2014 (9) TMI 610 - AT - Income Tax

Tribunal Decision: Interest Income Classification, Transfer Pricing, Donation Deduction, & Interest Levied Recomputation

Tricom India Limited Versus ITO-8(3) (3), Mumbai

The Tribunal upheld the denial of deduction under Section 10B for interest income, classified the interest income as 'Income from Other Sources,' modified ... Exemption of interest income earned u/s 10B – Held that:- As decided in assessee’s own case for the earlier assessment year, it has been held that, the assessee is a 100% Export Oriented Unit (EOU) registered under Software Technology Park Scheme for the development and export of computer software - The assessee had earned interest income and had also claimed deduction u/s 10B in respect of interest income - the interest income was derived from the business activity of the eligible unit and that it had consistently offered such income as Profit and gains of business and profession - The AO did not accept the contentions raised - deduction u/s 10B was allowable in respect of profit and gains derived from a 100% export oriented undertaking from the export of article or things or computer software - interest income had not been derived from export of article or things or computer software - the assessee was not entitled to deduction u/s 10B in respect of interest income - CIT (A) also rejected the claim of the assessee of netting of interest against the interest paid – the order of the CIT(A) is upheld – Decided against assessee. Assessability of interest under income from other sources – Held that:- As decided in assessee’s own case for the earlier assessment year, the Tribunal has rightly directed the AO to allow the expenses incurred for earning interest income - the assessee itself submitted that the interest had been earned from surplus funds generated which had been deposited in sort term deposits with banks - since the interest had been earned from the surplus funds, the AO assessing the interest income as income from other sources is justified - while computing the interest income as income from other sources all expenses incurred for earning of interest income have to be deducted - This aspect has not been examined either by the AO or by the CIT (A) – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of assessee. Determination of the Arm’s Length Price based on LIBOR – Held that:- The LIBOR has to be accepted as the basic rate for bench marking the interest to the AE’s - The assessee has adopted the interest rate of 250 basis point above the LIBOR for making the TP adjustment - CIT (A) has followed the RBI circular as per which all-in-cost ceiling of 350 basis point over the LIBOR has been prescribed in respect of loans of maturity period for more than 5 years - CIT (A) held that the arm’s length interest rate would be at LIBOR + 350 basis point. We however note that 350 basis point in the ceiling provided in the RBI circular - CIT(A) has just referred and followed the decision of the Tribunal - the issue has been decided by CIT(A) in accordance with the order of the Tribunal in assessee’s own case for immediate preceding assessment year – the order of the CIT(A) upheld – Decided against assessee. Issues Involved:1. Eligibility of interest income for deduction under Section 10B.2. Classification of interest income as 'Income from Other Sources' or 'Business Income.'3. Determination of Arm's Length Price (ALP) for interest on loans to Associated Enterprises (AEs).4. Application of tolerance band under Section 92C(2) for transfer pricing adjustments.5. Deduction of donations under Section 80G.6. Levy of interest under Sections 234B and 234C.Detailed Analysis:Issue 1: Eligibility of Interest Income for Deduction under Section 10BThe assessee argued that the interest income received from fixed deposits should be eligible for deduction under Section 10B. However, the Tribunal referenced its earlier decision in the assessee's own case for AY 2007-08, where it was decided that interest income does not qualify for deduction under Section 10B as it is not derived from the export of articles or software. The Tribunal upheld the CIT(A)'s decision, denying the deduction under Section 10B for the interest income.Issue 2: Classification of Interest IncomeThe assessee contended that the interest income should be classified as 'Business Income' rather than 'Income from Other Sources.' The Tribunal referenced its earlier decision, which classified the interest income as 'Income from Other Sources.' However, the Tribunal directed the AO to allow expenses incurred for earning the interest income, following the principle that net receipts should be considered, as upheld by the Supreme Court in the case of Associated Capsules Ltd. The Tribunal partially allowed this ground for statistical purposes, directing the AO to examine if any borrowed funds were used for making the fixed deposits.Issue 3: Determination of Arm's Length Price (ALP)Both the assessee and the Revenue disputed the determination of the ALP for interest on loans advanced to the assessee's AE. The Tribunal referenced its earlier decision, which held that the LIBOR rate should be used for benchmarking the interest on foreign currency loans. The CIT(A) had adopted LIBOR + 350 basis points, based on RBI guidelines. The Tribunal modified this, adopting LIBOR + 300 basis points as the appropriate rate, considering the facts of the case. Both the Revenue's and the assessee's appeals on this ground were dismissed, upholding the CIT(A)'s decision with the modification.Issue 4: Application of Tolerance Band under Section 92C(2)The assessee requested the application of the tolerance band under the first proviso to Section 92C(2) if the recomputed adjustment fell within the safe harbor. The Tribunal directed the AO to consider this relief as per law after recomputing the TP adjustment in accordance with the confirmed decision on the ALP determination.Issue 5: Deduction of Donations under Section 80GThe assessee claimed that the deduction for donations under Section 80G was incorrectly restricted. The Tribunal noted that this issue was not raised before the CIT(A) and does not arise out of the CIT(A)'s order. The Tribunal suggested that the assessee may file an application for rectification before the AO for enhanced deduction but declined to entertain this ground in the appeal.Issue 6: Levy of Interest under Sections 234B and 234CThe assessee argued that the interest levied under Sections 234B and 234C was excessive and incorrect. The Tribunal directed the AO to recompute the interest after giving effect to the Tribunal's order, considering this ground partly allowed for statistical purposes.Cross Objections:The assessee's cross objections became infructuous following the decision on Ground No. III of the assessee's appeal. The Tribunal dismissed the cross objections accordingly.Conclusion:The appeal filed by the assessee was partly allowed, the Revenue's appeal was dismissed, and the cross objections filed by the assessee were dismissed. The Tribunal's order was pronounced in the open court on 03/09/2014.