2017 (1) TMI 1811 - AT - Income Tax

Deduction u/s 10A - Computation of deduction - Whether foreign currency expenditure incurred by the appellant should not be reduced from export turnover for the purpose of computing the deduction ? - whether plea of the appellant that if communication expenses attributable to rendering business process outsourcing/IT enabled services are excluded from export turnover, the same should also be reduced from TTO in computing the deduction u/s 10A? - HELD THAT - We find that this issue is covered in favour of the assessee by the judgment of M/s Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT wherein it was held that the total turnover is the sum total of export turnover and domestic turnover and therefore, if an amount is reduced from the export turnover then the total turnover also automatically goes down by the same amount. Hence, we decide this issue in favour of the assessee and the A.O. is directed to recomputed the amount of deduction allowable u/s 10A in the light of this judgment of the Hon ble Karnataka High Court. TP Adjustment - MAM - claim of consideration of internal TNMM - HELD THAT - We find force in the submission of the ld. AR of the assessee that this issue should go back to the file of the TPO for fresh decision because this was the claim of the assessee before the authorities below that internal TNMM of the assessee for its substantial transaction with unrelated parties should also be considered to decide the ALP but this aspect of the matter has been brushed aside by the TPO and DRP. Hence, we set aside the order of the AO on TP issue and restore the matter to the file of the AO/TPO for a fresh decision, after examining the claim of the assessee for consideration of internal TNMM. Appeal of the assessee is partly allowed for statistical purposes.

Summary

Issues:
- Interpretation of law and correctness of assessment order under IT Act, 1961
- Assessment of total income against returned income
- Treatment of foreign currency expenditure for deduction u/s 10A
- Treatment of travel expenditure in foreign currency for deduction u/s 10A
- Set off of business loss and taxable income
- TDS credit claim
- Transfer pricing analysis and arm's length principle
- Consideration of internal TNMM for ALP determination
- Application of comparability criteria in transfer pricing analysis
- Use of powers u/s 133(6) for comparability purposes
- Opportunity of being heard in transfer pricing analysis
- Working capital adjustment in transfer pricing
- Risk profile adjustment in transfer pricing
- Compliance with proviso to sec. 92C of the Act

Analysis:
1. The appeal challenged the assessment order passed by the AO under the IT Act, 1961 for the assessment year 2007-08. The grounds raised by the assessee included issues related to incorrect interpretation of law, assessment of total income, treatment of foreign currency expenditure, set off of business loss, TDS credit claim, and transfer pricing analysis.

2. The Corporate Tax issue regarding the treatment of foreign currency expenditure for deduction u/s 10A was decided in favor of the assessee based on a judgment of the Hon'ble Karnataka High Court. The Court held that reducing an amount from export turnover automatically reduces the total turnover by the same amount. The AO was directed to recompute the deduction accordingly.

3. Regarding the Transfer Pricing (TP) issue, the assessee's claim for considering internal TNMM for ALP determination was not adequately addressed by the TPO and DRP. The tribunal set aside the order on TP issue and remanded the matter to the AO/TPO for a fresh decision, emphasizing the consideration of internal TNMM and providing the assessee with a fair opportunity to present arguments.

4. The tribunal expressed no opinion on the acceptability of the assessee's claim for adopting internal TNMM and left the TP issue open for further arguments and decision by the AO/TPO. The appeal was partly allowed for statistical purposes, and the decision was pronounced in open court.

This detailed analysis of the judgment highlights the key legal issues addressed, the decisions made by the tribunal, and the directions given for further proceedings, ensuring a comprehensive understanding of the case.