2019 (6) TMI 1092 - AT - Income Tax

Deduction u/s 10A on suo moto transfer pricing adjustment made by the assessee - as per AO suo moto transfer pricing adjustment could not be included as part of the total turnover of the undertaking and resultantly could not also form part of the total profit of the undertaking - HELD THAT - An identical case came up for hearing in the case of I-Gate Global Solutions Limited 2014 (6) TMI 1007 - KARNATAKA HIGH COURT as returned a finding that the assessee was entitled to deduction u/s 10A in respect of income declared in the return of income on the basis of computation of ALP. Also in APPROVA SYSTEMS PVT. LTD. VERSUS THE DY. COMMISSIONER OF INCOME TAX CIRCLE 1 PUNE 2018 (3) TMI 1031 - ITAT PUNE allowed deduction u/s 10A of the Act on the voluntary transfer pricing adjustment made by the assessee by noting that the assessee was entitled to deduction u/s 10A of the Act on additional income offered on account of suo moto adjustment on account of transfer pricing provisions and that the provisions of section 92C(4) of the Act were not attracted The first proviso to section 92C(4) is evidently applicable only to situations where adjustment to the ALP is made by the Assessing Officer/TPO/Ld. DRP and not to the voluntary adjustment made by the assessee itself. If the legislative intent was to treat the adjustments made by the Assessing Officer at par with the voluntary adjustment made by the assessee the legislative intent would have been expressed in different words and section 92C(4) would not have referred to computation of income made by the AO in terms of the ALP determined u/s 92C(3) based enhanced income - Thus we direct the AO to delete this disallowance and grant benefit of deduction u/s 10A on the amount of voluntary TP adjustment made by the assessee. - Decided in favour of assessee. Transfer pricing adjustment in respect of notional interest on outstanding receivables - HELD THAT - As in M/S COTTON NATURALS (I) PVT. LTD. 2015 (3) TMI 1031 - DELHI HIGH COURT held that the interest rate should be market determined interest rate applicable to the currency concerned in which the loan has to be repaid and that the interest rate should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. A perusal of the order of the TPO as well as the directions of the Ld. DRP shows that these aspects have not been duly considered by either of the authorities below and they have simply proceeded to make the transfer pricing adjustment on a certain notion without looking into the specific facts of this case. Therefore in view of aforementioned anomalies as pointed out by the Ld. AR with which we are in complete agreement we deem it appropriate to restore this issue to the file of the TPO for adjudicating the issue afresh after duly considering our observations as well as after giving due opportunity to the assessee to present its case - Assessee s ground allowed for statistical purposes. Not allowing set off of brought forward loss - AO is directed to allow the same after due verification. Set off of available MAT credit - AO is directed to do the needful as per law.

Summary

Issues Involved:
1. Deduction under Section 10A of the Income Tax Act.
2. Transfer Pricing Adjustment - Provision of IT Enabled Services.
3. Transfer Pricing Adjustment - Interest on outstanding receivables.
4. Set off of brought forward loss.
5. Set off of Minimum Alternate Tax (MAT) credit.
6. Levy of interest under Sections 234B and 234D.
7. Initiation of penalty proceedings under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Deduction under Section 10A of the Income Tax Act:
The core issue was whether the assessee was eligible for claiming a deduction under Section 10A on a voluntary transfer pricing adjustment. The assessee made a voluntary transfer pricing adjustment amounting to Rs. 1,96,45,478/- and claimed a deduction of Rs. 1,69,61,565/- under Section 10A, which was denied by the Assessing Officer (AO) and upheld by the Dispute Resolution Panel (DRP). The Tribunal held that the proviso to Section 92C(4) is applicable only to adjustments made by the AO/TPO and not to voluntary adjustments made by the assessee. The Tribunal relied on the precedents set by various High Courts and ITAT Benches, including the Karnataka High Court in I-Gate Global Solutions Ltd. vs. ACIT, which allowed the deduction under Section 10A on voluntary transfer pricing adjustments. The Tribunal directed the AO to grant the benefit of deduction under Section 10A on the amount of voluntary TP adjustment made by the assessee.

2. Transfer Pricing Adjustment - Provision of IT Enabled Services:
The AO and DRP enhanced the income of the assessee by INR 943,747, holding that the international related party transaction pertaining to IT enabled Services did not satisfy the arm’s length principle. The Tribunal noted that the issue was already resolved in favor of the assessee via a rectification order passed under Section 154 by the AO.

3. Transfer Pricing Adjustment - Interest on outstanding receivables:
The TPO made an adjustment of Rs. 45,36,868/- by applying the SBI prime lending rate of 14.88% to impute notional interest on outstanding receivables over 30 days. The Tribunal observed that the TPO did not consider the assessee's policy of allowing a 90-day credit period and failed to adjust for outstanding payables to the AE. The Tribunal directed the TPO to re-adjudicate the issue, considering the specific facts and the assessee's arguments, including the application of LIBOR plus 150 basis points as the interest rate.

4. Set off of brought forward loss:
The AO did not allow the set off of brought forward loss of Rs. 53,89,388/-. The Tribunal directed the AO to allow the set off after due verification.

5. Set off of Minimum Alternate Tax (MAT) credit:
The AO did not allow the set off of available MAT credit. The Tribunal directed the AO to allow the set off as per law.

6. Levy of interest under Sections 234B and 234D:
The Tribunal noted that the levy of interest under Sections 234B and 234D was consequential and did not require specific adjudication.

7. Initiation of penalty proceedings under Section 271(1)(c):
The Tribunal noted that the initiation of penalty proceedings under Section 271(1)(c) was consequential and did not require specific adjudication.

Conclusion:
The appeal of the assessee was allowed in terms of the Tribunal's observations. The AO was directed to grant the deduction under Section 10A on the voluntary TP adjustment, re-adjudicate the transfer pricing adjustment on outstanding receivables, and allow the set off of brought forward loss and MAT credit after due verification. The levy of interest and initiation of penalty proceedings were deemed consequential.