2015 (2) TMI 1126 - HC - Income Tax

High Court affirms ITAT on income treatment of deposits & ALP adjustment, citing accounting principles & precedent

The High Court upheld the ITAT's decisions on both issues, regarding the treatment of non-refundable deposits as income and ALP adjustment on interest for ... Addition on non refundable deposits - treated as income by the AO - accrual of income - ITAT deleted the addition - Held that:- This Court also notices that the assessee’s contentions with regard to spread over of such amount was accepted in all the earlier years, except the year in question i.e. Assessment Year (AY) 2007-08. Therefore, keeping in view the Supreme Court’s ruling in CIT vs. Excel Industries Ltd. 2013 [2013 (10) TMI 324 - SUPREME COURT] , it is held that the reconsideration of an issue, especially since it pertains to the method of treating a class of receipt, would not be appropriate. Addition respecting ALP adjustment on account of interest on inter-cooperate deposit - ITAT deleted the addition - Held that:- the interest rates on rupee bonds and debts, which has been extensively referred to in the order of the TPO, have no relevance at all. It is only elementary that interest is nothing but time value of money and when inflation pressure on a currency is lower as is the case with most strong currencies, the time value of money, i.e. interest, tends to be lower too. Therefore, comparing interest rate on rupee loans cannot at all be compared with interest rates on strong currencies like GBP, USD and CAD. All these erudite discussions about Indian bond market and interest rate are thus wholly irrelevant The ITAT has taken note of the fact that two specific comparables of USD borrowings i.e. L&T and Seri Infrastructure, on the interest rate of Libor had been taken into consideration. There is no material whatsoever, save and except for vague observations about weak financials of the subsidiaries – which are not supported by any specific facts and proceed on sweeping generalizations and assumptions, to reject the comparables taken by the assessee. When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent and legally sustainable reasons for doing so. On this point, therefore, the stand of the Assessing Officer cannot be accepted. Addition of 3% per annum - Held that:- What the TPO overlooks is the fact that such a transaction cost is relevant only to the domestic borrower who borrows in foreign currency from outside India. It has nothing to do with the arm's length interest rate for foreign currency borrowing by an overseas subsidiary. In any event, the interest rate is independent of incidental costs, and since TPO has taken lender as the tested party, the transaction cost to the borrower is wholly irrelevant. This adjustment is, therefore devoid of any legally sustainable basis. Also as the assessee advanced monies to the subsidiaries which were under its management and control, which in fact substantially reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis. Issues:1. Treatment of non-refundable deposits as income by the AO.2. ALP adjustment on account of interest on inter-corporate deposit.Analysis:1. The first issue revolves around the treatment of non-refundable deposits totaling Rs. 3,46,00,000 as income by the AO. The ITAT accepted the assessee's argument that the amount should be amortized over the estimated customer churn period, aligning with accounting principles. The Court noted that this practice was consistently followed by the assessee and accepted by the revenue in previous years. Citing the decision in CIT Vs Excel Industries Ltd, the Court upheld the ITAT's decision, emphasizing the inappropriateness of reconsidering an issue when the fundamental aspect remains consistent across assessment years.2. The second issue concerns the ALP adjustment of Rs. 10,11,786 on interest for inter-corporate deposits. The TPO directed adjustments based on lower interest rates, transaction costs, and lack of security. However, the ITAT ruled in favor of the assessee, highlighting that interest rates on foreign currency loans differ significantly from rupee loans. The ITAT emphasized the irrelevance of transaction costs for overseas subsidiaries borrowing in foreign currency and rejected the TPO's adjustments. Additionally, the ITAT noted that the assessee's advances to subsidiaries under its control reduced risks, justifying no adjustment on a higher basis.In conclusion, the High Court upheld the ITAT's decisions on both issues, emphasizing the reasonableness and justification of the ITAT's rulings. The Court found no legal grounds for interference, indicating that no questions of law arose from the judgments.