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2017 (5) TMI 777 - AT - Income TaxTransactions pertaining to software development services provided by the assessee to its AE located in UK and Australia - Held that - The maximum international transactions were undertaken by the assessee with its AEs of Canada as well as USA and only two transactions were undertaken with AEs of Australia and UK. Therefore the same ALP of 117.50% be applied with respect to remaining two international transactions. Accordingly, we set aside the order of CIT(Appeals) and direct the AO/TPO to apply the ALP of 117.50% with respect to the remaining transactions. Deduction u/s. 10A - Held that - The requirement of Sec.10A and 10B are similar and therefore, in view of this categorical finding of the ld. CIT(A) that in the initial year, the percentage of old and used plant and machinery was more than 20%, the assessee is not eligible for deduction u/s. 10A of the Act, in the initial year as well as in subsequent years. Therefore, we find no reason to interfere with the order of the ld. CIT(A) on this issue in any of these two years which are before us by respectfully following the judgment of the Hon ble Karnataka High Court rendered in the case of Sami Labs Ltd. (2010 (12) TMI 683 - Karnataka High Court ). Hence, we decline to interfere with the order of the ld. CIT(A) on this issue. Deduction u/s. 10A computation - Held that - As the profits & gains u/s. 10A were not to be included in the income of the assessee at all, the question of setting off of loss of the assessee from any business against such profits & gains of the undertaking would not arise. Similarly, as per section 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation u/s. 32(2) is to be set off as deduction u/s. 10A has to be excluded from the total income of assessee, the question of unabsorbed business loss being set off against such profits & gains of undertaking would not arise. See C.I.T. & Another Versus M/s Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT Reduction of telecommunication expenses from the export turnover - Held that - This issue is covered in the case of Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT in which it has been held that if certain expenses are excluded from the export turnover, the same should also be excluded from the total turnover.
Issues Involved:
1. Denial of deduction under Section 10A. 2. Setting off brought forward business loss and unabsorbed depreciation before computing deduction under Section 10A. 3. Transfer Pricing (TP) adjustments and arm's length price (ALP) determination. 4. Reduction of telecommunication expenses from export turnover. Detailed Analysis: 1. Denial of Deduction under Section 10A: The assessee challenged the denial of deduction under Section 10A related to its STP undertaking in Bangalore. The CIT(A) confirmed the AO's decision to deny this deduction. The Tribunal referenced its earlier decision in the assessee’s own case for AY 2001-02 and 2002-03, which found that the unit did not satisfy the conditions prescribed in clause (iii) of sub-sec.(2) of sec.10A, as more than 20% of the plant and machinery were transferred from other units. Therefore, the Tribunal upheld the CIT(A)'s decision, denying the deduction under Section 10A. 2. Setting Off Brought Forward Business Loss and Unabsorbed Depreciation: The assessee contended against the setting off of brought forward business loss and unabsorbed depreciation before computing deduction under Section 10A. The Tribunal noted that this issue was covered by the Hon'ble Karnataka High Court's judgment in CIT v. Yokogawa India Ltd., which was also upheld by the Supreme Court. The judgment clarified that profits under Section 10A should not be included in the total income, thus the question of setting off losses against such profits does not arise. Consequently, the Tribunal directed the AO to recompute the deduction under Section 10A in line with the Supreme Court's judgment. 3. Transfer Pricing (TP) Adjustments and Arm's Length Price (ALP) Determination: The assessee and revenue both raised issues regarding TP adjustments. The Tribunal noted that the MAP resolution determined the ALP for transactions with AEs in the USA and Canada at 17.5%. The assessee argued that this ALP should also apply to transactions with AEs in the UK and Australia. The Tribunal referenced the case of J P Morgan Services (P.) Ltd., where it was held that the ALP determined through MAP for major transactions should apply to remaining transactions. The Tribunal directed the AO/TPO to apply the ALP of 17.5% to transactions with AEs in the UK and Australia. 4. Reduction of Telecommunication Expenses from Export Turnover: The revenue contested the CIT(A)'s direction to recompute the deduction under Section 10A after reducing telecommunication expenses from both export turnover and total turnover. The Tribunal upheld the CIT(A)'s decision, referencing the Karnataka High Court's judgment in Tata Elxsi Ltd., which mandates that if expenses are excluded from the export turnover, they should also be excluded from the total turnover. Thus, the Tribunal confirmed the CIT(A)'s order. Conclusion: The Tribunal partly allowed the appeals for statistical purposes. It upheld the denial of Section 10A deduction for the Bangalore STP unit, directed the AO to recompute Section 10A deduction without setting off losses, applied the ALP of 17.5% to transactions with AEs in the UK and Australia, and confirmed the reduction of telecommunication expenses from both export and total turnover.
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