2020 (2) TMI 422 - AT - Income Tax

Tribunal upholds CIT(A)'s decisions on SEZ deductions, TDS exemption, and transfer pricing adjustments.

Dy. Commissioner of Income Tax Circle-1 (1) Guntur Versus M/s Bommidala Enterprises Pvt. Ltd.

The Tribunal upheld the CIT(A)'s decisions, allowing the assessee's trading activities in the SEZ unit to qualify for deduction under section 10AA, ... Disallowance of claim u/s 10AA - SEZ unit - Scope of the term 'Service' - trading activity - The AO viewed that the assessee is not engaged in the manufacturing activity and only engaged in the trading activity. - HELD THAT:- In the absence of instructions and directions to implement the circular of Ministry of Commerce (supra), no deduction is permissible as per the Act. However the Act does not define the term ‘services’ in section 10AA. The SEZ Rules define the services and the activity of the assessee is covered under the definition of services. Therefore, the argument advanced by the Ld.DR is not tenable. Hence, respectfully following the view taken by this Tribunal in the assessee’s own case [2017 (4) TMI 867 - ITAT VISAKHAPATNAM] , we hold that the assessee is eligible for deduction u/s 10AA on the profits derived by SEZ Unit in respect of trading activity of importing the goods for reexport. Accordingly, the ground raised by the revenue on this issue is dismissed Addition made by the AO u/s 40(a)(ia) of the Act in respect of Ocean Freight charges paid to the agents of foreign shipping company for non deduction of tax at source - HELD THAT:- In the instant case section 172 is applicable, since the payment is made to Shipping Agents. The department has not called for the return of income of the non resident shipping owners at the time of assessment. Therefore, we are of the considered opinion that the payment is squarely covered by Circular No. 723 of CBDT and there is no case for deduction of tax u/s 194C or 195 and consequent disallowance u/s 40(a)(ia) of the Act. Accordingly, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue. Transfer pricing adjustment - Arms Length Price on sales and the interest charged on outstanding receivables treating the outstanding receivables as International transactions - Assessee has objected for adopting TNMM as MAM instead of CPM adopted by the assessee - HELD THAT:- In view of the fact that there are no external comparables available in the public domain, we hold that the assessee has rightly bench marked the ALP adopting the internal comparables and hold that the international transaction is at ALP and no interference is called for in the order of the Ld.CIT(A). Accordingly, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue. TP adjustment is with regard to adjustment made by the TPO in respect of interest on receivables - HELD THAT:- In the instant case, the AO made TP adjustment in respect of interest on outstanding receivables that were received beyond the period of 180 days. The receivables are closely linked to the principal transaction of sale of goods. The AO did not consider the circumstances surrounding the receivables and did not consider that the outstanding receivables are not unsecured loans / advances given to AEs. Even if it is considered that the receivables as international transactions, since, the same are to be received in foreign exchange the interest if any required to be applied following LIBOR or LIBRO plus method. However in the instant case, receivables represent the trade receipts but not the unsecured/ secured loans. In the case of trade receipts, the sale price is fixed including the realizable time period and hence, once the transactions are at ALP in respect of sales, no separate adjustment is required to be made in of sales receivables Issues Involved:1. Disallowance of claim u/s 10AA of the Income Tax Act, 1961.2. Addition u/s 40(a)(ia) in respect of Ocean Freight charges.3. Transfer pricing adjustments for the A.Y. 2013-14.Detailed Analysis:1. Disallowance of Claim u/s 10AA of the Income Tax Act, 1961:The primary issue was whether the assessee's trading activity in the SEZ unit qualifies as 'services' under section 10AA of the Act. The assessee, engaged in importing and re-exporting cigarettes and alcoholic beverages, claimed that such trading activity falls under the scope of 'services' as per SEZ Rules and the Department of Commerce's Instruction No. 4/2006. The AO disallowed the claim, arguing that trading does not qualify as manufacturing or service activity under section 10AA. However, the CIT(A) allowed the appeal, following the Tribunal's earlier decision in the assessee's favor. The Tribunal upheld the CIT(A)'s decision, reiterating that the SEZ Rules define 'services' to include trading activities, and thus, the assessee's activities are eligible for deduction under section 10AA.2. Addition u/s 40(a)(ia) in Respect of Ocean Freight Charges:The AO added back amounts paid towards Ocean Freight charges to agents of foreign shipping companies due to non-deduction of TDS. The CIT(A) deleted the addition, relying on Circular No. 723 dated 19.09.1995, which exempts such payments from TDS provisions. The Tribunal upheld the CIT(A)'s decision, stating that the payments made to shipping agents are covered by the said circular, and sections 194C and 195 do not apply.3. Transfer Pricing Adjustments for the A.Y. 2013-14:The AO made adjustments based on the Transfer Pricing Officer's (TPO) findings, rejecting the assessee's chosen method (Cost Plus Method) and adopting the Transactional Net Margin Method (TNMM) with external comparables. The assessee argued that internal TNMM should be used, given the availability of segmental data. The CIT(A) sided with the assessee, noting that internal comparables provide a more accurate benchmark. The Tribunal upheld the CIT(A)'s decision, agreeing that internal TNMM is appropriate given the lack of suitable external comparables and the detailed segmental data provided by the assessee.Additional Issue: Interest on Outstanding Receivables:The TPO also made adjustments for interest on outstanding receivables beyond the credit period, treating them as international transactions. The CIT(A) deleted this adjustment, reasoning that differences in credit periods are factored into the sales price and that receivables are not separate international transactions. The Tribunal agreed, referencing similar cases where no interest was charged on trade receivables once the sale price was at arm's length.Conclusion:The Tribunal dismissed the revenue's appeals and upheld the CIT(A)'s decisions across all issues, confirming the eligibility of the assessee's SEZ unit activities for deduction under section 10AA, the non-applicability of TDS provisions on Ocean Freight charges, and the appropriateness of using internal comparables for transfer pricing adjustments.