2015 (12) TMI 959 - AT - Income Tax

Transfer pricing adjustment - Held that - When assessee is not able to bring on record anything to show any services to have been rendered by AE to it and there are no documentations to show any services to have been received from AE, in our opinion it will be fair conclusion that no services were in fact rendered by AEs to the assessee. There is no dispute that both the AEs were subsidiaries of the assessee. Therefore, the agreements between such subsidiaries, which have been brought before us as well as lower authorities for justifying the payments could be best considered only as self-effectuating documents. There was considerable onus on the assessee to show that actual services were rendered by its subsidiaries. It is a well settled principle of law that a court has to go into substance and not be satisfied with the and form has to get behind the smoke screen to find the true state of affairs. In our opinion, the assessee was unable to show any services to have been received from sister concerns. When no services were received then lower authorities in our opinion were justified in considering the ALP to be zero. The assessee has not been able to show any services having been rendered by the AE to it. As to the claim of the assessee that natural justice was denied to it, we find that a number of opportunities were given by not only the DRP but also the TPO. Even during the remand proceedings before the TPO the assessee was unable to show any TP documentation with regard to the TP services rendered by AE - Decided against assessee Disallowance u/s.10A - Held that - The reason why assessee was denied the deduction claimed u/s.10A of the Act on the export benefits received from this unit was that it was formed by splitting up or reconstruction of a business already in existence. By virtue of the agreement mentioned supra, we cannot say that there was a split up or reconstruction of a business already in existence. There is neither any split up or reconstruction of business of the assessee nor SSAPL. Thus we hold that deduction u/s.10A could not have been denied - Decided in favour of assessee Disallowance u/s.14A - Held that - Interest ordinarily cannot be considered as having nexus with the business of the assessee. Such interest would normally fall under the head income from other sources . No doubt, in assessee s case the Assessing Officer has not considered the interest receipt separately under the head income from other sources . But this will not, in our opinion, change the nature of the transaction or character of the receipts. Rule 8D(2) prescribes application of the formula set out therein on the expenditure incurred by way of interest which is not directly attributable to any particular income or receipt. There is no case for the assessee that the interest expenditure of ₹ 335,169,433/- incurred by it were attributable to any particular income or receipt. There is nothing in the said rule which would allow for netting of interest. Rule 8D(2)(ii) states expenditure by way of interest. If we allow netting of interest income on such expenditure, it would be equivalent to adding something which is not there in the Rule book. Especially so, since interest received was not from any business activity but from FDs. We are, therefore, of the opinion that application of Rule 8D does not allow for netting of any interest income with interest expenditure. - Decided against assessee

Issues Involved:
1. Transfer Pricing (TP) Adjustment
2. Disallowance of Deduction under Section 10A
3. Addition under Short Term Capital Gains (STCG)
4. Disallowance under Section 14A

Issue-wise Detailed Analysis:

1. Transfer Pricing (TP) Adjustment:
The assessee challenged a TP adjustment of Rs. 7,15,27,453/-. The assessee, engaged in software development, had international transactions with its AEs, SSI-US and SSI-UK, reported in Form 3CEB. The TPO found that the assessee could not substantiate the outgo of Rs. 7,15,27,453/- through credible TP documentation. Consequently, the TPO treated the arms-length price (ALP) of these services as zero and recommended an addition of Rs. 7,15,27,453/-.

The DRP upheld the TPO's view, concluding that the assessee failed to demonstrate any direct benefit from the payments made to the AEs. The DRP noted that the taxpayer was unable to prove the rendering of services by the AEs, furnish adequate documentation, or demonstrate comparability with independent transactions.

The assessee argued that the expenditure allocated by SSI-US and SSI-UK was justified, providing a breakdown of costs and referencing agreements and debit notes. However, the Tribunal found that the assessee failed to maintain necessary TP documentation and did not demonstrate actual services rendered by the AEs. The Tribunal upheld the lower authorities' decision to treat the ALP as zero, dismissing grounds 4 to 7.

2. Disallowance of Deduction under Section 10A:
The assessee claimed a deduction of Rs. 90,11,87,334/- under Section 10A, which was disallowed by the Assessing Officer on the grounds that the STPI license was in the name of SSAPL, not the assessee, and the business was reconstituted. The DRP upheld this view, noting that the business transfer included assets and employees, indicating reconstitution.

The assessee argued that SSAPL did not cease to exist and there was no reorganization. The STPI unit was transferred to the assessee with necessary approvals, and similar deductions were allowed in the previous year. The Tribunal found that the business transfer did not constitute a split-up or reconstruction. Given that the deduction was allowed in the previous year and there was no change in facts, the Tribunal held that the disallowance under Section 10A was unwarranted and allowed grounds 8 and 9.

3. Addition under Short Term Capital Gains (STCG):
The assessee's claim of Rs. 1,22,67,831/- as STCG was deducted from net profits and separately shown in the computation of income. The Assessing Officer treated this amount separately under STCG, which the assessee contested as a change of head. The Tribunal found no revenue implication in this treatment and dismissed ground 10 as academic.

4. Disallowance under Section 14A:
The assessee claimed exempt income of Rs. 8,87,677/-. The Assessing Officer proposed a disallowance of Rs. 1,13,91,75,666/- under Section 14A, which was later adjusted to Rs. 47,51,229/- based on the assessee's submission. The dispute centered on whether the disallowance should be based on gross or net interest.

The Tribunal noted that the interest received on FDs should not be netted against interest expenditure for the purpose of Rule 8D(2)(ii). The Tribunal held that the application of Rule 8D does not allow for netting of interest income with interest expenditure and dismissed grounds 11 and 12.

Conclusion:
The appeal was partly allowed, with the Tribunal upholding the TP adjustment and disallowance under Section 14A, but allowing the deduction under Section 10A. The issue regarding STCG was dismissed as academic.

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