2023 (3) TMI 1298 - AT - Income Tax

TP Adjustment - assessee had advanced loan to its overseas subsidiary and assessee charged interest at the rate of 3.24% per annum - interest was charged at LIBOR plus 300 points - HELD THAT - As submitted that the assessee charged interest on loan at 3.24% p.a. This fact is also evident which is the notes to Audit report in Form No 3CEB. During the year under consideration, average USD LIBOR was 0.58%. Interest rate considering LIBOR 300 bps would be 3.58%. This rate is within /- 5% range applicable for the year under consideration as per second proviso to section 92C(2). Hence, the interest received from loan given to Sasken Inc, USA should be considered at arm s length price. The TP addition should therefore be deleted. We direct the Ld.AO/TPO to consider the claim of the assessee based on the observation hereinabove. Accordingly this ground raised by the assessee stands allowed. Corporate guarantee given in respect of loan from banks availed by Sasken OY came to an end in September 2011 - There is a consistent approach taken by this Tribunal in adopting the rate of corporate guarantee at 0.5% in assessee s own case. We direct the Ld.AO/TPO to restrict the corporate guarantee adjustment at 0.5% based on the outstanding payables from Nordea Bank during F.Y. 2011-12. Adjustment made on use of trademark sasken as royalty - Assessee contended that question of AE s paying royalty does not arise - HELD THAT - As decided in assessee own case 2021 (8) TMI 1359 - ITAT BANGALORE passive association should be distinguished from active promotion of the MNE group's attributes that positively enhances the profit-making potential of particular members of the group. Each case must be determined according to its own facts and circumstances. Ld.TPO shall carry out necessary verification based on the which it must first be determined whether there is any Royalty that could be attributed. In the event Royalty is to be attributed, proper benchmarking needs to carried out the accordance with section 92CA of the Act, by selecting an authorised method and comparables. Adjustment proposed on software development segment - TPO rejected the TP analysis of the assessee in respect of the software services rendered and received by assessee which was done based on internal comparables - HELD THAT - As margins of comparables as per the TPO for provision of services and receipt of services is 20.5% and 19.22% respectively and the above details have been not considered by the Ld.TPO/AO. In the interest of justice, we remand this issue to the Ld.AO/TPO to verify the above details. In the event, the margins computed at segmental levels are found to be within 5%, no adjustment is warranted. The Ld.AO/TPO is directed to consider the claim of assessee based on the above observations in accordance with law. Accordingly, this ground raised by assessee stands allowed for statistical purposes. Disallowance computed u/s. 14A r.w.r.8D - HELD THAT - AO has not made any disallowance under Rule 8D(2)(ii) whereas the disallowance has been computed under Rule 8D(2)(iii). There is a conscious application of mind by the Ld.AO because of which no disallowance has been made under interest. We therefore cannot agree with the submissions of assessee that there needs to be an expressed satisfaction recorded by the Ld.AO. The act of the Ld.AO in computing the disallowance reveals that the accounts of the assessee has been verified. No merit in the Ld.AR s argument that an expressed satisfaction has to be recorded by the Ld.AO. Computation of disallowance under Rule 8D(2)(iii), the ratio laid down by Hon ble Special Bench of Delhi Tribunal in case of ACIT vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI has to be followed. We direct the Ld.TPO to restrict the disallowance only to the extent of the investment that has yielded exempt income during the year under consideration under Rule 8D(2)(iii).

Issues Involved:

1. General Issues
2. Transfer Pricing - Legal Issues
3. Transfer Pricing Adjustment - Interest Received from Subsidiary
4. Transfer Pricing Adjustment - Corporate Guarantee
5. Transfer Pricing Adjustment - Royalty
6. Transfer Pricing Adjustment - Software Development Services
7. Deduction under Section 10AA
8. Disallowance under Section 14A

Detailed Analysis:

1. General Issues:
The assessee argued that the assessment order and directions from the DRP were erroneous and should be quashed. However, these grounds were general in nature and did not require adjudication.

2. Transfer Pricing - Legal Issues:
The assessee contended that the AO erred in making a reference to the TPO for determining the arm's length price without demonstrating the necessity and expediency. The assessee also argued against the transfer pricing adjustments amounting to Rs. 5,57,22,444 and claimed that no addition could be made under Chapter X as it is not included in the definition of 'income' under section 2(24) or Chapter IV of the IT Act, 1961.

3. Transfer Pricing Adjustment - Interest Received from Subsidiary:
The assessee charged interest at 3.24% per annum from its subsidiary, Sasken Inc., based on LIBOR plus 300 basis points. The TPO rejected this analysis and applied an interest rate of 14.47% based on BB rated bonds, resulting in an adjustment of Rs. 1,96,54,734. The Tribunal remanded the issue back to the TPO, directing to benchmark the transaction by adopting the legal position as enunciated in the decisions of CIT v Cotton Naturals (I) (P) Ltd and CIT v Tata Auto Comp System Ltd. The Tribunal also noted that for AY 2011-12, the TPO had accepted the interest rate of 3.24% as arm's length.

4. Transfer Pricing Adjustment - Corporate Guarantee:
The TPO considered the corporate guarantee given to Sasken OY, Finland, as an international transaction and computed an adjustment of Rs. 2,75,238 at 0.925% of the guarantee amount. The Tribunal referred to its earlier decision, which directed the TPO to apply a rate of 0.5% on the closing balance of the corporate guarantee for TP adjustment. The Tribunal directed the AO/TPO to restrict the corporate guarantee adjustment to 0.5%.

5. Transfer Pricing Adjustment - Royalty:
The TPO made an adjustment of Rs. 1,90,75,332 for the use of the trademark 'SASKEN' by the AEs, computed at 2% of the external turnover. The Tribunal noted that the TPO did not have any material evidence to establish that the AEs were financially benefitted from the use of the trademark. The Tribunal remanded the issue back to the TPO for fresh consideration, directing to verify all agreements and the impact of the use of the brand on the subsidiaries' profits.

6. Transfer Pricing Adjustment - Software Development Services:
The TPO rejected the assessee's CUP method and adopted TNMM, resulting in an adjustment. The Tribunal noted that the TPO did not consider the segmental margins provided by the assessee and remanded the issue back to the AO/TPO to verify the segmental details. If the segmental margins are within +5%, no adjustment is warranted.

7. Deduction under Section 10AA:
The AO reduced communication charges, foreign currency expenses, and insurance charges only from export turnover while computing the deduction under section 10AA. The DRP directed the AO to reduce these expenses from both export turnover and total turnover. The Tribunal noted that the AO complied with the DRP's directions, making this ground infructuous.

8. Disallowance under Section 14A:
The AO disallowed Rs. 69,64,735 under section 14A by computing 0.5% of the average value of investments. The Tribunal noted that the AO did not provide any satisfaction as to why the assessee's voluntary disallowance was incorrect. The Tribunal directed the AO to restrict the disallowance only to the extent of investments that yielded exempt income during the year.

Conclusion:
The appeal filed by the assessee was partly allowed. The Tribunal remanded several issues back to the AO/TPO for fresh consideration and verification, providing specific directions for each issue.

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