2016 (5) TMI 1080 - AT - Income Tax

Deduction u/s 10A - interest receipts from FDRs - Held that - There was no business exigency or condition to make short Term FDRs therefore, the investment in FDRs cannot be regarded as inextricably connected with business of the assessee. Accordingly, the interest receipts from such FDRs constitute income from other sources and are not eligible for deduction u/s 10A of Income Tax Act, 1961. Addition of excess payment u/s 40A(2)(b) r.w.s 92CA - Held that - If the payment to Mr. Popp is unreasonably high then in the same proportion income earned is also high as the same is cost plus mark up. Therefore any disallowance will require corresponding correction in receipt also. Therefore, AO was directed to drop the proposed disallowance by the DRP. This finding of the DRP is proper as there is no correlation established by the Assessing Officer to the corresponding income as to the payment to Mr. Popp in the Assessment Order. Therefore, the ground of the Revenue that the addition of ₹ 1,90,00,000/- excess payment u/s 40A(2)(b) r.w.s 92CA of the Act should have been sustain by the DRP does not survive.

Issues Involved:
1. Validity of assessment orders.
2. Transfer pricing adjustments.
3. Selection of comparable companies.
4. Working capital adjustments.
5. Classification of interest income.
6. Penalty under Section 271(1)(c).
7. Interest under Sections 234B and 234C.
8. Excess payment under Section 40A(2)(b) read with Section 92CA.

Detailed Analysis:

1. Validity of Assessment Orders:
The assessee contended that the assessment orders passed by the Additional Director of Income Tax, Transfer Pricing Officer-II (TPO), and the Assessing Officer (AO), pursuant to the directions of the Dispute Resolution Panel-II (DRP), were "bad in law and void ab initio." However, these grounds were general and not pressed by the assessee, hence dismissed.

2. Transfer Pricing Adjustments:
The main contention revolved around an upward adjustment of Rs. 73,880,694 in respect of international transactions related to IT-enabled services provided to Associated Enterprises (AEs). The assessee argued that the TPO did not establish that any conditions specified under Section 92C(3) were satisfied before disregarding the arm's length price determined by the assessee. The TPO also erred in not accepting the economic analysis undertaken by the assessee and instead conducted a fresh analysis.

3. Selection of Comparable Companies:
The TPO rejected certain comparables identified by the assessee based on criteria such as turnover less than INR 1 crore, diminishing revenue trend, export earnings less than 75% of sales, and different financial year. The TPO included companies that were functionally dissimilar and earning supernormal profits, which the assessee contested. The ITAT remitted the matter back to the assessment stage for fresh adjudication, emphasizing the need for proper comparability and working capital adjustments.

4. Working Capital Adjustments:
The TPO denied working capital adjustments, stating the assessee did not provide reasonable and accurate data for calculation. The ITAT noted that working capital requirements affect margins or prices, costs, or profits and remitted the issue back for fresh adjudication.

5. Classification of Interest Income:
The AO classified interest income of Rs. 1,30,23,015 earned on short-term deposits as "Income from Other Sources" instead of business income, making it ineligible for deduction under Section 10A. The assessee argued that the interest income was inextricably linked to the business. The ITAT upheld the AO's classification, stating there was no business exigency to make short-term FDRs.

6. Penalty under Section 271(1)(c):
The AO initiated penalty proceedings under Section 271(1)(c) as a consequence of the additions made in the assessment order. This issue was consequential to the other grounds and was not independently adjudicated.

7. Interest under Sections 234B and 234C:
The AO charged interest under Sections 234B and 234C as a consequence of the additions made. This issue was also consequential to the other grounds and was not independently adjudicated.

8. Excess Payment under Section 40A(2)(b) read with Section 92CA:
The AO disallowed excess payment of Rs. 1,90,00,000, contending that the salary paid to Mr. Popp was too high. The DRP directed the AO to drop the disallowance, noting that the assessee recovered the salary cost with a markup as service income. The ITAT upheld the DRP's findings, stating there was no correlation established by the AO between the payment and the corresponding income.

Conclusion:
The ITAT partly allowed the appeal of the assessee concerning transfer pricing issues and remitted the matter back for fresh adjudication. The corporate tax grounds related to interest income were dismissed. The appeal of the Revenue was dismissed in its entirety.

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