2014 (12) TMI 349
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....sessee's appeal for the assessment year 2006-07 vide ITA No.1431/PN/2010 be taken as the lead case in order to appreciate the controversy. Accordingly, the appeal for assessment year 2006-07 was heard as the lead case. 3. ITA No.1431/PN/2010 is directed against the order of the Asstt. Commissioner of Income Tax, Circle- 1, Aurangabad (in short 'the Assessing Officer') passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short "the Act") dated 14.10.2010, which is in conformity with the directions given by the Dispute Resolution Panel- 1, Mumbai (in short 'the DRP') dated 27.09.2010. In this appeal the various Grounds of Appeal raised by the assessee read as under :- "1. That the assessing officer erred on facts and in law in completing the assessment under section 143(3) read with section 144(C) of the Income-tax Act, 1961 ("the Act") by enhancing the total income of the appellant (before set off of brought forward losses and depreciation) by Rs. 73,64,368/- 2. That the Assessing Officer/Transfer Pricing Officer ("AO/TPO") erred on facts and in law in making addition to the income of the appellant to the extent of Rs. 66,04,445/- on account of the alleged difference....
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.... the hands of the AE. 2.9 That the learned AO/TPO erred on facts and in law in not appreciating that the loan transactions between the appellant and its AE was genuine and entered into as a result of commercial expediency. 2.10 Without prejudice that the learned AO/TPO erred on facts and in law in not holding that +/(-)5% variation from the arm's length interest should have been allowed to the appellant under the provision of section 92C(2) of the Act. 3. That the AO erred on facts and in law in disallowing the depreciation amounting to Rs. 7,59,723 claimed by the appellant on assets forming part of block of assets not used during the relevant previous year. 3.1 That the AO erred on facts and in law in not appreciating that the expression "used for the purpose of business" as mentioned in section 32(1) of the Act, refers to the entire block of asset and not the individual assets forming part of the block of assets." 4. In brief, the relevant facts are that assessee is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of manufacture and sale of automotive tyres, tubes, flaps, etc. at its factory located at Aur....
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....prises. All other international transactions entered by the assessee with its associated enterprises have been accepted by the TPO to be at arm's length price. In this view of the matter, we confine our further discussion only in respect of the transaction of payment of interest on loans raised from associated enterprises, which is the international transaction in dispute before us. 7. The appellant company has incurred interest expenditure of Rs. 2,96,25,682/- in respect of three kinds of foreign currency cash loans raised from Goodyear Tyre and Rubber Co., an associated enterprise based in USA. Firstly, assessee had raised a technical knowhow loan in the past years which carried rate of interest of 12% per annum; secondly, assessee raised a foreign currency cash loan against import of capital goods in the past years which carried interest @ 12% per annum; thirdly, a loan by way of External Commercial Borrowing (ECB) was raised from the associated enterprise in the past years, for financing its working capital needs, which carried rate of interest of LIBOR plus 3%. The TPO compared the international transaction of the payment of interest on the aforesaid loans with the ceilin....
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....ssee, it was pointed out that there was a moratorium of payment on interest for initial seven years, which was, however, extended for next two years, and the Reserve Bank of India approved the rate of interest of 12% for the period starting after the end of such nine years. The Ld. Representative pointed out that the aforesaid terms of the loan are specifically approved by the Reserve Bank of India and therefore it would be inappropriate for the TPO, which is another wing of the Government, to say that the payment of interest by the assessee to the associated enterprise is not an arm's length price. The point made by the assessee is that the arm's length price of the transaction of interest paid by the assessee in the present case cannot be considered de-hors the factum of the Central Government having approved the terms and the rate of payment of interest. In this context, he has relied on the parity of reasoning upheld by the Tribunal in the following decisions : (i) Abhishek Auto Industries Ltd. Vs. DCIT (ITA No.1433/Del/2009 dated 12.11.2010); (ii) DCIT vs. Sona Okegawa Precision Forgings Ltd. (ITA No.5386/Del/2010 dated 16.12.2011); (iii) M/s Cadbury India Ltd. vs. Add....
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....rvive in relation to payment of interest on technical knowhow loan and foreign currency cash loans. 13. A pertinent issue has been raised by the assessee, which is with respect to the stand of the TPO that the expenditure of interest paid by the assessee during the year is to be benchmarked on a standalone basis by disregarding the fact that there was an initial moratorium period of 9 years during which no interest was payable and that the 12% rate of interest was payable only for the post-moratorium period. It is submitted that if the effective rate of loan was computed considering the period for which loan has been availed by the assessee, rate of interest would work out much lower than the benchmark considered by the TPO. In this context, the assessee company has calculated the effective rate of interest on a standalone basis by considering the loan outstanding during the year and the period for which it has been availed by the assessee, i.e. including the period of moratorium when no interest was payable. It is submitted that the effective rate of interest works out to be lesser than arm's length rate determined by the TPO. The details in this regard are as under :- Techn....
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....2003, whereby the agreed amount of technical knowhow fee payable to Goodyear USA was reduced to USD 67,50,000/-. On 11th July, 1996 assessee entered into an agreement with the associated enterprise in terms of which the technical knowhow fee payable was converted into a loan which was initially interest-free for the first seven years period and was thereafter re-payable in three branches carrying interest @ 12% per annum. Consequent to the modification of the technical assistance agreement done on 01.10.2003, the loan agreement was also modified by an agreement dated 02.10.2003 whereby the principal amount of loan was reduced from USD one crore to USD 67,50,000/-. The loan agreement dated 11.07.1996 was approved by the Reserve Bank of India vide letter dated 17.04.1996, which was subsequently amended vide RBI letter dated 10.06.2003 reducing the principal amount of loan from USD one crore to USD 67,50,000/-. Copies of such approvals have been placed in the Paper Book at pages 469 - 473. In terms of the RBI approvals, it transpires that the technical knowhow loan was interest free for initial period of seven years from the date on which technical knowhow fee was payable and at the e....
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....ate of LIBOR plus 3% as notified by the RBI in its Circular No.36 dated 14.11.2003, which was prevailing when the assessee raised such ECB loan. 19. In the background of the aforesaid terms and conditions of the loans raised from the associated enterprise, assessee paid interest aggregating to Rs. 2,96,25,683/- to its associated enterprises. The assessee benchmarked the aforesaid transaction of payment of interest by applying Comparable Uncontrolled Price (CUP) method as the most appropriate method and thus justified that the aforesaid payment of interest was at an arm's length price. The stand of the assessee was that interest charged on technical knowhow loan and foreign currency cash loan @ 12% was lower than the Prime Lending Rate (PLR) of interest charged by the State Bank of India at the relevant point of time, i.e. 12.25% - 13.25%. Assessee also justified the rate of interest on the ground that technical knowhow and foreign currency loans were specifically approved by the RBI wherein the rate of interest payable was also prescribed. Even with regard to the ECB loan availed, it was contended that the same was in accordance with guidelines and the interest rate ceiling pr....
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....e is 12%, but if the initial interest-free period of nine years is considered, the effective rate of interest would be even lower than the rate of 5.46% considered by the TPO as an arm's length rate. In this context, our attention has been drawn to a working furnished in the course of the hearing. With respect to the technical knowhow loan, it is explained that actual interest cost of Rs. 1,15,58,522/- (inclusive of the increased cost of borrowings on account of exchange in fluctuation) is spread over the period of loan the effective rate of interest for the assessment year 2006-07 works out to 2.51% only. Similarly, with respect to the foreign currency cash loan on spreading the actual interest cost of 1,39,69,848/- over the period of loan and also taking into account the increased borrowings on account of exchange rate fluctuation, the effective rate of interest for assessment year 2006-07 comes to 2.67%. It is sought to be pointed out that the aforesaid effective rates of interest is less than the arm's length rate of interest considered by the TPO in respect of technical knowhow and foreign currency cash loans. Therefore, there was no necessity of making any adjustment ....
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....ent and that assessee was not required to incur any interest costs. It is only subsequent to the moratorium period, assessee was to incur interest cost and that too, during the period of repayment of loans. Ofcourse, during the moratorium period the liability towards principal amount of loan was liable to be increased by 5% on account of exchange rate fluctuation. Considering the entirety of terms and conditions, therefore, the cost of borrowings to the assessee (i.e. on technical knowhow and foreign currency cash loans) are to be computed after factoring the initial period of moratorium. Therefore, it would be inappropriate to merely compare the stated rate of interest of 12% with the prevailing rates without taking into consideration the specific terms and conditions of the assessee's borrowings. Therefore, in-principle, we are agreement with the assessee for the proposition that it would be appropriate to compute effective rate of interest in respect of international transaction of loan entered into with the associated enterprise before carrying out the exercise of benchmarking such international transactions vis-à-vis the arm's length price/interest of the comparable....
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....ter reducing various expenses from the sale value of the products but the effective rate worked out to 2.30%, which was comparable to arm's length rate being considered by the Revenue. On the basis of the assertion of the assessee to the effect that the effective rate of royalty was lower than the comparable transaction, the addition made by the TPO was deleted by the Tribunal. The Ld. Representative for the assessee submitted that the concept of the effective rate of royalty as against the stated rate of royalty was approved by the Tribunal for the purpose of benchmarking the international transaction of the assessee. In the present case also, in our view the ratio of the decision of the Ahmedabad Bench of Tribunal in the case of Hitachi Home & Life Solutions (India) Ltd. (supra) applies. Therefore, in conclusion, without opining on the other arguments raised by the assessee, we deem it fit and proper to delete the addition with respect to the interest paid on Technical knowhow and foreign currency cash loans on the ground that the effective rate of interest incurred by the assessee is lower than the arm's length rate of interest considered by the TPO. Thus, on this aspect....
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.... is sought to be submitted that assessee paid interest rate to the associated enterprise which was even lower than the cost of borrowing of the associated enterprise. In this context, a reference has been made to page 257 to 260 of the Paper Book wherein it was pointed out to the TPO that the rate of interest payable by the associated enterprise on its borrowing to provide ECB to the assessee was LIBOR plus 4% or alternate basis rate +3%. But keeping in mind, the RBI restrictions associated enterprise charged only LIBOR plus 3% from the assessee company. Ld. Representative submitted that this internal benchmark available with the assessee has been disregarded by the TPO. 25. In our considered opinion, the aforesaid comparable uncontrolled transactions i.e. the transaction between the associated enterprise and M/s J.P. Morgan Chase Bank provides a direct benchmark for the purposes of determining the arm's length price of payment of interest in respect of ECB loans. While applying CUP method, in our view, it is appropriate that the amount charged in an controlled transaction is examined with the amount charged in an uncontrolled transaction. In the present case, the aforesaid tr....
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....owards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus where potential comparable is available in the shape of an uncontrolled transaction of the same assesses, it is likely to have higher degree of comparability vis-a-vis comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable. Ex consequenti, it follows that an internal comparable uncontrolled transaction ....
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.... earlier paras. Therefore, our decision in relation to the aforesaid issue in the appeal for assessment year 2006-07 would apply mutatis mutandis in this year also. Following the same, assessee succeeds in assessment year 2005-06 also. 31. In assessment year 2005-06, another issue is with regard to an addition of Rs. 5,48,472/- made by the Assessing Officer towards the import of capital goods. The relevant discussion in this regard made by the CIT(A) is as under :- "12.3 In respect of the adjustment of Rs. 5,48,472/- to the price paid by the appellant towards the import of capital goods, it has been observed that having a Global Transfer Pricing Policy does not mean that the markup stated in the Policy is automatically justified. As stated, the reasonableness of the markup has to be established. 10% markup over and above the cost of capital goods to AE cannot be said to be on lower side under any parameter of comparison. It is also observed that the evidences or certificate certifying the actual cost of incidental expenses as stated by the appellant like handling, warehousing, insurance, freight, etc. were not produced before the Assessing Officer nor before the TPO. Therefore, t....