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2017 (4) TMI 760 - AT - Income TaxSetting off of losses of non-STPI Unit against the profits of the STPI Unit prior to allowing the deduction under Section 10A - Held that - By following the latest judgment of the Hon ble Supreme Court in CIT v. Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT based on the substituted/amended provisions of Sec. 10A/10B which are applicable in the case of the assessee as well as the decision of the Tribunal in case of Biocon Ltd. (2014 (12) TMI 838 - ITAT BANGALORE), we decide this issue in favour of the assessee and direct the AO to allow deduction u/s. 10A without setting off the domestic losses. Allocation of expenses between the STPI Unit and non-STPI Unit on the basis of turnover ratio - Held that - DRP has not adjudicated this issue therefore we direct the Assessing Officer to verify the claim of the assessee regarding the double deduction of certain expenses against the profits of the STPI Units. Hence this issue is set aside to the record of the Assessing Officer for limited purpose of verification of the facts of double deduction of certain expenses as claimed by the assessee. Disallowance made under Section 14A - Held that - It is apparent that as far as the interest expenditure is concerned there is a reduction in the investment during the year under consideration and therefore no interest bearing fund was used for investment during the year under consideration. Even otherwise the Assessing Officer has not given a finding that the assessee has used borrowed fund for the purpose of making investment. Further it is not dear that in which year and how much of investment was made. Therefore having regard to these facts when there is a reduction in the investment during the year under consideration then without giving the specific finding of using the borrowed fund as well as no disallowance in the year of investment on account of interest expenditure, we are of the view that the Assessing Officer is not justified in making the disallowance on account of interest expenditure under Section 14A of the Act. As regards the disallowance on account of indirect administrative expenditure there is no dispute that there is a substantial movement in the investment portfolio of the assessee which consist of mutual funds, equity shares and inter-corporate deposits. Therefore when the assessee has taken the decision for selling and fresh investment during the year under consideration which involves a high level decision making process then the claim of the that no expenditure has been incurred for earning the dividend income is not acceptable. Accordingly, we uphold the disallowance on account of indirect administrative expenses being 0.5% of the average investment made under Section 14A of the Act. Disallowance of deduction in respect of Employees Contribution to PF and ESI - Held that - Identical issue was considered by the Hon ble jurisdictional High Court in the case of Essae Teraoka (P.) Ltd. 2014 (3) TMI 386 - KARNATAKA HIGH COURT by itself it is not sufficient to hold that the employer is not entitled for deduction as contemplated under Section 36(1)(va) of the IT Act r/w Section 43-B of the IT Act - The word contribution is used not only to mean contribution of the employer but also contribution to be made on behalf of the member employed by the employer directly - the word contribution used in Clause(b) of Section 43-B of the IT Act means the contribution of the employer and the employee - That being so, if the contribution is made on or before the due date for furnishing the return of income under sub-section(1) of Section 139 of the IT Act is made, the employer is entitled for deduction thus, the assessee is entitled for deduction Decided in favour of Assessee. Capital financing/advance to the AE - Held that - Allotting company has no access or right to use the said money till the allotment of shares. n this case the assessee has remitted this amount during the year under consideration as per the details given at page 707 of the paper book. It is also undisputed fact that no shares were allotted to the assessee till the end of the financial year as on 31.3.2009. thus when this money was available with the AE of the assessee for utilization then it loses the character of share application money and therefore the rule as laid down by the various decisions of this Tribunal relied upon by the learned Authorised Representative will not be applicable in a case where the money is available to the AE and there is an extraordinary delay in allotment of shares. Hence we are of the view that when this money was paid by the assessee to the AE and it was very much available to the assessee for utilization for business purpose of the AE then this transaction of payment of money to the AE against which no shares were allotted till the end of the financial year relevant to the assessment year under consideration will constitute an international transaction as per the provisions of Section 92B of the Act as it has a direct bearing on the profit and loss as well as the assets of the enterprises. Further as per the Explanation to Section 92B(1) of the Act till the date of allotment it will constitute as capital financing/advance to the AE. We find substance so far as the applicability of LIBOR because the remittance has been made in foreign currency and therefore it is appropriate to apply the LIBOR rate for determining the arm s length interest. Further the computation of the interest has to be from the date of remittance till the end of the financial year. Accordingly, we direct the TPO/A.O. to recompute the arm s length interest in respect of this transaction by taking into consideration LIBOR and the period from the date of remittance till 31.3.2009. As regards allowing the time period of 180 days, since this is not a case of an ordinary time period of allotment and therefore when this money was available with the AE for use then we do not find any merit or substance in this contention of the learned Authorised Representative. Deduction under section 10A - Held that - Respectfully following the aforementioned decision of the Hon ble High Court of Karnataka in the case of Tata Elxsi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT ), we uphold the order of the DRP in directing the Assessing Officer to reduce the expenditure incurred in foreign currency from both export turnover and total turnover for the purpose of computing the deduction under section 10A of the Act in the case on hand.
Issues Involved:
1. Setting off losses of non-STPI unit against profits of STPI unit before allowing deduction under Section 10A. 2. Allocation of expenses between STPI and non-STPI units. 3. Disallowance under Section 14A of the Income Tax Act. 4. Disallowance of employees' contribution to PF and ESI under Section 36(1)(va) read with Section 43B(b). 5. Transfer Pricing adjustments and selection of comparables. 6. Computation of arm's length price on share application money remitted to the subsidiary. 7. Exclusion of telecommunication expenses and expenses incurred in foreign currency from export turnover and total turnover. Detailed Analysis: 1. Setting off losses of non-STPI unit against profits of STPI unit before allowing deduction under Section 10A: The assessee argued that the AO and DRP erred by setting off losses of non-STPI units with the profits of STPI units before allowing the deduction under Section 10A. The assessee relied on the decision in CIT v. Yokogawa India Ltd. (341 ITR 385) and CIT v. Aurigene Discovery Technologies Ltd. The Tribunal noted that the jurisdictional High Court in Yokogawa India Ltd. held that the income of the Section 10A unit should be excluded before arriving at the gross total income. The Tribunal directed the AO to allow the deduction under Section 10A without setting off the domestic losses. 2. Allocation of expenses between STPI and non-STPI units: The assessee contended that certain expenses were charged twice against the STPI unit, reducing the profit eligible for deduction under Section 10A. The Tribunal directed the AO to verify the claim regarding the double deduction of certain expenses and make necessary adjustments. 3. Disallowance under Section 14A of the Income Tax Act: The assessee argued that no expenditure was incurred for earning exempt income, thus Section 14A should not apply. The Tribunal upheld the disallowance of indirect administrative expenses but found no justification for disallowing interest expenditure under Section 14A, as there was a reduction in investment during the year and no specific finding of borrowed funds used for investment. 4. Disallowance of employees' contribution to PF and ESI under Section 36(1)(va) read with Section 43B(b): The Tribunal followed the jurisdictional High Court's decision in CIT v. Sabari Enterprises (298 ITR 141) and Essae Teraoka (P.) Ltd. v. Dy. CIT (366 ITR 408), allowing the assessee's claim for deduction of employees' contribution to PF and ESI if paid before the due date for filing the return of income under Section 139(1). 5. Transfer Pricing adjustments and selection of comparables: The assessee sought exclusion of certain companies from the set of comparables. The Tribunal directed the exclusion of Sasken Communication Technology Ltd., KALS Information Systems Ltd., and Bodhtree Consulting Ltd. from the set of comparables based on functional dissimilarity and turnover filters. The Tribunal also directed the AO to recompute the operating profit margins by considering foreign exchange gain/loss as operating in nature if arising from sale proceeds. 6. Computation of arm's length price on share application money remitted to the subsidiary: The Tribunal held that the remittance of share application money to the subsidiary, pending allotment of shares, constituted an international transaction under Section 92B. The Tribunal directed the AO to recompute the arm's length interest using the LIBOR rate and for the period from the date of remittance till the end of the financial year. 7. Exclusion of telecommunication expenses and expenses incurred in foreign currency from export turnover and total turnover: The Tribunal upheld the DRP's direction to exclude telecommunication expenses and expenses incurred in foreign currency from both export turnover and total turnover while computing the deduction under Section 10A, following the jurisdictional High Court's decision in CIT v. Tata Elxsi Ltd. (349 ITR 98). Conclusion: The Tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal, providing directions to the AO on various issues, including the correct computation of deductions and transfer pricing adjustments.
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