2022 (11) TMI 1340 - AT - Income Tax

TP Adjustment - addition of corporate guarantee fees - TPO has made TP adjustment at 2% without considering any comparable unrelated transaction and on a notional basis - DRP directed the AO to adopt the rate at 0.92% as determined by the TPO in the first round of proceedings - HELD THAT - We notice that this issue is covered by the orders of the Tribunal in Medrich Ltd 2021 (4) TMI 1321 - ITAT BANGALORE in the case of Manipal Global Education Services (P.) Ltd 2019 (5) TMI 1942 - ITAT BANGALORE in the case of Xchanging Solutions Ltd 2016 (10) TMI 1211 - ITAT BANGALORE and in the case of ACIT v Tejas Networks Ltd 2022 (2) TMI 1326 - ITAT BANGALORE wherein it was directed to AO/TPO to make TP adjustments in respect of corporate guarantee at 0.50% for the assessment years under consideration. With respect to the balance on which the TP adjustment needs to be made, we see merit in the contention of the ld AR that the TPO himself has applied the rate on the closing balance of the outstanding guarantee in assessee s own case for AY 2012-13 and we therefore direct the AO to apply the rate @ 0.50% on the closing balance the of the corporate guarantee as of 31.03.2011 for the purpose of TP adjustment. It is ordered accordingly. Exclusion of royalty income while computing deduction under section 10A/10AA - We notice that the Hon ble Karnataka High Court in assessee s own case for the AY 2009-10 ( 2021 (11) TMI 1146 - KARNATAKA HIGH COURT held that royalty income constitutes profits and gains of business and eligible for deduction under section 10A. Thus we hold that the royalty income from licensing of software products should be considered as profits of business of eligible units for the purposes of providing deduction under section 10A and 10AA of the Act. Exclusion of expenses incurred in foreign currency while computing deduction u/s 10A - HELD THAT - Section 10A does not warrant exclusion of expenses incurred in foreign currency attributable to rendering of services in connection with development of computer software. Section 10AA specifically warrants exclusion of expenses incurred in foreign currency attributable to rendering of services in connection with computer software. Similar prescription is absent in section 10A. The exclusion from Export turnover under section 10A is of expenses incurred in foreign currency in providing technical services outside India. Technical services would mean making available specialized knowledge or information to a third person. The recipient of such knowledge or information is then enabled to apply and use such knowledge and information for the purpose of carrying out any work. Technical services would therefore mean and refer to the usage or deployment of specialized skills in rendering any services of a consultancy nature. Whether the services rendered by the assessee in terms of software development is to be regarded as technical services? - AO while reducing the expenses incurred in foreign currency has done it for the SEZ units also. In view of the fact that the expenses incurred in foreign currency being already reduced, in our considered view reducing the expenses based on the breakup in notes to accounts would amount to double reduction and not warranted. It is further noticed that the AO has made the similar reduction from the total turnover also while computing the deduction u/s.10A and 10AA. We therefore direct the AO to delete the deduction of Rs.7329.94 lakhs made in the export turnover and total turnover. It is ordered accordingly. Addition of withholding taxes and income tax - HELD THAT - From the perusal of records it is noticed that the taxable income is computed by the assessee by making additions and deletions to profit after tax and a sum of Rs. 3,72,68,820 is disallowed by the Assessee under the head Expenses debited to P L account and Withholding taxes and income taxes, net to profit after tax to arrive at profit before tax. Therefore we see merit in the argument that the addition made by the AO is not correct. We remit the issue back to the AO to verify and delete the addition. Disallowance u/s 14A - HELD THAT - We direct the AO to verify whether the investment in joint ventures which had not yielded any dividend income for the year under consideration and exclude the same for the purpose of computation of average value of investments under section 14A and for computation of disallowance under section 14A read with rule 8D in accordance with the decision of the Special bench of ITAT in the case of ACIT v Vireet Investment P Ltd 2017 (6) TMI 1124 - ITAT DELHI It is ordered accordingly.

Summary

Issues Involved:
1. Validity of draft assessment order.
2. Transfer Pricing (TP) adjustment on Corporate Guarantee.
3. Exclusion of royalty income from profits eligible for deduction under sections 10A/10AA.
4. Reduction of expenses incurred in foreign currency from export turnover while computing deduction under sections 10A/10AA.
5. Foreign Tax Credit.
6. Levy of interest under section 234B.
7. Disallowance under section 14A.
8. General grounds and prayer regarding various additions/disallowances.

Issue-Wise Detailed Analysis:

1. Validity of Draft Assessment Order:
The assessee raised objections regarding the validity of the draft assessment order. However, during the hearing, it was submitted that if the issues are considered on merits and adjudicated, the legal issue raised can be left open. Thus, the Tribunal focused on the merits of the case.

2. Transfer Pricing Adjustment on Corporate Guarantee:
The TPO initially made a TP adjustment at 2% without considering any comparable unrelated transactions. The DRP directed the AO to adopt the rate at 0.92%. The Tribunal noted that the judiciary has consistently held that the arm's length price of a corporate guarantee transaction ranges between 0.20% to 0.5%. The Tribunal directed the AO to apply the rate of 0.50% on the closing balance of the corporate guarantee as of 31.03.2011.

3. Exclusion of Royalty Income from Profits Eligible for Deduction Under Sections 10A/10AA:
The AO excluded royalty income from the profits eligible for deduction under sections 10A/10AA, relying on the Supreme Court decision in Engineering Analysis Centre of Excellence (P.) Ltd vs. CIT. The Tribunal, however, followed the Karnataka High Court decision in the assessee's own case, which held that royalty income from licensing software products should be considered as profits of business of eligible units for the purposes of providing deduction under sections 10A and 10AA.

4. Reduction of Expenses Incurred in Foreign Currency from Export Turnover While Computing Deduction Under Sections 10A/10AA:
The AO excluded expenses incurred in foreign currency from the export turnover of the 10A units. The Tribunal noted that the definition of export turnover under section 10A does not warrant exclusion of expenses incurred in foreign currency attributable to rendering of services in connection with the development of computer software. The Tribunal directed the AO to delete the deduction made in the export turnover and total turnover.

5. Foreign Tax Credit:
The AO made an addition stating that the computation of income should begin with the figure constituting profit before tax. The Tribunal found merit in the argument that the addition made by the AO was incorrect and remitted the issue back to the AO to verify and delete the addition.

6. Levy of Interest Under Section 234B:
This ground was considered consequential and did not warrant separate adjudication.

7. Disallowance Under Section 14A:
The Tribunal directed the AO to verify whether the investment in joint ventures which had not yielded any dividend income for the year under consideration and exclude the same for the purpose of computation of average value of investments under section 14A.

8. General Grounds and Prayer Regarding Various Additions/Disallowances:
Grounds No. 1 and 8 were general in nature and did not warrant separate adjudication.

Conclusion:
The Tribunal adjudicated the issues on merits, partly allowing the appeal by the assessee. The Tribunal directed the AO to make necessary adjustments and verifications as per the Tribunal's findings. The legal issue regarding the validity of the draft assessment order was left open.

Pronouncement:
The judgment was pronounced in the open court on the 11th day of November, 2022.