order of the Transfer Pricing Officer (TPO) is without any evidence. The Tribunal further held that even if any benefit accrued to the Associated Enterprises, it was merely incidental to the consultancy obtained by the respondent-assessee from M/s. Mc Kinsey & Co. Besides, the Tribunal held that even if it is assumed that certain benefit accrued to the Associated Enterprises and they were to compensate the respondent-assessee, the ALP would have to be determined. This can only be determined on finding out the consultancy charges paid by similarly situated and comparable independent entities. In the absence of any comparison, the Tribunal held that the action of the TPO cannot be upheld - Decided in against the Revenue. Deduction u/s 10A - Held that - respondent-assessee established three units at Chinchwad, Ackruti and Millennium. The Revenue denied the benefit of Section 10A of the said Act in respect of three units on the basis of the approval letter issued by Software Technology Park in India that the three units are to be considered as part of the existing unit. The Tribunal has recorded a finding of fact that all the three units fulfil the conditions prescribed under Section 10A(2) of the Act. The three units were separate and independent production units and the same cannot treated as mere expansion of the existing units. Thus, the respondent-assessee is entitled to its claim for deduction under Section 10A of the Act - Decided against the revenue.

Issues:
1. Set off of Section 10A unit losses against business profit
2. International transaction regarding excess period of credit to Associated Enterprises
3. Allocation of consultancy charges paid to M/s. McKinsey & Co.
4. Arm's length allocation of consultancy expenses
5. Interpretation of Section 80HHE regarding export turnover
6. Eligibility of units for deduction under Section 10A
7. Set off of losses of Sweden branch against other business income
8. Application of Double Taxation Avoidance Agreement (DTAA) with Sweden

Analysis:

1. Set off of Section 10A unit losses against business profit:
The Tribunal directed the AO to allow set off the Section 10A unit losses against business profit, contrary to the specific provision of sub-section (6) of section 10A. The Court relied on a previous decision in favor of the assessee, hence, no reason to entertain this issue.

2. International transaction regarding excess period of credit to Associated Enterprises:
The issue was related to whether the excess period of credit to Associated Enterprises constituted an international transaction. Due to an amendment to Section 92B(1) of the Income Tax Act, the matter was restored to the Tribunal for a fresh decision.

3. Allocation of consultancy charges paid to M/s. McKinsey & Co.:
The Tribunal found no evidence to support the conclusion that there was an arrangement between the assessee and its Associated Enterprises regarding consultancy charges. The decision was based on presumption and lacked concrete evidence, leading to the dismissal of the Revenue's claim.

4. Arm's length allocation of consultancy expenses:
The Tribunal did not entertain this question as it was not pressed by the senior counsel for the Revenue.

5. Interpretation of Section 80HHE regarding export turnover:
The Tribunal's decision was based on a factual finding that the units in question fulfilled the conditions prescribed under Section 10A(2), making them eligible for deduction under Section 10A.

6. Eligibility of units for deduction under Section 10A:
The Tribunal allowed the set off of losses incurred by the Sweden branch against other business income, following its previous decision under the India-Japan DTAA. The Court found no reason to entertain this issue as the clauses in the India-Sweden DTAA were not shown to be different.

7. Application of Double Taxation Avoidance Agreement (DTAA) with Sweden:
The appeal was admitted on the issue of the interpretation of Section 80HHE regarding export turnover.

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