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2014 (1) TMI 1363 - AT - Income TaxArm s length price in respect of interest charged on loan - Held that - The issue has been restored for fresh adjudication with a direction to the assessing officer to examine and calculate the differential interest to be levied for the relevant period instead of charging differential interest for the entire period of one year. Arm s length price in respect of guarantee to the Bankers of subsidiaries - Held that - The assessee has rendered a service to its US subsidiary for which it must charge fees at an arm s-length - The issue has been set aside for determining the quantum of corporate guarantee rates following the principle laid down in the aforesaid case. Purchase of software disallowed u/s 40(a)(ia) - Held that - The licence is purchased everytime by the assessee when it has to sell it to its customer - The amount paid for software is simply purchase cost of trading goods because the licence in respect of software is not obtained by the assessee - The perpetual licence is given directly to the end customer by the vendor company - The payments made by assessee to the Netherlands company will not fall under the ambit of Royalty as per Article 12 of the India-Netherlands DTAA - No withholding tax is liable to be deducted - Decided in favour of assessee. Expenses toward technical consultancy charges - Held that - The UK and USA subsidiaries did only contractual work parcelled out to it whose results were given to clients directly and no technical knowledge was made available to assessee - The payment would not fall under fee fo technical services even as per DTAA - Decided in favour of assessee. Whether communication expenses are to be exluded from export turnover - Held that - Decision in Patni Telecom Pvt. Ltd. vs. ITO 2008 (1) TMI 452 - ITAT HYDERABAD-A followed - The said expenses are not to be deducted from export turnover - The issue has been restored for fresh adjudication. Whether profit on account of foreign exchange fluctuation be reduced from export turnover - Held that - Decision in Sanyo LSI Technology India Private Limited 2014 (1) TMI 1257 - ITAT BANGALORE followed - The foreign exchange gain was income derived by export business of the assessee, hence, eligible for deduction u/s 10A of the Act - On account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business - Decided in favour of assessee.
Issues Involved:
1. Adjustment of Arms Length Price (ALP) for loan interest. 2. Corporate guarantees as international transactions. 3. Characterization of software purchase as royalty. 4. Disallowance of technical consultancy charges. 5. Exclusion of communication expenses from export turnover. 6. Treatment of foreign exchange fluctuation gain. 7. Disallowance of picnic expenses. Issue-Wise Detailed Analysis: 1. Adjustment of Arms Length Price (ALP) for loan interest: The assessee contested the Dispute Resolution Panel's (DRP) decision to grant relief of only Rs.9,03,674/- from the ALP determined by the Transfer Pricing Officer (TPO) at Rs.27,68,740/- for interest on a loan to its subsidiary. The TPO adopted the Indian rate of interest under the Comparable Uncontrolled Price (CUP) Method, determining the ALP at 14% p.a. The DRP partially adjusted this to 7.247%. The Tribunal directed the Assessing Officer (AO) to adopt a reasonable rate of LIBOR + 2% and calculate differential interest for the relevant period, not the entire year. 2. Corporate guarantees as international transactions: The assessee argued against the addition of Rs.12,78,695/- for corporate guarantees issued to City Bank India for its US subsidiary. The DRP and TPO considered it an international transaction under section 92B. The Tribunal noted that the benefit of the guarantee was for the US subsidiary, thus rendering a service for which fees must be charged at arm's length. The Tribunal set aside the issue to the TPO to decide the quantum of corporate guarantee rates as per the method in Glenmark Pharmaceuticals vs. ACIT. 3. Characterization of software purchase as royalty: The assessee objected to the disallowance of Rs.52,55,881/- under section 40(a)(i), arguing that the payment to GE Network Solutions for 'Small World Software' was not royalty but a purchase of a copyrighted article. The Tribunal agreed, noting that the software was bundled with the assessee's own software and sold to customers without obtaining any license. The Tribunal concluded that the payment was for trading goods, not royalty, and hence, no tax withholding was required. 4. Disallowance of technical consultancy charges: The AO disallowed Rs.19,48,02,907/- paid to foreign subsidiaries under section 40(a)(i), citing business connection and technical services. The Tribunal found that the assessee had not habitually secured orders for its subsidiaries but had only parcelled out work. The Tribunal held that section 9(1)(i) was inapplicable and that the retrospective amendment to section 9(1)(vii) could not justify disallowance under section 40(a)(i). The Tribunal also noted that under the India-USA and India-UK treaties, the payments did not fall under Fees for Technical Services (FTS) due to the "make available" clause. 5. Exclusion of communication expenses from export turnover: The AO excluded Rs.1,16,67,429/- of communication expenses from the export turnover. The Tribunal directed the AO not to reduce this amount from the export turnover, referencing the decision in Patni Telecom Pvt. Ltd. vs. ITO, which distinguished between technical services and software development services. 6. Treatment of foreign exchange fluctuation gain: The DRP held that the foreign exchange fluctuation gain of Rs.8,52,831/- should be reduced from both the "profit of the business" and the "total turnover." The Tribunal disagreed, citing the decision in Sanyo LSI Technology India Private Ltd. vs. DCIT, which treated such gains as part of business profits eligible for deduction under section 10A. 7. Disallowance of picnic expenses: The AO disallowed Rs.8,40,444/- for picnic expenses due to the non-production of vouchers. The Tribunal set aside this issue to the AO, directing to give the assessee another opportunity to substantiate its claim. Conclusion: The appeal in ITA No. 115/Hyd/2011 was partly allowed for statistical purposes, and ITA No. 2184/Hyd/2011 was allowed for statistical purposes. The Tribunal provided detailed directions for each issue, ensuring a thorough examination and appropriate relief based on the merits of each case.
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