2015 (5) TMI 970 - AT - Income Tax

Transfer pricing adjustment - TPO benchmarking the transaction of interest due on amounts outstanding from its AEs at LIBOR plus 300 basis points - Held that - The assessee in the present set of facts was carrying on its business with its AEs and the majority of business receipts were receivable from the AEs. Once the transaction between the assessee and its AEs was in foreign currency, then the same part takes the nature of international transaction and the said transactions have to be looked upon by applying the commercial principles with regard to an international transaction. If that is so, then the domestic lending rates cannot be applied in order to benchmark the transaction of the assessee with its AEs and the international rates fixed by LIBOR would come into play. There was substantial delay in receipt of payment from AEs and substantial amount stood unrecovered from the AEs beyond the stipulated periods. The assessee initially did not charge interest from the AEs and subsequently, charged interest from AEs at AFR i.e. America n Federal Rate @ 2.98%. The amount is in the character of loan or borrowing after the stipulated credit period and consequently, such recovery of dues in the international transaction with its AEs is to be benchmarked by applying CUP method of international bank rates. Accordingly, we hold that LIBOR plus rates have to be applied to the amounts due from the AEs beyond the period of 25 days, which was the weighted average number of days delay allowed to the third parties. After excluding the period of 25 days, interest is to be charged on the balance number of days of delay by applying LIBOR plus rates. We find that the TPO had applied average rate of LIBOR plus 300 basis points as the reasonable rate of interest, which the assessee should have charged to its AEs. The TPO had also charged plus 200 basis points as guaranteed commission. The CIT(A) has given a finding that in the absence of any expenditure having been incurred by the assessee on such guaranteed commission, there was no merit in including the same. The Revenue is not in appeal against the said finding of the CIT(A) and in the totality of the above said facts and circumstances, where it has not been established that the assessee has not paid any commission, there was no merit in charging plus 200 basis as guaranteed commission. However, we uphold the order of TPO in benchmarking the transaction of interest due on amounts outstanding from its AEs at LIBOR plus 300 basis points. The Assessing Officer / TPO shall determine the adjustment, if any, to be made in the hands of assessee on account of interest chargeable on the amounts due from its AEs beyond the credit period of 25 days after allowing the benefit of interest recovered by the assessee from its AEs

Issues Involved:
1. Adjustment under transfer pricing on account of delayed recoveries from Associated Enterprises (AEs).
2. Eligibility for deduction under Section 10A of the Income Tax Act for various units.
3. Set off of losses of units eligible for deduction under Section 10A against business profits.

Detailed Analysis:

1. Adjustment under Transfer Pricing on Account of Delayed Recoveries from Associated Enterprises (AEs):

Principle and Amount of Adjustment:
The Tribunal upheld the adjustment made by the Transfer Pricing Officer (TPO) regarding delayed recoveries from AEs. The TPO had determined an adjustment of Rs. 3,29,17,433/- for the delayed recoveries. The CIT(A) directed the computation of the adjustment at 7%, the prevailing rate on short-term deposits of 90 days.

Industry Practice and Interest Rates:
The Tribunal noted that the assessee did not charge interest on delayed recoveries from both AEs and non-AEs. The TPO applied the Comparable Uncontrolled Price (CUP) method using international bank rates. The Tribunal held that the interest rate should be benchmarked using LIBOR plus rates, as the transactions were international. The Tribunal concluded that the interest should be charged at LIBOR plus 300 basis points, excluding the 200 basis points for guarantee commission since no actual expenditure was incurred by the assessee on such commission.

2. Eligibility for Deduction under Section 10A of the Income Tax Act for Various Units:

General Eligibility:
The Tribunal upheld the CIT(A)'s decision to allow the deduction under Section 10A for all the units of the assessee. The Tribunal relied on its earlier orders and the Hon'ble Bombay High Court's judgments, which had consistently allowed the deduction for the units in question.

Specific Units:
- Chinchwad, Akurdi, and Millennium Business Park Units:
The Tribunal found that these units were not formed by splitting or reconstructing existing businesses. They were treated as independent units eligible for Section 10A deduction, following the Tribunal's earlier orders and the Hon'ble Bombay High Court's decisions.

- Bangalore and SPZ 47 Units:
The Tribunal upheld the CIT(A)'s finding that these units were independent undertakings. The units were established with separate STPI approvals, and the percentage of transferred employees was within the limits prescribed by the CBDT. The Tribunal rejected the Assessing Officer's view that the SPZ 47 unit was merely a system hub, accepting the assessee's explanation that it was engaged in remote infrastructure management.

- Other 8 Units:
The Tribunal dismissed the Revenue's appeal regarding the eligibility of these units for Section 10A deduction, following its earlier decisions for assessment years 2002-03 and 2003-04.

3. Set Off of Losses of Units Eligible for Deduction under Section 10A Against Business Profits:

The Tribunal upheld the CIT(A)'s decision to allow the set-off of losses of Section 10A units against the business profits. This issue was squarely covered by the Tribunal's earlier orders and the Hon'ble Bombay High Court's judgment in the assessee's own case. The Tribunal reiterated that Section 10A, post-amendment, provides for a deduction rather than an exemption, allowing the set-off of losses against other business income.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal. The Tribunal upheld the CIT(A)'s decisions on the eligibility for Section 10A deductions and the set-off of losses. It also directed the TPO to compute the arm's length price adjustment for delayed recoveries using LIBOR plus 300 basis points, excluding the guarantee commission.

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