2015 (5) TMI 639 - AT - Income Tax

Transfer pricing adjustment in respect of corporate guarantee - Held that - Following the earlier decisions of this Tribunal in assessee s own case, we direct the AO/TPO to adopt 0.5% as arm s length guarantee commission charges in respect of the guarantee provided by the assessee for obtaining the loan by the AE. TP adjustment in respect of interest on loan given to AE - Held that - The rate to be used for undertaking an adjustment should be LlBOR and not the average yield rates considered by the learned TPO. The LlBOR rate for March 2008 was 2.6798%. However the assessee has charged 7% from its AE as per the internal CUP available. Thus, the assessee has charged interest to EKC Dubai and EKC China at the rate higher than existing LlBOR rates. Accordingly, the said transaction of providing loan is at arm's length. Additions made by the AO are accordingly set aside - Decided in favour of assessee. TP adjustment on account of interest on re-characterization of share application money as loan advanced to AE - Held that - Subject to verification of the share certificate by the AO, the share application money cannot be treated as loan amount merely because there is a delay in issuance of shares by the subsidiary in the name of the assesse, which was duly explained by the assesse. Accordingly, this ground of the assesse s appeal is allowed in above terms. Expenditure on loan taken for Investment of USD 15.4 Million for the acquisition of Minacs Canada - whether is capital in nature hence not allowable? - Held that - As it is clear from the additional ground raised by the assesse that the same pertains to subsequent assessment years when the assesse earned some foreign exchange gain, therefore, for the year under consideration, no such gain has arisen to the assesse on account of the said investment and, therefore, no adjudication of this ground is required for the year under consideration. Accordingly, we reject the additional ground raised by the assesse being not arisen from the impugned orders of authorities below for the A.Y. under consideration - Decided against assessee. Allowance of deduction u/s 10A - whether the deduction u/s 10Aof the Act, should be restricted to the profit of the unit eligible for deduction? - CIT(A) has allowed the claim of loss of the assesse - Held that - As decided in Commissioner of Income-tax Vs. Black & Veatch Consulting (P.) Ltd 2012 (4) TMI 450 - BOMBAY HIGH COURT wherein held Section 10A is a provision which is in the nature of a deduction and not an exemption - the deduction under Section 10A has to be given effect to at the stage of computing the profits and gains of business - Section 80B(5) defines for the purposes of Chapter VI-A gross total income to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter Decided against revenue.

Issues Involved:
1. Transfer Pricing (TP) adjustment regarding corporate guarantee.
2. TP adjustment regarding interest on loan given to Associated Enterprise (AE).
3. TP adjustment on interest due to re-characterization of share application money as a loan.
4. Depreciation on software expenses.
5. Deduction under Section 10A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. TP Adjustment Regarding Corporate Guarantee:
The assessee provided a corporate guarantee for a loan availed by its AE, AVTL Canada, from DBS Bank Singapore. The Transfer Pricing Officer (TPO) determined the arm's length price (ALP) of the corporate guarantee at 3.25% (including clerkage charges), resulting in an adjustment of Rs. 1,08,54,400/-. The CIT(A) upheld this adjustment. The assessee argued that the corporate guarantee should not be classified as an international transaction and alternatively suggested a 0.5% guarantee fee, citing various tribunal decisions. The tribunal agreed with the assessee's alternative plea, directing the AO/TPO to adopt 0.5% as the arm's length guarantee commission charges.

2. TP Adjustment Regarding Interest on Loan Given to AE:
The assessee advanced a loan to its wholly-owned subsidiary, AVTL Canada, at CAD LIBOR + 1%. The TPO, however, adopted an ALP rate of LIBOR + 4.45%, leading to an upward adjustment. The CIT(A) reduced this adjustment by determining the ALP rate at LIBOR + 2%. The tribunal, referencing previous decisions, confirmed the CIT(A)'s determination of LIBOR + 2% as a reasonable interest rate for the ALP.

3. TP Adjustment on Interest Due to Re-characterization of Share Application Money as Loan:
The assessee advanced Rs. 4,48,01,190/- to its subsidiary, Transworks BPO Philippines Ltd., as share application money. The TPO re-characterized this amount as a loan and determined the ALP interest rate at LIBOR + 4.45%. The CIT(A) upheld this view. The assessee contended that the delay in issuing shares was due to regulatory approval and provided additional evidence (share certificate). The tribunal set aside this issue for AO/TPO to verify the share certificate and, subject to verification, ruled that the share application money should not be treated as a loan.

4. Depreciation on Software Expenses:
The assessee did not press this ground as the CIT(A) had already provided relief in the previous assessment year. Consequently, this ground was dismissed as not pressed.

5. Deduction Under Section 10A:
The assessee had two STPI units eligible for deduction under Section 10A. The AO restricted the deduction and set off the losses of the non-STPI unit against the profits of the STPI unit. The CIT(A) allowed the assessee's claim of loss carry forward. The tribunal, following the jurisdictional High Court's judgment in Commissioner of Income-tax Vs. Black & Veatch Consulting (P.) Ltd., upheld the CIT(A)'s decision, confirming that the deduction under Section 10A should be given at the stage of computing the profits and gains of business.

Additional Ground:
The assessee raised an additional ground regarding the treatment of investment in its foreign subsidiary AVTL Canada. The tribunal noted that this issue pertains to subsequent assessment years and rejected the additional ground for the current year, allowing the assessee to address it in future years.

Conclusion:
The assessee's appeal was partly allowed, and the revenue's appeal was dismissed. The tribunal directed specific adjustments and verifications, ensuring compliance with established legal precedents and relevant material evidence.

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