2016 (10) TMI 1374 - AT - Income Tax

TP Adjustment - interest on loans from its AEs - HELD THAT - Sasken India earns mostly in foreign currency with 80% of its sales and some of the domestic sales being in foreign currency. As per the newly introduced Safe Harbour rules by the CBDT the prescribed ALP rate is the base rate of SBI if the loan to Indian subsidiaries outside India is in Indian currency. All these facts are acknowledged by the TPO in his order. As pleaded that the impugned loan to its AEs were out of its own funds not out of borrowed funds the loans are given in US dollars interest was received in Indian rupees and when such transactions between it and its AEs are in international transactions the ratio of the above cases ie the transaction would have to be looked upon by applying commercial principles in regard to international transaction and in such cases the domestic prime lending rate would not have applicability and the international rate fixed being LIBOR would come into play. On the facts and circumstances of the case we are of the considered opinion that the issue requires to be examined by the TPO afresh in the light of the above materials and the ratios and accordingly remit the issue to the TPO. Disallowance u/s 14A - AR pleaded that the disallowance made u/s 14A read with rule 8D(2)(iii) has been made without demonstrating the incorrectness of the claim of the assessee that it has not incurred any expenditure towards earning exempt income. The said disallowance is therefore bad in law - HELD THAT - We are of the considered opinion that the issue requires to be examined by the AO afresh in the light of the above amendments and accordingly remit the issue to the AO. Addition under the caption Excess deduction u/s.10A /10AA - HELD THAT - On the facts and circumstances of the case it is clear that neither the AO has examined these issues properly nor they received due attention at the hands of the DRP. We are of the considered view that the above issues are required to be adjudicated by the AO afresh in the light of the above ratio and if the facts are similar to apply the above ratios accordingly and hence these issues are also remitted to the AO. Short credit of TDS - assessee submitted that since the AO has not allowed TDS credit -TDS credit should be fully allowed as claimed in the return of income - HELD THAT - We find that the DRP has directed the AO to verify the credit from the record vis- -vis the claim made by the assessee and give credit to it accordingly. We direct the AO to give credit to the amount claimed by the assessee. Deduction u/s.10A - HELD THAT - DRP had followed the judgment of Hon ble jurisdictional High Court in the case of Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT in directing exclusion of items deducted from export turnover from total turnover also for working out the deduction u/s.10A - Just for the reason that appeal has been filed by the Revenue against the judgment of jurisdictional High Court would not be a reason not to follow the jurisdictional High Court s judgment. We do not find any lacunae in the order of the DRP - In the result appeal of the Revenue stands dismissed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment on Interest Earned on Loans to Associated Enterprises (AEs)
2. Disallowance under Section 14A of the Income Tax Act
3. Excess Deduction under Section 10A / 10AA of the Income Tax Act
4. Short Credit of Tax Deducted at Source (TDS)
5. Levy of Interest under Section 234B of the Income Tax Act
6. Revenue's Appeal on Exclusion of Items from Export Turnover for Section 10A Deduction

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Interest Earned on Loans to Associated Enterprises (AEs):
The assessee, Sasken Communication Technologies Ltd, benchmarked its interest transactions against the LIBOR using the CUP method, receiving higher interest rates of 4.61% and 3.24% compared to the 0.79% LIBOR rate. However, the TPO compared the interest rate to corporate bonds in India, considering the loans to be high-risk and assigning them a BB grade with a 14.74% interest rate, resulting in an addition of Rs. 2,67,68,300 to the assessee's ALP. The DRP confirmed this addition. The assessee filed a rectification petition, arguing errors in the TPO's computation, but the TPO rejected it. The Tribunal remitted the issue to the TPO for fresh examination in light of the new materials and ratios.

2. Disallowance under Section 14A of the Income Tax Act:
The AO disallowed Rs. 1,28,29,387 under Section 14A, invoking Rule 8D, as the assessee had not maintained separate accounts for investments yielding exempt income. The DRP upheld this disallowance, stating that investment decisions are complex and require administrative expenses. The AR argued that the disallowance was made without demonstrating the incorrectness of the assessee's claim and cited the Finance Minister's Budget Speech and subsequent amendments to Rule 8D. The Tribunal remitted the issue to the AO for fresh examination in light of the amendments.

3. Excess Deduction under Section 10A / 10AA of the Income Tax Act:
The AO added Rs. 16,43,07,085 under the caption 'Excess deduction u/s.10A / 10AA', excluding royalty income and certain expenses from export turnover. The DRP did not give specific directions on these exclusions despite the assessee's objections. The Tribunal noted that the AO and DRP had not properly examined these issues and remitted them to the AO for fresh adjudication in light of relevant case laws.

4. Short Credit of Tax Deducted at Source (TDS):
The assessee claimed a shortfall in TDS credit of Rs. 14,08,748. The DRP directed the AO to verify and give credit accordingly. The Tribunal upheld this direction, instructing the AO to allow the TDS credit as claimed by the assessee.

5. Levy of Interest under Section 234B of the Income Tax Act:
The assessee challenged the levy of interest under Section 234B, which the Tribunal noted as consequential. The AO was directed to provide consequential relief.

6. Revenue's Appeal on Exclusion of Items from Export Turnover for Section 10A Deduction:
The Revenue appealed against the DRP's direction to exclude items deducted from export turnover from total turnover for Section 10A deduction, following the jurisdictional High Court's judgment in Tata Elxsi Ltd v. CIT. The Tribunal dismissed the Revenue's appeal, stating that the DRP's order was in line with the High Court's judgment.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes, remitting several issues for fresh examination, and dismissed the Revenue's appeal. The order was pronounced in open court on October 21, 2016.