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Facts
The assessee, Motherson Sumi Systems Limited, a manufacturer of automotive electrical distribution systems, filed an appeal against a final assessment order for AY 2010-11. The appeal challenged two primary adjustments: disallowance of Section 10B deduction for miscellaneous income (scrap sales, tool development, seating facility, sundries written back) generated by its 100% Export Oriented Undertakings (EOUs), and a Transfer Pricing adjustment for interest received on an inter-company foreign currency loan.
Held
The Tribunal ruled that the miscellaneous incomes were eligible for Section 10B deduction, distinguishing the "derived from" and "derived by an undertaking" contexts, and directed the AO to re-compute the deduction. Regarding the TP adjustment, it held that the interest rate charged by the assessee on its foreign currency loan to the AE was at arm's length, based on EURIBOR, and deleted the TPO's adjustment. Consequential interest levies and penalty proceedings were noted as premature.
Key Issues
1. Eligibility of miscellaneous income (scrap sales, tool development, seating facility, sundries written back) from 100% Export Oriented Undertakings for deduction under Section 10B of the Income Tax Act. 2. Validity of Transfer Pricing adjustment for interest received on a foreign currency loan to an Associated Enterprise, specifically regarding the determination of the arm's length interest rate.
Sections Cited
Section 143(3), Section 144C, Section 10B, Section 92CA(3), Section 92D, Rule 10D (Income-tax Rules, 1962), Section 80HH, Section 80IB, Section 80A(4), Section 80HHC, Section 80HHB, Section 10A, Section 234B, Section 234C, Section 234D, Section 271(1)(c)
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Income Tax Appellate Tribunal, DELHI BENCH “I”: NEW DELHI
Before: SHRI SHAMIM YAHYA & MS. ASTHA CHANDRA
The appeal filed by the assessee is directed against the final assessment order dated 16.01.2015 passed under section 143(3) read with section 144C of the Income Tax Act, 1961 (the “Act”) in pursuance to the directions of Ld. Dispute Resolution Panel (“DRP”) pertaining to the Assessment Year (“AY”) 2010-11.
The assessee has raised the following grounds of appeal:- “That on the facts and circumstances of the case, and in law;
Motherson Sumi Systems Limited vs. DCIT
That the Assessment Order passed in pursuance to the directions issued by the Learned Dispute Resolution Panel (DRP) is a vitiated order as the Ld. DRP has erred both on facts and in law, in not considering the submissions made by the Appellant and in confirming the addition made by the Ld. Assessing Officer (AO)/ Ld. Transfer Pricing Officer (TPO) to the Appellant's income.
2. That on the facts of the case and in law, the Ld. AO/L4. DRP has erred in reducing the eligible deduction under section 10B of the Income Tax Act, 1961 (the Act') by la 56,13,895/-on the basis of incorrect assumptions, conjectures and in doing so have grossly erred in: 2.1 holding that Miscellaneous Income/other Income which comprises of Scrap sales, tool development income, seating facility, Sundry write back are not "derived from" the eligible undertakings. 2.2 not accepting that the entire profits of eligible undertakings to be considered for deduction u/s 10B of the Act in view of provision of section 10B(1) read with section 108(4) of the Act. 3. The Ld. DRP erred both on facts and in law in confirming the Ld. AO/TPO's action of making an adjustment of Rs. 8,09,277/- to the income of the Appellant by holding that the international transactions of the Appellant pertaining to receipt of interest on the loans given to its subsidiary do not satisfy the arm's length principle envisaged under the Act. In doing so the Ld. DRP has grossly erred in agreeing the TPO's action of; 3.1. disregarding the ALP, as determined by the assessee in the Transfer Pricing (TP) documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules'); 3.2. completely disregarding the detailed and proper comparability analysis submitted by the Appellant; 3.3. comparing the returns earned by the Appellant with the return earned by investing in corporate bonds and also by applying the prime lending rate ('PLR) of State Bank of India ('SBI), thereby resulting in an erroneous application of Comparable Uncontrolled Price ('CUP")method; 3.4. disregarding the fact that the international transaction of interest received on loan has been accepted to be at an arm's length in prior years (AY 2005-06 and AY 2006-07) and no substantial changes have happened in the circumstances of the case warranting a fresh analysis or rejection of the arm's length nature of the transactions; 3.5. completely disregarding the detailed and proper comparability analysis of the interest received on loans as submitted by the Appellant under CUP method on the basis of the comparable third party loan agreements and instead determined the arm's length interest rate on the basis of the PLR applicable in India in that particular year, thereby resulting in an erroneous application of CUP method;
Motherson Sumi Systems Limited vs. DCIT 3.6. disregarding the analysis carried out by the Appellant to benchmark the international transaction of interest received on loan on various incorrect/ baseless statements with several infirmities in the TP Order so as to mislead the cause of justice, thereby clearly demonstrating a prejudiced mindset driven with the single-minded intention to recommend a TP adjustment; 3.7. disregarding judicial pronouncements in India in undertaking the TP adjustment.
4. That the Ld. AO has grossly erred in law in levying interest under section 234B, 234C and 234D of the Act.
5. That the Ld. AO erred in law in initiating penalty proceedings under section 271(1)(e) of the Act for concealment of particulars of income and for furnishing inaccurate particulars thereof.”
Briefly stated the assessee is a joint venture between Mothersons Group and Sumitomo Wiring Systems Ltd. Incorporated in India in 1986. It is engaged in the manufacturing of automotive electrical distribution systems. For AY 2010-11, it e-filed its return of income on 14.10.2010 declaring a total income of Rs. 225,49,25,870/-. The case was selected for scrutiny and thereafter was referred to the Ld. Transfer Pricing Officer (“TPO”) for determining the Arm’s Length Price (“ALP”) of the International transactions entered into with its Associated Enterprises (“AE”) during the relevant AY under consideration.
3.1 The details of the international transactions entered by the assessee with its AE during the AY 2010-11 are as under:-
S.No. Description of the transactions Amount (Rs.) 1 Purchase of goods 809,184,336 2 Sale of goods 593,175,507 3 Purchase of fixed assets: 56,893,579 4 Payment of Royalty and Technical fee 85,829,562 5 Services received 53,346,601 6 Services rendered 1,103,658 7 Reimbursement of expenses paid 20,388,953 8 Receipt of Guarantee fee 4,209,878 9 Receipt of Interest on loans 546,809 10 Reimbursement of expenses received 1,886,087
Motherson Sumi Systems Limited vs. DCIT
The Ld. Assessing Officer (“AO”) in the draft assessment order 3.2 proposed an addition of Rs. 56,13,895/- on account of disallowance of exemption under section 10B of the Act with respect to miscellaneous incomes/other incomes/scrap sales and relying on the decision of the Hon’ble Supreme Court in the case of Liberty India vs. CIT (317 ITR 218) held that the impugned incomes are not derived from the eligible units at Bangalore and Noida for the purpose of computation of deduction under section 10B of the Act.
3.3 The Ld. TPO proposed adjustment in respect of transaction of receipt of interest on loan amounting to Rs. 8,09,277/- by substituting the Arms Length rate of six months Euribor/LIBOR+205 bps (as applied by the assessee in its TP study) with SBI prime lending rate + 300 basis points and determined an arm’s length interest rate of 14.88%. Vide his order dated 08.01.2014 passed under section 92CA(3) of the Act the Ld. TPO proposed an adjustment of Rs. 809,277/- (i.e. 13,56,086 – 546809) to be made by the Ld. AO being the difference between arm’s length interest computed by him and the interest charged by the assessee on loan given to the subsidiary.
3.4 The Ld. AO passed the draft assessment order on 28.03.2014 making an addition to the income of Rs. 225,49,25,870/- returned by the assessee on account of adjustment proposed by the Ld. TPO amounting to Rs. 8,09,277/- and disallowance of exemption under section 10B amounting to Rs. 56,13,895/- assessing the total income at Rs. 2,26,13,49,042/-.
3.5 The assessee filed objection before the Ld. DRP who vide its order dated 24.12.2014 upheld the order of the Ld. AO/TPO.
3.6 Pursuant to the directions/ order of the Ld. DRP, the Ld. AO passed the final assessment order on 16.01.2015 making the aforesaid disallowance/ addition to the income returned by the assessee.
3.7 Aggrieved, the assessee is in appeal before the Tribunal and all the grounds relate thereto. 4
Motherson Sumi Systems Limited vs. DCIT
Ground no. 1 is general in nature.
As regards Ground no. 2 to 2.2 relating to disallowance of deduction under section 10B of the Act, brief facts narrated by the Ld. AR are that the assessee has 100% export oriented undertakings (“EOUs”) in Bangalore and Noida with respect to which it has been claiming deduction under section 10B of the Act in the preceding years as well as in the relevant AY under consideration. During the AY 2010-11, the assessee credited the following miscellaneous income/ other income to the P&L Account of its EOUs:
S. No. Other Income Bangalore Unit Noida Unit Amount (Rs.) Amount (Rs.) I Scrap Sales 27,71,440 21,40,908 II Tool development Income 21,20,015 - III Seating facility 1,80,000 - IV Sundries Written Back 21,764 - Total 50,93,219 21,40,908 5.1 The Ld. AR submitted that above incomes are generated out of the integral business activities of the EOUs and hence are eligible for deduction under section 10B of the Act. Scrap sales at Noida unit were generated during the process of manufacturing the rubber parts. Scrap was generated on cutting, scrapping and finishing. Bangalore unit was involved in manufacturing base for cooling fans placed in computers, primarily PCs and also in servers. Scrap at Bangalore unit was generated on account of drilling, shaving and scrapping of the metal for manufacturing fan base plates etc. The Ld. AR submitted that deduction of scrap sales under section 10B has to be allowed on proportionate basis i.e. in the proportion of export turnover to total turnover of the business of the EOUs. This view is supported by the decision of the coordinate bench of the Tribunal in assessee’s own case for AY 2004-05 in ITA No. 3432/Del/2008).
5.2 Tool development income has arisen from developing tools for manufacture of products for customers on the basis of orders received from Motherson Sumi Systems Limited vs. DCIT them and the subsequent recovery of costs from such customers. This income has been derived by the assessee in the ordinary course of its business of manufacturing and production of goods which represents its operational income. Regarding seating facility income, the Ld. AR submitted that the same is earned in the course of tool development wherein the customer person monitors the tool development specific to its product. The Ld. AR submitted that similar view as adopted by the coordinate bench in case of scrap sales should be applied in case of tool development and seating facility income. He further submitted that while disallowing the deduction claimed under section 10B, reliance placed by the Ld. AO on the decision of the Hon’ble Supreme Court in the case of Liberty India vs. CIT (2009) 317 ITR 218 and CIT vs. Sterling Foods (1999) 237 ITR 579 to the facts of the assessee’s case and his findings on interpretation of the term “derived from” appearing in section 80HH and 80IB of the Act are incorrect.
5.3 Sundries written back represent sundry items which are no longer liable to be paid. These represent expenses claimed in the earlier years which had bearing on the reduction on deduction under section 10B of the Act in those years and therefore reversal of the same should be treated as income of the undertaking of the relevant AY under consideration. The Ld. AR submitted that similar view as adopted by the coordinate bench in case of scrap sales should be applied here too.
5.4 The Ld. AR placed reliance on the decision of the Full Bench of Hon’ble Karnataka High Court in the case of CIT vs. Hewlett Packard Global Soft Ltd. (2017) 87 taxmann.com 182 (Karnataka) (FB) wherein another decision of the Hon’ble Karnataka High Court in the case of CIT vs. Motorola India Electronics (P.) Ltd. (2014) 46 taxmann.com 167 (kar) has been affirmed. The Ld. AR further submitted that the Hon’ble Apex Court on the similar issue has affirmed the decision of another bench of the Hon’ble Karnataka High Court in the case of PCIT vs. Rajesh Exports Ltd. (2020) 114 taxmann.com 93 (kar). He relied on several other decisions including the decision of the Hon’ble Delhi High Court in the case of Riviera Home 6
Motherson Sumi Systems Limited vs. DCIT Furnishing vs. ACIT (2016) 65 taxmann.com 287 (Del). In view of these decisions (supra) the reliance placed by the Ld. AO on the decisions of Chennai/ Mumbai Tribunal is no more a good law.
The Ld. DR strongly supported the order of the Ld. AO. The Ld. DR submitted that section 10B(1) of the Act clearly states that for claiming deduction under section 10B, two conditions have to be satisfied: (1) the assessee is required to be 100% export oriented unit and (2) the income is to be “derived from” export of articles or things or computer software. He argued that the miscellaneous income/ other income earned by the assessee has no correlation with exports and accordingly cannot be taken as derived from export. The income from scrap sales/ tool development/ seating facilities etc. is not even incidental to the export income and by no stretch of imagination can be treated as part of export income covered for section 10B deduction. He submitted that exemption provisions are to be strictly applied and interpreted. He relied on the decision of the Hon’ble Supreme Court in the case of Pr.CIT vs. Wipro Ltd. 140 taxmann.com 223 (SC); Saraf Exports vs. CIT (2023) 149 taxmann.com 145 (SC) and CIT vs. Menon Impex (P.) Ltd. (2003) 128 Taxman 11 (Mad) in support thereof.
In rebuttal, the Ld. AR submitted that all the decisions cited above which are relied upon by the Ld. DR are not applicable to the assessee’s case as these decisions are rendered in the context of interpretation of “derived from” under Chapter VIA deductions which is different from “derived by an undertaking” for claiming exemption under section 10A/ 10B of the Act.
We have heard the Ld. Representatives of the parties, considered their submissions and perused the records. There are four components of misc. / other income earned by the assessee during the AY 2010-11. So far as scrap sales are concerned the Ld. AR submitted the same is covered by the co- ordinate bench of the Tribunal in assessee’s own case for AY 2004-05 in ITA No. 3432/Del/2008. There is no change in the facts in the relevant AY. We have perused the order of the Tribunal (supra). The Tribunal has decided
Motherson Sumi Systems Limited vs. DCIT the issue of deduction on account of scrap sales under section 10B of the Act in its order (supra) holding as under:
6. We have considered rival submissions. Regarding ground No.1, with regard to exclusion of scrap sale from business profit, we are in agreement with the Ld. A.R. of the assessee that as per the provisions of Section 10B, no such exclusion from business profit is required and only proportionate deduction has to be allow as per the provisions of sub-section (4) of Section 10B in the proportion of export turnover to total turnover. We are in agreement with him because there is no such sub-section, clause or explanation in Section 10B in line with the Explanation (baa) to Section S0HHC where specific provisions are made for such exclusion from profit of business. It is not the case of the A.O. that scrap sale by the assessee were not generated in manufacturing process carried out by the assessee and hence we direct the A.O. that he should work out the deduction allowable to the assesse u/s 10B as per the provisions of Section toB(4) in the proportion of export turnover to total turnover without excluding the sale proceeds of scrap from business profit. Such sale proceeds of scrap should be added to total turnover and thereafter, the amount of deduction allowable to the assessee should be worked out as per sub-section (4) of Section 10B.
8.1 Respectfully following the decision of the Tribunal (supra), we hold that the impugned income on account of scrap sales earned by the assessee EOUs at Bangalore and Noida during AY 2010-11 is eligible for deduction under section 10B of the Act. Accordingly, we direct the Ld. AO to re- compute the deduction allowable to the assessee under section 10B in accordance with the applicable provisions contained therein.
As regards tool development income and seating facility, we note that the said income has arisen from developing tools for manufacture of products for customers on the basis of orders received from them and subsequent recovery of costs from such customers and the seating facility income is earned in the course of tool development from the customer relating to monitoring of tool development specific to its product. This factual position is not controverted by the Ld. DR. Given the nature of these receipts / income, we tend to agree with the contention of the Ld. AR that these have been earned by the assessee in the process of manufacturing / production of goods at its EOUs. In our view, it thus arises in the ordinary course of the business carried out by the assessee i.e 100% export of goods
Motherson Sumi Systems Limited vs. DCIT manufactured by it in its export oriented undertaking at Bangalore, even though not as a direct result of export and is therefore eligible for 100% deduction under section 10B of the Act.
Sundries written back represent expenses claimed in the earlier years and credited to the P&L account in the relevant AY and thus reversal of the same should be treated as income of the EOU at Bangalore in the relevant AY. In our considered view the claim of the assessee is correct as these amounts represent expenses related to EOU which is credited to P&L account and thus becomes part of income of the EOU eligible for deduction under section 10B of the Act.
We have also perused various judicial precedents relied upon by the Ld. Representatives of both the parties. In the case of CIT vs. Hewlett Packard Global Soft Ltd. (supra) the Full Bench of the Hon’ble Karnataka High Court while deciding on the allowability of deduction under section 10A/10B discarded the reliance placed by the Ld. AO on the decision in the case of Liberty India and Sterling Foods (supra) holding as under:-
34. We are of the considered opinion that the above referred decisions relied upon by the learned counsel for the Revenue, Mr. Aravind do not cover the cases under Sections 10-A and 10- B of the Act which are special provisions and complete code in themselves and deal with profits and gains derived by the assessee of a special nature and character like 100% Export Oriented Units (EOUs.) situated in Special Economic Zones (SEZs), STPI, etc., where the entire profits and gains of the entire Undertaking making 100% exports of articles including software as is the fact in the present case, the assessee is given 100% deduction of profit and gains of such export business and therefore incidental income of such undertaking by way of interest on the temporarily parked funds in Banks or even interest on staff loans would constitute part of profits and gains of such special Undertakings and these cases cannot be compared with deductions under Sections 80-HH or 80-IB in Chapter VI-A of the Act where an assessee dealing with several activities or commodities may inter alia earn profits and gains from the specified activity and therefore in those cases, the Hon'ble Supreme Court has held that the interest income would not be the income derived from" such Undertakings doing such special business activity.
The Scheme of Deductions under Chapter VIA in Sections 80-HH, 80-HHC, 80- 1B, etc from the 'Gross Total Income of the Undertaking, which may arise from different specified activities in these provisions and other incomes may exclude interest income from the ambit of Deductions under these provisions, but exemption under Section 10-A and 10-B of the Act encompasses the entire income derived from Motherson Sumi Systems Limited vs. DCIT the business of export of such eligible Undertakings including interest income derived from the temporary parking of funds by such Undertakings in Banks or even Staff loans. The dedicated nature of business or their special geographical locations in STPI or SEZs. etc. makes them a special category of assessees entitled to the incentive in the form of 100% Deduction under Section 10-A or 10-B of the Act, rather than it being a special character of income entitled to Deduction from Gross Total Income under Chapter VI-A under Section 80-HH, etc. The computation of income entitled to exemption under Section 10-A or 10-B of the Act is done at the prior stage of computation of Income from Profits and Gains of Business as per Sections 28 to 44 under Part-D of Chapter IV before 'Gross Total Income' as defined under Section 80- B(5) is computed and after which the consideration of various Deductions under Chapter VI-A in Section 80HH etc. comes into picture. Therefore analogy of Chapter VI Deductions cannot be telescoped or imported in Section 10-A or 10-B of the Act. The words 'derived by an Undertaking' in Section 10-A or 10-B are different from 'derived from' employed in Section 80-HH etc. Therefore all Profits and Gains of the Undertaking including the incidental income by way of interest on Bank Deposits or Staff loans would be entitled to 100% exemption or deduction under Section 10-A and 10-B of the Act. Such interest income arises in the ordinary course of export business of the Undertaking even though not as a direct result of export but from the Bank Deposits etc., and is therefore eligible for 100% deduction.
We have to take a purposive interpretation of the Scheme of the Act for the exemption under Section 10-A/10-B of the Act and for the object of granting such incentive to the special class of assessees selected by the Parliament, the play-in-the- joints is allowed to the Legislature and the liberal interpretation of the exemption provisions to make a purposive interpretation, was also propounded by Hon'ble Supreme Court in the following cases:- [1] In Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480, the Hon'ble Supreme Court held that:- “5. .......Since a provision intended for promoting economic growth has to be interpreted liberally, the restriction on it, too, has to be construed so as to advance the objective of the section and not to frustrate it. But that turned out to be the, unintended, consequence of construing the clause literally, as was done by the High Court for which it cannot be blamed, as the provision is susceptible of such construction if the purpose behind its enactment, the objective it sought to achieve and the mischief it intended to control is lost sight of. One way of reading it is that the clause excludes any undertaking formed by transfer to it of any building, plant or machinery used previously in any other business. No objection could have been taken to such reading but when the result of reading in such plain and simple manner is analysed then it appears that literal construction would not be proper...." [II] In R.K. Garg v. Union of India [1982] 133 ITR 239/[1981] 7 Taxman 53, the Hon'ble Apex Court has held as under:- ‘8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, j, that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait- jacket formula and this is particularly true in case of legislation dealing with Motherson Sumi Systems Limited vs. DCIT economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud (351 US 457:1 L Ed 2d 1485 (1957)) where Frankfurter, J., said in his inimitable style: "In the utilities, tax and economic regulation cases, there are good reasons for judicial self- restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability." The Court must always remember that "legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry"; "that exact wisdom and nice adaption of remedy are not always possible" and that "judgment is largely a prophecy based on meagre and uninterpreted experience". Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid.
On the above legal position discussed by us, we are of the opinion that the Respondent assessee was entitled to 100% exemption or deduction under Section 10- A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as 'Income from other Sources' under Section 56 of the Act. The incidental activity of parking of Surplus Funds with the Banks or advancing of staff loans by such special category of assessees covered under Section 10-A or 10-B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be de-linked from its profits and gains derived by the Undertaking engaged in the export of Articles as envisaged under Section 10-A or Section 10-B of the Act and cannot be taxed separately under Section 56 of the Act.”
11.1 It was also held by the Hon’ble High Court that the analogy of Chapter VI deductions could not be telescoped or imported into section 10A or 10B of the Act. The words ‘derived by an Undertaking’ as appearing in section 10A or 10B are different from ‘derived from’ employed in section 80-HH etc. and therefore all profits and gains of the undertaking including any incidental
Motherson Sumi Systems Limited vs. DCIT income would be entitled to 100% exemption or deduction under section 10A and 10B of the Act.
11.2 The Hon’ble Karnataka High Court has also affirmed the view expressed by the first Division Bench of this Court in the case of Motorola India Electronics (P.) Ltd. (supra) wherein it was held that entire profits and gains of 100% Export Oriented Undertaking including any incidental income would be entitled to 100% exemption or deduction under sections 10A/10B and as such the entire profits derived from the business of the undertaking should be taken into consideration, while computing the eligible deduction under section 10B/10A of the Act, by applying the provisions of section 10B(4) of the Act. The relevant observation of the Hon’ble Karnataka High Court is reproduced hereunder:
“7. Relying on these judgments, it was contended that the interest received or the consideration received from sale of import entitlement has no direct nexus with the profits and gains derived from the export of software and therefore, the assessee is not eligible for exemption. All the judgments were rendered prior to the amendment in the year 2001 and therefore, there cannot be any quarrel with the law laid down in these cases. All the judgments are rendered in the context of Section 80 HHC. Therefore, the judgment of the Tribunal for reassessment year 1998-99, where it has declined the benefit to the assessee cannot be found fault with. But there is change in the law for the assessment year 2001-02. Section 10(B)(1) and (4) reads as under- "Section 108: Special provisions in respect off newly established hundred per cent export oriented undertakings (1) Subject to the provisions of this section, a 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, shall be allowed from the total income of the assessee: Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years: Provided further that for the assessment year beginning on the 1st day of April, 2003, the deduction under this subsection shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software
Motherson Sumi Systems Limited vs. DCIT Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2012 and subsequent years: Provided also that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub- section (1) of section 139. (4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.” By Finance Act, 2001, with effect from 01.04.2001, the present Sub-section (4) is substituted in the place of old Sub-section (4). No doubt Subsection 10(8) speaks about deduction of such profits and gains as derived from 100% EOU from the export of articles or things or computer software. Therefore, it excludes profit and gains from export of articles. But Sub-section (4) explains what is the profit derived from export of articles as mentioned in Sub-section (1). The substituted Sub- section (4) says that profits derived from export of articles or things or computer software shall be the account which bares to the profits of the business of the undertaking and not the profits and gains from export of articles. Therefore, profits and gains derived from export of articles is different from the income derived from the profits of the business of the undertaking. The profits of the business of the undertaking includes the profits and gains from export of the articles as well as all other incidental incomes derived from the business of the undertaking. It is interesting to note that similar provisions are not there while dealing with computation of income under Section 80HHC. On the contrary there is specific provisions like Section 80HHB which expressly excludes this type of incomes. Therefore, in view of the aforesaid provisions, it is clear that, what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking.
8. In the instant case, the assessee is a 100% EOU, which has exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. Now the question is whether the interest received and the consideration received by sale of import entitlement is to be construed as income of the business of the undertaking. There is a direct nexus between this income and the income of the business of the undertaking. Though it does not par take the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of Income from Profits and Gains' incorporated in Sub-section (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also. We do not find any merit in these appeals. Therefore, the first substantial question of law raised in is answered in favour of the revenue and against the assessee and the first substantial question of law in ITA No.447/2007 is answered in favour of the assessee and against the revenue. “
Motherson Sumi Systems Limited vs. DCIT 11.3 The decision in the case of Motorola India Electronics (P.) Ltd. (supra) has also been affirmed by another bench of Hon’ble Karnataka High Court in the case of Rajesh Exports Ltd. (supra) (copy of the decision at page 281 of the Case Law Paper Book refers) which has further been affirmed by the Hon’ble Apex Court in PCIT vs. Rajesh Exports Ltd.
Similar view has been taken by the Hon’ble Delhi High Court in the case of Riviera Home Furnishing (supra) by observing as under:-
“15. In the considered view of the Court, the submissions made on behalf of the Revenue proceed on the basic misconception regarding the true purport of the provisions of Chapter VIA of the Act and on an incorrect understanding of Section 80A(4) of the Act. The opening words of Section 80A(4) read "Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter...... "What is sought to be underscored, therefore, is that Section 80A, and the other provisions in Chapter VIA, are independent of Sections 10A and 10B of the Act. It appears that the object of Section 80A(4) was to ensure that a unit which has availed of the benefit under Section 10B will not be allowed to further claim relief under Section 801A or 801B read with Section 80A(4). The intention does not appear to be to deny relief under Section 10B(1) read with Section 10B(4) or to whittle down the ambit of those provisions as is sought to be suggested by Mr. Manchanda. Also, he is not right in contending that the decisions of the High Courts referred to above have not noticed the decision of the Supreme Court in Liberty India. The Karnataka High Court in Motorola India Electronics (P.) Ltd. (supra) makes a reference to the said decision. That decision of the Karnataka High Court has been cited with approval by this Court in Hritnik Exports (P.) Ltd. (supra) and Universal Precision Screws (supra). In Hritnik Exports (P.) Ltd. (supra) the Court quoted with approval the observations of the Special Bench of the ITAT in Maral Overseas Ltd. (supra) that "Section 10A/10B of the Act is a complete code providing the mechanism for computing the 'profits of the business' eligible for deduction u/s 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act."
16. This then brings us to the questions framed for consideration in the present case and the decision of the ITAT in not accepting the Assessee's plea in regard to 'customer claims' 'freight subsidy' and 'interest on fixed deposit receipts' even while it accepted the Assessee's case as regards 'deemed export drawback'.
17. The contention of the Assessee as regards customer claims was that it had received the claim of Rs. 28,27,224 from a customer for cancelling the export order. Later on the cancelled order was completed and goods were exported to another customer. The sum received as claim from the customer was non-severable from the income of the business of the undertaking. The Court fails to appreciate as to how the ITAT could have held that this transaction did not arise from the business of the export of goods. Even as regards freight subsidy, the Assessee's contention was that it had received the subsidy in respect of the business carried on and the said
Motherson Sumi Systems Limited vs. DCIT subsidy was part of the profit of the business of the undertaking. If the ITAT was prepared to consider the deemed export draw back as eligible for deduction then there was no justification for excluding the freight subsidy. Even as regards the interest on FDR, the Court has been shown a note of the balance sheet of the Assessee [which was placed before the AO] which clearly states that "fixed deposit receipts (including accrued interest) valuing Rs. 15,05,875 are under lien with Bank of India for facilitating the letter of credit and bank guarantee facilities." In terms of the ratio of the decisions of this Court both in Hritnik Exports (P.) Ltd. (supra) and Universal Precision Screws (supra), the interest earned on such FDR ought to qualify for deduction under Section 10B of the Act.”
The Ld. DR has relied on the decisions (supra) of the Hon’ble Supreme Court in the case of Pr.CIT vs. Wipro Ltd.; Saraf Exports; and Menon Impex (P.) Ltd. in support of its contention that the miscellaneous income / other income is not eligible for claim of exemption under section 10B of the Act the same being not derived from the export business of the assessee undertaking. In our humble and considered view, his reliance on these decisions to the facts of the present case in hand is misplaced. The issue for consideration before the Hon’ble Apex Court in the case of Wipro Limited (supra) was whether a taxpayer can withdraw its claim of deduction under section 10B by filing a revised return or in the course of assessment which has no bearing on the facts of the present case. The Ld. DR has relied on this decision to support his contention that exemption provisions should be strictly construed which in our view has no relevance considering the provisions of section 10B(1) and 10B(4) of the Act. Another case relied upon by the Ld. DR is Saraf Exports (supra) delivered by the Hon’ble Supreme Court wherein the Hon’ble Court has interpreted the term ‘derived from’ under section 80IB of the Act while relying on its own decisions in the case of Liberty India and Sterling Foods (supra), which in our view is not applicable to the facts of the present case wherein claim of deduction under section 10B falling under Chapter III of the Act is in question which is different from deduction under section 80HH, 80IB etc. falling under Chapter VIA of the Act. The decision of the Hon’ble Madras High Court in the case of Menon Impex (P.) Ltd. (supra) would also not help the Ld. DR to support his contentions as the Hon’ble Delhi High Court in the case of Riviera Home Furnishing (supra) and the Hon’ble Karnataka High Court in 15
Motherson Sumi Systems Limited vs. DCIT the case of Motorola India Electronics (P.) Ltd. (supra) have discarded the application of these decisions which were rendered in the context of section 80HH and prior to amendment in section 10B(1) & 10B(4) w.e.f. AY 2001-02 and therefore not a good law any more.
In view of the above factual matrix of the case and the legal position set out above, we hold that the miscellaneous/other income in the form of scrap sales, tool development income, seating facility and sundries written back are eligible for claim of exemption under section 10B of the Act and direct the Ld. AO to re-compute the deduction in terms of section 10B(4) of the Act.
The next ground of appeal (ground No. 3 to 3.7) relate to the adjustment made to the international transaction of receipt of interest on loans. The brief facts relating to this issue are that the assessee had extended a foreign currency (euro) loan to its subsidiary, MSSL Handels GmbH.
15.1 During the relevant AY no fresh loan was given to MSSL Handels GmbH and it was the same loan which was given prior to FY 2009-10. However, the interest rate has been increased to 6% in the relevant AY as against 4.2% in the earlier years.
15.2 In order to establish the arm’s length nature of the interest receipts during AY 2010-11 under consideration, the assessee applied CUP method to benchmark the interest income received from MSSL Handels GmbH. Further the credit rating of the borrower was determined using S&P Corporate Rating Criteria. Based on the implied credit rating obtained, a search for third party comparable loan agreements was undertaken using LPC Loan Connector data base. After carrying out appropriate adjustments (tenor and currency adjustment on the third party agreements), the following results were obtained (TP Report-Page 107 to 109 of Paper Book refers):
Motherson Sumi Systems Limited vs. DCIT Borrowing entity Credit Rating Rate of Interest (%) Arm's Length Rate MSSL Handels B- 6% (rate changed from 6 months 6 months Euribor + 205 bps GmbH EURIBOR + 200 basis points to or 4.995% 6% w.e.f 1.4.2008)
15.3 Based on the above, the Ld. AR submitted that since the interest income received by the assessee was at a higher effective interest rate than the interest rate for loan transactions entered into between unrelated entities during the same time period and in the same geographical region, the rate of 6% charged by the assessee from its AE is at arm’s length. However the Ld. TPO recomputed the ALP of the impugned interest income by applying the actual Prime Lending Rate (PLR) of the State Bank of India for loans issued in India which has resulted into an adjustment of Rs. 8,09,277/- in the hands of the assessee. The Ld. AR further submitted that the international transaction of receipt of interest on loan was undertaken by the assessee even in AY 2005-06 and 2006-07 and no adverse inference was drawn by the Ld. TPO in both these AYs. He submitted that the impugned issue has been decided in favour of the assessee by the co- ordinate Bench of the Tribunal in assessee’s own case for AY 2007-08 (ITA No. 5718/Del/2013) and AY 2008-09 (ITA No. 375/Del/2013). Thereafter, order giving effect to the Tribunal’s order for AY 2007-08 and 2008-09 both dated 20.10.2016 were passed by the Ld. TPO wherein the benchmarking analysis undertaken by the assessee was accepted and interest rates arrived at by the assessee were held to be at arm’s length. (Copy at page 224 to 229 of the Paper Book)
15.4 He submitted that the present facts remain same as that of AY 2007- 08 and 2008-09 and that for the relevant AY 2010-11 there is no material difference in LIBOR and EURIBOR interest rates (six months) which is represented in the below table:-
Motherson Sumi Systems Limited vs. DCIT
FY 2009-10 EURIBOR Average Rates LIBOR Average Rates (in %)* (in %)* April'09 0.900 0.82337 May'09 0.789 0.67819 June'09 0.818 0.65571 July'09 0.391 0.28019 August'09 0.348 0.27473 September'09 0.343 0.29381 October'09 0.351 0.29040 November'09 0.365 0.31515 December'09 0.388 0.31750 January'10 0.355 0.29644 February’10 0.345 0.29928 March'10 0.341 0.29546 *For Euro 15.5 The Ld. DR relied upon the order of the Ld. AO/TPO. He submitted that the assessee has canvassed the impugned issue as covered. However, from the perusal of the orders of the Tribunal it is seen that the Tribunal has just set aside the issue to the file of the AO for deciding afresh. He also placed reliance on the finding of the Ld. DRP on page 14 of its order wherein the Ld. DRP have followed the safe harbour rules as mandated by the CBDT.
We have heard the Ld. Representatives of the Parties and perused the records. We observe that the impugned issue has been decided in favour of the assessee by the co-ordinate Bench of this Tribunal in assessee’s own case for AY 2007-08 (ITA No. 5718/Del/2013) and 2008-09 (ITA No. 375/Del/2013) vide its common order dated 01.04.2015 (copy at page 203 to 223 of the Paper Book) wherein the Tribunal while relying on the orders of the Mumbai Tribunal in the case of Hinduja Global Solutions Ltd. vs. ACIT (ITA No. 254/Mum/2013) and M/s. Bhandsali & Co. Vs. ACIT (ITA No. 825/Mum/214) set aside the impugned issue to the file of the Ld. TPO to be decided afresh on the basis of the finding of the Mumbai Tribunal in its aforementioned orders (supra). The relevant findings and observation of the Delhi Tribunal in its order (supra) is reproduced herein below for ready reference:-
Motherson Sumi Systems Limited vs. DCIT
17. Considering above submissions, we find that it is an undisputed fact that in the earlier assessment years 2005-06 and 2006-07, the interest rates have been accepted at arm's length. On an identical issue, the Mumbai Bench of the ITAT in the case Hinduja Global Solutions Ltd. vs. ACIT (supra) has given following findings. The relevant para No.17 thereof is being produced hereunder: “17. We have carefully considered the rival submissions and perused the record. The case of the assesssee was that LIBOR as on 31/3/2008 was 2.49% against which the assessee has charged interest @ 6% p.a. In other words, interest charged by the assesses is much higher then the corresponding arm's length LIBOR even from an Indian transfer pricing perspective. It is not in dispute that the loan has been denominated in US dollars. Though the Ld. DR, for the first time, raised a contention that the assessee might have taken loan in the earlier year to advance the same to its AE in the earlier year, in fact neither the TPO nor the DRP has considered the aspect from that angel and the assesses consistently prayed before the tax authorities that the assesses has not incurred any interest cost on funds given to the AE as the source of fund is surplus available with the assessee. In the absence of any material to prove to the contrary, merely because some interest has been paid in the immediately preceding year, it cannot be assumed that the assessee borrowed funds in the immediately preceding year was the source for the purpose of advancing loans to its AE. Having regard to the overall circumstances of the case we are of the view that the issue stands squarely covered by the decision of the ITAT Delhi Bench in the case of Cotton Naturals (1) P. Ltd. Wherein the Bench observed that the CUP method is the moist appropriate method in order to ascertain arm's length price of the international transaction i.e, where the lending of money was in foreign currency to its AE the domestic prime lending rate would have no applicability and the interbank rate fixed should be taken as benchmark rate for international transactions. WE, therefore, hold that LIBOR rate has to be adopted in the instant case since the interest charged by the assessee from its AE is higher than the LIBOR rate in the year under consideration no transfer pricing adjustment in that regard is warranted. We therefore set aside the order of the AO in this regard and allow the grounds urged by the assessee.
Again in the case of M/s. Bhansali & Co. (supra), the Mumbai Bench of the ITAT has decided the issue as under vide para No. 5 of the order, the is as under: "We have carefully perused the orders of the authorities below. It is an admitted fact that the loan was given in the year 2005. It is also undisputed fact that interest rate charged as LIBOR plus 200 basis points have been accepted in completed assessments from AYs 2005-06 to 2008-09. Thus, by taking a different view on the same set of facts violates the rule of consistency. Secondly, the DRP erred in considering the loan as loan from India. The fact of the matter is that it was a foreign currency loan which was given abroad. Therefore the most appropriate method is taking the LIBOR as correct benchmark. A similar view has been taken by the Tribunal in the case of Hinduja Global Solution Ltd. 145 ITD 361. Considering the past history and the decision of the Tribunal (supra), we find that the benchmarking done by the assessee is correct and the AO is directed to delete the addition. Ground no.1 with its sub ground is allowed.
Motherson Sumi Systems Limited vs. DCIT
Thus in the interest of justice, we set aside the matter to the file of the learned TPO/Assessing Officer to decide the issue afresh in view of the above findings of the ITAT in the cited cases after affording opportunity of being heard to the assessee. The ground Nos. 3, 4 and 5 are accordingly allowed for statistical purposes.”
We have also perused the order(s) giving effect to the Tribunal’s order (supra) passed by the Ld. TPO dated 20.10.2016 for AY 2007-08 and 2008- 09 pursuant to the above directions of the Tribunal in its order (supra). For both the AYs 2007-08 and 2008-09, the Ld. TPO accepted the benchmarking analysis undertaken by the assessee and held the interest rates arrived at by the assessee to be at arm’s length by recording his finding that no adverse inference has been drawn in respect of the international transactions undertaken by the assessee in both the AYs.
18. Respectfully following the decision of the Tribunal’s order for AY 2007- 08 and 2008-09 and the order giving effect to the Tribunal’s order passed by the Ld. AO thereof, we are of the view that the interest rates arrived at by the assessee using EURIBOR is at arm’s length and no further TP adjustment is required in respect of the impugned international transaction. Accordingly, the addition of Rs. 8,09,277/- made by the Ld. AO pertaining to receipt of interest on the loans given to its AE is hereby deleted. The Ld. AO is directed to amend the assessment accordingly. Ground No. 3 to 3.7 are allowed.
19. Ground No. 4 relating to levy of interest under section 234B, 234C and 234D of the Act are consequential in nature.
Ground No. 5 relating to initiation of penalty proceedings under section 271(1)(c) of the Act is premature and hence not adjudicated.
Motherson Sumi Systems Limited vs. DCIT
In the result, appeal of the assessee is allowed for statistical purposes.