2013 (6) TMI 420 - AT - Income Tax

ITAT orders fresh review of Section 10A deduction and approves CUP method for transfer pricing on interest receipts

The ITAT Mumbai set aside the disallowance of deduction under section 10A related to reallocation of common head office expenses among units in a Software ... Deduction u/s 10A disallowed - Unit No. II and Unit No. III set up in Software Technology Park - reallocation of certain common head office expenses amongst various units - matter was referred to DRP - Held that:- Even ground No. 3b is without prejudice to the claim of deduction under section 10A i.e., the reallocation of expenditure should be done only after adding back the common expenses as originally allocated by the assessee. It appears that the AO has not properly appreciated the issue. Since ground of disallowance u/s 10A is already set aside as mutatis mutandis identical to those of the immediately preceding year, it fair and reasonable to set aside this issue also with a direction to the AO to reconsider the matter in accordance with law. Needless to observe that the assessee shall be given an opportunity of being heard and if the assessee has already allocated the expenditure the same has to be added back to the profits of the units and then only the reallocation process should begin. Adjustments recommended by the TPO and DRP with regard to the interest receipts shown on loan given to AE - as per TPO as per the CUP method if it is benchmarked against LIBOR the interest rate declared by the assessee is higher and hence no adjustment is required - whether it is not in accordance with law - Held that:- The case of the assessee was that LIBOR as on 31.03.2008 was 2.49% against which the assessee has charged interest @ 6% p.a. Interest charged by the assessee is much higher than the corresponding arm's length LIBOR even from an Indian transfer pricing perspective. It is not in dispute that the loan has been denominated in US dollars. Though the D.R., for the first time, raised a contention that the assessee might have taken loan in the earlier year to advance the same to its AE in the earlier year, in fact neither the TPO nor the DRP has considered the aspect from that angle and the assessee consistently prayed before the tax authorities that the assessee has not incurred any interest cost on funds given to the AE as the source of fund is surplus available with the assessee. In the absence of any material to prove to the contrary, merely because some interest has been paid in the immediately preceding year, it cannot be assumed that the assessee borrowed funds in the immediately preceding year was the source for the purpose of advancing loans to its AE. Having regard to the overall circumstances of the case the issue stands squarely covered by the decision of Cotton Naturals (I) P. Ltd. [2013 (6) TMI 174 - ITAT DELHI], wherein observed that the CUP method is the most appropriate method in order to ascertain arm's length price of the international transaction i.e., where the lending of money was in foreign currency to its AE the domestic prime lending rate would have no applicability and the interbank rate fixed should be taken as benchmark rate for international transactions. Therefore, hold that LIBOR rate has to be adopted in the instant case since the interest charged by the assessee from its AE is higher than the LIBOR rate in the year under consideration no transfer pricing adjustment in that regard is warranted - set aside the order of the AO and allow the grounds urged by the assessee. Interest u/s 234B - Held that:- As charging of interest under section 234B is mandatory but it is consequential in nature depending upon the additions/adjustments upheld. The AO is directed to compute the interest. chargeable under section 234B Issues Involved:1. Deduction under section 10A for Unit No. II and Unit No. III.2. Reallocation of common head office expenses among various units.3. Transfer pricing adjustments for interest receipts on loans given to Associate Enterprises (AE).4. Charging of interest under section 234B.Detailed Analysis:1. Deduction under section 10A for Unit No. II and Unit No. III:The assessee contended that Units No. II & III, set up in Software Technology Park during the Financial years 2000-01 & 2001-02 respectively, were new independent units and thus eligible for deduction under section 10A. The Assessing Officer (AO), following previous orders, rejected the claim, treating the units as expansions of existing business. The Tribunal, agreeing with the assessee, set aside the AO's order and directed a fresh assessment in line with the Tribunal's observations for A.Y. 2005-06, as the facts and circumstances were identical.2. Reallocation of common head office expenses among various units:The AO reallocated common head office expenses based on turnover, which the assessee contested, arguing that the original allocation was reasonable and consistent with prior years. The Dispute Resolution Panel (DRP) supported the AO's method but acknowledged merit in the assessee's alternative contention that reallocation should begin only after adding back already allocated expenses. The Tribunal agreed with the assessee, setting aside the AO's order and directing a reconsideration, ensuring the assessee is heard and the initial allocations are added back before reallocation.3. Transfer pricing adjustments for interest receipts on loans given to Associate Enterprises (AE):The assessee lent US$28,31,775 to its AE, charging 6% interest. The Transfer Pricing Officer (TPO) and DRP rejected the LIBOR-based benchmarking, suggesting a domestic cost of borrowings plus a 3% markup. The Tribunal found that the loan, denominated in US dollars, should be benchmarked against LIBOR, as the interest charged by the assessee was higher than the LIBOR rate. The Tribunal held that no transfer pricing adjustment was warranted, setting aside the AO's order.4. Charging of interest under section 234B:The assessee acknowledged that charging interest under section 234B is mandatory but argued it is consequential. The Tribunal directed the AO to compute the interest chargeable under section 234B based on the final adjustments.Conclusion:The appeal filed by the assessee was partly allowed, with directions for fresh assessments and reconsiderations on the disputed issues, ensuring compliance with the Tribunal's observations and providing the assessee an opportunity to present their case.