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2023 (9) TMI 1307 - AT - Income TaxDeduction u/s 10A in respect of interest income earned by the assessee - CIT(A) allowed deduction in respect of interest income earned by the assessee from parking of surplus funds with banks - revenue is aggrieved by the decision of Ld CIT(A) in allowing deduction u/s 10A without setting off of loss incurred from other eligible units against profit of eligible units - HELD THAT - As in assessee s own case in A.Y. 2005-06 in the appeal of the revenue 2023 (1) TMI 1292 - ITAT MUMBAI as held that the loss incurred in one unit need not be set off of against the profits of other units for the purpose of computing deduction u/s 10A of the Act in respect of profit earning units. We notice that, in this regard, the Coordinate Bench has followed the decision rendered in the case of Scientific Atlanta India 2010 (2) TMI 658 - ITAT, CHENNAI wherein it was held that section 10A of the Act is a deduction section and not an exemption section. Further it was held that the deduction has to be computed undertaking-wise . The Hon ble Supreme Court has held in the case of CIT vs. Yokogawa India Ltd 2016 (12) TMI 881 - SUPREME COURT that the deduction u/s 10A of the Act should be computed at the stage before arriving at the Gross total income of the eligible undertaking. Thus we are of the view that the Ld CIT(A) was justified in holding that the losses incurred in other eligible units are not required to be set off against the profits of the undertaking against which the deduction u/s 10A was allowed. Computation of deduction u/s 10A - whether the telecommunication charges are required to be deducted from the Export turnover while computing deduction u/s 10A of the Act or not? - HELD THAT - As relying on HCL Technologies Ltd 2018 (5) TMI 357 - SUPREME COURT we direct the AO to compute the deduction u/s 10A of the Act by excluding telecommunication charges both from export turnover and total turnover while computing deduction u/s 10A of the Act. TP adjustment in respect of income - assessee selected itself as tested party and adopted TNM method as most appropriate method - Net Profit Margin was selected as Profit Level Indicator (PLI) and the assessee s margin was 22% - assessee identified 43 companies, whose average margin was 9%. Accordingly, the assessee contended that its international transaction with AEs is at arms length - HELD THAT - TPO, after holding that the foreign AEs should be taken as tested parties have selected three unknown Indian comparable companies. Accordingly, he has held that the assessee should have remunerated the AEs at Cost plus 10% margin. Admittedly, the above said approach of the TPO is against the Transfer pricing provisions and also in gross violation of principles of natural justice. Accordingly, we are of the view that the Ld CIT(A) was justified in rejecting the above said approach of TPO. Net profit margin declared by the assessee is 22%. We noticed that the average margin of 11 comparable companies selected by the Ld CIT(A) was 22.53%. Hence the difference in the margin rate falls within the tolerance limit of 5%, in which case, the international transactions of the assessee should be considered to be at arms length. Accordingly, no transfer pricing adjustment is called for. Accordingly, we modify the order passed by Ld CIT(A) on this issue and hold that no transfer pricing adjustment is called for. Accordingly, we delete the addition sustained by Ld CIT(A). Disallowance u/s 14A r.w.r. 8D - HELD THAT - The year under consideration being A.Y. 2006-07, the provisions of Rule 8D will not apply to the year under consideration as per the decision rendered by Hon ble Bombay High Court in the case of Godrej Boyce Mfg Co Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT Accordingly the tax authorities are not justified in applying provisions of rule 8D to the year under consideration. However, since the assessee has earned exempt income, a portion of expenditure needs to be disallowed in terms of section 14A of the Act. The Hon'ble Bombay High Court has upheld the disallowance of 2% of exempt income in the case of Godrej Agrovet Limited 2014 (8) TMI 457 - BOMBAY HIGH COURT Following the same, we direct the Assessing Officer to restrict the disallowance under section 14A to 2% of the exempt income. TP adjustment made in respect of delayed receivable from the AEs - TPO noticed that the assessee has received money from its AEs with considerable delay and accordingly made transfer pricing adjustment of Rs. 3.80 crores on account of delayed receivable by adopting interest at 6.87% on average quarterly balance due from AEs - HELD THAT - We noticed that the AEs have remitted money to the assessee with delay ranging from 1 day to a period exceeding 1 year, after realization from their debtors. Hence the reasoning given by the Tribunal, as rightly pointed by Ld D.R, would not apply to the facts of the year under consideration. We also noticed that the TPO has computed the interest by taking average quarterly balances. In our view, the same is not correct method of computing interest on delayed receivables. Since the details of realization of individual bills are available, it will be possible for the assessee/TPO to compute interest individually after allowing accepted credit period. Thus we are of the view that this issue requires fresh examination at the end of the Assessing Officer/TPO. Accordingly we set aside the order passed by the learned CIT(A) on this issue and restore the same to this file for examining this issue afresh in the light of discussions made supra. TP Adjustment - loan given to AEs - TPO has arrived at ALP rate of interest for i flex America at 8.37% and for ISE Mauritius Company Mauritius at 11.75% - TPO took the view that the assessee has undercharged interest and accordingly made transfer pricing adjustment - HELD THAT - We notice that, with regard to Mauritius subsidiary, no material has been furnished by the assessee to substantiate the ALP of interest charged. It is the submission of Ld A.R that the ALP of interest income should be determined by considering LIBOR rate, to which certain points are added to bring the same to market rate. We notice that the TPO has considered Prime Lending rate plus Guarantee charges, which according to Ld A.R is not correct. We agree with the contentions of Ld A.R on this point. Thus, we notice that both the parties have not substantiated their stand properly. Accordingly, we are of the view that this issue also requires examination at the end of AO/TPO. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO/TPO for examining this issue afresh.
Issues Involved:
1. Deduction under section 10A on interest income. 2. Disallowance under section 14A in respect of exempt income. 3. Transfer pricing adjustment in respect of revenue received. 4. Deduction under section 10A without adjusting loss of other eligible units. 5. Computation of deduction under section 10A without deducting telecommunication expenses. 6. Transfer pricing adjustment on delayed receivables. 7. Transfer pricing adjustment on interest undercharged on loans to AEs. Summary: 1. Deduction under section 10A on interest income: The assessee appealed against the denial of deduction under section 10A on interest income. The Tribunal referenced its own decision in the assessee's case for A.Y. 2003-04, where it was held that interest income from temporary parking of surplus funds is eligible for deduction under section 10A. Consistent with this view, the Tribunal reversed the CIT(A)'s order and directed the AO to allow the deduction. 2. Disallowance under section 14A in respect of exempt income: The assessee contested the disallowance made under section 14A. The Tribunal noted that Rule 8D does not apply to A.Y. 2006-07 as per the Bombay High Court's decision in Godrej Boyce Mfg Co Ltd. However, since the assessee earned exempt income, a portion of expenditure needed to be disallowed. Following the Bombay High Court's decision in Godrej Agrovet Limited, the Tribunal directed the AO to restrict the disallowance to 2% of the exempt income. 3. Transfer pricing adjustment in respect of revenue received: The Tribunal found that the TPO's approach of selecting foreign AEs as tested parties and using undisclosed Indian comparables was against transfer pricing provisions and natural justice. The CIT(A) correctly rejected this approach and selected 11 comparable companies, whose average margin was 22.53%, within the tolerance limit of 5%. Thus, the Tribunal held that no transfer pricing adjustment was required and deleted the addition of Rs. 7.88 crores. 4. Deduction under section 10A without adjusting loss of other eligible units: The Revenue's appeal on this issue was dismissed. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in CIT vs. Yokogawa India Ltd, which stated that deduction under section 10A should be computed undertaking-wise without adjusting losses from other units. 5. Computation of deduction under section 10A without deducting telecommunication expenses: The Tribunal agreed with the CIT(A) that telecommunication charges should be deducted from both "Export turnover" and "Total turnover" while computing deduction under section 10A, following the Supreme Court's decision in CIT vs. HCL Technologies Ltd. 6. Transfer pricing adjustment on delayed receivables: The Tribunal found that the TPO's method of computing interest on delayed receivables using average quarterly balances was incorrect. They noted that the AEs remitted money with significant delays after realization from their debtors. The issue was remanded to the AO/TPO for fresh examination, allowing computation of interest on individual bills after accepted credit periods. 7. Transfer pricing adjustment on interest undercharged on loans to AEs: The Tribunal observed that neither the assessee nor the TPO substantiated their stand properly regarding the ALP of interest on loans to AEs. The issue was remanded to the AO/TPO for re-examination, considering the LIBOR rate plus appropriate points to determine the market rate. Conclusion: The appeal of the assessee was partly allowed, and the appeal of the revenue was treated as partly allowed. The Tribunal directed proper opportunities for the assessee to be heard. The judgment was pronounced on 23.6.2023.
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