2015 (12) TMI 296 - AT - Income Tax

Re-computation of the arm s length price of the assessee s international transaction in respect of Information Technology Enables Services ( ITES ) - main argument of the Ld. Counsel was that since the mark-up MAP has concluded the Arm s Length mark-up at 14.38% for 96% of the total transactions done with the AE s, then without prejudice to the other submissions, for remaining transactions of 4% also same treatment should be given, same bench marking should be done, and ALP mark-up of 14.38% should be applied, more particularly, because of the fact that the AO or DRP have not made any distinction between the US entities and non-US entities - Held that - letter dated 9th April 2015 in Fno. 480/13/2010-FTD-1 has been issued in the case of the assessee company under MAP proceedings for A.Y.2006-07 to 2010-111 by the DCIT(OSD), APA-I on behalf of the Foreign Tax and Tax Research Division -I, Central Board of Direct Taxes, New Delhi wherein it has been confirmed that for A.Y.2006-07, for US related transactions, the margin has been determined at 14.38% as against margin of 21.58%, as was determined by the Transfer pricing officer (TPO). It has been further clarified by way of note in the said letter that apportionment between US and non-US ALP and TP adjustment had been margined out by the APA section (of FT and TR Division) on the basis of US and non-US revenue. It is further noted from the perusal of the annual accounts of the assessee company that aggregate turnover has been shown at ₹ 47,30,521/-, and no distinction has been made between the US and non-US transactions. Similarly in the orders passed by the lower authorities also no such distinction as ever been made by any of the authorities. Under these circumstances, in our considered view, whatever margin has been determined for the 96% of the transactions, same margin should be determined for the remaining 4% transactions as well. It is worth noting that, even before us, no distinction in facts or nature of transactions has been brought out on record. Therefore, in our considerate view, mark-up of 14.38% should be determined for the remaining 4% transactions pertaining to non-US entities as well. Exemption u/s 10A - lower authorities held that unabsorbed depreciation has emanated from exempt unit and accordingly exemption u/s 10A of the Act should be computed after setting off of the unabsorbed depreciation - Held that - Respectfully following the judgment of coordinate Bench in assessee s own case we direct the AO to allow deduction u/s 10A before setting off of the brought forward unabsorbed depreciation. Interest income on deposits with banks - chargeable to income tax under the head Income from other Sources as against the assessee s claim that such interest income is chargeable to tax under the head profit and gains of business of profession - Held that - Respectfully following orders of coordinate bench of earlier years in assesee s own case, we hold that interest income, would be assessable under the head income from business. Since the income from interest has been treated as part of business income, it shall be included for determining the amount of total turnover of the business and accordingly the benefit of deduction u/s 10A shall be provided on the amount of interest income proportionately, in terms of mechanism provided in subsection (4). In other words the amount of profit eligible for deduction u/s 10A shall be the amount which bears to the profits of the business of undertaking, the same proportion as export turnover bears to the total turnover the business of the undertaking of the assessee. The AO is directed to grant the benefit of deduction u/s 10A by re-computing the same in terms of our directions as given above. MAT calculation - assessee s claim rejected that book profit u/s 115JB has to be computed inter alia by reducing the amount of interest income on deposits of ₹ 2,05,03,390/- credited to profit and loss account, to which provisions of section 10A apply, in terms of clause (ii) to Explanation 1 to Section 11JB - Held that - Respectfully following the judgment of Coordinate Bench in assessee s own case, we hold that for the purpose of computing to profit u/s 115JB of the Act, income has to be computed as per the schedule VI of the Companies Act and not on the basis of provisions of Income Tax Act.

Issues Involved:
1. Addition to income by re-computing the arm's length price (ALP) of international transactions.
2. Setting off unabsorbed depreciation against exempt income under Section 10A.
3. Taxability of interest income on deposits and its eligibility for deduction under Section 10A.
4. Computation of book profit under Section 115JB.
5. Deduction of business expenditure disallowed as prior period expenditure.

Issue-wise Detailed Analysis:

1. Addition to Income by Re-computing the ALP of International Transactions:
The assessee challenged the addition of Rs. 39,30,43,000 to its income by re-computing the ALP for ITES provided to its AE, JP Morgan Chase & Co., US (JPMC). The assessee accepted the MAP conclusion for Rs. 37,65,35,194 at an arm's length mark-up of 14.38%, revising the grounds of appeal to cover only the remaining Rs. 1,65,07,806. The Tribunal noted that no distinction was made between US and non-US transactions by lower authorities and decided that the same mark-up of 14.38% should be applied to the remaining 4% transactions. Thus, the assessee received partial relief.

2. Setting Off Unabsorbed Depreciation Against Exempt Income Under Section 10A:
The assessee contested the setting off of unabsorbed depreciation of Rs. 2,29,59,653 against exempt income under Section 10A. The Tribunal referred to its order for A.Y. 2005-06 and the decision of the Hon'ble Bombay High Court in CIT vs. Black And Veatch Consulting Pvt. Ltd., which held that deduction under Section 10A should be allowed before setting off brought forward business loss and unabsorbed depreciation. The Tribunal directed the AO to allow the deduction under Section 10A before setting off unabsorbed depreciation.

3. Taxability of Interest Income on Deposits and Its Eligibility for Deduction Under Section 10A:
The assessee argued that interest income on deposits should be taxed under "profits and gains of business or profession" and be eligible for deduction under Section 10A. The Tribunal referred to its orders for A.Ys. 2004-05 and 2005-06, and the Hon'ble Karnataka High Court's decision in CIT vs. Motorola India Electronics (P) Ltd., which supported the assessee's claim. The Tribunal held that interest income should be treated as business income and eligible for deduction under Section 10A, proportionately computed as per sub-section (4) of Section 10A.

4. Computation of Book Profit Under Section 115JB:
The assessee claimed that book profit under Section 115JB should be computed by reducing interest income on deposits to which Section 10A applies. The Tribunal referred to its order for A.Y. 2005-06 and decisions in Moser Baer India Ltd. vs. DCIT and Ajanta Pharma Ltd. vs. CIT, which held that for computing book profit under Section 115JB, income should be computed as per the Companies Act, not the Income Tax Act. The Tribunal directed the AO to follow this principle.

5. Deduction of Business Expenditure Disallowed as Prior Period Expenditure:
The assessee contended that business expenditure disallowed as prior period expenditure for A.Y. 2007-08 should be allowed notionally for A.Y. 2006-07. The Tribunal noted that the DRP had already directed the AO to examine and allow such expenditure if it qualified under Section 37. The Tribunal reinforced this direction, asking the AO to re-examine the issue and adjudicate after granting the assessee a proper hearing.

Conclusion:
The appeals were partly allowed, providing relief to the assessee on several grounds, including the re-computation of ALP, setting off unabsorbed depreciation, taxability and deduction of interest income, and computation of book profit. The Tribunal directed the AO to follow its orders and the DRP's directions for proper adjudication.

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