2014 (8) TMI 867 - AT - Income Tax

Deduction u/s 10A for GE-GDC STP Unit setting of new unit or expansion of existing unit - Held that - even if a new unit was established by the assessee company as expansion of its existing unit, substantial fresh capital having been invested in the said unit and it was capable of doing business of its own, independent of the old unit, the same was eligible to be treated as a newly established undertaking; and that therefore, the CIT (A) was not correct in holding that both the units were liable to be treated as one unit for the purpose of computing deduction u/s 10A of the Act the order of the CIT(A) is upheld Decided against Revenue. Set off of losses against income from STP units Unabsorbed losses and depreciation - Held that - The matter has already been decided in assessee s own case for the earlier assessment year, the Tribunal has held that as per Section 10A (1) of the Act, any profits and gains derived from an industrial undertaking, to which this Section applies, shall not be included in the total income of the assessee - the profits of the eligible industrial undertaking did not form part of the total income at all - it did not enter the computation provision - what was to be computed was the profits of the eligible industrial undertaking and not the resultant business income after set off of loss in other activities - the loss from other business activities should not be set off against profits derived from eligible industrial undertaking - the action of the CIT (A) is upheld in directing the AO to re-compute the total income of the assessee after allowing the set off of the losses arising out of the STP units of the assessee against the income of its non-STP undertakings and to allow carry forward of unabsorbed losses and depreciation Decided against Revenue. Travelling expenses allowed Held that - The matter has already been decided in assessee s own case for the earlier assessment year, the Tribunal has held that the observations of the AO with regard to the assessee not having produced the relevant documentary evidence in the shape of bills/vouchers concerning the travelling expenses claimed, have been found by the CIT (A) to be incorrect The finding of the CIT (A) has not been successfully refuted by the department - The deductible expenditure incurred for the purpose of business does not require the presence of a receipt on the credit side to justify deduction of an expense - expenditure wholly and exclusively for the purpose of business cannot be disallowed merely because the assessee's income or the turnover would be very much reduced - the AO has not brought any material or evidence on record to show and establish that the travelling expenses incurred by the assessee during the year have not been expended for the purpose of assessee's business or have not been incurred in the course of carrying of any business activity of the assessee Decided against Revenue. Treatment of miscellaneous income Eligibility for deduction u/s 10A Held that - The matter has already been decided in assessee s own case for the earlier assessment year, the Tribunal has held that the amount received by the assessee towards notice period was to be treated as income derived from the eligible undertaking and that deduction u/s 10A of the Act shall be allowed accordingly - the amount received by the assessee towards notice period is to be treated as income derived from the eligible undertaking and deduction u/s 10A of the Act is to be allowed accordingly Decided against Revenue. Transfer pricing adjustment u/s 92CA(3) Software development and related services with AE - Held that - The assessee is right in contending that since the profit of each of the STP units of the assessee company cannot be evaluated separately and independently of one another, they cannot be segregated and the approach of the TPO in considering the result of each STP unit, on a standalone basis, for the purpose of determining the ALP relating to the assessee's international transactions, was incorrect - The action of the CIT(A) in accepting this contention of the assessee is upheld CIT(A) has rightly concluded that the benchmarking of the transactions should be based on the aggregation at the entity level and not at the unit level Decided against Revenue.

Issues Involved:

1. Deduction under Section 10A for GE-GDC STP Unit.
2. Set off of losses arising out of STP units against the income from non-STP units.
3. Carry forward of unabsorbed losses and depreciation of STP units.
4. Allowance of travelling expenses of Rs. 11,07,62,619.
5. Treatment of miscellaneous income from recovery of notice pay as income eligible for deduction under Section 10A.
6. Deletion of addition made on account of excess claim of depreciation on computer peripherals.
7. Allowance of credit for taxes paid in Australia.
8. Deletion of addition made under Section 92CA (3) on account of transfer pricing adjustments.

Detailed Analysis:

1. Deduction under Section 10A for GE-GDC STP Unit:

The assessee set up a new unit (GE-GDC) in 2000, which was approved as a separate STP unit. The AO treated it as an extension of the existing business and denied the deduction under Section 10A. The CIT (A) allowed the deduction, following Tribunal decisions for AYs 2003-04, 2006-07, and 2008-09, which treated the new unit as a separate undertaking. The Tribunal upheld the CIT (A)'s decision, noting that the new unit was independently capable of production and had substantial fresh capital investment.

2. Set off of losses arising out of STP units against the income from non-STP units:

The AO disallowed the set off of losses from STP units against non-STP units' income, relying on the Tribunal's order for AY 1999-2000. The CIT (A) allowed the set off, following Tribunal decisions for AYs 2003-04 and 2006-07. The Tribunal noted that post-amendment (effective from 01.04.2001), Section 10A provided for a deduction rather than an exemption, allowing losses from eligible units to be set off against income from non-eligible units. The Tribunal upheld the CIT (A)'s decision.

3. Carry forward of unabsorbed losses and depreciation of STP units:

The AO denied the carry forward of unabsorbed losses and depreciation of STP units. The CIT (A) allowed it, following Tribunal decisions for AYs 2003-04 and 2006-07. The Tribunal upheld the CIT (A)'s decision, noting that the amended Section 10A allowed for the carry forward of such losses and depreciation.

4. Allowance of travelling expenses of Rs. 11,07,62,619:

The AO disallowed the excess travelling expenses claimed by the assessee, citing a lack of supporting bills/vouchers. The CIT (A) directed the AO to delete the disallowance, noting that the assessee had produced audited books of account and the disallowance was ad hoc. The Tribunal upheld the CIT (A)'s decision, observing that the AO had not provided any material evidence to disprove the genuineness of the expenses.

5. Treatment of miscellaneous income from recovery of notice pay as income eligible for deduction under Section 10A:

The AO treated the miscellaneous income from recovery of notice pay as income from other sources. The CIT (A) directed the AO to treat it as business income eligible for deduction under Section 10A, following the Tribunal's decision for AY 2006-07. The Tribunal upheld the CIT (A)'s decision, noting that the income was incidental to the business and should be treated as business income.

6. Deletion of addition made on account of excess claim of depreciation on computer peripherals:

The AO disallowed the excess claim of depreciation on computer peripherals. The CIT (A) deleted the addition, following the Tribunal's decision for AY 2006-07, which allowed depreciation at 60% on computer peripherals. The Tribunal upheld the CIT (A)'s decision.

7. Allowance of credit for taxes paid in Australia:

The AO disallowed the credit for taxes paid in Australia. The CIT (A) directed the AO to allow the credit, noting that the taxable income had increased due to additions made in the assessment order. The Tribunal upheld the CIT (A)'s decision, directing the AO to allow the credit after examination.

8. Deletion of addition made under Section 92CA (3) on account of transfer pricing adjustments:

The TPO made adjustments based on unit-wise benchmarking rather than entity-wise. The CIT (A) directed the AO/TPO to delete the adjustment, following Tribunal decisions for AYs 2004-05 and 2006-07, which favored entity-wise benchmarking. The Tribunal upheld the CIT (A)'s decision, noting that the assessee's approach of entity-wise benchmarking was consistent with past decisions and the internal comparables were more reliable.

Conclusion:

The Tribunal upheld the CIT (A)'s decisions on all grounds, except for the general ground (Ground No.1), which was not specific. The appeal filed by the department was partly allowed, with the order pronounced in the open court on 06.05.2014.

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