2013 (6) TMI 104 - HC - Income Tax

Interest income - operating income or not? - Transfer pricing adjustment - Whether loss on sale of fixed assets, interest paid to income tax, office closure cost, amount paid to telephone adalat are abnormal costs to be excluded while computing the operating expenses? - Held that - Questions concerned are essentially are of fact and do not give rise to any substantial questions of law. Whether a particular activity of the assessee i.e. the interest generating activity in this case, should be taken into consideration in the determination of the ALP is a question which needs to be decided considering the nature of the business of the assessee, which is referred to as business model in the transfer-pricing jargon. It has been rightly observed by the Tribunal that such a consideration is not relevant for the purpose of determining the operating income of an assessee for the purposes of transfer pricing regulations. The Tribunal‟s view that in such circumstances the interest income cannot be considered to be its operating income is essentially a question of fact to be gathered from the nature of the assessee s business and its business profile - no substantial questions of law meriting scrutiny of this Court. Whether the appellant is entitled to the benefit of 5% range mentioned in Proviso 92C(2) while computing the Arm s Length Price - Held that - This controversy need not detain any more, as it has been put at rest by the amendment made to section 92C by the insertion of sub-section (2A) by the Finance Act, 2012 with retrospective effect from 01.04.2002. Having regard to the amendment made with retrospective effect from the assessment year 2002-03, which is the year before us, no substantial question of law can be said to arise. Expenses relating to closure of the business - whether were abnormal expenses and cannot be considered while arriving at the ALP - Tribunal noted that closure of the Indian units would automatically reduce the costs of the associated enterprisetherefore, would be a relevant issue for inclusion in the operating costs - Held that - Tribunal failed to keep in mind that even according to the AO the assessee was being compensated for its agency and market support service by way of handling commission and fixed service fee. It seems rather remote that considering the nature of the remuneration received by the assessee from its associated enterprise, the payment of compensation on closure of the Indian offices would have any impact on the transfer pricing issue or in the fixing of the ALP. It therefore, appears that having regard to the nature and manner in which the assessee is remunerated for its services, the payment of compensation to the Indian units on their closure would represent abnormal costs which have to be excluded in the determination of the ALP. The income tax authorities as well as the Tribunal have erred in holding to the contrary - in favour of the assessee. Attribution of the allocation of overhead expenses to trading of goods segment vis-a-vis attributing it to agency support services - Held that - It is nobody s case that the expenses were not incurred. It is also not the case of the revenue that the bifurcation of the indirect expenses on the basis of revenues is not an appropriate allocation key . The decision of both the CIT (A) and the ITAT is based on the undisputed figures submitted by the assessee. These figures have also been scrutinized by the transfer pricing officer. Therefore, no perversity in the decision of the Tribunal because it is based on the evidence embedded in the books of accounts themselves. The charge of perversity raised by the revenue seems to be unjustified. T- no substantial question of law arises.

Issues Involved:
1. Classification of interest income as operating or non-operating income.
2. Allowance of relatable expenses for interest income.
3. Application of the 5% range under Proviso 92C(2) for transfer pricing adjustments.
4. Consideration of data from previous years for transfer pricing.
5. Treatment of closure of business expenses in transfer pricing.
6. Non-consideration of relevant material and evidence by the Tribunal.
7. Allocation of overhead expenses between trading and agency support services.

Issue-wise Detailed Analysis:

1. Classification of Interest Income as Operating or Non-Operating Income:
The assessee argued that the interest income of Rs. 1.72 crores should be considered as operating income, citing its business model and the integral nature of investing surplus funds. The Tribunal, however, agreed with the TPO and CIT (Appeals) that interest income from surplus funds is non-operating income. The Tribunal's findings were based on the nature of the assessee's core business activities, which did not primarily involve earning interest income. The Tribunal concluded that including interest income in operating income would result in an inappropriate Profit-Level Indicator (PLI) for a service provider like the assessee.

2. Allowance of Relatable Expenses for Interest Income:
The Tribunal found that neither the interest income nor the interest expenditure should be considered in the computation of the arm's length price (ALP). The assessee admitted that question No.3 did not arise from the Tribunal's order. The Tribunal's decision was based on the nature of the business and the separation of interest income from core business activities.

3. Application of the 5% Range Under Proviso 92C(2):
The assessee contended that it was denied the benefit of the 5% range under Proviso 92C(2). The Tribunal held that the proviso does not provide a standard deduction but ensures that the transfer price is not disturbed if it is within +5% of the arithmetic mean of comparable prices. The Tribunal found that the assessee's case did not fall within this variation. This issue was further resolved by the retrospective amendment to Section 92C(2A) by the Finance Act, 2012, which clarified that the 5% variation applies only if the difference exceeds 5% of the arithmetic mean.

4. Consideration of Data from Previous Years for Transfer Pricing:
The assessee argued that data from the previous two years should be considered for determining the ALP. However, the Tribunal noted that the assessee did not press this ground before it, leading to its rejection. The Tribunal's decision was based on the Special Bench's decision in the case of Aztectech Software & Technology, which was against the assessee.

5. Treatment of Closure of Business Expenses in Transfer Pricing:
The Tribunal upheld the revenue's view that closure expenses should be included in operating costs, as the closure of Indian units would reduce the costs of the associated enterprise. However, the Tribunal's decision was challenged on the grounds that the assessee was compensated by a fee or commission, not on a cost-plus basis. The Tribunal's decision was found to be erroneous, as the closure costs should be considered abnormal and excluded from the ALP computation.

6. Non-Consideration of Relevant Material and Evidence by the Tribunal:
The Tribunal's decision was challenged on the grounds of non-consideration of relevant material and evidence. This question was answered against the assessee, as the Tribunal had considered the relevant material in its decision-making process.

7. Allocation of Overhead Expenses Between Trading and Agency Support Services:
The revenue contended that the allocation of overhead expenses to the trading segment was not justified. The Tribunal, however, agreed with the CIT (Appeals) that the expenses had no relation to the international transactions and should be excluded from the commission segment. The Tribunal's decision was based on the undisputed figures submitted by the assessee and scrutinized by the TPO. The Tribunal found no perversity in the decision, as it was based on evidence from the books of accounts.

Conclusion:
The appeal of the revenue (ITA No.1114/2011) was dismissed, while the appeal of the assessee (ITA No.1042/2011) was allowed in part. No substantial questions of law were found to arise from the Tribunal's order, except for the treatment of closure expenses, which was decided in favor of the assessee.

← Previous Next →