9911796707
TMI Blog2011 (12) TMI 161X X X X Extracts X X X X X X X X Extracts X X X X ..... sp;3. The following contentions of ld. AO/ld. TPO, amongst others, are bad in law and on the facts and circumstances of the case: (a) Extending interest free loans to associate enterprise was an entirely separate transaction which was not in conjunction with the main activity of software development and hence merited a separate analysis. (b) The loan was not given from the funds received from ITG Investments (a company which has invested money in the appellant company). (c) The method adopted by the appellant to justify the arm's length price i.e. Transactional Net Margin Method is not justified. 4. The ld. AO has erred in law by not providing an opportunity of being heard to the appellant before passing the order of assessment on the basis of Arm's length price determined by the ld. TPO. 5. The ld. TPO and the ld. AO has erred in law and in the facts and circumstances of the case in applying the Transfer Pricing provisions mechanically and without appreciating the facts and circumstances of the case. 6. The ld. AO and the ld. CIT(A) has erred in calculating deduction u/s 10B of the Act. They have erred in law and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, the assessee has inferred that no external comparable Uncontrolled Price was available for benchmarking this transaction and thus, it proceeded to apply Transactional Net Margin Method (TNMM) to determine the arm's length basis of this loan. The detailed discussion on this has been given in page 28 of the Transfer Pricing Report. The assessee has further argued that this loan would have fetched on interest of 10% as per the lending rate authorized by the Reserve Bank of India. The assessee has used overall TNMM in which this notional interest has been factored in the software development income. The notional amount of interest of Rs. 31.51 lacs (page xxxi of the TP report) has been deducted from the Software development income of Rs. 16.64 crores. The operating expenses of the assessee during the year were Rs. 14.91 crores. The net operating margin ratio after deduction of the notional interest element was higher than the average net margins of the comparable. Accordingly, the assessee has concluded that the interest free loan given to its subsidiary was at arm's length. On analysis of the transactions it was observed that extending of the interest free loans to the AE was an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used in the form of a loan would have to be forgone by the assessee. Under the arm's length conditions, i.e. if there is no relation between the two persons other than the normal business relation, no person will give loan without charging any interest. Whenever, a person advances a loan to other person, it forgoes its income which it would have earned if the same amount would have been invested in some other financial instrument or deposit. Besides, foregoing the income, it undertakes the risk of loosing the entire amount if the borrower defaults in repayment of loan. Under the arm's length condition no person would undertake such a big risk without expecting any return. Secondly, on an analysis of the financial transactions of the assessee, it was observed that the amount received from the Singapore based venture capital fund has been received in the F.Y. 2000-01. The Singapore based company ITG Investment had contributed an amount of USD 7 million as share application money. A major part of this share application money amounting to Rs. 32.61 crore remained invested in the form of FDRs as in the beginning of the financial year. The assessee had exclusive rights on this money and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to reject the TPO's report and proceed to still determine the ALP by himself." (iii) Further on going through the case records, I find that the TPO has given the report dated 18.3.05 while the assessment was made u/s 143(3) vide order dated 29.03.2005. Thus, there was difference between the TPO report and the assessment order for 11 days. Further, I find that the representative of the assessee appeared before the AO on 23.03.05 and 29.03.05 i.e. after data of TPO report and date of assessment and filed certain details before the AO. (iv) Though the record does not speak, whether the AO has given any specific opportunity with reference to TPO report dated 18.3.2005, yet the copy of TPO's report was marked to the assessee and the representative of the assessee appeared twice before the AO after the receipt of TPO's report. Hence, the assessee was fully aware about addition recommended by the TPO and it had sufficient opportunity to file the objection before the AO, if it has any grievance against the TPO's report. Thus, there was default from both the sides, i.e. first the AO failed to provide the specific opportunity with reference to TPO report, on the other hand th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the assessment order merely on the ground that no specific opportunity with reference to TPO's report dated 18.3.05 was provided. Moreover, having co-terminus power with the AO, I am going to consider the appellant's objection on merit which will amount to proper opportunity to the appellant and meet out the principle of natural justice, if at all not followed by the AO, in respect of the TPO's report. (ix) In respect of merit of the case, I find that the appellant has provided interest free loan amounting to Rs. 7,39,16,850/- to its "Associated Enterprises (AE) situated in USA and used Transactional Net Margin Method (TNMM) to bench mark the international transactions. In this regard, the TPO observed, "that extending of the interest free loans to the AE was an entirely separate transaction which was not in conjunction with the main activity of software development and hence merited a separate analysis." Considering the fact of the case, the TPO in his report dated 18.3.05 further observed, "under arm's length condition i.e. if there is no relation between the two persons other than the normal business relation no person will give loan without charging any interest". &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 relating to Transfer Pricing are decided against the appellant." 5. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR on behalf of the assessee while carrying us through the impugned orders and the findings of the TPO contended that the ld. CIT(A) was not justified in upholding the addition, the amount having been advanced to wholly owned subsidiary in USA and the transaction was exceptional in nature. Though the cost of funds so advanced was factored in determining the ALP of transactions of sales made to the AE, no separate addition should be made in view of certain exceptional circumstances since the subsidiary was facing financial crunch. To a query by the Bench, the ld. AR admitted that the transaction of advancing of loan to AE was an independent transaction and while making transfer pricing study, the assessee could not identify any uncontrolled transaction. While relying on the decision dated 20th May, 2011 of the of Chennai Bench of the ITAT in the case of Shiva Industries & Holdings Ltd. in IT Appeal No. 2148/Mad./2010 for the A.Y. 2006-07, the ld. AR further pointed out that in the said decision LIBOR rates were consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain domestic borrowings of the assessee. On appeal, the Tribunal observed that the cost incurred by the assessee was not a relevant consideration under the CUP method and held that it was irrelevant whether the loans were advanced out of own funds or out of borrowed funds and whether the interest free loan were commercially expedient for the assessee or not. However, the Tribunal held that since the transaction was of lending in foreign currencies to its foreign subsidiaries, the comparable transaction should be foreign currency lending between unrelated parties. Since, the assessee had a foreign currency loan from a bank, it held that the rate of lending by the bank would be an appropriate comparable, irrespective of whether such funds were actually used for lending monies to the subsidiaries. On this basis, the Tribunal directed the TPO to recompute the ALP considering the rate at which the assessee had borrowed in foreign currency from the bank. In the light of aforesaid view taken by a co-ordinate Bench and considering the facts and circumstances of the case, we are of the opinion that the assessee, in the instant case, was required to comply with the provisions of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to its subsidiary by the assessee, we consider it fair and appropriate to vacate the findings of the ld. CIT(A) and restore the matter to the file of the AO for fresh adjudication with the directions to recompute the ALP of the aforesaid international transaction in the light of our aforesaid observations, following CUP method, keeping in view various judicial pronouncements, including those referred to above and of course, after allowing sufficient opportunity to the assessee. Since onus is on the assessee to establish ALP of the international transaction, the assessee shall also provide all necessary relevant inputs for establishing ALP of the transaction in accordance with CUP method. With these directions, ground nos. 1 to 5 in the appeal are disposed of. 8. The next ground no. 6 relates to computation of deduction u/s 10B of the Act. During the course of assessment proceedings, the AO noticed that the assessee claimed deduction u/s 10B of the Act on its entire business income in the original return. However, in the revised return, the assessee restricted its claim to those units which earned business profit and carried forward loss of unit having business loss. While referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the 'total income' of the assessee, which means that the losses first from other units shall be set off from the profit of first unit of Gurgoan and the deduction shall be allowed on the balance income, i.e. the net income which works out after setting off the loss of other units. (v) As regards arguments based on explanatory note and CBDT Circular about the allowability of deduction from the profit of the business of the undertaking, I find that it may be applicable in case where the assessee was doing different types of business in different undertaking. On the contrary, in the appellant's case I find that all the units are doing the same nature of business and deriving income from export of software. In this situation, the argument of ld. AR for claiming deduction u/s 10B from the positive profit of one unit and claiming losses of other units to be carried forward for setting off in subsequent years is not tenable. (vi) Further, I do not find substance in the arguments that sec. 10B(c)(ii) permits the assessee to carry forward the losses incurred by remaining four units to be set off in subsequent years before setting off such losses from the positive income deri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was held that the assessee entitled to deduct u/s 10B in respect of profits of the eligible units while the loss sustained by the four units could be set off against the normal business income. On the other hand, ld. DR relied upon the decision in the case of CIT v. Patspin India Ltd. [2011] 15 taxmann.com 122 (Ker.) and CIT v. Himatasingike Seide Ltd. [2006] 286 ITR 255/156 Taxman 151 (Kar.). 11. We have heard both the parties and gone through the facts of the case as also the afore-cited decisions relied upon by both the parties. The extant provisions of sec. 10B(1) of the Act provide for deduction of such profits and gains as are derived by a hundred per cent. export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer, software, as the case may be from the total income of the assessee. Indisputably, each of the five unit is 100% EOU and carry on the business of computer software. The assessee in its revised return claimed deduction of profits of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. DR in the case of Petspin India Ltd. (supra), following the view taken in Himatasingike Seide Ltd. (supra), we are of the opinion that the said decision is not applicable to the facts of the instant case since in the cited decisions the issue related to of set off of unabsorbed depreciation brought forward u/s 32(2) of the Act. The Hon'ble High Court while referring to provisions of sec. 28 to 43D of the Act observed that business profit has to be first determined based on sections 32 to 43D of the Act as provided u/s 29 and it is with reference to the profits so determined, deduction eligible u/s 10B(4) has to be computed. Such are not the facts and circumstances before us since the issue before us relates to deduction u/s 10B(4) of the Act in respect of each unit separately without setting of losses of other units. Therefore, reliance on the cited decision is misplaced. 13. In Honeywell International India (P.) Ltd. v. Dy. CIT [2008] 26 SOT 503 (Delhi), the ITAT allowed set off of loss of amorphous unit, which was otherwise eligible for deduction u/s 10A of the Act, against the profit of other units as per sec. 70 of the Act. 14. Since the lower authorities did not have th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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