2013 (6) TMI 532 - AT - Income Tax

Claim under section 10A rejected - Held that - Respectfully following the principles laid down in CIT v. EHPT India P. Ltd. 2011 (12) TMI 49 - DELHI HIGH COURT no need to disturb the method of apportionment of expenditure and turnover which were accepted by the AO in the earlier years. The assessee is eligible for deduction u/s 10A and the reason for disallowing entire claim cannot be accepted. Even the DRP was not correct in rejecting the assessee objection stating that the issue is pending before ITAT, the fact of which is not correct. However, in the anxiety of disallowing the entire claim, AO has not examined the apportionment of export turnover and expenses of units therefore matter is restored to the file of the AO to examine the issue of deriving at the profits of eligible unit. In favour of assessee. Reduction of technical fees and satellite link charges from export turnover - Held that - CIT(Appeals) in the assessment year 2005-06 has followed the order of the ITAT while giving relief on satellite charges in the assessment year 2004-05,thus the satellite charges cannot be considered as telecommunication charges so as to exclude from the export turnover - alternate ground that the technical fees and satellite link charges should also be excluded from the total turnover in case they were to be excluded from the export turnover covered in favour of the assessee by various judicial pronouncements. in favour of assessee. Disallowance under section 40(a)(ia)- Held that - Since this issue was crystallised by the order of the ITAT in the same assessment year, the disallowance u/s 40(a)(ia) does not arise, as there is no need to deduct tax on the amount paid to Equant Network Services Ltd. Accordingly the disallowance made by the AO stands deleted. In favour of assessee. Transfer pricing adjustment in respect of ITES services rendered by the assessee - Held that - Since, the assessee was not been given proper opportunity to examine the comparables selected by the Transfer Pricing Officer and as the objections raised by the assessee are not examined or rebutted either by the Transfer Pricing Officer or by the Dispute Resolution Panel and considering the fact that the information obtained by the Transfer Pricing Officer with reference to certain comparables and segmental data was not even made available to the assessee, we are of the opinion that the issue has to be set aside to the file of the Transfer Pricing Officer for determining the arm s length price afresh after providing the information to the assessee which was collected by the Transfer Pricing Officer. In favour of assessee by way of remand.

Issues Involved:
1. Deduction under section 10A of the Income-tax Act.
2. Reduction of technical fees and satellite link charges from export turnover.
3. Disallowance under section 40(a)(ia).
4. Transfer pricing adjustment.
5. Initiating penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Deduction under section 10A of the Income-tax Act:
The assessee's claim under section 10A was disallowed by the Assessing Officer (AO) based on section 10A(4). The assessee, an ITES provider, had two units, one at SEEPZ and another at Vikroli, both in Mumbai. The Vikroli unit qualified for the deduction under section 10A. The AO disallowed the entire claim, arguing that it was not in accordance with section 10A(4). The Dispute Resolution Panel (DRP) upheld this disallowance, citing pending litigation from previous years. However, the Tribunal found that the head-count method for apportioning expenses, consistently followed by the assessee, was reasonable and had been accepted in previous years. The Tribunal cited the Delhi High Court's decision in CIT v. EHPT India P. Ltd. and concluded that the AO should not have disallowed the entire deduction. The matter was remanded to the AO for re-examination of the apportionment of expenses and turnover.

2. Reduction of technical fees and satellite link charges from export turnover:
The AO reduced technical fees and satellite link charges from the export turnover, which affected the deduction under section 10A. The DRP declined to intervene, stating that the issue was pending before the Tribunal. The Tribunal noted that the technical fees issue was not pending and had been resolved in favor of the assessee in previous years. The Tribunal upheld the assessee's claim that the technical fees should not be excluded from the export turnover as the services were rendered in India. Regarding satellite link charges, the Tribunal followed its earlier decision in favor of the assessee, holding that these charges were not telecommunication charges attributable to delivery outside India and should not be excluded from the export turnover.

3. Disallowance under section 40(a)(ia):
The AO disallowed payments made to Equant Network Services Ltd., treating them as fees for technical services liable for tax deduction at source. The DRP upheld the AO's decision. However, the Tribunal referred to its earlier decision in the same assessment year, which concluded that the payments were not liable for tax deduction at source as they were not in the nature of royalty or fees for technical services. Consequently, the disallowance under section 40(a)(ia) was deleted.

4. Transfer pricing adjustment:
The AO referred the matter to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of international transactions. The TPO rejected most of the comparables selected by the assessee and made adjustments based on new comparables, leading to an addition of Rs. 4.97 crores. The DRP upheld the TPO's adjustments. The Tribunal found that the TPO had not provided the information obtained under section 133(6) to the assessee, violating the principles of natural justice. The Tribunal remanded the matter to the TPO for fresh determination of the ALP after providing the necessary information to the assessee and considering the assessee's objections.

5. Initiating penalty proceedings under section 271(1)(c):
The Tribunal noted that the issue of initiating penalty proceedings under section 271(1)(c) did not arise for consideration at this stage and rejected the ground.

Conclusion:
The appeal was partly allowed, with the Tribunal remanding the issues related to section 10A deduction and transfer pricing adjustment to the AO and TPO, respectively, for fresh examination. The disallowance under section 40(a)(ia) was deleted, and the reduction of technical fees and satellite link charges from export turnover was reversed. The initiation of penalty proceedings under section 271(1)(c) was not considered at this stage.

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