Income Tax Appellate Tribunal - Mumbai
Trigyn Technologies Ltd, Mumbai vs Assessee on 20 April, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "K", MUMBAI
BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER
AND SHRI AMIT SHUKLA, JUDICIAL MEMBER
ITA No. 1986/MUM/2012
(Assessment Year : 2005-06)
M/s. Trigyn Technologies Limited,
Unit 27A, SDF-1,SEEPZ, Andheri (E),
Mumbai 400 096
PAN:AAACL2065K ... Appellant
Vs.
The ACIT 11(3)(1),
Room No.427, 4th Floor,
Aaykar Bhavan,
M.K.Road, Mumbai. .... Respondent
ITA No. 3012/MUM/2012
(Assessment Year : 2005-06)
The ACIT 11(3)(1),
Room No.427, 4th Floor,
Aaykar Bhavan,
M.K.Road, Mumbai. ...... Appellant
Vs.
M/s. Trigyn Technologies Limited,
Unit 27A, SDF-1,SEEPZ, Andheri (E),
Mumbai 400 096
PAN:AAACL2065K ....Respondent
Assessee by : Shri Vijay Mehta
Revenue by : Shri N.K.Chand
Date of hearing : 30/03/2016
Date of pronouncement : 20/04/2016
2
ITA No.1986& 3012/MUM/2012
(Assessment Year : 2005-06)
ORDER
PER G.S. PANNU,AM:
The captioned cross-appeals filed by the assessee and Revenue pertaining to A.Y. 2005-06 are directed against an order passed by Ld. CIT(A)-15, Mumbai dated 27/02/2012, which in turn arises out of an order passed by Assessing Officer under section 143(3) of the Income Tax Act, 1961 ( in short the Act) dated 05/01/2011.
2. Insofar as the appeal of the assessee is concerned, the Grounds of appeal raised read as under :
"Following grounds of appeal are without prejudice to each other:
1. The learned CIT(A) has erred in law and on facts in confirming the disallowance of Rs.50,50,800/- made by the Assessing Officer treating the same as capital expenditure. The Id. CIT(A) ought to have deleted the said disallowance as the expenses were incurred for obtaining advisory services so as to facilitate the restructure of bank debts and, therefore, for the purposes of the business.
2. The learned CIT(A) has erred in law and on facts in confirming the disallowance of Rs.10,00,000/- incurred by the appellant in connection with issuance of shares and, as such, claimed as share issue expenses.
3. Without prejudice to the above, the Id. CIT(A) ought to have directed the Assessing Officer to allow the aforesaid expenditure of Rs. 10,00,000/ - u/s. 35D of the Act.
4. The learned CIT(A) has erred in law and on facts in sustaining the addition of Rs.15,35,03,849/- u/s. 28(iv) of the Act, representing the waiver of the outstanding principal amount of loan. The Id. CIT (A) ought to have considered that the loan was obtained and utilized for acquisition of capital assets and, therefore, not liable to be taxed either u/s. 28(iv) or u/ s. 41(1) of the Act.
5. The learned CIT(A) has erred in law and on facts in confirm the addition of Rs.3,25,00,000/- out of the amount of Interest waived.
6. The learned CIT(A) has erred in law and on facts in upholding the action of the Assessing Officer in bringing to tax Rs. 34,61,28,850/- as book profit u/s. 115JB of the Act by holding that amount of waiver of principal and interest on loan are not income generated out of SEZ business activity.
7. The learned CIT(A) has erred in law and on facts in sustaining the action of the Assessing Officer in not allowing the benefit of set off of unabsorbed depreciation against income from other sources.3
ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06)
8. The learned CIT(A) has erred in law and on facts in confirming the TNMM method adopted by the TPO/AO in preference to the benchmarking done by the appellant following CUP method and in virtually approving the computation of ALP made by the TPO / AO subject to exclusion of three companies."
3. Further, the Ground of appeal raised in the cross appeal by the Revenue reads as under :
"1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in allowing the benefit of -5% relief to the assessee as per proviso to Sec.92C(2) of the Income Tax Act, 1961, without appreciating that the same is not a standard deduction to all the assesses under the Income Tax Act, 1961"
4. Before proceeding to adjudicate the respective Grounds of appeal, it would be appropriate to note the background of the case. The assessee is a company incorporated under the provisions of the Companies Act, 1956 and is engaged in the business of software development and rendering technical services outside India in the field of computer software. For the assessment year under consideration, assessee company filed a return of income declaring an income of Rs.8,43,41,285/- which was set-off against brought forward business losses and ultimately the taxable income was declared at Nil. During the year under consideration, assessee had also entered into certain international transactions with its associated enterprise abroad within the meaning of Sec. 92B of the Act and consequently the Assessing Officer also took into consideration the determination of arms length price of such international transactions determined by the TPO in an order passed u/s 92CA(3) of the Act. In the assessment finalized u/s 143(3) of the Act, the Assessing Officer determined the total income at Rs.31,17,15,420/- under the normal provisions of the Act, after making certain additions/disallowances. Assessee-company carried such 4 ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06) additions/disallowances in appeal before the CIT(A) who allowed partial relief. Assessee is in further appeal before us on the aforestated Grounds of appeal in respect of the reliefs not granted by the CIT(A) whereas Revenue in its appeal has assailed some of the reliefs allowed by the CIT(A).
5. In this background, the rival counsels have been heard and the relevant material perused. We may first take up the Grounds of appeal raised by the assessee in seriatim. By way of Ground of appeal no. 1, assessee-company has assailed the action of the CIT(A) in sustaining a disallowance of Rs. 50,50,800/- representing expenditure incurred by the assessee for obtaining advisory services in connection with the restructuring of bank debts. Such expenditure was claimed as a revenue expenditure which has been disallowed by the Assessing Officer treating the same as capital expenditure.
6. In this context, relevant facts are that assessee paid a sum of Rs.50,50,800/- to M/s. Quartet Financial Services Pvt. Ltd. in respect of advisory services rendered by them with respect to restructuring of bank debt, identification of investor, raising equity capital and structuring of such transactions. Justifying the payment as revenue expenditure, the stand of the assessee before us as well as before the lower authorities is on the following lines. It has been explained that assessee had an outstanding loan liability from Global Trust Bank carrying heavy interest cost which was affecting its profitability adversely. With a view to reducing interest cost, assessee-company made a decision to restructure the debts or identify a strategic investor 5 ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06) who could take over the debts of the assessee-company. For the said purpose, Quartet Financial Services Pvt. Ltd. was appointed to come up with proposals which would enable assessee to achieve the said purpose and accordingly, a fee of Rs.50,50,800/- was paid. The ld. Representative for the assessee pointed out before us that it was because of the proposals given by the said consultant that assessee was able to restructure its interest bearing debts which resulted in reduced interest costs.
7. The Revenue, on the other hand, pointed out that the expenditure has been incurred on account of capital restructuring and therefore such expenditure was to be considered as a capital expenditure following the ratio of the judgment of the Hon'ble Supreme Court in the case of Brooke Bond (India) Ltd. vs. CIT,225 ITR 798 (SC).
8. We have carefully considered the rival submissions. Insofar as the fact-situation is concerned, the invoice raised by Quartet Financial Services Pvt. Ltd., a copy of which is placed at pg. 1 of the Paper Book, reveals that fee of Rs.50,50,800/- was paid for services in connection with advice on the restructuring of bank debts, identification of investor, raising equity capital in the company and structuring of such transactions. At pages 14 to 17 of the Paper Book is placed a copy of the mandate letter of the said consultant, which reveals the scope and methodology of the services provided to the assessee. The aforesaid material brings out that the fee has been paid to the said consultant primarily for rendering advice to reduce the interest burden of the 6 ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06) assessee-company by, inter alia, exploring the possibility of identifying a strategic investor/lender. It is a settled proposition that payments made to consultants for obtaining professional services in connection with debt restructuring with banks, etc. is a revenue expenditure within the meaning of Sec. 37(1) of the Act and such proposition is supported by the judgment of the Hon'ble Gujarat High court in the case of CIT vs. Gujarat State Fertilizers & Chemicals Ltd.,358 ITR 323 (Guj), a decision which was relied upon by the ld. Representative for the assessee in the course of the hearing. However, the ld. Representative for the assessee, quite fairly conceded that insofar as the proportion of fee relatable to the restructuring and raising of equity share capital was concerned, such expense would fall for disallowance as per the ratio of Brooke Bond (India) Ltd. (supra). In this context, having regard to the entirety of facts and circumstances of the case, in our view, it would be in fitness of things that 10% of the expenditure, i.e. Rs.5,05,080/- be disallowed and balance of the expense be allowed as a revenue expenditure. In our considered opinion, the aforesaid conclusion is quite justified inasmuch as the entirety of the expenditure cannot be considered as a capital expenditure by applying the judgement of the Hon'ble Supreme Court in the case of Brook Bond India Ltd. (supra) because factually speaking the fee is paid primarily for restructuring of bank debts and not entirely for raising of the equity. Therefore, we set- aside the order of CIT(A) and direct the Assessing Officer to restrict the disallowance to Rs.5,05,080/- and delete the balance. As a consequence, insofar as Ground of appeal no. 1 is concerned, assessee partly succeeds.
7ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06)
9. By way of Ground of appeal nos. 2 & 3, assessee-company has assailed the disallowance of Rs. 10,00,000/- incurred in connection with issuance of shares. The facts which emerge from the perusal of the orders of authorities below reveal that the impugned expenditure has been incurred in connection with increase in authorised share capital of the assessee-company and raising of share capital. The said expenditure, in our view, has been rightly disallowed following the ratio of the judgment of the Hon'ble Supreme Court in the case of Brook Bond India Ltd. (supra). Such expenditure is also not covered in the scope of Sec. 35D of the Act, as fairly conceded by the ld. Representative for the assessee. Thus, assessee has to fail insofar as Ground of appeals nos. 2 & 3 are concerned. We hold so.
10. The next issue is by way of Ground of appeal no. 4 which relates to the action of the CIT(A) in sustaining the addition of Rs. 15,35,03,849/- u/s. 28(iv) of the Act representing waiver of the outstanding principal amount of loan. In this context, the brief facts are that in an earlier financial year of 2000-01 assessee had obtained credit facilities from Global Trust Banks Ltd., which inter-alia, included raising of Term loans of Rs.15 crores and Rs.24 crores totalling to Rs.39 crores. Upto the year under consideration assessee had repaid certain amounts in respect of the above loans on account of principal as well as interest thereof. During the period under consideration, the total principal amount of loan outstanding was Rs.26.60 crores comprising of Rs.21.60 crores on account of Term loans and Rs.5 crores in respect of the redeemable Preference Share Capital. Further, cumulative interest amount outstanding was Rs.19.26 crores. Assessee-company entered 8 ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06) into a One Time Settlement (OTS) with the lending bank whereby it paid a sum of Rs.11.25 crores representing repayment of Term loan of Rs. 6.25 crores and redemption of preference share capital of Rs. 5 crores. The balance of Rs.34.61 crores comprising of Rs.15.35 crores on account of outstanding principal amount of loan and Rs.19.26 crores on account of outstanding interest was waived by the bank. Insofar as the waiver of outstanding interest amount of Rs. 19.26 crores is concerned, there is no dispute as an such amount was offered for taxation by way of credit in the Profit and Loss account. The other sum of Rs. 15.35 crores representing waiver of the outstanding principal amount of loan is concerned, assessee asserted that such an amount was a capital receipt not chargeable to tax. The dispute pertains to the aforesaid stand of the assessee inasmuch as according to the Assessing Officer the entire amount of waiver of the outstanding principal loan amount of Rs.15.35 crores represents a cessation of an existing liability and accordingly such amount was treated as a benefit chargeable to tax in terms of Sec. 28(iv) of the Act. The aforesaid stand of the Assessing Officer has been further affirmed by the CIT(A) on the ground that the waiver of principal amount of loan amounting to Rs. 15.35 crores was revenue in nature and thus assessable in terms of Sec. 28(iv) of the Act. In this background, the rival counsels have made their submissions before us.
11. Before us, the Ld. Representative for the assessee has vehemently pointed out that both the authorities below have erred in denying the claim of the assessee by relying on the judgment of the Hon'ble Bombay High Court in the case of Solid Containers Limited vs. 9 ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06) CIT, 308 ITR 417(Bom), which is not applicable to the facts of the present case. The plea set up by the assessee is that the principal amount of loan which has been waived by the bank was indeed utilized for acquisition of a capital asset and, therefore, such waiver of debt is to be seen in the capital field and not in the revenue field so as to be taxed under section 28(iv) of the Act. It was, therefore, contended that the facts of the present case are similar to those in the case of Mahindra and Mahindra Ltd. vs. CIT, 261 ITR 501(Bom) and thus the action of the lower authorities in relying upon the judgment in the case of Solid Containers Ltd. (supra) is liable to be set-aside. In support of the contention that the Term loans raised from the Global Trust Bank have been utilized for acquisition of a capital asset, our attention was invited to the submission made before the lower authorities, which are contained in the respective orders. Apart therefrom, our attention has also been invited to the Paper Book, whereby it is sought to be explained that on receipt of term loan of Rs. 36.00 crores on 01/01/2001, an amount of Rs.34.95 crores was remitted towards acquisition of shares of Applisoft Inc. a Company based abroad. Our attention has also been invited to copies of the foreign remittance certificates evidencing the aforesaid remittances, which have been placed in the Paper Book at pages 3 & 4. Ld. Representative for the assessee pointed out that the aforesaid factual matrix has not disputed by the lower authorities.
12. In this context, the Ld. Departmental Representative for the Revenue reiterated the stand of the income-tax authorities by pointing out that the loan sanction letter of the bank, a copy of which is placed at page 26 of the Paper Book, brings out that the purpose of the loan 10 ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06) was for utilization towards working capital/ acquisition of shares and, therefore, it could not be said that the entire purpose of the loan was for acquiring a capital asset. On this basis, the Ld. Departmental Representative for the Revenue has justified the action of the lower authorities in deciding the issue against the assessee by applying the ratio of the judgment of the Hon'ble Bombay High Court in the case of Solid Containers Limited (supra).
13. In reply, the Ld. Representative for the assessee pointed out that though the loan sanction letter of the bank reflects the purpose of the term loan as "working capital/For acquisition", but ultimately it is the utilization of the loan proceeds which show that the same has been utilized for acquisition of a capital asset, and it has not been used in trading operation. Ld. Representative for the assessee also relied upon the judgment of the Madras High Court in the case of Iskraemeco Regent Ltd. vs. 331 ITR 317(Mad) as also a subsequent judgment of the Hon'ble Delhi High Court in the case of Logitronics P.Ltd. vs.CIT, 333 ITR 386 (Del) in support of his submissions that the waiver of loan in the present case is not taxable under section. 28(iv) of the Act.
14. We have carefully considered the rival submissions. The crux of the controversy before us arises from a One Time Settlement(OTS) entered by the assessee with its bank, whereby upon payment of certain amount, assessee has been allowed waiver of a portion of the principal amount of loan outstanding and interest thereof. The issue regarding the taxability of waiver of interest is not in dispute before us and the only issue before us relates to the taxability of a sum of Rs.15,35,03,849/-, which represented the principal amount of the loan 11 ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06) outstanding, waived by the bank. In principle we are in agreement with the proposition that in the context of waiver of loan amount, where loan was raised for acquiring a capital asset, the waiver thereof cannot be construed on revenue account and in a situation where the loan was for trading purpose the waiver thereof is liable to be treated as a revenue receipt chargeable to tax. In fact, the aforesaid premise clearly emerges from the judgments of the Hon'ble Bombay High Court in the case of Solid Containers Limited (supra) and Mahindra & Mahindra Ltd. (supra). In the case of Mahindra & Mahindra Ltd. (supra), the assessee had utilized the loan proceeds for importing capital assets. Subsequently, the lender waived the recovery of such loan, which was interpreted by the Assessing Officer to be cessation of liability towards the lender as a benefit taxable under section 28(iv) of the Act. The CIT(A)upheld the aforesaid stand and additionally held that waiver of loan amounted of remission of a trading liability taxable under section41(1) of the Act also. The Hon'ble Bombay High Court, in this background held that waiver of loan repayment did not give rise to a benefit referred to in section 28(iv) of the Act inasmuch as the loan was utilized for capital assets. Even section 41(1) of the Act was held not applicable. In the case of Solid Containers Ltd. (supra), the fact situation was that the waiver related to a loan which was taken for trading activity. According to the Hon'ble High Court, since the loan amount was for trading activity waiver thereof was assessable as income. The Hon'ble High Court further referred to its earlier judgment in the case of Mahindra & Mahindra Ltd.(supra) and noted that the same operated in a different fact situation inasmuch as in the earlier judgment, the loan funds were utilized for meeting the cost of import of 12 ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06) plant and machinery and, therefore, waiver of such loan did not constitute business. What follows from the aforesaid two judgments is that the taxability of waiver of loan amount would depend upon the purpose for which the loan was put to use. If the loan was for acquiring a capital asset, waiver thereof would not constitute income whereas, in a case where loan was for trading activity, its waiver would constitute income chargeable to tax. To the similar effect is the judgment of the Hon'ble Madras High Court in the case of Iskraemeco Regent Ltd. (supra) and also the judgment of Hon'ble Delhi High Court in the case of Logitronics P.Ltd. (supra), which have been relied upon by the assessee before us.
15. In the above background, we may now come back to the facts of the present case. In the instant case, it is quite evident as per the bank sanction letter dated 29/11/2000, copy of which is placed at page-26 of the Paper Book, that the Term loans of Rs.39.00 crores (i.e. 15.00 crores + Rs.24.00 crores) were sanctioned for the purpose of 'working capital/For acquisition'. The assessee has been consistently asserting right from the level of the Assessing Officer that upon disbursement of loan, the loan proceeds have been utilized for acquiring shares in M/s. Applisoft Inc. and in this context our attention has also been invited to the bank statement for the relevant period placed in the Paper Book at page-2 and also the foreign remittance certificate placed at pages 3 & 4 of the Paper Book. It is quite evident that a sum of Rs.34.95 crores has been transferred after receipt from the bank for acquiring the shares in M/s.Applisoft Inc. Such fact-situation is not disputed by the lower authorities. However, the plea set up by the income-tax authorities is that since the purpose of the loan included usage for working capital, 13 ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06) therefore, it could not be said that the loan was for acquiring capital asset. In our considered opinion, what is more important is to consider the actual utilization of loan funds and not merely the purpose of the loan, though it may be an important ingredient. In the present case, loan sanction letter does not prescribe that the loan proceeds are to be used only for working capital requirements. Moreover as the bank statement of the assessee reveals, upon disbursal of the loan of Rs.36.00 cores on 01/01/2001, an amount of Rs.34.94 crores was remitted towards acquisition of shares of M/s. Applisoft Inc. Therefore, the utilization of loan funds for such purpose is quite evident from record.
16. In the course of hearing it was pointed out to the Ld. Representative that as the Term loan raised from the bank amounted to Rs.39.00 crores, whereas the amount claimed to have been spent for acquisition of shares i.e. on capital asset was only Rs.34.99 crores, the balance of Rs.4.01 crores cannot be said to have been spent for acquiring a capital asset. In this context, Ld. Representative for the assessee quite fairly conceded the above situation that the total amount invested for acquisition of shares was Rs.34.50 crores which was lower than the total loan raised of Rs.39.00 crores, but, it has been argued that the issue in question relates to only the principal amount of Rs.15.35 crores which has been waived, therefore, the waiver of Rs.15.35 crores is to be understood as out of the amount of Rs.34.50 crores, which has been utilized for acquiring capital asset. In our considered opinion, the onus in this regard is on the assessee to demonstrate that the entire amount of loan has been utilized for acquiring capital asset and in the absence of any clinching material on 14 ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06) record, it has to be held that the amount of loan said to have been utilized for acquiring capital asset is only to the extent of the amount used for purchase of shares of M/s. Applisoft Inc. As per a working provided by the Ld. Representative for the assessee such amount is crystallized at Rs.34.99 crores and the balance of Rs.4.01 crores is considered as being used for trading operations. Therefore, having regard to the facts of the present case, the waiver of loan can be said to be relatable to acquisition of capital asset to the extent of the proportion in which the loan proceeds were utilized for acquisition of capital asset. At the time of hearing, when the aforesaid was put across to the assessee a working thereof was furnished whereby it was submitted that an amount of Rs.1.57 crores out of the total waiver of Rs.15.35 crores can only be considered to fall within the scope of section 28(iv) of the Act for the reason that the same related to loan funds used for the purposes of trading/business. Quite clearly, the balance of the waiver is relatable to the proportion of loan funds utilized for acquisition of the shares of M/s. Applisoft Inc. and on this aspect the ratio of the judgement of the Hon'ble Bombay High Court in the case of Mahindra and Mahindra Ltd.(supra) clearly supports the plea of the assessee. In this background of the matter, we, therefore, conclude that so far as the amount used for the purchase of capital asset is concerned, the waiver thereof is a capital receipt not chargeable to tax under section 28(iv) of the Act, which follows that the Assessing Officer is required to restrict the disallowance under section 28(iv) of the Act to the extent of Rs.1.57 crores only, being the loan waiver which has been used for trading activity. We hold so. Thus, on this issue assessee partly succeeds.
15ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06)
17. In so far as Ground of appeal No.5 which relates to addition of Rs.3.25 crores out of interest waiver is concerned, the same was not pressed at the time of hearing and is accordingly dismissed as not pressed.
18. The issue in Ground of appeal No.6 relates to the action of the income-tax authorities in brining to tax a sum of Rs.34,61,28,850/- for the purposes of section 115JB of the Act. The aforesaid amount represented the amount of waiver of principal and interest on bank loan. The plea of the assessee was that the aforesaid amount constituted income arising from business carried on in Special Economic Zone unit (SEZ unit)and, therefore, the same would not fall for consideration under section 115JB of the Act in view of the specific provision of sub-section(6) of section 115JB of the Act.
18.1 The aforesaid stand of the assessee has not found favour with the Assessing Officer or the CIT(Appeals) on the ground that the aforesaid income has accrued to the assessee on account of One Time Settlement with the bank and is not on account of rendering of services of software development by the assessee and thus, the provisions of sub-section (6) of section 115JB of the Act do not help the assessee. Against the decision of the income-tax authorities in including the aforesaid amount as part of book profit for the purposes of section 115JB of the Act, assessee is in further appeal before us.
18.2 Before us the Ld. Representative for the assessee vehemently pointed out that the only business activity of the assessee was in SEZ Unit and that assessee has no other place of business or office. Referring to the Annual Report for the instant year, the Ld. 16 ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06) Representative for the assessee pointed out that assessee had only one office i.e. in SEZ Unit, from where it was carrying out all its business activities and, therefore, the aforesaid income has also to be considered as income from the business carried on in the SEZ Unit.
18.3 With regard to the plea that the income on account of loan waiver was not generated out of the services being rendered by SEZ Unit, the Ld. Representative for the assessee pointed out that the loan was used to make investment for acquiring the shares of Applisoft Inc., which was for the purpose of business and generating higher revenues. In this context, attention was invited to the order of the Tribunal in the assessee's own case for assessment year 2004-05 vide ITA No.4855/Mum/2009 dated 21/8/2013, wherein assessee had explained that the investment in the shares of Applisoft Inc. was for the purpose of business and out of commercial expediency, and this plea was accepted by the Tribunal, though in a different context relating to allowability of interest expenditure under section 36(1)(iii) of the Act. For the aforesaid reasons, it has been pointed out that the impugned income on account of waiver has to be considered as income from business carried out in SEZ Unit, which is liable for exclusion as per provisions of sub-section (6) of section 115JB of the Act.
18.4 On the other hand, the Ld. Departmental Representative for the Revenue has reiterated the reason adopted by the lower authorities in support of the case of the Revenue, which we have already noted in earlier para and the same is not being repeated for the sake of brevity.
18.5 The dispute essentially revolves around the provisions of sub- section(6) of section 115JB of the Act, which prescribes that the section 17 ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06) would not apply to the income accrued or arising from any business carried on or services rendered by an entrepreneur or a developer in SEZ Unit, as the case may be. In the present case, the assessee is engaged in the business of software development and rendering of technical services outside India in the field of computer software. The business of the assessee is being carried on in a unit located in SEZ. Factually speaking, there is no dispute to the aforesaid position. On the strength of the business being carried out in the SEZ Unit, assessee claimed that the provisions of section 115JB of the Act do not apply to the income accrued or arising from the business so carried on in the SEZ Unit. The difference between the assessee and the Revenue on the application of sub-section(6) of section 115JB of the Act relates to the waiver of outstanding principal amount of loan and interest thereof. The stand of the Revenue is that such income is not generated out of the services rendered by the assessee but is on account of a One Time Settlement with the bank and, therefore, it does not fall in the exclusion contained in the sub-section(6) of section 115JB of the Act . The phraseology of sub-section (6) of section 115JB of the Act prescribes that the income referred thereto may arise out from the 'services rendered' or from the 'business carried on' by the unit. The concept of 'income arising from services rendered' is narrower than the 'income arising from any business carried on' and viewed in that light in our view, the impugned income can definitely be said to be falling within the expression 'arising from any business carried on' in SEZ Unit. Therefore, in our view, the assessee has to succeed on its plea seeking exclusion of the impugned sum from the purview of section 115JB of 18 ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06) the Act on account of sub-section (6) thereof. We hold so. Thus, on this aspect, the assessee succeeds.
19. The next Ground relates to the action of the lower authorities in not allowing the benefit of set off of unabsorbed depreciation against income from other sources. On this aspect, the facts are that during the year under consideration, the assessee had claimed benefit of set-off of brought-forward business loss and unabsorbed depreciation against income from other sources. The Assessing Officer held that assessee was not entitled to set-off of carried forward business loss against income from other sources. Before the CIT(Appeals), the assessee fairly admitted that the claim of set-off of carried forward business loss against income from other sources was not correct but it was contended that the claim for set off of unabsorbed depreciation against income from other sources was quite justified. Before the CIT(Appeals), the assessee placed reliance on the judgment of the Hon'ble Supreme Court in the case of Virmani Industries Pvt. Ltd., 216 ITR 607(SC). The CIT(Appeals) disagreed with the assessee and accordingly assessee is in further appeal before us.
19.1 Before us, the Ld. Representative for the assessee pointed out that having regard to the express provisions of section 32(2) of the Act, the depreciation allowance of earlier years is deemed to be the allowance of the succeeding year and hence the unabsorbed depreciation is liable to be set-off against the income from other sources in such succeeding year. It has also been contended that the judgment of the Hon'ble Supreme Court in the case of Virmani Industries Pvt. Ltd. (supra) supports the plea that unabsorbed 19 ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06) depreciation can be carried forward and set-off against the income of subsequent years. Ld. Representative for the assessee contended that assessee would be satisfied, if the matter be sent back to the file of the Assessing Officer for allowing appropriate set-off of unabsorbed depreciation against income from other sources.
19.2 Though the Ld. Departmental Representative for the Revenue has not opposed the prayer of the assessee for setting-aside the matter back to the file of Assessing Officer, yet the orders of the authorities below has been sought to be defended.
19.3 In our considered opinion, in the present case, the only issue agitated by the assessee is in relation to set-off of claim of unabsorbed depreciation, which in our view, is quite well-founded in terms of section 32(2) of the Act. To the aforesaid extent, we set-aside the order of CIT(Appeals) and direct the Assessing Officer to revisit the claim of the assessee in accordance with law, after allowing the assessee a reasonable opportunity of being heard. Thus on this aspect assessee succeeds for statistical purposes.
20. In Ground of appeal No.8, the plea of the assessee is that the CIT(Appeals) has erred in confirming the adoption of Transactional net margin method (TNMM) selected by the Transfer Pricing Officer/Assessing Officer in preference to the CUP method adopted by the assessee for determining the arm's length price (ALP) of the international transactions entered with its associated enterprise abroad. The primary dispute in this ground relates to the application of CUP method selected by the assessee to benchmark its international transaction for the purpose of determining their arm's length price. The 20 ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06) income-tax authorities have applied the TNMM which has lead to an adjustment of Rs.90,42,380/- to the returned income in order to bring the stated value of the international transaction to its arm's length price. The CIT(A) has affirmed the application of TNMM method, though he has allowed part relief by excluding certain concerns from the list of comparables.
20.1 On the said issue, it was a common point between the parties that similar issue has been considered by the Tribunal in assessment year 2004-05 vide ITA No.4855/Mum/2009 dated 21/08/2013 and also in assessment years 2005-06 and 2006-07 in a combined order in ITA Nos.3123 & 3124/Mum/2012 dated 3/12/2014. Copies of such orders have been placed on record and it is pointed out that the issue has been sent back to the file of the Assessing Officer for determining the arm's length price of international transaction afresh including the selection of the most appropriate method for carrying out comparability analysis. Following the aforesaid precedents and in the absence of any variation in facts in this year , the impugned issue is also sent back to the file of the Assessing Officer to redetermine the arm's length price of the international transactions, keeping in mind the directions of the Tribunal for earlier assessment years vide orders dated 21/08/2013(supra) and 3/12/2014(supra). Thus, on this aspect the assessee succeeds.
20.2 In the result, the appeal of the assessee is partly allowed.
21ITA No.1986& 3012/MUM/2012 (Assessment Year : 2005-06)
21. In so far as the cross appeal of the Revenue is concerned, the only issue raised by the Revenue relates to the determination of arm's length price of international transactions. Since the matter relating to the transfer pricing adjustment has been sent back to the file of the Assessing Officer by us while disposing of Ground of appeal No.8 in the cross appeal of the assessee, the aforesaid ground is also liable to be disposed of accordingly. Thus, on this aspect, the Ground of appeal of the Revenue is treated as allowed for statistical purposes.
22. Resultantly, the appeals of the assessee and Revenue are partly allowed.
Order pronounced in the open court on 20th April , 2016.
Sd/- Sd/-
(AMIT SHUKLA) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated 20 /04/2016
Vm, Sr. PS
Copy of the Order forwarded to :
1. The Appellant ,
2. The Respondent.
3. The CIT(A)-
4. CIT
5. DR, ITAT, Mumbai
6. Guard file.
BY ORDER,
//True Copy//
(Dy./Asstt. Registrar)
ITAT, Mumbai