TaxTMI 
TaxTMI 
2014 (6) TMI 669
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....s and sellers. Sumitomo Corporation, Japan has overseas branches, liaison offices and other subsidiaries across the globe. These affiliates, like the assessee, act as support centres and render facilitation and market support services. Thus, the assessee is a facilitator of transactions between its foreign associated enterprises (AEs) and customers/vendors in India. The major role of the assessee is to mediate between its AEs and vendors/customers to/from India and also to provide information to the AEs which helps them in taking effective business decisions about transacting from or to India, though such decisions are taken by such AEs alone. For rendering such services, the assessee gets commission on sales from the transactions in which it mediates and also a fixed service charge for providing market support services by making available data about Indian market and advertisements/articles etc. from the information available in India. Apart from rendering the said services to its AEs, the assessee also undertook certain trading transactions at its own during the year under consideration. The assessee reported four types of international transactions in its audit report in Form 3C....
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....t material on record. Before proceeding further, it is paramount to note that the ld. AR has not disputed the application of TNMM as the most appropriate method and also the consideration of current year's figures alone of the assessee as well as comparables for the purposes of determining the ALP. 5.1. Now we take up the first grievance of interest income on FDRs vis-a-vis its inclusion or exclusion from the operating revenue for the purposes of calculating Arm's length price (ALP) of the international transaction under TNMM. Section 92C deals with the computation of ALP. Sub-section (1) provides five specific methods and one general method for the computation of ALP. One of such methods given under sub-section (1) is TNMM. The procedure for determining ALP under TNMM has been enshrined in Rule 10B(1)(e) of the Income-tax Rules, 1962. For the sake of convenience, we are reproducing the relevant part of Rule 10B(1)(e) as under:- '(e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets....
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....onal transaction and are also operational in nature. If a particular item of expenditure or income does not affect the international transaction, the same is liable to be rejected at the very outset. In that eventuality, the question of the same being operating or non-operating becomes academic. It is only if the item of income or expenditure passes the first stage, being its relation with the international transaction, that it needs to pass through the second stage of being operating so as to find its place in the computation of net operating profit margin. 5.3. Excess of operating revenues over operating expenses derived from the core business operations is called operating income. It represents income from ordinary business activities, and excludes expenses, such as interest, taxes and those of nonrecurring nature. In accountancy jargon, operating profit is synonym for Earnings before interest and taxes (EBIT). All costs associated with financing activities are excluded. Not only interest outgo is not operating expense, the amount of interest income is also not operating income, unless the assessee is engaged in the business of financing activity. Albeit the interest expense ....
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....iced that the assessee incurred interest and finance charges and also earned interest income on deposits. The TPO not only excluded interest income from the operating revenue, but also did not include interest expenditure in the operating costs to work out the net operating profit margin. The assessee has quietly accepted the action of the TPO in not including interest expenditure in the operating costs but is harping on the inclusion of the interest income in the operating revenue. Thus it can be seen that whereas the position of the Revenue is consistent on interest expenditure as well as interest income, the stand of the assessee is inconsistent inasmuch as it wants the interest expenditure to be excluded from the operating costs but the interest income continuing to form part of the operating income. 5.6. Notwithstanding the inconsistent stand, we find that since the international transaction under consideration is not that of financing, naturally, interest income and interest expenditure cannot be construed as the items of operating nature. At this juncture, it would be in the fitness of things to note the judgment of the Hon'ble jurisdictional High Court in Marubeni India ....
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.... the character of interest income in the hands of the assessee as to whether it is operating or nonoperating income. From the above factual narration, it is evident that in so far as interest of Rs.5,251/- is concerned, the same is emanating from FDRs under lien with the Sales-tax Department, which divulges that the same is linked with the domestic transactions with the unrelated parties and has absolutely no connection with the international transactions. As regards the balance interest of Rs.1.89 crore and odd, such FDRs are inferred to have been made out of surplus funds as the assessee failed to demonstrate any direct link between international transactions and the making of FDRs on which such interest income was earned. Ex consequenti, such interest income cannot be held as anything other than 'Income from other sources.' 5.8. The second reason for not approving this contention is that the question as to whether interest is 'Business income' or not is irrelevant when the point for determination is the amount of operating profit margin. Operating profit margin is obviously a part of the overall profit margin which is deduced by reducing non-operating expenses and non-operati....
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....s. 5 lac by not filing any cross appeal, we cannot accept the contention of the ld. DR that no deduction was called for. Now the limited point before us is to examine as to whether this estimated amount of Rs. 5 lac as deduction for allowing deduction towards administrative and other costs is appropriate. 6.2. Though there is no mechanism provided in the Act to find out such administrative and other costs incurred in making the FDRs on which the interest income is earned, we find some hint from the prescription of section 14A of the Act which deals with not allowing any deduction for the expenditure incurred in relation to income not includible in the total income. Rule 8D has been enshrined in the Income-tax Rules as a measure for determining the amount of expenditure in relation to income not includible in the total income. Clauses (i) and (ii) of Rule 8D (2) deal with the amount of expenditure directly relating to income including interest. Clause (iii) provides for the amount equal to 0.50% of the average of the value of investment towards other expenses. It is sum total of these components which is disallowed u/s 14A read with Rule 8D. 6.3. We have noticed above that the....
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....he TPO and it was too late in the day to argue before the Tribunal for eliminating this case from the list of comparables. 7.2. We are not agreeable with the view canvassed by the ld. DR that this case cannot be considered at this stage for the purposes of exclusion because no such issue was raised before the TPO. The Special Bench of the Tribunal in the case of DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB) 1 has held that a tax payer cannot be estopped from pointing out a mistake committed by it in including a case as comparable, which was in fact not so. Various Benches of the Tribunal have followed this Special bench verdict in permitting the assessees to raise an issue for the exclusion of a particular case which was inadvertently included in the transfer pricing study. As such, we do not find any merit in the preliminary objection raised by the ld. AR on this issue. 7.3. Coming to the merits of the exclusion or otherwise of this case, we find that there is no discussion in the order of the TPO about the comparability or otherwise of this case with the assessee. In our considered opinion, the ends of justice would meet adequately if the impugned order is set ....
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....ddition has been restored to the AO, the penalty should also be restored for taking a fresh decision in accordance with the view finally taken in the quantum proceedings. We, therefore, set aside the impugned order and remit the matter to the file of the AO for deciding the question of penalty afresh after taking decision in the quantum proceedings about the addition, if any, on account of transfer pricing adjustment. 12. Before parting with this appeal, we would like to record that the ld. AR made marathon arguments urging us to render decision in his favour on the question of penalty u/s 271(1)(c) of the Act with reference to the interest income from FDRs. He strenuously argued that no penalty was exigible on this score. 13. We are not convinced with the proposition put forth on behalf of the assessee that a decision must be rendered on the maintainability or otherwise of penalty on the exclusion of interest income from the operating revenues. The obvious reason for our this decision is that the amount of interest income is not subject matter of addition on which penalty has been imposed. There is no doubt that the assessee did offer this amount as income. It is only while ....