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2017 (5) TMI 777 - AT - Income Tax


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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