Assessee's appeal partly allowed, Tribunal remands transfer pricing issues for fresh consideration & provides specific directions.

The appeal filed by the assessee was partly allowed. The Tribunal remanded several transfer pricing adjustment issues back to the AO/TPO for fresh consideration and verification, providing specific directions for each issue. The Tribunal directed adjustments on interest received from subsidiary, corporate guarantee, royalty, and software development services to be reconsidered. Additionally, the Tribunal instructed the AO to restrict the disallowance under Section 14A only to the extent of investments yielding exempt income during the year.

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Issues Involved:

1. General Issues
2. Transfer Pricing - Legal Issues
3. Transfer Pricing Adjustment - Interest Received from Subsidiary
4. Transfer Pricing Adjustment - Corporate Guarantee
5. Transfer Pricing Adjustment - Royalty
6. Transfer Pricing Adjustment - Software Development Services
7. Deduction under Section 10AA
8. Disallowance under Section 14A

Detailed Analysis:

1. General Issues:
The assessee argued that the assessment order and directions from the DRP were erroneous and should be quashed. However, these grounds were general in nature and did not require adjudication.

2. Transfer Pricing - Legal Issues:
The assessee contended that the AO erred in making a reference to the TPO for determining the arm's length price without demonstrating the necessity and expediency. The assessee also argued against the transfer pricing adjustments amounting to Rs. 5,57,22,444 and claimed that no addition could be made under Chapter X as it is not included in the definition of 'income' under section 2(24) or Chapter IV of the IT Act, 1961.

3. Transfer Pricing Adjustment - Interest Received from Subsidiary:
The assessee charged interest at 3.24% per annum from its subsidiary, Sasken Inc., based on LIBOR plus 300 basis points. The TPO rejected this analysis and applied an interest rate of 14.47% based on BB rated bonds, resulting in an adjustment of Rs. 1,96,54,734. The Tribunal remanded the issue back to the TPO, directing to benchmark the transaction by adopting the legal position as enunciated in the decisions of CIT v Cotton Naturals (I) (P) Ltd and CIT v Tata Auto Comp System Ltd. The Tribunal also noted that for AY 2011-12, the TPO had accepted the interest rate of 3.24% as arm's length.

4. Transfer Pricing Adjustment - Corporate Guarantee:
The TPO considered the corporate guarantee given to Sasken OY, Finland, as an international transaction and computed an adjustment of Rs. 2,75,238 at 0.925% of the guarantee amount. The Tribunal referred to its earlier decision, which directed the TPO to apply a rate of 0.5% on the closing balance of the corporate guarantee for TP adjustment. The Tribunal directed the AO/TPO to restrict the corporate guarantee adjustment to 0.5%.

5. Transfer Pricing Adjustment - Royalty:
The TPO made an adjustment of Rs. 1,90,75,332 for the use of the trademark 'SASKEN' by the AEs, computed at 2% of the external turnover. The Tribunal noted that the TPO did not have any material evidence to establish that the AEs were financially benefitted from the use of the trademark. The Tribunal remanded the issue back to the TPO for fresh consideration, directing to verify all agreements and the impact of the use of the brand on the subsidiaries' profits.

6. Transfer Pricing Adjustment - Software Development Services:
The TPO rejected the assessee's CUP method and adopted TNMM, resulting in an adjustment. The Tribunal noted that the TPO did not consider the segmental margins provided by the assessee and remanded the issue back to the AO/TPO to verify the segmental details. If the segmental margins are within +5%, no adjustment is warranted.

7. Deduction under Section 10AA:
The AO reduced communication charges, foreign currency expenses, and insurance charges only from export turnover while computing the deduction under section 10AA. The DRP directed the AO to reduce these expenses from both export turnover and total turnover. The Tribunal noted that the AO complied with the DRP's directions, making this ground infructuous.

8. Disallowance under Section 14A:
The AO disallowed Rs. 69,64,735 under section 14A by computing 0.5% of the average value of investments. The Tribunal noted that the AO did not provide any satisfaction as to why the assessee's voluntary disallowance was incorrect. The Tribunal directed the AO to restrict the disallowance only to the extent of investments that yielded exempt income during the year.

Conclusion:
The appeal filed by the assessee was partly allowed. The Tribunal remanded several issues back to the AO/TPO for fresh consideration and verification, providing specific directions for each issue.

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