2020 (7) TMI 435 - AT - Income Tax

Tribunal directs re-computation for AY 2008-09 and AY 2009-10 appeals

The Tribunal partly allowed the appeals for both AY 2008-09 and AY 2009-10, directing the AO/TPO to recompute the adjustments based on the Tribunal's ... TP Adjustment - comparable selection - HELD THAT:- Primary function of the assessee is to provide business process outsourcing services (BPO), consisting of inbound customer services, outbound collections, transaction processing, financing and accounting services, knowledge management of complex technologies, telemarketing and invoice processing thus companies functionally dissimilar with that of assessee need to be selected from final list. Rejection of companies having RPT of more than 25% of the operating revenue as well as companies having different financial year ending. Adjustment on account of provision of Corporate and performance guarantee - HELD THAT:- As decided in M/S. EVEREST KENTO CYLINDERS LTD. [2015 (5) TMI 395 - BOMBAY HIGH COURT]manner in which the Transfer Pricing Officer has proceeded to determine the arm's length rate based on the probable rate being charged by the commercial banks is not justified. In this view of the matter, three per cent rate of guarantee commission fee determined as arm's length rate by the income-tax authorities cannot be approved, though the ld. DRP in its direction has already restricted it to 1.5%. In the alternative, the addition that is required to be sustained is the position canvassed by the assessee before the Transfer Pricing Officer i.e. adoption of 0.50 per cent as arm's length rate for the purpose of determining the arm's length income on account of guarantee commission fee in the instant case. Considering the entirety of facts and circumstances of the case and on the basis of the material available on record, the rate of 0.50 per cent is to be upheld for the purpose of determining the arm's length rate of the guarantee commission fee. In the result this ground of appeal is partly allowed. Adjustment on account of provision of loan to AE’s - HELD THAT:- Assessee vehemently submitted that direction of ld. DRP resulted in to total rate of interest at 8.8%. The Hon’ble Delhi High Court in CIT Vs Cotton Naturals (I) (P) Ltd [2015 (3) TMI 1031 - DELHI HIGH COURT] while considering the question of law whether the Income-Tax Appellate Tribunal was right in holding that the interest @ 4% p.a. charged by the respondent assessee from its subsidiary i.e. the Associated Enterprise was arm's length rate of interest and the adjustment made in the Assessment Order determining the arms' length rate of interest at 12.20% was unwarranted, held that Arm's length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid. Hon’ble Jurisdictional High Court in CIT Vs Tata Autocomp System Ltd [2012 (5) TMI 45 - ITAT MUMBAI] also held that where assessee advanced loans to its AE situated in Germany, rate of interest was to be determined on basis of rate prevailing in Germany where loan had been consumed. Considering the aforesaid decisions of Hon’ble High Courts, we direct the AO/TPO to recompute the adjustment of interest on loan by following the decision of CIT Vs Tata Autocomp System Ltd (supra). The assessee is directed to provide necessary details to AO/TPO. In the result this Ground of appeal is allowed for statistical purpose. Income from sub-lease as income from other sources - Eligibility for deduction u/s 10A - HELD THAT:- Assessee has claimed deduction under section 10 A against the business income list of the assessee also credited a rental income of ₹ 6.53 crore in its profit and loss account and the same was included in the head of income from business on which the assessee claimed deduction under section 10A. The assessing officer took his view that the rental income is not eligible for deduction under section 10A. The DRP affirm the action of assessing officer as the same is not qualified for deduction under section 10A. Before us, the learned AR of the assessee failed to bring any convincing fact to treat the said rental income as a business income of the assessee. As noted that the DRP on the application of assessee for seeking rectification for its direction dated 07/09/2012, vide order dated 21st December 2012 has already directed the assessing officer/TPO to allow expenditure incurred in earning such income. Therefore, in our considered view no further direction is required. Issues Involved:1. Transfer Pricing Adjustments2. Income from Sub-Lease Treated as 'Income from Other Sources'3. Rent Expenditure Not Allowed as Deduction from 'Income from Other Sources'4. Initiation of Penalty Proceedings under Section 271(1)(c)5. Short Credit of TDSDetailed Analysis:1. Transfer Pricing Adjustments:General:The assessee challenged the upward adjustments made by the AO/DRP, which included Rs. 47.28 crore for call center and data processing services, Rs. 1,09,738 for interest on loans to associated enterprises, and Rs. 2.47 crore for corporate guarantees. The AO/DRP upheld these adjustments and the TPO's methodology, rejecting the principle of res-judicata in transfer pricing adjustments.Provision of Call Center and Data Processing Services:The TPO rejected the Comparable Uncontrolled Price (CUP) method used by the assessee and applied the Transaction Net Margin Method (TNMM). The TPO selected 22 comparables and calculated an arithmetic mean margin of 27.53%, resulting in an adjustment of Rs. 47.28 crore. The DRP directed the exclusion of two comparables and upheld the remaining 20.Provision of Corporate Guarantee:The TPO charged 3% interest on corporate and performance guarantees, suggesting an adjustment of Rs. 2.47 crore. The DRP reduced the interest rate to 1.5%. The Tribunal, following the jurisdictional High Court's guidance, further reduced the rate to 0.50%.Provision of Loans to AEs:The TPO applied a domestic interest rate of 14.39% based on Crisil data, resulting in an adjustment of Rs. 1,09,738. The DRP directed the use of the domestic cost of borrowing plus a 3% markup, leading to an 8.8% interest rate. The Tribunal directed the AO/TPO to recompute the adjustment based on market-determined interest rates applicable to the currency and country of repayment, following the Delhi High Court's decision in CIT vs. Cotton Naturals (P) Ltd.2. Income from Sub-Lease Treated as 'Income from Other Sources':The assessee sub-leased a property taken on lease to avoid excessive expenditure. The AO treated the sub-lease income of Rs. 6.53 crore as 'Income from Other Sources' and denied the deduction under section 10A. The DRP upheld this treatment but directed the AO to allow expenses incurred in earning such income under section 57(iii). The Tribunal confirmed this direction.3. Rent Expenditure Not Allowed as Deduction from 'Income from Other Sources':The Tribunal noted that the DRP had already directed the AO to allow the deduction of expenses incurred in earning the sub-lease income under section 57(iii). Therefore, no further direction was required.4. Initiation of Penalty Proceedings under Section 271(1)(c):The Tribunal did not specifically address the initiation of penalty proceedings under section 271(1)(c) in detail, as it was a general ground.5. Short Credit of TDS:For AY 2009-10, the assessee claimed a short credit of TDS amounting to Rs. 2,07,96,985. The Tribunal directed the AO to verify the details and grant the correct TDS credit after providing the assessee an opportunity to present evidence.Conclusion:The Tribunal partly allowed the appeals for both AY 2008-09 and AY 2009-10, directing the AO/TPO to recompute the adjustments based on the Tribunal's directions and applicable legal precedents. The Tribunal also ensured that the assessee was granted the correct TDS credit and allowed deductions for expenses incurred in earning sub-lease income.