2014 (4) TMI 787 - AT - Income Tax

Tribunal partially allows appeals, directs re-evaluation using Profit Split Method. Disallowance reversed, interest upheld.

Global One India P. Ltd. Versus ACIT, Circle 12(1), New Delhi

Global One India P. Ltd. Versus ACIT, Circle 12(1), New Delhi - [2014] 31 ITR (Trib) 722 (ITAT [Del]) Issues Involved:1. Determination of the Most Appropriate Method (MAM) for Transfer Pricing.2. Disallowance under Section 40A(ia).3. Levy of interest under Section 234B.4. Additional grounds related to deduction under Section 80-IA(4) and interest under Section 234C.5. Initiation of penalty under Section 271(1)(c).Detailed Analysis:1. Determination of the Most Appropriate Method (MAM) for Transfer Pricing:The primary issue was whether the Profit Split Method (PSM) or the Transactional Net Margin Method (TNMM) was the MAM for determining the Arm's Length Price (ALP) of the international transactions undertaken by the assessee for the Assessment Years 2007-08 and 2008-09.- Assessee's Position: The assessee adopted the PSM, arguing that the operations were highly integrated, interconnected, and involved unique intangibles. They used a residual profit analysis to allocate profits based on the relative contributions of each entity within the Equant Group.- TPO's Position: The TPO rejected PSM, favoring TNMM, arguing that PSM was not correctly applied and that the assessee did not benchmark against external comparables. The TPO also cited the lack of significant sales/marketing activities and the routine nature of the field operations as reasons to reject PSM.- Tribunal's Findings: The Tribunal concluded that the assessee's operations were indeed integrated and interrelated, making PSM the MAM. It noted that TNMM was not suitable due to the complex and unique contributions of each entity. The Tribunal also highlighted that the TPO should correct the application of PSM rather than reject it outright. The Tribunal directed the AO to determine the ALP using residual PSM, considering the relative value of each entity's contribution.2. Disallowance under Section 40A(ia):The AO disallowed payments made for lease lines, holding that these were covered under Section 194-I, requiring tax deduction at source.- Assessee's Argument: The assessee argued that the payments were for standard facilities and not for the use of equipment, relying on judicial precedents like the Delhi High Court's decision in Asia Satellite Tele Communication Co.- Tribunal's Decision: The Tribunal allowed the assessee's claim, following the jurisdictional High Court's decision, and held that payments for standard facilities did not fall under Section 194-I.3. Levy of Interest under Section 234B:The assessee contested the levy of interest under Section 234B.- Tribunal's Decision: The Tribunal dismissed the grounds related to the levy of interest under Section 234B, stating that it is mandatory and consequential.4. Additional Grounds Related to Deduction under Section 80-IA(4) and Interest under Section 234C:The assessee raised additional grounds for deduction under Section 80-IA(4) and contested the levy of interest under Section 234C.- Tribunal's Decision: The Tribunal admitted the additional grounds, following the Supreme Court's decision in National Thermal Power Co. Ltd. v. CIT. It remitted the matter to the AO for fresh adjudication in accordance with the law.5. Initiation of Penalty under Section 271(1)(c):The assessee contested the initiation of penalty under Section 271(1)(c).- Tribunal's Decision: The Tribunal dismissed the grounds related to the initiation of penalty as premature.Conclusion:The appeals were allowed in part, with the Tribunal directing the AO to re-evaluate the transfer pricing adjustments using the residual PSM, and to adjudicate the additional grounds related to Section 80-IA(4) and interest under Section 234C. The disallowance under Section 40A(ia) was reversed, and the levy of interest under Section 234B was upheld. The initiation of penalty under Section 271(1)(c) was dismissed as premature.