2014 (4) TMI 930 - AT - Income Tax

Determination of ALP u/s 92C of the Act - Transfer pricing adjustment - Addition on interest Held that - Junk bond rate canot accepted while analyzing loans advanced internationally Relying upon Siva Industries & Holdings Ltd. Versus Assistant Commissioner of Income-tax, Company Circle-VI(4), Chennai 2011 (5) TMI 451 - ITAT, CHENNAI - assessee has advanced a loan of USD 150,000 to CES, USA @ 6% interest per annum - Another loan of USD 6,80,000 was converted into equity share capital and the value of interest received up to the date of conversion was at Rs. 15,56,833/-, for which rate of interest calculated at Libor Plus 157 basis points - Assessee has adopted Libor 1.57% base points, there was no reason to restore the matter to the TPO as the rate of Libor can be considered as ALP Decided in favour of Assessee. Exclusion of communication expenses Held that - The decision in ITO v. Saksoft Ltd. 2009 (3) TMI 243 - ITAT MADRAS-D followed - the AO is directed to exclude the communication expenses from the total turnover also and workout the deduction accordingly Decided in favour of Assessee. Determination of ALP u/s 92C of the Act - Transfer pricing adjustment Income from software segment, ITES segment and capital advances to AE Held that - As already decided that these companies are not to be selected on various reasons, the objections of Assessee s upheld and the TPO/AO is directed to work out the arithmetic mean of PLI on the balance of companies Decided in favour of Assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustments in ITES Segment.
2. Transfer Pricing Adjustments in Software Development Segment.
3. Determination of ALP for Interest on Loan to AEs.
4. Exclusion of Communication Expenses from Export Turnover under Section 10A.

Detailed Analysis:

1. Transfer Pricing Adjustments in ITES Segment:
The Assessee challenged the comparables selected by the TPO for the ITES segment. The TPO had adopted 13 comparables, some of which were contested by the Assessee on various grounds such as involvement in fraud, different functionalities, super-normal profits, and mergers affecting financials. The Tribunal upheld the Assessee's objections, directing the TPO/AO to exclude these disputed companies and recalculate the arithmetic mean of the Profit Level Indicator (PLI). The specific companies excluded were Maple eSolutions Ltd., Vishal Information Technologies Ltd., Asit C. Mehta Financial Services Ltd., Spanco Ltd., Goldstone Infratech Ltd., Allsec Technologies Ltd., Datamatics Financial Services Ltd., Apex Knowledge Solutions P. Ltd., and Transworks Information Services Ltd.

2. Transfer Pricing Adjustments in Software Development Segment:
The Assessee objected to certain comparables selected by the TPO for the software development segment, citing reasons such as differences in business models, super-normal profits, and significant acquisitions. The Tribunal accepted the Assessee's objections and directed the TPO to exclude the disputed companies, including Infosys Ltd., Flextronics Software Systems Ltd., Persistent Systems Ltd., KALS Info Systems Ltd., Accel Transmatics Ltd., and Megasoft Ltd. The TPO was instructed to rework the arithmetic mean of the PLI after excluding these companies.

3. Determination of ALP for Interest on Loan to AEs:
The Assessee had received interest on a loan to its AE at LIBOR plus 1.57%. The TPO had benchmarked the interest at 14% based on the junk bond rate, leading to an adjustment. The DRP majority opinion favored benchmarking the interest rate at LIBOR plus certain basis points, which was not implemented by the AO. The Tribunal agreed with the DRP's majority opinion, rejecting the junk bond rate and accepting LIBOR plus 1.57% as the ALP. The Tribunal cited precedents from coordinate benches supporting the use of LIBOR for international transactions.

4. Exclusion of Communication Expenses from Export Turnover under Section 10A:
The AO had excluded communication expenses from the export turnover but not from the total turnover while calculating the deduction under Section 10A. The Assessee argued that these expenses should also be excluded from the total turnover. The Tribunal upheld the Assessee's contention, directing the AO to exclude the communication expenses from the total turnover as well, in line with decisions from the Special Bench of the ITAT and other coordinate benches.

Conclusion:
The Tribunal allowed the Assessee's appeal partly, directing necessary adjustments and recalculations by the TPO/AO in line with the Tribunal's findings on the disputed comparables and the determination of ALP for interest on loans. The Tribunal also directed the AO to exclude communication expenses from the total turnover for Section 10A deductions. The appeal was pronounced in the open court on 29th November 2013.