TMI Blog2014 (9) TMI 610X X X X Extracts X X X X X X X X Extracts X X X X ..... upheld – Decided against assessee. Assessability of interest under income from other sources – Held that:- As decided in assessee’s own case for the earlier assessment year, the Tribunal has rightly directed the AO to allow the expenses incurred for earning interest income - the assessee itself submitted that the interest had been earned from surplus funds generated which had been deposited in sort term deposits with banks - since the interest had been earned from the surplus funds, the AO assessing the interest income as income from other sources is justified - while computing the interest income as income from other sources all expenses incurred for earning of interest income have to be deducted - This aspect has not been examined either by the AO or by the CIT (A) – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of assessee. Determination of the Arm’s Length Price based on LIBOR – Held that:- The LIBOR has to be accepted as the basic rate for bench marking the interest to the AE’s - The assessee has adopted the interest rate of 250 basis point above the LIBOR for making the TP adjustment - CIT (A) has followed the RBI circular as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s including other legal precedents so sought to be relied to hold this ground against the Appellant Company have failed to appreciate that either the said decisions have been delivered in context of provisions other than Section 1O of the Act which have used the expression derived from as against derived by in Section 1OB and/or in case if some of the decision so relied which have considered provisions using expression similar to Section 1OB have either been set aside by the Apex Court or aforesaid averments have not been relied and/or considered by them; iv. It is an undisputed fact which has been accepted by the Respondent over the years, that interest income as derived from fixed deposit with banks and other entities have been received and utilized in the business of said undertaking as the Appellant Company is 100% export oriented undertaking; which otherwise substantiates the eligibility of the said interest income for deduction under Section 1OB of the Act; and v. Unlike deduction under Chapter VI-A of the Act, Section 1OB does not provide for provisions that income derived from profits and gains of eligible business should be considered as the only source of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OB of the Income-tax Rules, 1962; ii. the CUP Method requires that the controlled transaction of rate of interest charged on loan advanced by the Appellant to its AE should be compared with the rate of interest on loan advanced among independent parties in comparable circumstances; iii. the comparison made by the Ld. CIT(A) to benchmark the aforesaid international transaction by considering the rate of interest on a transaction of loan availed in London Markets was unjustified; iv. the loan was advanced by the Appellant Company to AE in USA and in US currency therefore, it was necessary to benchmark the rate of interest with rates prevailing in USA. The US Fed rates also referred to as Fed Fund Target Rate ( FFTR ) is America s most important and most influential benchmark interest rate. The FFTR can be described as the main or key interest rate for the United States. The interest rate-setting Federal Open Market Committee (FOMC) uses the FFTR as its most potent tool for regulating the US economy; and v. the US Fed and LIBOR rates are reflective of the fact of rate of interest prevailing in different countries at different points in time and therefore, since the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not computing the correct total income by not providing deduction of donation paid of ₹ 10,48,837 under Section 80G of the Act, under normal provisions of the Act. 2. He failed to appreciate and ought to have held that: i. deduction under Section 80G was restricted to only ₹ 25,525/-, as against the Appellant Company is entitled to deduction of ₹ 5,10,500/-; ii. Without doubting the authenticity of the donation so made by the Appellant Company; the deduction under Section 80G was restricted to ₹ 25,525/-; and iii. the necessary supporting documents viz, donation receipts, confirmation, and/or certificate of registration of the aforesaid trust, etc, as available with the Appellant Company shall be submitted during the course of hearing; 3. In view of above, the Appellant Company prays that the AC be directed to provide deduction under Section 80G while computing total income under the normal provisions of the Act. Ground VI The Appellant Company prays that the Ld. CIT (A) erred in not directing the AC to levy interest under Section 234B and Section 234C of the Act to the extent disclosed in the return of income. Without prejudice, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent s Appeal No. 322/M/2014 for the captioned Assessment Year GROUND I 1. On facts and circumstances of the case and in law, the Ld. CIT(A) as well as AO erred in determining the Arm s Length price ( ALP ) of the international transaction of interest income received by the Respondent Company on loans advanced to Tricom Document Management Inc, an US based wholly owned subsidiary and thereby Associated Enterprise ( AE ) of the Respondent Company, by benchmarking the said international transaction with a rate of interest of LIBOR + 300 basis points and average domestic rate of interest of around 16% , respectively, without appreciating the provisions of Section 92C of the Income-tax Act read with Rule 1OB and Rule 10C of the Income-tax Rules 1962 2. They failed to appreciate and ought to have held that: i. the Respondent Company was dependent upon its said AE for want of ITES services effected in US through the said AE and in turn the AE was dependent upon the Respondent Company for want of its financial support; ii. the said AE was a major vendor of the ITES services for the Respondent Company and therefore is significantly dependent upon its AE for revenues and vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction u/s 10B in respect of interest income. The assessee had submitted that the interest income was derived from the business activity of the eligible unit and that it had consistently offered such income as Profit and gains of business and profession. The AO, however, did not accept the contentions raised. It was observed by him that deduction u/s 10B was allowable in respect of profit and gains derived from a 100% export oriented undertaking from the export of article or things or computer software. But in this case interest income had not been derived from export of article or things or computer software. The AO placed reliance on the judgment of Hon ble Supreme Court in case of Pandian Chemicals Ltd ( 262 ITR 278). Accordingly the AO assessed the income as income from other sources and denied the claim of deduction u/s 10B. The assessee also made an alternative claim that only the net interest income after excluding the expenses incurred for the purpose of earning interest income should be excluded while computing the deduction u/s 10B. The AO however, did not accept the claim following the judgment of Hon ble High Court of Bombay in case of CIT Vs. Asian Star Co. (326 ITR 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court of Bombay in case of CIT (A) Vs. Asian Star Co.( 326 ITR 56) in which it has been held that while computing deduction, the gross receipts and not the net receipts are required to be taken into account. However, the said decision of High Court has not been held by the Hon ble Supreme Court in case of Associated Capsules Ltd. (343 ITR 89) in which it has been held that the net receipts are required to be adopted. The assessee has also raised dispute about the nature of interest income which it had not declared as business income and which has been assessed by AO as income from other sources. We find, from perusal of para 5 of the order of tribunal in assessment year 2006-07 (Supra) in which the assessee itself submitted that the interest had been earned from surplus funds generated which had been deposited in sort term deposits with banks. Therefore, since the interest had been earned from the surplus funds, in our view, the AO assessing the interest income as income from other sources is justified. However, while computing the interest income as income from other sources all expenses incurred for earning of interest income have to be deducted. This aspect has not been exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in similar situation would be the arms length interest and, therefore the issue was the interest set at which the assessee would have advanced money to independent 3rd party in India by lending such surplus money. The TPO noted that the assessee had charged interest at the rate of 15 to 18% from other parties within India and, therefore, the assessee would have earned more interest had it not advanced money to the subsidiary but to an independent 3rd party. TPO, therefore, held that the average rate of interest charged from the other parties i.e. 16.5% would be the arm s length interest rate in this case and accordingly made adjustment of ₹ 26,61,267/-. The AO following the order of TPO made an addition of ₹ 26,61,267/- to the total income of the assessee in the assessment order passed u/s 143 dated 17.1.2011 2.1 The assessee disputed the decision of AO/TPO and submitted before CIT(A) that in the U.S. market where the AE was situated rate of interest on borrowings was around 2 to 3%. The assessee charged 200 basis point above the LIBOR rate i.e. @ 7.5%. Therefore, the AE had paid more interest to the assessee company which had been taxed in India. It was also argued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to the advances given to the AE the Tribunal observed that arm s length interest rate in such a case would be the interest rate on FD with the banks for a term equivalent to the term for which the loans were given to the AE. The learned AR for the assessee in the reply pointed out that the Tribunal in case of Aurion Pro Solutions. Ltd. Vs. ACIT (Supra) had finally in para 8.13 followed the view taken by the other bench of Tribunal that LIBOR rate was most suitable for bench marking the interest on loans to the AE. 4. We have perused the records and considered the rival contentions carefully. The dispute is regarding transfer pricing adjustment made by the AO on account of funds advanced by the assessee to the AE located in U.S. at the rate of 7.5% which was 250 basis points above the LIBOR (London Inter Bank Offer Rate). The assessee followed the CUP method for accounting the TP adjustment which has been accepted by the AO /TPO. The assessee had not given foreign currency loan to any other 3rd party in the U.S. The assessee had, however, given loans to the domestic parties at interest rate varying from 15% to 18%. The AO /TPO have treated average rate of interest at which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s assessee are dismissed. It may also be mentioned here that the decision referred to in the grounds of appeal filed by the Revenue was duly considered by the Tribunal in its earlier order. 6. Apropos Ground No.IV of assessee s appeal, it was submitted by Ld. AR that AO may be directed to give appropriate relief as per the first proviso to section 92C(2) in case the recomputed adjustment falls within the safe harbour. In this view of the situation after hearing both the parties, we direct the AO to consider this relief to the assessee as per law after recomputing the TP Adjustment in accordance with decision of Ld. CIT(A), which has been confirmed in respect of Ground No.III. We direct accordingly. This ground is considered to be allowed for statistical purposes in the manner aforesaid. 7. Apropos Ground No.V, during the course of hearing it was found that this issue was not raised by the assessee before Ld. CIT(A). The facts relating to this ground as submitted by Ld. AR are that the assessee had made a donation of ₹ 10.00 lacs to Gian Sagar Educational Charitable Trust and a sum of ₹ 21,000/- to Shri Vedmata Gayatri Trust and claimed deduction under section 80G ..... X X X X Extracts X X X X X X X X Extracts X X X X
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