2021 (10) TMI 1053 - AT - Income Tax

Tribunal Decisions on Income Deductions, Interest, and Transfer Pricing

The Tribunal allowed the deduction under section 10A for income derived from training activity, considering it intricately connected to software export. ... Deduction under section 10A for income from training activities - deduction under section 10A for interest earned on temporary parking of surplus funds - transfer pricing adjustment for notional interest on delayed receivables - transfer pricing adjustment on customization fees and application of CUP method - allowability of guarantee commission on intra-group loans - interest under section 234DDeduction under section 10A for income from training activities - Income derived from training activity is includible in total turnover and export turnover for computing deduction under section 10A and qualifies for the deduction. - HELD THAT: - The Tribunal followed its earlier decision in the assessee's own case for assessment year 2002-03, which was affirmed by the jurisdictional High Court. Applying that precedent to the identical facts, the Tribunal held that training provided to customers for use of the software is intricately connected to the export of software and therefore forms part of the undertaking's turnover for section 10A purposes. Consequent direction was given to the Assessing Officer to allow the claim by including the training income in both total and export turnover. [Paras 7, 23]Allow claim; direct AO to include training income in total and export turnover for section 10A.Deduction under section 10A for interest earned on temporary parking of surplus funds - Interest earned on temporary parking of surplus funds that is integrally connected to the export business can qualify for deduction under section 10A, but the quantification and attribution to the 10A units must be verified by the Assessing Officer. - HELD THAT: - Differentiating section 10A/10B (a self-contained code) from Chapter VI-A jurisprudence, the Tribunal accepted the line of authority (including the Karnataka Full Bench and the jurisdictional High Court) that interest from temporary parking of surplus export funds is part of the profits and gains of the undertaking and cannot be treated as unrelated income from other sources. The Tribunal, however, made clear that the factual apportionment of the claimed interest to the 10A units requires examination; hence the assessee was directed to produce evidence and the AO was tasked to verify the attribution of the apportioned amount. [Paras 14, 15, 35]Allow claim in principle; remit to AO for factual verification and quantification of the interest attributable to 10A units.Transfer pricing adjustment for notional interest on delayed receivables - Notional transfer pricing adjustment on account of interest for delayed remittance by overseas associated enterprises is deleted where evidence shows delays were due to end-customer payment timing and the AEs did not benefit. - HELD THAT: - The Tribunal examined the reconciliation statements, subsidiary bank statements and other evidence furnished by the assessee, and the appreciation by the Commissioner (Appeals) that remittances by AEs depended on end-customer payments. Finding that the AEs were not end customers and that delays were attributable to end-customer payment cycles (and some AEs were loss-making), the Tribunal concluded that the AEs did not obtain a benefit meriting an interest-based adjustment. On facts, therefore, the TPO's notional interest adjustment was set aside. [Paras 16, 17, 20, 21, 38]Delete the transfer pricing adjustment relating to notional interest on delayed receivables.Transfer pricing adjustment on customization fees and application of CUP method - Adjustment disallowing customization fees retained by overseas subsidiaries (applying CUP to hold such services rendered by subsidiaries at nil) is not sustained where the arrangement and factual matrix match prior decisions in the assessee's own case which were affirmed by the High Court. - HELD THAT: - The Tribunal relied on its earlier decision in the assessee's own case for assessment year 2002-03 (affirmed by the jurisdictional High Court) which found that subsidiaries performed market and data-collection functions that justified retention of a portion of revenue. Given identical facts and absence of contradicting material from Revenue, the Tribunal upheld the Commissioner (Appeals)'s deletion of the TPO's adjustment and rejected the application of CUP to treat subsidiary contribution as nil. [Paras 25, 26, 27, 28, 37]Uphold deletion of customization-fee adjustment; dismiss Revenue's challenge.Allowability of guarantee commission on intra-group loans - No separate guarantee commission is exigible where the assessee itself has advanced loans to associated enterprises and charged interest at an appropriate arm's length rate; therefore the TPO's addition for notional guarantee commission is deleted. - HELD THAT: - The Tribunal agreed with the Commissioner (Appeals) that the concept of charging a guarantee commission arises where a borrower obtains funds from a third-party lender subject to a corporate guarantee. Here the assessee was the lender and had charged LIBOR plus basis points; the TPO produced no material to show the charged rate was not arm's length. Consequently, there was no basis to impose an additional guarantee commission. [Paras 40, 41]Dismiss adjustment for guarantee commission; uphold deletion by Commissioner (Appeals).Interest under section 234D - The Tribunal allowed Revenue's appeal on the issue and reversed the Commissioner (Appeals) by sustaining interest under section 234D in accordance with prevailing legal position. - HELD THAT: - Counsel for the assessee conceded that the Revenue's ground on section 234D must be allowed in view of current law. The Tribunal, on that admission and the applicable legal position, reversed the Commissioner (Appeals) and allowed the Revenue's challenge. [Paras 30, 31, 32]Allow Revenue's ground; reverse Commissioner (Appeals) on section 234D interest.Final Conclusion: Appeals disposed with mixed results: the Tribunal allowed the assessee's claims that training income and qualifying interest income (subject to AO's factual verification) fall within section 10A; deleted transfer pricing adjustments relating to notional interest on delayed receivables and to guarantee commission on intra-group loans; upheld deletion of customization-fee adjustment; but allowed the Revenue's challenge on interest under section 234D. Orders remitted to AO where factual quantification was required. Issues Involved:1. Denial of deduction under section 10A of the Income Tax Act, 1961 for income derived from training activity.2. Disallowance of deduction under section 10A for interest income.3. Transfer pricing adjustment due to interest charged on delayed receivables.4. Inclusion of income from training activity in total turnover for computing deduction under section 10A.5. Transfer pricing adjustment on account of customization fee.6. Deletion of interest charged under section 234D.7. Adjustment towards granting fee on loan extended to AE.Issue-wise Detailed Analysis:1. Denial of Deduction under Section 10A for Training Activity Income:The assessee challenged the denial of deduction under section 10A for income derived from training activity. The AO and the Commissioner (Appeals) disallowed the deduction, stating that the training activity was not related to software development. However, the Tribunal noted that in the previous assessment year, the Tribunal and the jurisdictional High Court had allowed the deduction, considering the training activity as intricately connected to software export. Therefore, the Tribunal directed the AO to allow the deduction under section 10A for the training activity income.2. Disallowance of Deduction under Section 10A for Interest Income:The AO disallowed the deduction under section 10A for interest income, treating it as income from other sources. The assessee argued that the interest income was from temporary parking of surplus funds and should be included in the profits of the undertaking. The Tribunal referred to the Karnataka High Court's decision in CIT vs. Hewlett Packard Global Ltd., which held that interest income from temporary parking of surplus funds is integral to the business activity and qualifies for deduction under section 10A. The Tribunal allowed the assessee's claim, subject to factual verification by the AO.3. Transfer Pricing Adjustment Due to Interest Charged on Delayed Receivables:The TPO made an adjustment for interest on delayed receivables from AEs, applying a rate of 8%. The assessee argued that the delay was due to end customers' delayed payments to subsidiaries. The Tribunal found that the delay in receivables was due to the end customers' delayed payments and not because of any benefit passed on to the AEs. The Tribunal deleted the adjustment, agreeing with the assessee's explanation and evidence provided.4. Inclusion of Income from Training Activity in Total Turnover for Section 10A Deduction:The revenue challenged the inclusion of training activity income in the total turnover for computing deduction under section 10A. The Tribunal upheld its earlier decision that training activity income should be included in both total turnover and export turnover for section 10A computation. Therefore, the revenue's ground was dismissed.5. Transfer Pricing Adjustment on Account of Customization Fee:The TPO adjusted the customization fee paid to subsidiaries, arguing that third-party distributors were not given a share in the customization fee. The Tribunal referred to its previous decision, upheld by the High Court, which stated that subsidiaries' role in collecting customization work justified the fee paid. The Tribunal upheld the Commissioner (Appeals)'s decision to delete the adjustment.6. Deletion of Interest Charged under Section 234D:The revenue challenged the deletion of interest charged under section 234D. The assessee's counsel agreed that the ground should be allowed based on the current legal position. The Tribunal reversed the Commissioner (Appeals)'s decision and allowed the revenue's ground.7. Adjustment towards Granting Fee on Loan Extended to AE:The TPO proposed an adjustment for guarantee commission on loans advanced to AEs, arguing that a corporate guarantee would entail a cost. The Tribunal found that the assessee had charged interest at the appropriate rate and there was no need for an additional guarantee commission. The Tribunal upheld the Commissioner (Appeals)'s decision to delete the adjustment.Summary of Appeals:1. ITA No. 5023/Mum/2007: Allowed2. ITA No. 4888/Mum/2007: Partly Allowed3. ITA No. 4488/Mum/2010: Allowed4. ITA No. 5078/Mum/2010: DismissedOrder Pronounced in the Open Court on 12th October, 2021.