2010 (4) TMI 704 - AT - Income Tax

Arms Length Price Deduction u/s 80HHC In this case, the assessee in our humble opinion,contrary to the stand of many similar organizations, has taking unsustainable stand that none of the methods prescribed under law, can be followed by it - Mumbai L Bench of the Tribunal in the case of UCB India P. Ltd. vs. ACIT (2009 -TMI - 59726 - ITAT BOMBAY-L) where it is held that section 92C read with Rule 10B(l)(e) deals with Transactions Net Margin Method (TNMM) and it refers to only net profit margin realised by an enterprise from an international transaction or a class of such transaction, but not operational margins of enterprises as a whole - . As both the assessee as well as the Assessing Officer have not followed the law, in the interest of justice, we deem it appropriate to permit the assessee to furnish a fresh transfer pricing study report, in support of its contention, that the transactions with associated enterprises were in fact at arms length Accordingly the matter is referred back to AO for fresh adjudication Business income or other sources - Interest income from the bank deposits - assessee has placed certain monies with the Bank as FD and these deposits were kept as margin money for availing facilities from the bank - The Jurisdictional High Court in the case of Indo Swiss Jewels Ltd. & Another, 284 ITR 389 (Bom) It was held that such interest income, is to be assessed only as income from business Decided in the favour of the assessee Regarding exclusion of 90% of such income from profits of business while computing relief u/s. 8OHHC - The Hon ble Bombay High court in the case of CIT-III Vs. Asian Star Co. Ltd (2010 -TMI - 77709 - BOMBAY HIGH COURT),held that only 90% gross interest is to be eliminated - In the result, both these appeals are allowed for statistical purposes

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions under transfer pricing regulations.
2. Computation of relief under Section 80HHC of the Income Tax Act.
3. Classification of interest income as 'business income' or 'income from other sources.'

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for International Transactions:

The assessee, a partnership firm engaged in the import, manufacture, and export of diamonds, was scrutinized for its international transactions with associated enterprises. The Transfer Pricing Officer (TPO) determined the ALP using the Transactional Net Margin Method (TNMM) despite the assessee's contention that none of the prescribed methods were applicable. The TPO compared the assessee's profit margins with those of other comparable companies and made adjustments based on operational profit ratios. The First Appellate Authority excluded certain comparables, leading to a revised profit margin within the permissible range, thereby deleting the addition of Rs. 1.69 crores made by the Assessing Officer.

The Tribunal upheld the necessity of using one of the prescribed methods under Chapter-X of the Income Tax Act for determining ALP. However, it found fault with the TPO's application of TNMM at the enterprise level instead of transaction level. The Tribunal set aside the TPO's order and remanded the matter to the Assessing Officer for fresh adjudication, allowing the assessee to furnish a new transfer pricing study report.

2. Computation of Relief under Section 80HHC:

The issue involved the treatment of foreign exchange rate difference gains from earlier years. The First Appellate Authority included these gains as part of the export turnover for the purpose of deduction under Section 80HHC. The Revenue contested this inclusion, arguing that the gains did not form part of the export turnover for the assessment year in question. The Tribunal, following the decision of the Special Bench in the case of Prakash Shah, remanded the matter to the Assessing Officer for fresh adjudication in accordance with law.

3. Classification of Interest Income:

The assessee argued that interest income from bank deposits kept as margin money should be classified as 'business income.' The First Appellate Authority dismissed this claim, categorizing it as 'income from other sources.' The Tribunal, referencing the jurisdictional High Court decisions in Indo Swiss Jewels Ltd. and Lok Holdings, held that such interest income should indeed be assessed as 'business income.' However, it also noted that 90% of the gross interest must be excluded while computing relief under Section 80HHC, following the Bombay High Court's decision in CIT-III Vs. Asian Star Co. Ltd.

Conclusion:

The Tribunal allowed the appeals for statistical purposes, setting aside the matters to the Assessing Officer for fresh adjudication. It emphasized the mandatory application of prescribed methods for determining ALP and the correct classification of interest income, while also addressing the computation of relief under Section 80HHC in line with prevailing legal precedents.