2014 (6) TMI 669 - AT - Income Tax

Transfer pricing adjustments - determination of ALP - exclusion of interest income from the operating revenue - Held that - since the international transaction under consideration is not that of financing, naturally, interest income and interest expenditure cannot be construed as the items of operating nature. - First the interest in the present circumstances is not in the nature of Business income - The second reason for not approving this contention is that the question as to whether interest is Business income or not is irrelevant when the point for determination is the amount of operating profit margin. Operating profit margin is obviously a part of the overall profit margin which is deduced by reducing non-operating expenses and non-operating incomes from the net profit. As the assessee is not in the financing activity with its AEs, but, rendering only mediatory and support services, we hold that interest earned from investing working capital service cannot first qualify as income from such international transactions and then at any rate it is not a operating income. This contention raised on behalf of the assessee is therefore, repelled. Deduction of administrative and other costs incurred in making these FDRs yielding interest income - Held that - it would be just and fair to apply this logic in working out the amount of administrative and other costs incurred by the assessee in making FDRs on which the interest income was earned. That being the position, there would result the deductible amount of Rs.13.19 lac against the impugned order granting deduction of Rs. 5 lac. We, therefore, hold that operating expenses be reduced by this extent. Inclusion of the case of Samrat Clearing in the list of comparables - The only thing available was its Profit & Loss Account with sales/operating income at Rs. 9 lac. The ld. AR contended that the TPO himself excluded this case in the immediately succeeding year on the ground of low turnover. It was, therefore, prayed that this case be expelled from the list of comparables. - Held that - there is no discussion in the order of the TPO about the comparability or otherwise of this case with the assessee. - matter remanded back to TPO/AO - decided partly in favor of assessee.

Summary

Issues Involved:
1. Exclusion of interest income from operating revenue.
2. Deduction of administrative expenses related to interest income.
3. Reconsideration of the comparability of Samrat Clearing with the assessee.
4. Imposition of penalty under Section 271(1)(c) of the Income-tax Act, 1961.

Detailed Analysis:

1. Exclusion of Interest Income from Operating Revenue:
The core issue revolves around the inclusion or exclusion of interest income from fixed deposits (FDRs) in the operating revenue for calculating the Arm's Length Price (ALP) under the Transactional Net Margin Method (TNMM). The Tribunal noted that the assessee, a subsidiary of Sumitomo Corporation, Japan, earned interest income of Rs. 1.90 crore from FDRs. The Tribunal upheld the TPO's decision to exclude this interest income from operating revenue, emphasizing that interest income is typically considered non-operating unless the business is financing. The Tribunal referenced the Hon'ble Supreme Court's decision in DIT(I.T.) vs. Morgan Stanley & Co., which supports the exclusion of interest income from operating revenue in non-financing businesses. The Tribunal also cited the Hon'ble jurisdictional High Court's decision in Marubeni India Pvt. Ltd. vs. DCIT, which affirmed that interest income is not operating income.

2. Deduction of Administrative Expenses Related to Interest Income:
The assessee contested the CIT(A)'s estimation of administrative and other costs incurred in making FDRs at Rs. 5 lakh. The Tribunal found this estimation inadequate and referred to Rule 8D of the Income-tax Rules, which provides a measure for determining the amount of expenditure related to income not includible in total income. Applying Rule 8D(2)(iii), the Tribunal determined that 0.50% of the average value of investments (Rs. 26.38 crore) should be considered, resulting in an allowable deduction of Rs. 13.19 lakh for administrative and other costs.

3. Reconsideration of the Comparability of Samrat Clearing:
The assessee argued for the exclusion of Samrat Clearing from the list of comparables, claiming it was included inadvertently and lacked proper data. The Tribunal acknowledged that a taxpayer could point out mistakes in the inclusion of comparables, as established in the Special Bench decision in DCIT vs. Quark Systems Pvt. Ltd. The Tribunal set aside the impugned order to the extent of this issue and remitted it to the TPO/AO for a fresh determination of the comparability of Samrat Clearing, allowing the assessee a reasonable opportunity to be heard.

4. Imposition of Penalty under Section 271(1)(c):
The Tribunal addressed the penalty imposed under Section 271(1)(c) related to the transfer pricing addition. Given that the quantum addition was remitted for fresh determination, the Tribunal cited the Hon'ble Supreme Court's decision in Mohd. Mohatram Faruqui vs. CIT, which held that penalty should also be reconsidered in light of the final decision in quantum proceedings. The Tribunal thus set aside the penalty order and remitted it to the AO for fresh consideration post the quantum proceedings.

Conclusion:
The Tribunal upheld the exclusion of interest income from operating revenue and increased the allowable deduction for administrative expenses to Rs. 13.19 lakh. It remitted the issue of the comparability of Samrat Clearing to the TPO/AO for fresh consideration and set aside the penalty order for reconsideration after the quantum proceedings. The Tribunal's decision ensures a thorough re-evaluation of the key issues, providing the assessee with a fair opportunity to present its case.