2023 (3) TMI 352 - AT - Income Tax

Assessee wins on transfer pricing equity investment documentation and Section 10A export turnover verification

The ITAT Hyderabad ruled in favor of the assessee on multiple issues. The tribunal held that no transfer pricing adjustment was warranted on equity ... TP Adjustment - TPO adopted the interest @ 12.25% as ALP on the interest free loan and proposed upward adjustment - HELD THAT:- We find before the TPO, the assessee vide its reply dated 26.12.2013 had categorically stated that during the financial year 2009-10, they made equity investment in their wholly owned subsidiary M/s Global Inc, USA and the investment in equity was made for the purpose of development of software products and new technology products. It was categorically stated that against this investment the company M/s. Global I.T. Inc, US has allotted the shares copy of which is placed at page 161 of the Paper Book. Under these circumstances, the allegation of the TPO that the taxpayer did not submit the details of the investment in the AE claimed as equity investment despite numerous opportunities given by the TPO is incorrect. DRP in assessee’s own case for the A.Y 2008-09 has deleted the addition being the ALP of the international transaction pertaining to the Arm’s Length interest on the investment. We find the Hon'ble Bombay High Court in the case of Vodafone India Services (P) Ltd vs. Union of India [2014 (10) TMI 278 - BOMBAY HIGH COURT] has held that the issue of shares at a premium by the assessee to its nonresident holding company does not give right to any income from an admitted international transaction and therefore, there is no occasion to apply Chapter X in such cases. Since admittedly the assessee has furnished the relevant details before the TPO as well as the DRP by submitting that the investment was made towards equity investment for the purpose of business expansion of the assessee company and its subsidiary company and the investments were made out of the internal funds raised by the assessee and since the DRP in the assessee’s own case in the immediately preceding A.Y has deleted such addition made by way of adjustment on ALP being investment in equity and the Revenue has accepted the same by not filing any appeal before the Tribunal, therefore, we are of the considered opinion that the DRP was not justified in directing the TPO to adopt LIBOR+2% as interest receivable by the assessee on loan to its AE especially when the assessee has not given any loan but the same is towards equity, the share certificate of which was already filed before the lower authorities. The grounds raised by the assessee on this issue are accordingly allowed. Computing the eligible deduction u/s 10A - HELD THAT:- In view of the submissions of the assessee and in view of the conditions laid down in section 10A, we direct the A0 to verify export bill invoice wise export realised as claimed by the assessee with reference to the FIRCs and consider the export turnover to the extent the proceeds are released in convertible foreign exchange within the stipulated time limit or within the extended time if any given supported by relevant certificates and accordingly recompute the deduction allowable u/s.10A. Treatment of gain on Foreign Exchange fluctuation as other income - HELD THAT:- Assessee submitted that the assessee has already offered such foreign exchange fluctuation as other income and addition of the same will amount to double taxation and therefore, he has no objection if the same is restored to the file of the Assessing Officer with a direction to verify the same and if it amounts to double addition, then the same has to be deleted. The learned DR has no objection for the above proposition. Therefore, the issue of foreign exchange fluctuation gain is restored to the file of the Assessing Officer with a direction to verify that the assessee has already offered the same to taxation and addition of the same will amount to double addition. AO shall decide the issue as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds raised by the assessee on this issue are accordingly allowed for statistical purposes. Exclusion of telecommunication charges from the total turnover for the purpose of computing deduction u/s 10B - HELD THAT:- As relying on cases M/S TESCO HINDUSTHAN SERVICE CENTRE PVT LTD [2018 (7) TMI 1234 - SC ORDER],HCL TECHNOLOGIES LTD. [2018 (5) TMI 357 - SUPREME COURT] DRP is fully justified in holding that the communication expenses to be deducted from both total turnover and export turnover. Accordingly, the ground raised by the Revenue on this issue is dismissed. Issues Involved:1. Validity of the order passed under section 143(3) read with section 144C(13) beyond the prescribed time.2. Computation of Arm's Length Price (ALP) for international transactions.3. Treatment of investments in subsidiaries as interest-free loans.4. Re-categorization of investments as loans under section 145.5. Eligibility and computation of deduction under section 10A.6. Exclusion of onsite development charges and export proceeds from export turnover.7. Exclusion of telecommunication charges from total turnover.8. Treatment of foreign exchange fluctuation gain as other income.Detailed Analysis:1. Validity of the Order Passed Beyond Prescribed Time:The assessee contended that the order passed under section 143(3) read with section 144C(13) was beyond the prescribed time limit. However, this ground was not pressed by the assessee's counsel, and therefore, it was dismissed as not pressed.2. Computation of Arm's Length Price (ALP) for International Transactions:The TPO proposed an upward adjustment of Rs. 6,14,62,097/- treating the investment in subsidiaries as interest-free loans and charging interest at 12.25%. The DRP directed the TPO to adopt LIBOR + 2% as the interest rate. The Tribunal found that the assessee had indeed made equity investments in its wholly-owned subsidiary and provided share certificates as evidence. Thus, the Tribunal held that the investments cannot be treated as loans, and no interest can be charged on them. The grounds raised by the assessee on this issue were allowed.3. Treatment of Investments in Subsidiaries as Interest-Free Loans:The Tribunal observed that the investment in the subsidiary was for equity and not loans. The DRP's direction to adopt LIBOR + 2% was found unjustified as the assessee had provided sufficient evidence of equity investment. The Tribunal allowed the grounds raised by the assessee and deleted the addition made by the TPO.4. Re-categorization of Investments as Loans Under Section 145:The Tribunal agreed with the assessee's contention that re-categorizing the nature of the asset by treating investment as a loan is not permitted under section 145. The Tribunal relied on various judicial precedents to support this view and allowed the grounds raised by the assessee.5. Eligibility and Computation of Deduction Under Section 10A:The Assessing Officer reduced the export turnover by the amount not received in convertible foreign exchange within the stipulated time. The DRP directed the Assessing Officer to verify the export bills and recompute the deduction allowable under section 10A. The Tribunal restored the issue to the Assessing Officer for verification and recomputation of the deduction.6. Exclusion of Onsite Development Charges and Export Proceeds from Export Turnover:The Assessing Officer excluded onsite development charges and export proceeds from the export turnover for the purpose of section 10A deduction. The Tribunal restored the issue to the Assessing Officer to verify the details and substantiate the same to the satisfaction of the Assessing Officer.7. Exclusion of Telecommunication Charges from Total Turnover:The DRP directed the Assessing Officer to exclude telecommunication charges from both export turnover and total turnover while computing the deduction under section 10A. The Tribunal upheld this direction, relying on the Supreme Court's decision in the case of HCL Technologies Ltd., which stated that expenses excluded from export turnover must also be excluded from total turnover.8. Treatment of Foreign Exchange Fluctuation Gain as Other Income:The assessee contended that the foreign exchange fluctuation gain was already offered as other income, and its addition would result in double taxation. The Tribunal restored the issue to the Assessing Officer to verify and ensure that there is no double addition.Conclusion:The Tribunal allowed the appeals filed by the assessee partly for statistical purposes and dismissed the appeal filed by the Revenue. The Tribunal directed the Assessing Officer to verify and recompute the deductions and adjustments as per the Tribunal's findings.