2014 (8) TMI 64 - AT - Income Tax

Transfer Pricing Adjustment Income from international transactions Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the assessee was justified in undertaking internal bench marking analysis on standalone basis by placing on record working of operating profit margin from international transactions with AEs and transactions with unrelated parties undertaken in similar functional and economic scenario, and the same should be the basis for determination of arm s length price in respect of international transactions undertaken with the associated enterprise - the matter is remitted back to the AO for fresh adjudication and for the purpose of determining the arm s length price in respect of the international transactions undertaken with the associated enterprise by making internal comparison of profitability form the international transactions with associated enterprise and profitability from the international transactions with unrelated parties after allocating respective revenues and expenses to both the segments Decided in favour of Assessee. GE-GDC different unit or the extension of existing STP Held that - Assessee company is engaged in the activities of software development and related services - The software related business is being carried out from the STP Unit and the exemption u/s 10A has been claimed - new STP Unit was treated by the assessee to be an independent unit for the purpose of exemption claimed u/s 10A of the Act AO has not accepted the claim of the assessee by holding that the new unit is nothing but an extension of the existing unit and not entitled to separate deduction of exemption u/s 10A - as decided in assessee s own case for the earlier assessment year, it has been held that the new unit cannot be treated to be as one and same unit with the existing unit for the purpose of computing deduction u/s 10A of the Act Decided in favour of Assessee. Miscellaneous income part of business or income from other sources Held that - The notice period pay was to be considered as income derived by the eligible undertaking and as such notice period pay would go to reduce the expenses on account of salary and the real nature of the transaction will not have any affect on the income derived by the assessee from the eligible undertaking - because the assessee instead of crediting the notice period pay to the salary account and reducing the salary expenses, had shown the amount separately in the profit & loss account, that book-entry by itself would not change the real nature of transaction and it was accordingly held that the recovery of notice pay represents income derived from the industrial undertaking thus, the amount received by the assessee towards notice period is to be treated as income derived from the eligible undertaking and deduction u/s 10A shall be allowed Decided in favour of Assessee. Ad-hoc disallowance of interest expenses - Interest paid on short term loans which are invested in acquisition of fixed assets shall be capitalized along with fixed assets or not Held that - The interest expenditure on the utilization of borrowed funds for the acquisition of new assets, from the date of its acquisition till the date when the asset is put to use, is to be disallowed - the interest paid on the capital borrowed for acquisition of an asset for extension of existing business, shall not be allowed as deduction, from the date on which the capital was borrowed for acquisition of the asset till the date on which the asset was first put to use - no efforts has been done by the AO to find out the date on which the assessee borrowed the fund for acquisition of asset in the relevant AY and we also find that no attempt has been made by the AO to find out on which date the asset thus procured with the said borrowed fund have been put to use - Only after the dates has been found out then only one can compute the disallowance as prescribed by the proviso to section 36(1)(ii) of the Act thus, the matter is remitted back to the AO with a direction to AO to find out the date on which the assessee borrowed the fund for acquisition of asset and also to find out on which date the asset for extension of business thus procured has been put to use Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Treatment of GE-GDC unit for exemption under Section 10A
3. Classification of Miscellaneous Income
4. Disallowance of Interest Expenses

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue revolves around the Transfer Pricing Adjustment, where the Assessing Officer (AO) made an adjustment of Rs. 34,25,12,827 to the income of the assessee due to differences in the Arm's Length Price (ALP) of international transactions. The assessee applied the Transactional Net Margin Method (TNMM) using internal comparables, comparing operating profit margins from related and unrelated parties. The AO and Transfer Pricing Officer (TPO) rejected this internal benchmarking, favoring external comparables, resulting in a proposed adjustment of Rs. 49.28 crores, later revised to Rs. 34,25,12,827 after considering working capital adjustments.

The Tribunal, referencing previous cases and OECD guidelines, emphasized the preference for internal comparables over external ones. It was noted that the internal benchmarking was duly audited and certified by a Chartered Accountant. The Tribunal directed the AO/TPO to re-examine the segmented profitability and determine the ALP based on internal comparisons, as done in previous assessment years (2006-07 to 2008-09).

2. Treatment of GE-GDC Unit for Exemption under Section 10A:
The second issue concerns whether the GE-GDC unit is a new independent unit or an extension of an existing Software Technology Park (STP) unit for the purpose of claiming exemption under Section 10A. The AO treated the new unit as an extension of the existing unit, denying separate exemption.

The Tribunal, referencing its previous orders for assessment years 2003-04 to 2008-09, held that the new unit, established with substantial fresh investment and registered separately, should be considered an independent unit. Consequently, the Tribunal directed the AO to allow the deduction under Section 10A for the new unit.

3. Classification of Miscellaneous Income:
The third issue pertains to the classification of miscellaneous income of Rs. 43,77,370, which the AO treated as "income from other sources," thereby disallowing the Section 10A deduction. The assessee argued that this amount was received as notice pay from employees and should reduce the salary cost, thus qualifying for the Section 10A deduction.

The Tribunal, referencing its decisions in previous years, held that notice period pay should be considered as income derived from the eligible undertaking, allowing the Section 10A deduction accordingly.

4. Disallowance of Interest Expenses:
The final issue involves the disallowance of Rs. 1,75,50,000 in interest expenses. The AO capitalized this interest, arguing that short-term loans were used for acquiring fixed assets. The assessee contended that the interest should not be capitalized post the assets being put to use.

The Tribunal noted that interest on borrowed capital for asset acquisition should only be capitalized for the period between borrowing and the asset being put to use, as per Section 36(1)(iii). Since the AO did not ascertain the specific dates of borrowing and asset utilization, the Tribunal remanded the issue back to the AO to determine these dates and appropriately capitalize the interest for the relevant period. Post this period, the interest should be allowed as a deduction.

Conclusion:
The Tribunal directed the AO/TPO to re-evaluate the Transfer Pricing Adjustment using internal comparables, acknowledged the GE-GDC unit as a new independent unit eligible for Section 10A exemption, classified notice pay as business income eligible for Section 10A deduction, and remanded the interest expense issue for re-evaluation based on specific borrowing and asset utilization dates. The appeal was partly allowed for statistical purposes.