2020 (8) TMI 758 - AT - Income Tax

Deduction u/s 10A - Addition on the interest income and the miscellaneous income on the ground that the above income do not have a direct nexus with the business income of the assessee - HELD THAT - Respectfully following the decision of the Tribunal in assessee s own case for the two immediately preceding assessment years, we hold that the assessee is entitled to deduction u/s 10A on the interest income and miscellaneous income. It is to be noted that the appeal filed by the Revenue challenging the allowability of deduction u/s 10A on interest income has not yet been reversed by the Hon ble High Court although it has admitted the substantial question of law. TP Adjustment - Comparable selection - HELD THAT - Companies functionally different with that of assessee need to be deselected from final list. Forex income and bank charges as operating in nature - HELD THAT - AO, following the safe harbor rules, treated the foreign exchange income, bank charges and provision for doubtful debts as non-operating income. The DRP held that foreign exchange fluctuations are indeed part of the revenue/expenses in so far as nexus with operations is established. Similarly, they held the bank charges and provision for doubtful debts as part of the operational revenue/expenses. Respectfully following the decision of the Tribunal in assessee s own case, we do not find any infirmity in the order of the DRP and, accordingly, the same is upheld. The ground raised by the Revenue on this issue is dismissed.

Issues Involved:
1. Deduction under Section 10A/10AA on interest and miscellaneous income.
2. Transfer Pricing adjustments in software development and ITES segments.
3. Treatment of Forex income, bank charges, and provision for doubtful debts as operating in nature.

Issue-Wise Detailed Analysis:

1. Deduction under Section 10A/10AA on Interest and Miscellaneous Income:

The assessee, engaged in IT and ITES, claimed deductions under Section 10A/10AA on interest income from FDRs and miscellaneous income. The AO disallowed these deductions, arguing the income lacked a direct nexus with business operations. The DRP upheld this view, noting the absence of a direct link between the income and the business operations eligible for deduction under Section 10A.

The Tribunal, however, referred to its own decisions in the assessee's cases for A.Y. 2009-10 and 2010-11, where similar income was allowed as deductions under Section 10A. It cited the Delhi High Court's ruling in Riviera Home Furnishing, which held that interest on FDRs used for business operations qualifies as business income eligible for deduction. The Tribunal also referenced the Karnataka High Court's decision in CIT vs. Hewlett Packard Global Soft Ltd., supporting the treatment of interest on bank deposits as business income.

Consequently, the Tribunal allowed the assessee's appeal, granting deductions under Section 10A on both the interest income and miscellaneous income, emphasizing the consistency of judicial precedents in similar cases.

2. Transfer Pricing Adjustments in Software Development and ITES Segments:

The AO referred the assessee's international transactions to the TPO, who proposed adjustments based on a set of comparables. The DRP directed the exclusion of certain comparables from both segments, leading to the Revenue's appeal.

Software Segment:
The Tribunal upheld the DRP's exclusion of seven comparables, including Infosys Ltd. and Persistent Systems Ltd., based on functional dissimilarity, significant R&D expenses, and the presence of intangible assets. It restored the issue of Persistent Systems Ltd. to the TPO for fresh adjudication, following its own precedent.

ITES Segment:
The Tribunal supported the DRP's exclusion of three comparables, including e-Clerx Services and Infosys BPO Ltd., due to functional dissimilarity and significant brand value. It restored the issue of Infosys BPO Ltd. to the TPO for re-evaluation.

3. Treatment of Forex Income, Bank Charges, and Provision for Doubtful Debts as Operating in Nature:

The AO, following safe harbor rules, treated these items as non-operating. The DRP, however, considered them operating in nature, citing their direct nexus with business operations. The Tribunal agreed, referencing its own decision in the assessee's case for A.Y. 2009-10, which treated foreign exchange fluctuations as part of operational revenue/expenses.

The Tribunal upheld the DRP's decision, confirming that Forex income, bank charges, and provision for doubtful debts should be treated as operating in nature, aligning with judicial precedents.

Conclusion:

The Tribunal allowed the assessee's appeal regarding deductions under Section 10A on interest and miscellaneous income and upheld the DRP's exclusions of certain comparables in the transfer pricing adjustments. It restored specific issues to the TPO for fresh adjudication and confirmed the treatment of Forex income, bank charges, and provision for doubtful debts as operating in nature. The Revenue's appeal was partly allowed for statistical purposes.

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