ITAT MUMBAI BENCH ‘K’
Stream International Services (P.) Ltd.
versus
Assistant Director of Income-tax (International Taxation)
IT Appeal No. 8997 (Mum.) of 2010
[ASSESSMENT YEAR 2006-07]
JANUARY 11, 2013
ORDER
R.S. Syal, Accountant Member
This appeal by the assessee emanates from the order passed by the Assessing Officer u/s 143(3) read with section 144C of the Act on 14.10.2010 in relation to the assessment year 2006-2007.
2. The first ground is against the confirmation of disallowance u/s 14A to the tune of Rs. 16,55,850. Briefly stated the facts of the case are that the assessee made investments of Rs. 33,11,70,086 in Infowayaz International Private Limited in the past. Neither any fresh investment was made in the current year in the securities fetching exempt income nor any exempt income was earned. No disallowance was offered under section 14A by claiming that no expenditure was incurred for earning such exempt income. The Assessing Officer, relying on the prescription of section 14A read with Rule 8D, computed the disallowance in the draft order. When the matter came up before the Dispute Resolution Panel, it directed the Assessing Officer to compute the disallowance by considering the details of direct and indirect expenses to be furnished by the assessee before him. No disallowance was made towards interest in the final order passed by the AO u/s 143(3) read with section 144C. However, the disallowance was computed towards expenditure at the rate of 0.5% of the investment. Such disallowance was made by considering the mandate of Rule 8D. The assessee is aggrieved against this disallowance.
3. After considering the rival submissions and perusing the relevant material on record, we find that the Hon’ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 has held that the disallowance u/s 14A is required to be made as per Rule 8D in relation to the assessment year 2008-09 and subsequent years. For the earlier years, the direction is to compute the disallowance on some ‘reasonable basis’. As the assessment year under consideration is 2006-07, the disallowance is required on some reasonable basis and not as per rule 8D. As the AO has applied rule 8D, his action cannot be countenanced. The ld. counsel for the assessee contended that since no exempt income was realized in the previous year relevant to the assessment year under consideration, so no disallowance u/s 14A was called for. It is observed that the Special Bench of the Tribunal in the case of Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi)(SB) has held that the disallowance u/s 14A is warranted even if there is no exempt income. In the absence of any judgment of the Hon’ble High Court on the question, the Special Bench decision is binding on the other Benches of the Tribunal. Respectfully following the afore quoted Special Bench order, we uphold, in principle, the action of the AO in computing disallowance u/s 14A even in the absence of any exempt income. However, the computation of the disallowable amount of expenses is restored to the file of A.O. to be done in accordance with the decision of the Hon’ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra).
4. Ground no.2 of the appeal is against treating rental income earned on leasehold premises from M/s. Accenture Services Private Limited as “Income from house property”. During the course of assessment proceedings it was found that the assessee had taken three floors of a building on lease for its business purpose. Out of the three floors, the assessee sublet one of the floors to M/s. Accenture Services Private Limited and received rent of Rs. 2,20,24,192. This amount was treated as business income. The assessee claimed deduction for expenses of Rs. 1,11,84,160 as rent and maintenance paid and Rs. 7,93,554 as depreciation on leasehold improvements. On being show caused as to why the receipt be not considered as “Income from house property”, the assessee stated that it had occupied all the three floors at the beginning of the year for its business purposes. Due to the availability of excess capacity with the company, the first floor of the premise was subleased to M/s. Accenture Services Private Limited in August 2005 which remained let out till April 2006. A copy of the sublease agreement was also submitted. It was, thus claimed that the amount of receipt be considered as business income. Not convinced, the Assessing Officer treated the sum of Rs. 2.20 crore earned from subletting of leasehold premises as “Income from house property”. The expenses so claimed by the assessee were consequently disallowed.
5. We have heard the rival submissions and perused the relevant material on record. On a specific query, the learned AR submitted that the premises were taken on lease by the assessee for a period of three years. It is seen that only one floor was subleased to M/s. Accenture Services Private Limited for a short period from August 2005 to April 2006 as it was not required by the assessee at the relevant time. Now the question before us is as to whether the rental income so realized from subletting of first floor is of the nature of income given under the head ‘Income from house property’. Section 22 of the Income-tax Act, 1961 clearly provides that the annual value of a property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, shall be chargeable to income-tax under the head “Income from house property”. The expression “Owner of house property” has been defined in section 27. Admittedly clauses (i), (ii), (iii) and (iiia) of section 27 have no application in the extant facts. Clause (iiib) of section 27, which has been pressed into service by the ld. DR, provides that “a person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in clause (f) of section 269UA, shall be deemed to be the owner of that building or part thereof ;”. In turn, section 269UA(f) defines “transfer” in relation to an immovable property to mean ‘transfer of such property by way of sale or exchange or lease for a term of not less than twelve years, …….’. It, therefore, follows that in order to be covered under section 22, it is sine qua non that the assessee must be the owner of the house property as per section 27 read with section 269UA(f). Reverting to the facts of the instant case, it is manifest that the assessee is not the owner of the property. It cannot also be considered as deemed owner of house property within the meaning of section 27 because it took property on lease for a period of three years. Since the assessee was neither the owner nor the deemed owner of the house property, applying the provisions of section 22, the annual value of such property could not have been charged to tax under the head “Income from house property”. As it is a case of simple subletting or property, not facilitating the carrying on of the assessee’s business in any manner, the rental income so realized by the assessee in the present circumstances cannot be considered as ‘Business income’. In such a situation, it is directed that the same should be included under the head ‘Income from other sources’. The impugned order on this issue is set aside and the matter is restored to the file of the AO for doing the needful accordingly. The Assessing Officer will allow eligible deductions and allowances as per the relevant provisions under Chapter IV-F. While allowing such deductions, the Assessing Officer will also ensure that no deduction is doubly claimed/allowed, firstly, in computing of income under the head “Profits and gains of business or profession” and then under the head “Income from other sources”. This ground is disposed off accordingly.
6. Ground no.3 about treating the interest income of Rs. 7,77,291 as ‘Income from other sources’ was not pressed by the learned AR. The same is, therefore, dismissed.
7. Last ground of the appeal is against the confirmation of transfer pricing adjustment of Rs. 2,20,39,947. Before proceeding to decide this ground on merits, it is imperative to note that the assessee modified ground no.4 also to encompass the challenge to the inclusion of certain comparable cases. The ld. DR raised objection to such modification of the ground by arguing that the amendment having been carried out after the time limit for filing appeal, should be rejected and the ground as taken in memo of appeal be considered. There is hardly any substance in the argument. Admittedly the appeal was filed in time, inter alia, taking up ground on this issue in the original memo of appeal. Now the assessee has simply amended the ground already taken. It cannot even be called as an additional ground of appeal empowering the opposite side to take objection to its admission. This contention is sans merit and hence repelled.
8. Briefly stated the facts of the case are that the assessee is engaged in the business of providing IT enabled services to Stream US and Stream Europe through its call centre located in Mumbai. It entered into certain international transactions with its associated enterprises (AEs). A reference u/s 92CA(1) was made by the A.O to the Transfer Pricing Officer (TPO) for determination of Arm’s Length Price (ALP) in respect of international transactions done by the assessee during the year under consideration. The assessee declared operating profit on total cost (OP/TC) at 15%. It applied Transactional Net Margin Method (TNMM) as the most appropriate method. The arm’s length percentage of OP to TC was worked out at 7.31% on the basis of current year’s data and 9.93% on the basis of multiple year data. The assessee chose 15 comparable cases for working out OP/TC at 7.31% as per current year’s data. The TPO included certain new cases at his own and ignored certain cases considered by the assessee. Eventually, the TPO took 13 cases as comparables and determined OP/TC at 24%. In such process of vetting and selection of cases, the TPO inter alia applied filters of (i) number of companies with less than 25% related party transactions, and (ii) companies with export revenue more than 25% of the revenues. Following is the chart showing comparable cases finally chosen by the TPO along with amount of sales and OP to total cost percentage.
