2018 (11) TMI 1578 - AT - Income Tax

TPA - loans advanced to AE - rate of interest to be charged by the assessee from its AE - Held that - In the present case we find from the perusal of TP study report filed before us at pages 179 to 182 we find that assessee as well as TPO had not undertaken the exercise of analyzing the transaction. No material was brought on record indicating the terms of loan i.e. tenure of loan security offered terms of repayment of loan currency in which loan is to be repaid etc. and RBI policy governing advancing of loans by Indian holding company to its foreign subsidiary companies credit rating etc. determination of credit rating of the lender and borrower identification of comparable third party loan agreements. Therefore we remand the matter back to the TPO with a direction that assessee-company shall submit the TP study on the above loans and the TPO shall consider the analysis and bench mark the transaction by adopting legal position as enunciated in the case law cited above. Thus this ground of appeal is partly allowed for statistical purposes. ALP addition on account of corporate guarantee - Held that - The approach of the TPO applying bench marking for ALP for corporate guarantee cannot be upheld. There cannot be universal application of any rate of commission. It depends upon terms and conditions on which loan has been given risk undertaken and relationship between bank and client economic and business interest are some of the major factors which are required to be taken into consideration to arrive at appropriate rate of commission. In the present case neither the assessee nor the TPO analyzed the transactions in terms of the above stated facts. Therefore we deem it appropriate to remand the matter to the file of the TPO/AO for fresh adjudication after analyzing the transaction in the above stated terms. TPO shall bench mark the transactions of services of providing bank guarantee to its AE by adopting comparable unrelated transactions. As held in Tata Auto Comp. System Ltd 2015 (4) TMI 681 - BOMBAY HIGH COURT the considerations applied for issuance of corporate guarantee are distinct from that of bank guarantee. Therefore bank guarantee commission cannot be applied. Accordingly this ground of appeal is partly allowed for statistical purposes. Disallowance u/s 14A r.w.r 8D - Held that - There is no dispute about applicability of rule 14A as the assessee had earned exempt income. The Assessee also not denying applicability of rule 8D of IT Rules. However only contention advanced is while computing average value of investments for the purpose of computing disallowance under sub-clause (3) of rule 8D it is contended that investments which yielded exempt income should be taken into consideration and the value of investments in equity of overseas/subsidiaries debentures share application money should not be taken into consideration. From the perusal of orders of the lower authorities it is clear that the assessee had not raised this contention before the lower authorities. We find that the assessee had neither filed any application for admission of this additional ground of appeal nor had the assessee had filed evidence in support of the above contention. Therefore in the absence of application for admission of additional grounds of appeal the contention cannot be admitted as it is a mixed question of fact and law. Exclusion of royalty income from eligible profits for deduction u/s 10A/10AA - Held that - it is clear that goods exported have should have direct nexus with industrial undertaking which is a duly registered 100% EOU under STPI scheme. In the present case there was no material on record establishing that IPR are generated by the industrial undertaking which is duly registered under 10A/10AA. Even before lower authorities the assessee had not discharged its burden of proving nexus between industrial undertaking and royalty income. In the decisions relied upon by the Learned AR of the assessee the issue before the Hon ble High Court was whether interest income earned on EFI etc. forms part of the business income and whether same can be claimed as eligible profits as business income u/s 10A. In those cases there does not exist any dispute as regards existence of nexus between income and industrial undertaking. Therefore the decisions relied upon by the Learned AR of the assessee do not come to the rescue of the assessee. Hon ble Tribunal Delhi bench in the case of Zuari Leasing & Finance Corporation Ltd. vs. ITO 2008 (4) TMI 359 - ITAT DELHI-I held that the Tribunal should not remand back to the file of the AO in order to give a second innings to the litigant. Thus there is no merit in the ground of appeal raised by the assessee. Deduction of expenses incurred in foreign currency from export turn over while computing deduction u/s 10A/10AA - Held that - Hon ble DRP directed that telecom expenditure insurance charges incurred in foreign currency incurred in connection with delivery of software be reduced from the total turnover as well as export turnover following the decision of the jurisdictional High Court in the case of CIT vs. Tata Elxsi 2011 (8) TMI 782 - KARNATAKA HIGH COURT and expenditure incurred towards travelling and salary of the employees of the assessee deployed abroad for development testing installation and management of software outside India directed the AO to exclude same from the export turnover following the decision of the coordinate bench of Tribunal in the assessee s own case for assessment years 2004-05 2006-07 and 2008-09. Reduction of communication and insurance charges from export turnover so that the AO has adopted excessive amount as the amounts were not incurred on export or delivery of software outside India. This requires verification of facts. Accordingly we remand this issue back to the file of the AO to verify the contention of the assessee. Disallowance of loss on account of foreign exchange fluctuation on repayment of loan - Held that - Disallowance of expenditure results in inflation of business profits which are eligible for deduction u/s 10A. This proposition of law is clearly enunciated by the Hon ble Bombay High Court in the case of Gem Jewellery 2010 (6) TMI 65 - BOMBAY HIGH COURT . Computation of deduction u/s 10A - Held that - As regards portion of the expenses incurred in foreign exchange towards insurance travelling and communication is concerned in the case of CIT vs. Tata Elxsi 2011 (8) TMI 782 - KARNATAKA HIGH COURT held that the same is required to be reduced from export turnover as well as total turnover. Respectfully following the ratio of the decision of the Hon ble jurisdictional High Court we direct that expenses incurred in foreign exchange towards insurance travelling and communication are to be reduced both from export turnover as well as total turnover.

Summary

Issues Involved:
1. Transfer Pricing Adjustment on Interest Received from Subsidiary
2. Transfer Pricing Adjustment on Corporate Guarantee
3. Disallowance under Section 14A
4. Exclusion of Royalty Income from Profits Eligible for Deduction under Section 10A/10AA
5. Reduction of Expenses Incurred in Foreign Currency from Export Turnover
6. Reduction of Communication and Insurance Charges from Export Turnover
7. Deduction under Section 10A for Disallowance of Loss on Foreign Exchange Fluctuation
8. Computation of Deduction under Section 10A of the Act

Detailed Analysis:

1. Transfer Pricing Adjustment on Interest Received from Subsidiary:
The assessee advanced loans to its subsidiary in the USA, charging interest at 3.24% against the LIBOR rate of 0.54%. The TPO applied a rate of 13.46% based on the yield rate of corporate bonds. The Tribunal cited the Delhi High Court's decision in Cotton Naturals (I) (P.) Ltd., emphasizing that the LIBOR rate should be used for benchmarking international transactions. The matter was remanded to the TPO for fresh adjudication, directing the assessee to submit a comprehensive TP study.

2. Transfer Pricing Adjustment on Corporate Guarantee:
The TPO treated the corporate guarantee provided to Sasken OY, Finland, as an international transaction, suggesting an ALP adjustment. The Tribunal noted that the transaction of furnishing a bank guarantee constitutes an international transaction. The TPO's approach of applying a universal rate of commission was rejected. The matter was remanded to the TPO for fresh adjudication, emphasizing the need to analyze the transaction terms and conditions.

3. Disallowance under Section 14A:
The AO applied Rule 8D of the IT Rules, disallowing Rs. 1,04,91,588/-. The Tribunal noted that the assessee did not raise specific contentions before the lower authorities and failed to file an application for admission of additional grounds. Consequently, the Tribunal dismissed the grounds of appeal related to Section 14A disallowance.

4. Exclusion of Royalty Income from Profits Eligible for Deduction under Section 10A/10AA:
The AO excluded royalty income from eligible profits, stating it was not derived directly from the industrial undertaking. The Tribunal upheld this view, noting the absence of material evidence establishing a nexus between the industrial undertaking and royalty income. The Tribunal dismissed the ground of appeal, rejecting the plea for remand.

5. Reduction of Expenses Incurred in Foreign Currency from Export Turnover:
The AO reduced Rs. 7329.94 lakhs from export turnover. The Hon'ble DRP directed the AO to verify the nature of the expenditure and follow the Tribunal's decision in the assessee's own case for earlier assessment years. The Tribunal found no grievance in the DRP's direction and dismissed the ground of appeal as infructuous.

6. Reduction of Communication and Insurance Charges from Export Turnover:
The assessee contended that the AO adopted excessive amounts. The Tribunal remanded the issue back to the AO for verification, allowing the ground of appeal partly for statistical purposes.

7. Deduction under Section 10A for Disallowance of Loss on Foreign Exchange Fluctuation:
The assessee admitted the loss was capital in nature but contended it should inflate business profits eligible for deduction under Section 10A. The Tribunal agreed, following the Bombay High Court's decision in Gem Jewellery, allowing the ground of appeal.

8. Computation of Deduction under Section 10A of the Act:
The revenue's appeal challenged the DRP's direction to exclude certain expenses from both export turnover and total turnover. The Tribunal upheld the jurisdictional High Court's decision in Tata Elxsi, dismissing the revenue's grounds of appeal.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the revenue's appeal. The detailed analysis and remand directions emphasize the need for precise benchmarking and verification of transactions and expenses.