2021 (5) TMI 338 - AT - Income Tax

TP Adjustment - holding foreign exchange fluctuation gain should not form part of operating income for comparative analysis - HELD THAT - As clear from the findings of the authorities below that in case of the assessee, the amount of foreign exchange gain are arise out of the revenue transactions - when foreign exchange fluctuation income is an operating income then same has to be taken into consideration while determining ALP of international transactions entered into by assessee - we consider that the amount of foreign exchange gain/loss arising out of revenue transaction is required to be considered as an item operating revenue/cost, therefore, we restore this issue to the file of Assessing Officer/TPO to compute the assessee s margin as well as comparables by considering foreign exchange gain/loss as an item of operating revenue/cost - this ground of appeal of the assessee is allowed for statistical purposes. Including Accentia Technologies Ltd. in the set of comparables - HELD THAT - We consider that there is functional dissimilarity in the case of M/s. Accentia Technology Ltd. as compared to the function performed by the assessee company that has not been specifically considered by the TPO and DRP. It is categorically demonstrated from the facts and findings of various judicial decisions as supra that M/s. Accentia Technology Ltd. has expertise in all the areas of transcription, coding, billing and collections, therefore, we direct the Assessing Officer/TPO to exclude M/s. Accentia Technology Ltd. in the set of comparables for determining arms length price of international transactions in the case of the assessee. Therefore, this ground of appeal of the assessee is allowed. Including Genesys International Corporation Ltd in set of comparables - As gone through the above referred decision in the case of Mercer Consulting (India) Ltd. 2016 (8) T MI 1163 - PUNJAB AND HARYANA HIGH COURT wherein held in reference to Genesys Industrial Corporation Ltd. that it provides a full range of geospatial services to its clients. Geospatial services relate to the relative position of things on the earth s surface. This includes 3D mapping, navigation, maps, image processing and cadastral mapping etc. The two services are entirely different therefore cannot be compared for the purpose of determing the ALP - neither the TPO nor the DRP has specially considered the relevancy of the Genesys International Corporation Ltd as comparable in the case of the assessee - we restore this issue to the file of TPO/A.O. for deciding afresh for taking it as comparable after examination of functional differences as referred in the decision of the Hon ble High Court in the Punjab as supra. Therefore, this ground of appeal of the assessee is allowed for statistical purposes. Upward adjustment in respect of interest on loan to Colwell and Saloman and not accepting the interest at 4% already charged by the assessee - TPO has adopted the rate as it was done in the last year by taking dollar dominated Libor (2.69%) 2.5 margin 4% risk rate and made upward adjustment - HELD THAT - During the course of assessment the assessee has not objected to the benchmarking of interest rate by following the procedure as in the last year.The interest rate has been calculated on the same basis as it was done in the last year. Considering the above facts and circumstances, we do not find any merit in this ground of appeal of the assessee, therefore, the same stands dismissed. Disallowance u/s. 14A r.w.r. 8D - assessee has used interest bearing fund for earning exempt income - Suo moto disallowance of addition - HELD THAT - As brought to our notice that assessee had already made suo moto disallowance of ₹ 1 lacs u/s. 14A of the Act. In the light of the above facts, we consider that the disallowance u/s. 14A cannot exceed the exempt income earned by the assessee as held in the case of Corrtech Energy Pvt. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT therefore, we direct the Assessing Officer to restrict the disallowance u/s. 14A to the extent of dividend income after reducing the suo moto disallowance of ₹ 1 lacs already made by the assessee. Exclusion of two entities identifies as comparable by TPO Coral Hub Ltd. Comic Global Ltd. - HELD THAT - It is evident from the analysis of the annual account as per page 5-6 of the DRP order that Coral Hub Ltd s operating cost consists 90.57% as outsourcing charges and Cosmic Global Ltd s operating cost comprises 57.31% as outstanding charges - aforesaid two companies business model were quite different from the business model of the assessee. Because of significant dissimilarities it cannot be considered comparable services. After considering the facts and judicial finding as reported in the decision of DRP, we do not find any merit in the appeal of revenue and the same stands dismissed. Disallowance on claim of devolvement of guarantee against SBLCs provided by the assessee company to the IDBI Bank who in turn gave SBLCs to the Bank of India, Manchester and to seven vendors of Rosebys Operations Ltd., the subsidiary company of the assessee - Rejecting application of tests made by TPO/AO for determining nature of transaction related to devolvement of SBLCs - HELD THAT - As assessee company had acquired its subsidiary company Rosebys Operations Ltd. to expand its textile business operations globally based on the study carried out by KSA Techno Pak, renowned global consultant. It is clear from the comprehensive written submission from the assessee and the detailed findings of the ld. DRP as elaborated supra in this order that assessee company had provided guarantee against SBLC issued by IDBI bank to BOI Manchester and directly to vendors of Roseby for the working capital of Rosebys as a temporary measure to tide over the financial difficulties and further expand the business of the assessee company and same was on account of commercial reasons due to occurrence of financial global crisis. Because of such unforeseen global financial crisis the Rosebys Operations Ltd went into liquidation consequently the assessee company has suffered loss - we consider no infirmity in the order of the ld. DRP holding that loss suffered on account of devolvement of guarantee as revenue loss for the assessee company. Upward adjustment in respect of IT enabled services rendered to AE in cryptic manner - AO noticed that assessee was having international transaction with associated enterprise and the TPO has made upward adjustment on the basis of capacity utilization adjustment and average of comparable value of services computed on ALP - HELD THAT - After perusal of the finding of TPO, A.O. and CIT(A), it is observed that the detailed information furnished by the assessee has not been considered while rejecting the claim of the assessee of under utilization of capacity. In the light of the aforesaid facts and circumstances, we restore this issue of upward adjustment to the file of the A.O. for deciding afresh after excluding the two comparables as mentioned above and considering the capacity utilization of the employees and the profit margin after verification and examination of the details furnished by the assessee. Accordingly, this ground of appeal of the assessee is partly allowed for statistical purposes. Under utilization of capacity of its expenses - HELD THAT - After perusal of the material on record, it is observed that the TPO/CIT(A) has not specifically considered these details while adjudicating this issue, therefore, we consider it appropriate to restore this issue to the file of TPO/Assessing Officer for deciding afresh after examination of the relevant details and supporting material to be produced by the assessee. Therefore, this ground of appeal of the assessee is allowed for statistical purposes. TDS u/s 195 - Disallowance u/s. 40(a)(ia) - AO disallowed commission paid to foreign agents by holding that the income on account of commission paid to overseas agents was deemed to accrue or arise income and was taxable under the provision of section 5(2)(b) r.w.s. 9(1)(i) - HELD THAT - Services have been rendered by the foreign agents outside India. The concerns were booked by them in their countries and none of the activities of procurement of orders was taken place in India. The agents have carried out all the activities on foreign soil and none of their activities was in India and therefore it cannot be said that the income has accrued or arised in India. CIT(A) has rightly held that there was no permanent establishment and business connection in India and the services were rendered outside India. It is clear from the finding of ld. CIT(A) that the commission agents have not carried out any activity in India. Non-residents commission agents were not having any permanent establishment in India. Therefore, commission paid to non-resident agents was not liable to tax under the provision of the act. Allowing long term capital loss as revenue loss claimed during the course of the appellate proceedings - AO has stated that since assessee has not filed the revised return of income therefore such loss could not be entertained - HELD THAT - CIT(A) has discussed the submission of the assessee company stating that huge loss of subsidiary companies i.e. Indian Britain BV passed resolution to reduce its share capital of Euro 18564400 (185644 shares) to 18545835.60 (185644 Shares) out of 221586 shares so that such amount can be set off against the accumulated deposit. This has resulted in loss due to reduction in value of share of its subsidiary company. As demonstrated from the finding of the ld. CIT(A) that assessee company has made investment in the subsidiary company on account of business development out of commercial expediency and thus on reduction of capital of the said subsidiary company, the loss incurred in the value of shares were in the nature of business losses. In the light of the facts and finding reported in the decision of ld. CIT(A) as elaborated in this order, we do not find any infirmity in the decision of the ld. CIT(A) in allowing the losses on reduction in value of share on investment in subsidiary company as business losses in the hand of the assessee company. Therefore, this ground of the appeal of the revenue is dismissed. Claim of loss on invocation of guarantee of subsidiary company - CIT(A) has allowed the claim of assessee and treated the transaction as revenue in nature - assessee has claimed losses on account of invocation of corporate guarantee given to Exim Bank on behalf of its subsidiary and had written off the same in the books of account as losses incidental to the business u/s. 37 - AO has rejected the claim on the ground that assessee has not made this claim through revised return of income as per the provision of section 139(5) of the Act - HELD THAT - he loan given by Exim Bank to subsidiary Wales N.V. was for the purpose of business and as per commercial expediency of the assessee company. CIT(A) has also stated that there was direct proximity and relationship of assessee s business to the subsidiaries business. The ld. CIT(A) has also stated that on identical issue in assessee s own case the dispute resolution panel vide its order u/s. 144C(5) held that the guarantee against SBLC was for its business purpose and was commercially expedient. Thus after considering the detailed facts and finding elaborated in the order of the ld. CIT(A) as cited in this order, we do not find any merit in this ground of appeal of the revenue, therefore, the same stands dismissed. Adjustment in book profit u/s. 115JB by disallowance u/s. 14A r.w.r. 8D - HELD THAT - After considering the decision of Special Bench of ITAT Delhi in the case of VIREET INVESTMENT (P.) LTD. 2017 (6) TMI 1124 - ITAT DELHI wherein it is held that disallowance made u/s. 14A r.w.r. 8D of the act is not required to be added u/s. 115JB for computing book profit. Considering the above facts and circumstances and finding of ld. CIT(A), we do not find any merit in the appeal of the revenue, therefore, the same stands dismissed.

Summary

Issues Involved:
1. Foreign Exchange Fluctuation Gain as Part of Operating Income
2. Adjustment for Capacity Utilization
3. Inclusion of Accentia Technologies Ltd. as Comparable
4. Inclusion of Genesys International Corporation Ltd. as Comparable
5. Exclusion of Certain Comparables
6. Upward Adjustment of Interest on Loan
7. Disallowance under Section 14A
8. Treatment of Corporate Guarantees/SBLCs
9. Exclusion of Coral Hub Ltd. and Cosmic Global Ltd. as Comparables
10. Devolvement of SBLCs as Capital or Revenue Loss
11. Upward Adjustment on IT Enabled Services
12. Disallowance of Foreign Commission Expenses
13. Long-Term Capital Loss as Business Loss

Detailed Analysis:

1. Foreign Exchange Fluctuation Gain as Part of Operating Income
The assessee argued that foreign exchange fluctuation should be part of operating income for comparability analysis, citing Techbooks International Pvt. Ltd. and Effective Teleservices P. Ltd. The Tribunal agreed, noting that foreign exchange gains/losses from revenue transactions should be included in operating revenue/costs. The issue was restored to the AO/TPO for recomputation.

2. Adjustment for Capacity Utilization
The assessee did not press this ground of appeal, and it was dismissed.

3. Inclusion of Accentia Technologies Ltd. as Comparable
The assessee contended that Accentia Technologies Ltd. should not be included as a comparable due to functional dissimilarities. The Tribunal agreed, citing various judicial pronouncements, and directed the AO/TPO to exclude Accentia Technologies Ltd. from the set of comparables.

4. Inclusion of Genesys International Corporation Ltd. as Comparable
The assessee opposed the inclusion of Genesys International Corporation Ltd., arguing functional differences. The Tribunal restored the issue to the AO/TPO for fresh examination, considering the decision in Mercer Consulting (India) Ltd.

5. Exclusion of Certain Comparables
The assessee did not press this ground of appeal, and it was dismissed.

6. Upward Adjustment of Interest on Loan
The TPO made an upward adjustment for interest on a loan to an associate concern, which the DRP sustained. The Tribunal found no merit in the assessee's appeal and dismissed it.

7. Disallowance under Section 14A
The AO made a disallowance under Section 14A, which the DRP sustained. The Tribunal held that the disallowance cannot exceed the exempt income earned and directed the AO to restrict the disallowance accordingly.

8. Treatment of Corporate Guarantees/SBLCs
The Tribunal dismissed the grounds related to corporate guarantees/SBLCs as they were rendered infructuous by the decision in ITA No. 976/Ahd/2014.

9. Exclusion of Coral Hub Ltd. and Cosmic Global Ltd. as Comparables
The DRP excluded these companies from the set of comparables due to significant outsourcing, which was upheld by the Tribunal, noting the business model differences.

10. Devolvement of SBLCs as Capital or Revenue Loss
The AO treated the devolvement of SBLCs as capital loss, but the DRP allowed it as a revenue loss. The Tribunal upheld the DRP's decision, noting the commercial expediency and business purpose behind the guarantees.

11. Upward Adjustment on IT Enabled Services
The Tribunal restored the issue of upward adjustment to the AO/TPO for fresh examination, considering capacity utilization and excluding certain comparables.

12. Disallowance of Foreign Commission Expenses
The AO disallowed foreign commission expenses, but the CIT(A) allowed the appeal, noting that the services were rendered outside India with no PE in India. The Tribunal upheld the CIT(A)'s decision.

13. Long-Term Capital Loss as Business Loss
The AO treated the loss on investment in a subsidiary as a capital loss, but the CIT(A) allowed it as a business loss, considering commercial expediency. The Tribunal upheld the CIT(A)'s decision, noting the business purpose behind the investment.

Conclusion:
The Tribunal provided a detailed and issue-wise analysis, addressing each ground of appeal comprehensively. Significant emphasis was placed on the commercial expediency and business purposes behind various transactions, leading to favorable outcomes for the assessee in several key areas.