TMI Blog2014 (6) TMI 669X X X X Extracts X X X X X X X X Extracts X X X X ..... ting income. This contention raised on behalf of the assessee is therefore, repelled. Deduction of administrative and other costs incurred in making these FDRs yielding interest income - Held that:- it would be just and fair to apply this logic in working out the amount of administrative and other costs incurred by the assessee in making FDRs on which the interest income was earned. That being the position, there would result the deductible amount of Rs.13.19 lac against the impugned order granting deduction of Rs. 5 lac. We, therefore, hold that operating expenses be reduced by this extent. Inclusion of the case of Samrat Clearing in the list of comparables - The only thing available was its Profit & Loss Account with sales/operating income at Rs. 9 lac. The ld. AR contended that the TPO himself excluded this case in the immediately succeeding year on the ground of low turnover. It was, therefore, prayed that this case be expelled from the list of comparables. - Held that:- there is no discussion in the order of the TPO about the comparability or otherwise of this case with the assessee. - matter remanded back to TPO/AO - decided partly in favor of assessee. - ITA No. 2307/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elated administrative/commercial services for which the assessee was allowed commission and fee totaling Rs. 18,16,75,474/-. To benchmark this international transaction, the assessee followed Profit Split Method (PSM) in its Transfer pricing study by taking average of its three years profits. Sixteen comparable companies were chosen whose Berry ratio (ratio of gross profit over operating expenses) was shown at 1.09% again on the basis of three years data. The TPO rejected the assessee s adoption of Berry ratio; and also the use of multiple-year data both for the assessee and sixteen comparables. He opined that the Transactional Net Margin Method (TNMM) was the most appropriate method to be applied by considering the data for the current year alone. On being called upon to supply information in this fashion, the assessee furnished its operating profit margin in which interest on deposits amounting to Rs. 1,90,85,506/- was considered as part of its Operating revenue. The TPO held such interest to be non-operating. He also worked out OP/TC of sixteen comparables cited by the assessee at 9%, by considering the current year s data alone. That is how, the TP adjustment of Rs. 2,88,64, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncontrolled transaction or a number of such transactions is computed having regard to the same base ; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm s length price in relation to the international transaction. 5.2. Sub-clause (i) of this Rule stipulates that the net profit margin realized by the enterprise from an international taxation is computed in relation to cost incurred or sales effected or assets employed or to be employed or having regard to any other relevant base. The Hon ble Supreme Court in DIT(I.T.) VS. Morgan Stanley Co. (2007) 162 Taxman 165 (SC) ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not concerned with the operations of the hub activity of business. The same logic applies to the interest income which is also considered as non-operating revenue unless the business is that of financing. The crux is that not only interest income is construed as non-operating, but interest expenditure is also considered as non-operating. Thus both the interest expense as well interest income are required to be eliminated from the purview of operating cost and operating revenue to find out the net operating profit. 5.4. At this stage, we want to make it clear that the assessee has been remunerated in the form of commission as percentage of transaction value and fixed fee for providing market support services. The commission rates are in no way related to the incurring of any interest cost or the earning of interest income by the assessee. We have noticed above that the assessee s role in the international transactions is only that of mediating between purchasers/sellers in/from India on one hand and its AEs on the other. There is hardly any risk undertaken by the assessee or the capital employed in so far as these transactions are concerned. As regards the fee for market suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the authorities that the interest was not operating income. When the matter came up before the Hon ble High Court, their Lordships affirmed the view taken by the Tribunal. The ld. AR was fair enough to concede that the question of exclusion of interest income has been decided by the Hon ble High Court against the assessee, but he claimed that it was not rule of universal application. He emphasized that the interest income in the present circumstances was different from the one that was considered by their Lordships and, hence, the same should be considered as a part of operating income. It was also accentuated that the instant interest income was in the nature of Business income and not Income from other sources , which factor makes its case distinguishable. 5.7. We find no reason to countenance the contention put forth on behalf of the assessee for two reasons. First is that interest in the present circumstances is not in the nature of Business income . If we scrutinize the detail of interest earned on FDRs, which is available on pages 222 and 223 of the paper book, it is overt that there are three items of interest income totaling to Rs.5,251 on FDRs under lien with S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of Association permitting the making of investment. In this regard, the Hon ble High Court has held that : The Tribunal has rightly noted that the fact that the memorandum of association gave powers to the assessee to earn interest by making investments is relevant only for the purpose of determining the appropriate head of income under section 14 of the Income Tax Act, 1961 under which the interest would fall to be assessed. It has been rightly observed by the Tribunal that such a consideration is not relevant for the purpose of determining the operating income of an assessee for the purposes of transfer pricing regulations. In view of the foregoing discussion, we find the contention of the ld. AR devoid of merits on both the counts, viz., first that the interest is Business income and second because of the same being so, should per se be considered as operating income. 5.9. Another attempt was also made by the ld. AR to convince us, by arguing that the interest was earned by investing working capital and not equity capital and hence the interest be treated as operating income. We are again unable to comprehend as to how this contention alters the character of interest inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of direct and interest expenditure in consonance with clauses (i) and (ii). Then comes clause (iii), which deals with other expenses. As we have to presently calculate a reasonable amount of administrative and other costs incurred in making these FDRs on which interest income was earned, it is the prescription of clause (iii) of Rule 8D(2) which renders some guidance and can be taken assistance of. The TPO has recorded that the amount of investments in time deposits as on 31.3.03 stands at Rs. 26.38 crore. If we apply % of such value of investment, then, the administrative and other costs comes to Rs. 13.19 lac. In our considered opinion, it would be just and fair to apply this logic in working out the amount of administrative and other costs incurred by the assessee in making FDRs on which the interest income was earned. That being the position, there would result the deductible amount of Rs.13.19 lac against the impugned order granting deduction of Rs. 5 lac. We, therefore, hold that operating expenses be reduced by this extent. 7.1. The only other point agitated by the ld. AR in this appeal is against the inclusion of the case of Samrat Clearing in the list of comparables. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transactions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such proceedings. 8. In the result, the appeal is partly allowed. ITA No.6719/Del/2013 PENALTY U/S 271(1)(c) 9. The assessee, vide this appeal, is aggrieved against confirmation of penalty amounting to Rs. 1,05,23,735/- imposed by the AO u/s 271 (1)(c) of the Act. The AO imposed the penalty with reference to the transfer pricing addition as reduced pursuant to the order passed by the ld. CIT (A) in quantum proceedings. The said penalty came to be upheld by the impugned order. The assessee is aggrieved against the imposition of this penalty. 10. After considering the rival submissions and perusing the relevant material on record, we find that there are basically three issues involved in the quantum appeal, viz., (i) Exclusion of interest income of Rs. 1.90 crore from the operating revenue; (ii) Deduction of administrative expenses incurred in relation to such interest income; and (iii) Reconsideration of the comparability or otherwise of the case of Samrat Clearing with the assessee. 11. After deciding the first issue of the exclusion of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act of the decision of the TPO on this issue ultimately got reflected in the final transfer pricing adjustment proposed by him. There is hardly any need to emphasize that penalty u/s 271(1)(c) is always imposed with reference to the amount of tax sought to be evaded, which, in turn, finds its foundation from the ultimate addition. The effect of our decision in restoring the matter to the TPO/Assessing Officer is that the amount of addition and the resultant amount of tax sought to be evaded cease to exist for the time being. The possibility of deletion or reduction in the transfer pricing addition in the fresh proceedings cannot be ruled out. It is quite possible that notwithstanding the exclusion of interest income from the operating profits, there may still not be any TP addition, if the overall profit rate of the finally chosen comparables is found to be within the safe harbor margin vis-a-vis that of the assessee. Since the addition does not stand as of now, it is too early to ask for our decision on an aspect of the matter, whose impact on the addition is unknown. Ergo, we are disinclined to give any decision on the question of penalty at this juncture. 14. In the result, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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