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2014 (10) TMI 393 - AT - Income TaxTreatment of rental income on leasehold premises - Sub-letting of property - AO treated it as income from house property Held that - Following the decision in Stream International Services (P.) Ltd. Versus Assistant Director of Income-tax (International Taxation) - 7(2), Mumbai 2013 (9) TMI 339 - ITAT MUMBAI - the assessee was neither the owner nor the deemed owner of the house property, applying the provisions of section 22, the annual value of such property could not have been charged to tax under the head Income from house property - As it was a case of simple subletting or property, not facilitating the carrying on of the assessee s business in any manner, the rental income so realized by the assessee in the present circumstances cannot be considered as Business income - In such a situation, it was directed that the same should be included under the head Income from other sources - The impugned order on the issue was set aside and the matter was restored to the file of the AO for doing the needful accordingly - The Assessing Officer will allow eligible deductions and allowances as per the relevant provisions under Chapter IV-F - While allowing such deductions, the Assessing Officer will also ensure that no deduction is doubly claimed/allowed, firstly, in computing of income under the head Profits and gains of business or profession and then under the head Income from other sources Decided in favour of assessee. Exempt income earned as dividend disallowed u/s 14A Held that - Following the decision in GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT - application of Rule 8-D is prospective and is applicable from AY 2008-09 - the DRP has considered the disallowance of 5% to be reasonable - the AO has not appreciated the directions of the DRP correctly, may be directions was not clear the AO is directed to restrict the disallowance u/s 14A of the Act to 5% of the exempt income Decided in favour of assessee. Transfer pricing adjustment Determination of ALP Selection of comparables directors of companies selected involved in serious fraud cases - Held that - Assessee rightly contended that the company deserves to be excluded as the Directors of this company were involved in fraud, therefore, financial results of the company are not reliable relying upon Capital IQ Information Systems (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax (International Taxation) 2014 (3) TMI 626 - ITAT HYDERABAD - whenever a company or its directors are found to be involved in fraud, exclusion of such company is upheld from the final list of comparables as the financial results are not reliable thus, those company cannot be treated as comparable. Infosys BPO Ltd. Extremely high turnover Held that - The turnover of this company is extremely high as compared to that of the assessee - Infosys is a brand and commands premium in the market, therefore, this company should be excluded from the list of comparables - Infosys is a brand and commands premium in the market - the turnover for the year of this company was ₹ 649.56 crores as against that of the assessee of ₹ 54.17 crores which is almost 12 times of the assessee - Infosys BPO Ltd. is a joint company and it assumes significant business risks unlike the assessee who does not assume significant risks therefore deserves to be excluded from the final list of comparables the company is directed to be deleted as comparable. Caliber Point Business Solutions Ltd. Related party transaction Held that - The related party transaction is more than 25% which is a filter adopted by the TPO himself - the DRP has not considered this objection because it was of the opinion that related party transaction is mainly for reimbursements and recoveries and therefore would not affect the company - as decided in assessee s own case for the earlier assessment year, it has been rightly held that a pure reimbursement of expenses by one AE to another AE is very much a transaction as per section 92F(v) and consequently is equally an international transaction as per section 92B requiring consideration as per section 92 of the Act this company cannot be treated as comparable.
Issues Involved:
1. Treatment of rental income. 2. Disallowance under Section 14A of the Income Tax Act. 3. Transfer pricing adjustment. 4. Taxability of rental income. 5. Grant of short credit of TDS. 6. Levy of interest under Section 234B of the Income Tax Act. Detailed Analysis: 1. Treatment of Rental Income: The primary issue was whether rental income earned on leasehold premises should be classified as "Income from House Property" or "Income from Other Sources." The Tribunal had previously addressed a similar issue in A.Y. 2006-07, directing the A.O. to treat the rental income under "Income from Other Sources." Following this precedent, the Tribunal restored the matter to the A.O. to compute the income after allowing eligible deductions and ensuring no double deductions. Consequently, Ground No. 1 was allowed for statistical purposes. 2. Disallowance under Section 14A: The A.O. disallowed expenses under Section 14A, read with Rule 8-D, for earning exempt income. The DRP directed a 5% disallowance, but the A.O. applied 0.5% of the average investment. The Tribunal clarified that Rule 8-D is applicable prospectively from A.Y. 2008-09 and upheld the DRP's 5% disallowance rate. Therefore, Ground No. 3 was allowed. 3. Transfer Pricing Adjustment: The A.O. made a transfer pricing adjustment of Rs. 6,40,58,995/- based on the TPO's analysis of comparable companies. The assessee objected to the inclusion of 15 companies, arguing they were not comparable due to various reasons, including involvement in fraud, extraordinary events, and functional differences. The Tribunal reviewed each company's comparability: - Maple Esolutions Ltd. and Triton Corp. Ltd. were excluded due to involvement in fraud. - CMC Limited (Seg) was excluded due to high related party transactions and low employee cost to sales ratio. - Accentia Technologies Ltd. was excluded due to extraordinary events and lack of segmental data. - Asit C. Mehta Financial Services Ltd. (Seg) was excluded due to low employee cost to sales ratio. - Infosys BPO Ltd. was excluded due to high turnover and brand premium. - Spanco Ltd. (Seg) was remanded to the A.O./TPO for further verification. - Bodhtree Consulting Ltd. was remanded to the A.O./TPO for verification of hiving off business and segmental data. - Caliber Point Business Solutions Ltd. was excluded due to high related party transactions. - eClerx Services Ltd. and Mold-Tek Technologies Ltd. were excluded due to functional differences. - Informed Technologies India Limited was excluded due to low employee cost to sales ratio. - Vishal Information Technologies Ltd. was excluded following the precedent from A.Y. 2006-07. - Wipro Ltd. (Seg) was excluded for reasons similar to Infosys BPO Ltd. The A.O./TPO was directed to recompute the Arm's Length Price accordingly. 4. Taxability of Rental Income: Grounds No. 1.2 and 1.3 regarding the taxability of rental income were treated as allowed in line with the decision on Ground No. 1. 5. Grant of Short Credit of TDS: The Tribunal directed the A.O. to allow the credit of TDS as per the law after due verification. 6. Levy of Interest under Section 234B: The levy of interest under Section 234B was deemed mandatory and consequential. Conclusion: The appeal was allowed in part for statistical purposes, with specific directions for the A.O. and TPO to follow the Tribunal's findings and recompute the necessary adjustments. The order was pronounced on 10th October 2014.
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