2013 (9) TMI 339 - AT - Income Tax

Section 14A disallowance upheld without exempt income; rental income taxed under Other Sources; transfer pricing rules applied

Stream International Services (P.) Ltd. Versus Assistant Director of Income-tax (International Taxation) - 7 (2), Mumbai

Stream International Services (P.) Ltd. Versus Assistant Director of Income-tax (International Taxation) - 7 (2), Mumbai - [2013] 23 ITR 70 Issues Involved:1. Disallowance under Section 14A.2. Classification of rental income.3. Classification of interest income.4. Transfer pricing adjustment.Detailed Analysis:Disallowance under Section 14A:The first issue pertains to the disallowance of Rs. 16,55,850 under Section 14A. The assessee had made past investments in Infowayaz International Private Limited but did not earn any exempt income during the relevant year. The Assessing Officer (AO) computed the disallowance based on Rule 8D, which was later upheld by the Dispute Resolution Panel (DRP). However, the Tribunal noted that as per the Hon'ble jurisdictional High Court in Godrej & Boyce Mfg. Co. VS. DCIT, Rule 8D is applicable from the assessment year 2008-09 onwards. For earlier years, the disallowance should be computed on a 'reasonable basis'. The Tribunal upheld the principle of disallowance under Section 14A even in the absence of exempt income, following the Special Bench decision in Cheminvest Ltd. v. ITO. The computation of the disallowable amount was remanded back to the AO to follow the jurisdictional High Court's decision.Classification of Rental Income:The second issue involves the treatment of rental income earned from subletting a floor to M/s. Accenture Services Private Limited. The AO classified this income as 'Income from house property,' which the assessee contested, claiming it as business income. The Tribunal observed that Section 22 applies to properties owned by the assessee, and since the assessee was neither the owner nor the deemed owner, the rental income could not be classified under 'Income from house property.' Instead, it should be classified under 'Income from other sources.' The matter was remanded back to the AO for reclassification and allowing eligible deductions under Chapter IV-F, ensuring no double deduction occurs.Classification of Interest Income:The third issue regarding the classification of interest income of Rs. 7,77,291 as 'Income from other sources' was not pressed by the assessee's counsel and was therefore dismissed.Transfer Pricing Adjustment:The fourth issue concerns a transfer pricing adjustment of Rs. 2,20,39,947. The assessee challenged the inclusion of certain comparable cases used by the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP). The Tribunal examined objections against four comparables:1. Datamatics Financial Services Limited: The Tribunal found that the company's related party transactions exceeded the 25% threshold set by the TPO, warranting its exclusion.2. Goldstone Infratech Limited: The Tribunal noted that this company did not meet the export revenue filter of more than 25% of revenues. The case was remanded to the AO/TPO to verify the figures and reconsider its inclusion.3. Maple eSolutions Limited: The Tribunal directed its exclusion based on precedents from the Delhi and Hyderabad Benches, which had excluded this company due to data reliability issues.4. Vishal Information Technologies Limited (VITL): The Tribunal found that VITL outsourced a significant portion of its services, making it incomparable to the assessee, which provided services in-house. The Tribunal directed the AO/TPO to reconsider its inclusion.The Tribunal concluded that if the four contested comparables are excluded, the total margin of OP/TC might fall within the permissible range under Section 92C(2). However, since two cases were remanded for reconsideration, the final decision on the mean OP/TC was deferred. The AO/TPO was directed to re-evaluate the comparables and provide the assessee an opportunity for a hearing.Conclusion:The appeal was partly allowed for statistical purposes, with specific directions for re-evaluation and reclassification of income and comparables. The Tribunal emphasized the importance of following jurisdictional High Court decisions and ensuring accurate classification and computation of income and transfer pricing adjustments.