2015 (5) TMI 639 - AT - Income Tax

Tribunal Decides on Transfer Pricing and Deduction Issues, Sets Arm's Length Commission

The tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal. Specific adjustments were directed, including adopting a 0.5% arm's ... Arm's length guarantee commission - use of LIBOR as international benchmark rate for cross-border loans - internal comparable (internal CUP) for interest benchmarking - re-characterisation of share application money as loan versus capital contribution - remand for verification of share certificate - deduction under Section 10A as a deduction in computing business profits (not a post-computation set-off)Arm's length guarantee commission - Determination of arm's length price for corporate guarantee given by the assessee to secure AE's bank loan. - HELD THAT: - The Tribunal accepted the assessee's alternative contention and followed earlier coordinate-bench decisions (including the assessee's own preceding-year finding) that the universal application of a 3% guarantee commission is not warranted; guarantee fees depend on factual matrix including terms, risk and comparable internal transactions. In pari materia facts, the Tribunal directed adoption of 0.5% as the arm's length guarantee commission rate and directed the AO/TPO to compute ALP accordingly. [Paras 2]Adopt 0.5% as arm's length guarantee commission and direct AO/TPO to compute adjustment on that basis.Use of LIBOR as international benchmark rate for cross-border loans - internal comparable (internal CUP) for interest benchmarking - Benchmark rate for interest on loan advanced by the assessee to its AE (whether LIBOR+2% as held by CIT(A) or LIBOR+4.45% as adopted by TPO). - HELD THAT: - The Tribunal applied its consistent approach that LlBOR is the appropriate international benchmark for foreign-currency denominated inter-company loans and relied upon earlier coordinate-bench decisions. Having considered rival contentions, the Tribunal confirmed the CIT(A)'s conclusion adopting 6 months LIBOR + 200 basis points as the arm's length rate, thereby reducing the TPO's upward adjustment. [Paras 3]Confirm CIT(A)'s adoption of 6 months LIBOR + 2% as the arm's length interest rate.Re-characterisation of share application money as loan versus capital contribution - remand for verification of share certificate - Whether share application money advanced to subsidiary constitutes a loan (subject to TP interest) or genuine capital infusion by issue of shares. - HELD THAT: - Though shares were issued after a delay, the assessee explained the delay as due to obtaining regulatory approval and produced a share certificate evidencing allotment. The Tribunal noted that the share certificate was not before the authorities below and, given the explanation, held that the transaction cannot be treated as loan merely because of the delay. The Tribunal set aside the issue to the AO/TPO for verification of the share certificate and fresh consideration of whether the funds were capital or loan. [Paras 4]Set aside to AO/TPO to verify the share certificate and reconsider whether the share application money is capital (and thus not subject to TP interest) or to be re-characterised as loan.Dismissal of ground as not pressed - Claim for depreciation on software expenditure for A.Y. 2007-08. - HELD THAT: - The assessee did not press this ground at hearing and the revenue raised no objection to its dismissal as not pressed. The Tribunal therefore declined to adjudicate the substantive claim for this year. [Paras 5]Ground dismissed as not pressed.Procedural non-justiciability of consequential grounds for subsequent years - Additional ground seeking capital treatment for foreign-exchange gain arising in subsequent assessment years if acquisition-related borrowing is held to be capital. - HELD THAT: - The Tribunal observed that the additional ground related to events and tax consequences of subsequent assessment years and that no such gain had arisen in the year under appeal. Consequently the ground did not arise for adjudication in A.Y. 2007-08 and was rejected as not arising from the impugned orders for the year under consideration. The assessee was left free to pursue the plea in the relevant subsequent years. [Paras 6]Additional ground rejected as not arising for A.Y. 2007-08; liberty granted to raise consequential pleas in subsequent years.Deduction under Section 10A as a deduction in computing business profits (not a post-computation set-off) - carry forward and set off of business losses vis-a -vis Chapter VI-A deductions - Whether deduction under Section 10A must be restricted to profits of the eligible undertaking or may be given from total income after set-off of losses of non-eligible units. - HELD THAT: - The Tribunal followed the jurisdictional High Court's decision holding that Section 10A is a deduction to be given at the stage of computing profits and gains of business (i.e., prior to application of set-off/carry forward under Section 72). Applying that principle, the Tribunal found no error in CIT(A)'s allowance of the assessee's claim and rejected the revenue's contention. [Paras 8]Affirm CIT(A)'s allowance under Section 10A; revenue's grounds on this issue dismissed.Final Conclusion: The assessee's appeal is partly allowed: arm's length guarantee commission reduced to 0.5%, LIBOR+2% confirmed as ALP for interest on the inter-company loan, share application money issue remanded to AO/TPO for verification of share certificate and fresh consideration, and the software depreciation ground dismissed as not pressed. The revenue's appeal is dismissed. Issues Involved:1. Transfer Pricing (TP) adjustment regarding corporate guarantee.2. TP adjustment regarding interest on loan given to Associated Enterprise (AE).3. TP adjustment on interest due to re-characterization of share application money as a loan.4. Depreciation on software expenses.5. Deduction under Section 10A of the Income Tax Act.Issue-wise Detailed Analysis:1. TP Adjustment Regarding Corporate Guarantee:The assessee provided a corporate guarantee for a loan availed by its AE, AVTL Canada, from DBS Bank Singapore. The Transfer Pricing Officer (TPO) determined the arm's length price (ALP) of the corporate guarantee at 3.25% (including clerkage charges), resulting in an adjustment of Rs. 1,08,54,400/-. The CIT(A) upheld this adjustment. The assessee argued that the corporate guarantee should not be classified as an international transaction and alternatively suggested a 0.5% guarantee fee, citing various tribunal decisions. The tribunal agreed with the assessee's alternative plea, directing the AO/TPO to adopt 0.5% as the arm's length guarantee commission charges.2. TP Adjustment Regarding Interest on Loan Given to AE:The assessee advanced a loan to its wholly-owned subsidiary, AVTL Canada, at CAD LIBOR + 1%. The TPO, however, adopted an ALP rate of LIBOR + 4.45%, leading to an upward adjustment. The CIT(A) reduced this adjustment by determining the ALP rate at LIBOR + 2%. The tribunal, referencing previous decisions, confirmed the CIT(A)'s determination of LIBOR + 2% as a reasonable interest rate for the ALP.3. TP Adjustment on Interest Due to Re-characterization of Share Application Money as Loan:The assessee advanced Rs. 4,48,01,190/- to its subsidiary, Transworks BPO Philippines Ltd., as share application money. The TPO re-characterized this amount as a loan and determined the ALP interest rate at LIBOR + 4.45%. The CIT(A) upheld this view. The assessee contended that the delay in issuing shares was due to regulatory approval and provided additional evidence (share certificate). The tribunal set aside this issue for AO/TPO to verify the share certificate and, subject to verification, ruled that the share application money should not be treated as a loan.4. Depreciation on Software Expenses:The assessee did not press this ground as the CIT(A) had already provided relief in the previous assessment year. Consequently, this ground was dismissed as not pressed.5. Deduction Under Section 10A:The assessee had two STPI units eligible for deduction under Section 10A. The AO restricted the deduction and set off the losses of the non-STPI unit against the profits of the STPI unit. The CIT(A) allowed the assessee's claim of loss carry forward. The tribunal, following the jurisdictional High Court's judgment in Commissioner of Income-tax Vs. Black & Veatch Consulting (P.) Ltd., upheld the CIT(A)'s decision, confirming that the deduction under Section 10A should be given at the stage of computing the profits and gains of business.Additional Ground:The assessee raised an additional ground regarding the treatment of investment in its foreign subsidiary AVTL Canada. The tribunal noted that this issue pertains to subsequent assessment years and rejected the additional ground for the current year, allowing the assessee to address it in future years.Conclusion:The assessee's appeal was partly allowed, and the revenue's appeal was dismissed. The tribunal directed specific adjustments and verifications, ensuring compliance with established legal precedents and relevant material evidence.