2013 (1) TMI 395 - AT - Income Tax

Notional interest computed on account of a delay in realization of the dues from AE added back for the purposes of arriving at the arm s length pricing u/s 92CA(3) - DR stated that the receivable from the AE is an international transaction within the meaning of section 92B - Held that - Not in dispute that the impugned addition was made prior to the amendment made u/s 92B of the Act by inserting Explanation by the Finance Act, 2012 w.r.e.f. 1-4-2002 and all the decisions of the Tribunal relied on by both the parties are prior to the said amendment. This being so and keeping in view that the assessee has taken certain new plea at the stage of rejoinder reiterating that sale value and interest cannot be regarded as a separate transaction, relied on the second part of the decision in Nimbus Communications Ltd. s case (2010 (1) TMI 921 - ITAT, MUMBAI) thus in the interest of justice, the matter should go back to the file of the A.O. to decide the same afresh - grounds of assessee partly allowed for statistical purpose. Setting off the past-unabsorbed losses prior to calculating exemption u/s 10A - Held that - The issue stands covered in favour of the assessee by the recent decision of The Commissioner of Income Tax-10 Versus Black & Veatch Consulting Pvt.Ltd. 2012 (4) TMI 450 - BOMBAY HIGH COURT Section 10A is a provision which is in the nature of a deduction and not an exemption - the deduction under Section 10A has to be given effect to at the stage of computing the profits and gains of business - Section 80B(5) defines for the purposes of Chapter VI-A gross total income to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter - against revenue. Disqualification of interest income, directly sprang from the business operations, from exemption u/s 10A - Held that - Following the consistent view of the Tribunal as decided in Jewelex International (P.) Ltd. s case (2010 (9) TMI 906 - ITAT MUMBAI), Greytrix (India) (P.) Ltd. case (2013 (1) TMI 381 - ITAT MUMBAI) & Tropicate Textiles (P.) Ltd. 2012 (7) TMI 57 - ITAT, MUMBAI to hold that the assessee is entitled to deduction u/s 10A of the interest income of Rs. 25,002/- on the FD pledged with the bank on account of margin money. As regards the interest on NSC Rs. 248/- and interest on loan to employees Rs. 135,583/- there is no nexus between the interest income and the income derived by the undertaking of the assessee in terms of the provisions of section 10A, therefore, the A.O. was justified in treating the same as income from other sources not eligible for deduction u/s 10A - partly in favour of assessee.

Summary

Issues Involved:
1. General grounds.
2. Disallowance under Section 14A.
3. Addition of notional interest for arm's length pricing under Section 92CA(3).
4. Set off of past-unabsorbed losses before calculating exemption under Section 10A.
5. Bifurcation of interest income for exemption under Section 10A.

Issue-wise Detailed Analysis:

1. General Grounds:
Ground Nos. 1 and 5 were general in nature and rejected due to the absence of any specific plea.

2. Disallowance under Section 14A:
Ground Nos. 2 to 2.4 pertained to the sustenance of disallowance under Section 14A of the Income Tax Act. The assessee's counsel chose not to press these grounds, and consequently, they were rejected.

3. Addition of Notional Interest for Arm's Length Pricing:
The issue revolved around the addition of Rs. 35,561/- as notional interest for arm's length pricing due to delayed realization of dues from an associated enterprise, Medusind Solutions Inc. The Transfer Pricing Officer (TPO) computed this interest based on the average MIBOR rate of 5.68%. The assessee contended that no interest was charged due to a mutual understanding with the AE and that it was a zero-debt company. However, the TPO deemed the delay abnormal and calculated the interest accordingly. The assessee argued that such adjustment did not constitute an international transaction under Section 92B of the Act. The tribunal noted that the amendment to Section 92B by the Finance Act, 2012, which included "receivable from the AE" as an international transaction, was applicable. The tribunal remanded the matter back to the Assessing Officer (A.O.) for fresh consideration in light of the new plea and the amendment.

4. Set Off of Past-Unabsorbed Losses:
Ground No. 4.1 addressed the issue of setting off past-unabsorbed losses before calculating the exemption under Section 10A. The A.O. had set off unabsorbed losses before allowing the deduction under Section 10A. The tribunal referred to the decision of the Hon'ble Bombay High Court in Black & Veatch Consulting (P.) Ltd., which held that the deduction under Section 10A should be given at the stage of computing the profits and gains of business, before the application of provisions of Section 72. Consequently, the tribunal directed the A.O. to allow the deduction under Section 10A before setting off the brought forward unabsorbed losses.

5. Bifurcation of Interest Income:
Ground No. 4.2 involved the bifurcation of interest income for the purpose of exemption under Section 10A. The A.O. had treated the entire interest income of Rs. 2,20,958/- as income from other sources, not eligible for deduction under Section 10A. The tribunal noted that interest on fixed deposits pledged with banks for margin money (Rs. 25,002/-) was eligible for deduction under Section 10A, following the precedent set in Jewelex International (P.) Ltd. However, interest on NSC (Rs. 248/-) and loans to employees (Rs. 135,583/-) were not considered business income and thus not eligible for deduction under Section 10A. The tribunal partly allowed the ground, permitting the deduction for interest on fixed deposits but not for the other interest incomes.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific directions for fresh consideration by the A.O. on the issue of notional interest and the allowance of deduction under Section 10A before setting off unabsorbed losses. The tribunal upheld the bifurcation of interest income, allowing deduction for interest on fixed deposits pledged with banks but not for interest on NSC and loans to employees.