2016 (3) TMI 1396 - AT - Income Tax

TP Adjustment - international transaction arising from interest charged on the loan advanced by the assessee to its AE - assessee has charged interest at WIBOR 1%, whereas, the TPO had adopted BPLR of SBI for benchmarking the transaction - Whether the rate of interest to be adopted is BPLR of SBI or WIBOR 1% for benchmarking the transaction? - HELD THAT - AR pointed that due to frequent changing of the BPLR by all the banks, the prevalent BPLR of all the Indian Banks are not readily available in the Public Domain or any statistical database. Poland being member of European Union, the more appropriate rate for comparison would be the RFC rates for Euros. The average RFC rates for Euros being 2.80% and the highest rate for 3 years and above being 3.30% only, the rate of 5.47% charged by the assessee company to its subsidiary in Poland is justified. We find that the similar issue had come up before the Coordinate Bench of the Tribunal in the case of Varroc Engineering Pvt. Ltd. Vs. The Asstt. Commissioner of Income Tax 2015 (3) TMI 111 - ITAT PUNE In the said case the assessee had benchmarked its international transaction relating to interest rate charged at international rate. The benchmarking was adopting at foreign currency City Bank rates. The TPO rejected the benchmarking made by the assessee and adopted the BPLR. We hold that the DRP has erred in confirming the findings of the TPO in adopting BPLR rates. The TPO is directed to recompute the interest rate by adopting WIBOR 1% in respect of the international transaction under appeal. Accordingly, ground no. 3 raised in the appeal is allowed. Claim of deduction u/s.10A - HELD THAT - We find that identical issue had come up before the Tribunal in appeal of the assessee for the assessment years 2005-06 and 2006-07. The Tribunal decided the issue in favour of the assessee. The relevant extract of the order of the Tribunal 2015 (12) TMI 398 - ITAT PUNE held that the deduction under section 10A of the Act has to be given at the stage when the profits and gains of the business are computed in the first instance.

Issues Involved:
1. Determination of taxable income.
2. Addition to the transfer price of the international transaction of "Charge of Interest."
3. Restriction of deduction under section 10A of the Income Tax Act, 1961.
4. Computation of deduction under section 10A after set-off of losses of other business units/undertakings.

Issue-wise Detailed Analysis:

1. Determination of Taxable Income:
The appellant challenged the assessment order that determined the taxable income at Rs. 7,69,28,572/- instead of NIL as returned by the appellant. The appellant's income was adjusted by the Assessing Officer (AO) based on the directions of the Dispute Resolution Panel (DRP) and the Transfer Pricing Officer (TPO). The appellant's grounds for appeal included objections to the adjustments made by the TPO and the disallowance of deductions under section 10A.

2. Addition to the Transfer Price of the International Transaction of "Charge of Interest":
The appellant contested the addition of Rs. 2,27,809/- made by the TPO to the transfer price of the international transaction of charging interest on a loan to its associated enterprise (AE) in Poland. The TPO adopted the Banking Prime Lending Rate (BPLR) of State Bank of India (SBI) at 12.25% instead of the Warsaw Interbank Offer Rate (WIBOR) + 1% used by the appellant. The appellant argued that the correct indicative factor for determining the charge of interest should be the WIBOR + 1% due to the nature of the transaction and the location of the AE in Poland. The Tribunal, referencing several precedents, including the case of Varroc Engineering Pvt. Ltd. vs. The Asstt. Commissioner of Income Tax, held that for international transactions in foreign currency, commercial principles regarding international transactions should apply. Thus, the Tribunal directed the TPO to recompute the interest rate using WIBOR + 1%.

3. Restriction of Deduction under Section 10A:
The appellant claimed a deduction under section 10A for its Software Technology Park (STP) units before setting off losses from other units. The AO disallowed this, following the earlier order for assessment year 2005-06, and computed the deduction after setting off the profits of eligible units with the losses of other eligible/non-eligible units. The Tribunal referenced its own decision in the appellant's case for assessment years 2005-06 and 2006-07, where it was held that the deduction under section 10A should be computed separately for each unit without setting off losses from other units. The Tribunal reiterated that the deduction under section 10A is unit-specific and should be computed before any intra-head adjustments.

4. Computation of Deduction under Section 10A after Set-off of Losses of Other Business Units/Undertakings:
The appellant argued that the deduction under section 10A should be computed at the unit level without setting off losses from other units. The Tribunal upheld this view, citing the Bombay High Court's decision in CIT vs. Black & Veatch Consulting Pvt. Ltd., which clarified that the deduction under section 10A should be applied at the stage of computing the profits and gains of business before any intra-head adjustments. The Tribunal concluded that the AO and DRP erred in restricting the deduction under section 10A by setting off losses from other units and directed the AO to recompute the deduction accordingly.

General Grounds:
The Tribunal noted that ground nos. 1 and 8 raised by the appellant were general in nature and did not require specific adjudication.

Conclusion:
The Tribunal allowed the appeal partly, directing the TPO to recompute the interest rate using WIBOR + 1% and the AO to recompute the deduction under section 10A without setting off losses from other units. The appeal was disposed of in the terms indicated above.

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