2021 (7) TMI 508 - AT - Income Tax

Correct head of Income - Interest income earned from deposits kept in banks for availing bank guarantees - assessable under the head Income from other sources OR business income - HELD THAT - The bank deposits have been made for availing bank guarantees to be given in favour of Income tax department and Customs department. So far as, the bank guarantees given in favour of income tax department is concerned, we agree with the view of the AO that the liability towards income tax arises upon the assessee, which owns eligible undertakings. The income tax liability arises upon the assessee on the profits already generated by the undertaking. Hence, the deposits made for availing such bank guarantees, in our view, cannot be linked with the business carried on by the undertakings. Hence we agree with the view of the tax authorities that the interest income earned on bank deposits made for securing bank guarantees in favour of income tax department cannot be considered as business income of the eligible undertaking. Accordingly, the same has been rightly assessed under the head Income from other sources. Also noticed that the bank guarantees have been given in favour of Customs department also - There should not any dispute that the transactions under the Customs Act could be linked to a particular undertaking, in which case, the interest income earned on the above said bank deposits could be linked to any particular eligible undertaking . Since transactions under Customs Act are related to import/export activities carried on by the undertakings, we are of the view that the decision rendered in the case of Hewlett Packard Global Soft Ltd 2017 (11) TMI 205 - KARNATAKA HIGH COURT can be applied on it. Accordingly, the interest income shall normally form part of business income of the undertaking. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to assess interest income from bank deposits for availing duty benefits under Customs Act as business income of the relevant undertaking. The assessee is directed to link the bank deposits with specific undertaking so that the AO could work out deduction u/s 10A accordingly. TP adjustment made in respect of ITES services - Comparable selection - HELD THAT - As relying on the case of Indecomm Global Services (India) P 2019 (8) TMI 1664 - ITAT BANGALORE exclusion of M/s Infosys BPO Ltd, M/s TCS E-serve Ltd and M/s Excel Infoways Ltd. Following the above said decision, we direct exclusion of above said three companies. The co-ordinate bench has remanded the matter to the file of AO/TPO M/s Universal Print Systems Ltd and M/s BNR Udyog Ltd. Following the same, we restore these two companies to the file of AO/TPO with similar directions. Inclusion of Crystal Voxx Ltd - Plea raised by the Assessee is correct and the TPO ought to have regarded this company as comparable company because the only reportable segment of this company was BPO. We direct the TPO to include this company as a comparable company. Inclusion of foreign exchange gain as part of profits of undertaking for the purpose of computing deduction u/s 10AA - HELD THAT - As relying on case of Wipro Ltd 2012 (2) TMI 535 - KARNATAKA HIGH COURT we direct the AO to consider foreign exchange gains realised on export proceeds as income derived from export and allow deduction u/s 10AA of the Act. Setting off of brought forward losses prior to computing deduction u/s 10AA - HELD THAT - The Hon ble Supreme Court has held in the case of Yokogawa India Ltd 2016 (12) TMI 881 - SUPREME COURT that the deduction u/s 10A has to be made independently and immediately after the stage of determination of its profits and gains. held that the deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. In the present case, the deduction claimed by the assessee is under section 10AA, which is akin to the deduction allowed u/s 10A of the Act. Accordingly, the ratio laid down by Hon ble Supreme Court in the above said case shall apply to the deduction claimed u/s 10AA of the Act. Accordingly, we direct the AO to allow deduction u/s 10AA without setting off of brought forward losses. Deduction of expenses incurred on buy back of shares - HELD THAT - This issue has been decided in favour of the assessee by the co-ordinate bench in the assessee s own case relating to AY 2011-12 2020 (9) TMI 1102 - ITAT BANGALORE thus we direct the AO to allow the expenses incurred on buy back of shares. Non-grant of brought forward MAT credit - HELD THAT - Since this issue requires factual verification, we restore this issue to the file of the AO with the direction to examine the claim of the assessee in accordance with law. Charging of interest u/s 234C - A.R submitted that the interest u/s 234C is chargeable on the returned income AND AO has charged said interest on assessed income - HELD THAT - We find merit in the submission of Ld A.R, since it is in accordance with the provisions of sec. 234C of the Act. Accordingly, we direct the AO to charge interest u/s 234C of the Act on the returned income.

Summary

Issues involved:
1. Classification of interest income from bank deposits.
2. Transfer pricing adjustment for ITES services.
3. Inclusion of foreign exchange gain in profits for deduction under Section 10AA.
4. Set-off of brought forward losses before computing deduction under Section 10AA.
5. Deduction of expenses incurred on buy-back of shares.
6. Non-granting of brought forward MAT credit.
7. Charging of interest under Section 234C on assessed income.

Detailed Analysis:

1. Classification of Interest Income from Bank Deposits:
The primary issue for AY 2010-11 was whether the interest income earned from deposits kept in banks for availing bank guarantees should be assessed under "Income from other sources." The Tribunal had previously directed the AO to verify the purpose of the deposits and decide based on the Motorola India Electronics Ltd case. The AO concluded that the interest income from bank guarantees for income tax liabilities was not related to any particular undertaking and should be assessed under "Income from other sources." The CIT(A) upheld this view. However, the Tribunal held that interest income from bank deposits for availing duty benefits under the Customs Act should be considered business income of the relevant undertaking and directed the AO to assess it accordingly.

2. Transfer Pricing Adjustment for ITES Services:
For AY 2012-13, the assessee challenged the transfer pricing adjustment made by the TPO. The TPO had selected ten comparable companies and made adjustments. The Tribunal, following previous decisions, directed the exclusion of five companies (Universal Print Systems Ltd, Infosys BPO Ltd, TCS E-Serve Ltd, BNR Udyog Ltd, and Excel Infoways Ltd) and included Crystal Voxx Ltd as a comparable company. The matter was restored to the AO/TPO for fresh determination of the ALP of the international transactions.

3. Inclusion of Foreign Exchange Gain in Profits for Deduction under Section 10AA:
The Tribunal directed the AO to consider foreign exchange gains realized on export proceeds as income derived from export and allow deduction under Section 10AA, following the decision in Sanyo LSI Technology India Pvt Ltd.

4. Set-off of Brought Forward Losses before Computing Deduction under Section 10AA:
The Tribunal held that the deduction under Section 10AA should be allowed without setting off brought forward losses, following the Supreme Court's decision in Yokogawa India Ltd, which stated that deductions under Section 10A should be made independently and immediately after determining the profits and gains of the eligible undertaking.

5. Deduction of Expenses Incurred on Buy-back of Shares:
The Tribunal allowed the expenses incurred on the buy-back of shares as revenue expenditure, following the decision in the assessee’s own case for AY 2011-12 and the Karnataka High Court's judgment in CIT v. Motor Industries Co. Ltd.

6. Non-granting of Brought Forward MAT Credit:
The issue of non-granting of brought forward MAT credit was restored to the AO for factual verification and examination in accordance with the law.

7. Charging of Interest under Section 234C on Assessed Income:
The Tribunal directed the AO to charge interest under Section 234C on the returned income, as per the provisions of the Act.

Conclusion:
The appeal for AY 2010-11 was partly allowed, and the appeal for AY 2012-13 was allowed, with specific directions to the AO for reassessment and verification on various issues.