2019 (2) TMI 2126 - AT - Income Tax

TP Adjustment - Business Process Outsourcing (BPO) services segment - margin which is to be calculated in respect of turnover of non-USA and UK countries which is 23% of the total turnover in the assessment year 2010-11 and 27% of the total turnover in the assessment year 2011-12 - HELD THAT - We find that it is not in dispute that the nature of transaction which was entered into with associated enterprises situated in US and UK were same as associated enterprises situated in non-US and UK countries. The TPO has also applied same net profit margin rate for turnover of non-USA and UK countries as was applied for USA and UK countries. We therefore do not find any good reason why the margin rate agreed upon under MAP in respect of USA and UK business should not be applied for business transaction of other countries also. We have no material to hold that the net margin rate for the non-UK and USA countries will be different from the net margin rate of transactions with USA and UK. We therefore set aside the orders of the lower authorities and direct the AO to adopt net margin @ 14.99% for the assessment year 2010-11 and 15.01% for the assessment year 2011-12. Therefore the ground of appeal of the assessee is partly allowed. Disallowance of Prior Period expenses - HELD THAT - The issue of alleged prior period expenses is restored to the file of the AO for examining/verifying the claim of the assessee and allowing the same if it is found that the payments have crystallized in the year under appeal. Deduction u/s 10A - Respectfully following the decision of Genpact India 2011 (11) TMI 119 - DELHI HIGH COURT we set aside of the orders of lower authorities and direct the AO to compute deduction u/s 10A of the Act after deducting the Telecommunication expenses both from export turnover and total turnover of the assessee. Thus this ground of appeal of the assessee is allowed. TDS claim credit - Restore this issue back to the file of the Assessing Officer for allowing credit for TDS claimed by the assessee in the return of income after verification as per law. Classification of gain - gain on buyback of shares is to be taxed under the head capital gain OR deemed dividend u/s 2(22)(d) - HELD THAT - We hold that the receipt of buyback of share cannot be taxed as deemed dividend u/s 2(22)(d) of the Act. However same has to be taxed under the head capital gains. Accordingly we direct the AO to verify as to whether the assessee has shown the amount under the head capital gains. With these directions the ground of appeal of the revenue is dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

1. Whether the Transfer Pricing (TP) adjustments made by the Assessing Officer (AO) concerning the Business Process Outsourcing (BPO) services segment were justified, given the arm's length principle under the Income-tax Act, 1961.

2. The validity of disallowing prior period expenses and the appropriate treatment of such expenses.

3. The legality of the Dispute Resolution Panel's (DRP) enhancement of income under section 144C(8) of the Act without prior disallowance or variation proposed in the draft order.

4. Correct computation of deduction under section 10A of the Act, particularly concerning the reduction of telecommunication charges from export turnover.

5. The appropriateness of the AO's allowance of partial credit for taxes deducted at source (TDS).

6. The classification of gain on buyback of shares as capital gain versus deemed dividend under section 2(22)(d) of the Act.

ISSUE-WISE DETAILED ANALYSIS

1. Transfer Pricing Adjustments

The relevant legal framework involves the arm's length principle as per the Income-tax Act, 1961. The Tribunal examined whether the TP adjustments made by the AO were in line with the arm's length principle. The AO had enhanced the income of the appellant by significant amounts for the assessment years 2010-11 and 2011-12, arguing that the international transactions did not satisfy the arm's length principle. The Tribunal noted that the Mutual Agreement Procedure (MAP) resolutions with the UK and US were settled, and it was argued that similar margins should apply to other associated enterprises. The Tribunal found no reason to differentiate between transactions with US/UK and other countries, directing the AO to adopt the MAP margin rates for other countries as well.

2. Prior Period Expenses

The Tribunal addressed the disallowance of prior period expenses, which the AO had rejected as they pertained to earlier years. The Tribunal referenced its previous decision for the assessment year 2009-10, directing the AO to verify if the expenses crystallized in the relevant year and allow them accordingly.

3. DRP's Enhancement of Income

The DRP's power to enhance income under section 144C(8) was challenged, as it was argued that no disallowance/variation was proposed in the draft order. However, this ground was dismissed for lack of prosecution.

4. Deduction under Section 10A

The Tribunal considered whether telecommunication charges should be deducted from both export turnover and total turnover when computing deductions under section 10A. Citing the Delhi High Court's decision in Genpact India, the Tribunal ruled that such deductions should be made from both export and total turnover, aligning with the statutory interpretation principles.

5. Partial Credit for TDS

The issue of partial credit for TDS was addressed, with the Tribunal directing the AO to verify and allow the TDS credit claimed by the assessee in the return of income.

6. Classification of Gain on Buyback of Shares

The Tribunal examined whether the gain on buyback of shares should be taxed as capital gain or deemed dividend. It referenced the Bangalore Tribunal's decision and a CBDT circular, clarifying that prior to 01.06.2013, such transactions should be taxed as capital gains and not as dividends under section 2(22)(d). The Tribunal directed the AO to verify the classification under capital gains.

SIGNIFICANT HOLDINGS

The Tribunal established several core principles:

- The MAP resolution margins applicable to US/UK transactions should also apply to other associated enterprises for similar transactions.

- Prior period expenses should be allowed if verified to have crystallized in the relevant year.

- Deduction under section 10A requires telecommunication charges to be deducted from both export and total turnover.

- Gain on buyback of shares prior to 01.06.2013 is to be taxed as capital gains, not as deemed dividend.

The Tribunal's final determinations included partial allowance of the assessee's appeals and dismissal of the department's appeal.