AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (7) TMI 215
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....u/s 92CA(3), part directions issued by the Dispute Resolution Panel ("DRP") and consequently the additions made in impugned assessment order for Assessment year 2007-08 are contrary to law to the extent additions are made to returned income as the same are made in gross violation of the principles of natural justice without considering all the relevant materials on record and by relying on irrelevant materials. 1.3 On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in partly confirming the draft order passed by the Learned Assistant Commissioner of Income Tax, Circle 3(1), New Delhi (hereinafter referred to as 'AO') thereby partly confirming the order under section 92CA(3) of the Act passed by the Learned TPO. A part of the directions of the DRP/Learned TPO are contrary to law inter alia for the following reasons: 1.3.1 The Hon'ble DRP & Learned TPO erred in concluding that 'Return on Value Added Costs' (ROVAC), used by appellant as Profit Level Indicator ("PLI") for its merchanting business, is not permissible while applying Transactional Net Margin Method ("TNMM"). The Hon'ble DRP & Learned TPO failed to appreciate that ROVAC is the appropriat....
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....O failed to appreciate that the discounting of PN results in business income for CTSFA, and in the absence of its Permanent Establishment ('PE') in India under the relevant Double Tax Avoidance Agreement ('the treaty'), the same cannot be brought to tax in India, and therefore the assessee was not liable for deduction of tax at source under section 195 of the Act. 2.1.3 That on the facts and circumstances of the case and in law, the Hon'ble DRP and Learned AO failed to appreciate that by discounting of PN from CTSFA, the assessee has neither borrowed any loan nor incurred any debt, but has merely sold the PN at a discount. 2.1.4 That on the facts and circumstances of the case and in law, the Hon'ble DRP and Learned AO erred in holding that the discounting charges were interest under section 2(28A) of the Act and therefore liable for tax withholding under section 195 of the Act. The Hon'ble DRP and Learned AO also erred in completely ignoring the circulars issued by the Central Board of Direct Taxes clarifying to the opposite effect. 2.1.5 Without prejudice to above, the Hon'ble DRP and Learned AO erred in not appreciating that payment of interest, if any, is by a non-resident....
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....f income. The above grounds are independent and without prejudice to each other. The Appellant craves leave to add, alter, supplement, amend, vary, withdraw or otherwise modify the ground mentioned herein above at or before the time of hearing." 3. The present case was fixed for hearing on 16.03.2015, during the course of hearing the ld. Counsel for the assessee Mr. Iyar, CA stated that all the issues raised in this appeal are covered vide order dated 28.11.2013 in ITA No. 4095/Del/2010 for the assessment year 2006-07 is assessee's own case. Mr. J. James, Adv. was present on behalf of the Department as a Standing Counsel on the said date. The case was adjourned for 19.03.2015, so that the Departmental Representative may go through the small synopsis addressing the issues, filed by the ld. Counsel for the assessee. However, on 19.03.2015, the ld. Standing Counsel for the Revenue, Mr. Judi James, while mentioning at the outset in some of the appeals, on the oral instructions of ld. CIT DR, Sh. A. K. Singh who was not present in the Court, sought adjournment and misrepresented the fact. Accordingly, instead of giving an adjournment, pass over was given in the batch of 7 to 8 app....
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....ssions of the ld. Counsel for the assessee and perusing the material available on the record. 4. Ground Nos. 1.1 to 1.3.8 are co-related and relates to the transfer pricing matter. Vide these grounds the grievance of the assessee relates to the Return on Value Added Costs (ROVAC) used by the assessee as Profit Level Indicator (PLI) for its merchanting business which the AO held as not permissible for applying Transactional Net Martin Method (TNMM). 5. The facts of the case in brief are that the assessee is a wholly owned Indian subsidiary of M/s Cargil Mauritius Ltd. and was engaged in the business of import, export and domestic trading in edible oils, fertilizers, grains, oil seeds and other food products/processed food. It was also engaged in the business of processing crude oil. The assessee filed its return of income on 31.10.2007 declaring loss of Rs. 136,18,93,333/-. Later on, the case was selected for scrutiny. During the course of assessment proceedings, the AO noticed from the Form No. 3CEB filed alongwith the return of income that the assessee during the year had international transactions with associated enterprises/concerns to the tune of Rs. 34,561,860,465/-. The AO ....
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....the Arm's Length Price." 6. The assessee filed the following evidences for the international transaction pertaining to the import of oil before the DRP: "a) Comparable quotes from Chicago Board of Trade ("CBOT"); b) Internal comparable uncontrolled prices; c) Comparable uncontrolled transaction prices for import of oil sourced from Customs Authorities." 7. The DRP observed that CBOT is an internationally recognized and accepted commodity exchange based in Chicago, USA and that the quotations provided by commodity exchanges are squarely covered by Rule 10D(3). It was further observed that the TPO has accepted the commodity exchange quotes used by the assessee in support of international transaction prices for other commodities such as sugar, where data from National Commodities Derivatives Exchange was used and wheat, where data from CBOT itself was considered as comparable uncontrolled price information. Accordingly, the DRP was of the view that CBOT was an appropriate use of data for applying CUP method. The DRP also observed that the assessee made an adjustment for SOAM premium to the CBOT data to arrive at prices at which trades were carried out between buyers and....
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....le companies. 8. The DRP after considering the submissions of the assessee observed as under: "Ground Nos. 5 to 10 are related and hence considered together. For the international transactions pertaining to merchanting activities the assessee has raised the objections which have been discussed above. Our observations with regard to these objections are as under: 1. The TPO in his order has clearly shown that all the transactions of purchase and sale are carried out by the assessee in its own name which was evident from the fact that the assessee had reported all the sales and purchase in the audited annual accounts. It has never been the claim of the assessee that its audited annual accounts are liable to be rejected. Therefore we don't find any merit in argument that the assessee is participating in risk free buy-sell trade. Once the assessee has purchased the commodity all the risks are being borne by the assessee. We feel that the assessee becomes a full risk bearing entity once the commodities are purchased by the assessee in its name. In view of the above, we reject the objection of the assessee and direct that Ground No. 5 does not require any interference. 2. The asses....
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....ay of a logical search carried out by him. The filters have been chosen by the TPO based on the turnover of the assessee. It is a fact that a company having huge turnover of Rs. 4172 Crores cannot be compared with companies having small turnover. The TPO has therefore applied the turnover filter correctly. The TPO has also referred to the decision in the case of Quark Systems Pvt. Ltd. 2010-TIOL-31-ITAT-CHD-SB in which it was held by the Hon'ble ITAT that turnover filter should be applied while selecting the comparables. The objection of the assessee also does not hold good because the TPO has also examined all the comparables selected by the assessee and have reached a logical conclusion. The objection of the assessee that Food Corporation of India should not be selected as a comparable also does not hold good. It has been pointed out by the assessee that FCI is a Government Corporation and it is getting subsidy from the Government and therefore it should not be considered as a comparable. The TPO has verified the financials of the company on the Prowess and it was noticed by him that this company is having profits and the same are reflected in the Prowess data base. In view o....
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....2011 in this case. After perusal of order of the Hon'ble DRP, it has been found that the DRP has directed the TPO to verify the CUP data supplied by the assessee in manufacturing segment. The same has been checked and found to be correct. Accordingly the revised adjustment is given below: Segment As per TPO order As per revised order Merchanting Segment Rs.992520677 Rs.992520677/- Merchanting Segment Rs.1819304876/- Nil Total Adjustment Rs.2811825533/- Rs.992520677/- Thus, the AO is therefore directed to reduce the income of the assessee by an amount of Rs. 1819304876/- Therefore, in view of the recommendation of the TPO as above, an amount of Rs. 992520677/- (Rs.2811825533 - Rs. 1819304876) is being added to the income of the assessee company. Having regard to the adjustments made by the TPO amounting to Rs. 992520677/- attributable to difference in Arm's Length Price of the international transactions entered into by the assessee company with its associated enterprises. I am satisfied that the assessee company has furnished inaccurate particulars of its income on this issue. Hence, penalty proceedings u/s 271(1)(c) r.w.s 274 of the I.T. Act, 19....
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....by any of the following methods, being the most appropriate method in the following manner namely:- a) Comparable uncontrolled price method, b) Resale price method, c) Cost plus method, d) Profit split method, e) Transactional net margin method and f) The net profit margin realized by the enterprise from an international transaction entered into within an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. The above clause (i) of Rule 10B is further judged with reference to the following as contained in sub clause (ii) of Rule 10B which reads as under:- "For the purpose of sub rule (i) the comparability of an international transaction within uncontrolled transaction shall be judged with reference to the following namely:- a) The specific characteristic of the property transferred or services provided in either transaction; b) The functions performed taking into account the assets employed or to be employed and the risks assumed by the respective parties to the transaction. c) The contractual terms whether or not such terms are forma....
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....ake into account the difference if any between the international transaction and comparables uncontrolled transaction and then arm's length price is to be determined with respect to functions comparables, assets employed and risks assumed by the parties. 28. Here in the present case, the assessee was engaged into three distinct activities of manufacturing, physical trade and merchanting. Involvement of assets into three different business activities cannot be the same. In the case of manufacturing activity there can be huge investments in the form of fixed assets and working capital whereas in the case of merchanting trade there is minimum requirement of fixed assets and working capital. Similarly in the case of physical trade there is less amount involved as capital as comparables to manufacturing activity but more than as required in merchanting trade. Therefore, if the amount of capital involved in three different activities are different and naturally risk will be different in these categories of business. Therefore, the three business activities carried different functions and risk profile. Therefore, if the Assessing Officer combined all the three business activities for th....
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....cation as in the preceding year. 12. Vide Ground Nos. 2.1 to 2.1.8 the grievance of the assessee relates to the disallowance of Rs. 274,567,319/- made by the AO u/s 40(a)(i) of the Act for discounting charges. 13. The facts related to this issue in brief are that the assessee had paid a sum of Rs. 274,567,319/- to Cargill TSF Asia Pte Limited, Singapore (CTSFA) and Cargill International SA (CISA) on account of discounting charges. In this transaction, the assessee was getting bills discounted from its Singapore associated enterprise for receiving money on the strength of sale of bills. The assessee paid interest to CTSFA and CISA for this discounting. During the course of assessment proceedings, the AO asked the assessee to explain as to why the discounting charges should not be disallowed as was done in the preceding assessment years 2004-05 to 2006-07. The assessee submitted that since the discounting charges were business income of these offshore entities and since they did not have a Permanent Establishment in accordance with the applicable treaty, the same was not taxable in India in the hands of these entities. 14. The assessee vide reply dated 15.12.2010 submitted to AO a....
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....he net amount received from the CTSFA and repaying this loan along with interest to them through the foreign buyer and hence such discount is prima facie nothing but interest only. 1. Our legal submission '1. It is humbly submitted that section 195 of the act reads as under: "195(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force." On perusal of section 195 of the Act, it is clear that where a person pays any interest or any other sum chargeable to tax to a non-resident, only then he is required to deduct tax at source. Therefore, for the purpose of deduction of tax at source under section 195 it is essential that payment made to non-resident should be chargeable to tax in India in the hands of nonresident. 2. It is humbly submitted that "interest" has bee....
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....ey in present or in future." Once there is a debt, it will be a 'debt owed' for the payer and 'debit claim' for the recipient. 3. Deposit Supreme Court in case of CIT Vs Bazpur Co-operative Sugar Factory Ltd. (172 ITR 321) "The essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfillment of certain conditions." In the present case, the assessee has sold the PN at a discount to CTSFA on "without recourse" basis. The assessee has neither borrowed any money nor incurred any debit towards as once the PN are discounted by them, the CTSFA does not have any right to recover the amount legally from the assessee in case of any default in payment by overseas buyer. They collect the amount of PN from the overseas buyer in its own name and not on behalf of the assessee. Thus, this discounting transaction is not covered under section 2(28A) of the Act. The definition of interest under income tax Act, 1961 does not cover 'discounting charges' becomes clear if one refer to the definition of interest as provided in section 2(7) of the interest tax Act, 1974: "Interest" means interest on loans and advances ma....
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.... Vs CWT (supra). While considering the definition of the word 'debt' it has been held that there was no conflict on the definition of the word 'debt' and that all the decisions agreed that the meaning of the expression 'debt' may take color from the provisions of the concerned Act, it may have different shades of meaning. It was held that the definition of the word 'debt' to the effect that a debit is a sum of money which is now payable or will become payable in future by reason of a present obligation debitrun in praesenti solvendum in futuro' was unanimously accepted. It is, thus, submitted that the definition of interest as per the DTAA which is confined to 'debt-claims' also presupposes the existence of money which is payable in future by reason of a present obligation. As submitted earlier, the transaction of sale of PN by the assessee, is typically on without recourse basis. Therefore, no present or future liability exists or can be assumed to exist between the assessee and CTSFA. Thus, nothing can bring the alleged discounting transaction within the framework of 'debt or borrowings'." 15. The assessee placed the reliance on the Circular Nos. 65 & 647 dated 02.09.197....
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....counting charges paid by the assessee holding these to be interest expenses and therefore consequent disallowance u/s 40a(ia) for non deduction of tax. We find that similar issue arose in respect of another company of the assessee namely Cargil Global India Pvt. Ltd. wherein assessment year 2004-05 in I.T.A.No.684/Del/2009, the Tribunal had made the following observations:- "The discounting charges are not in the nature of interest paid by the assessee. Rather after deducting discount, the assessee received net amount of bill of exchange accepted by the purchaser CFA not having any PE in India is not liable to tax in respect of such discount earned by it and hence the assessee is not under obligation to deduct tax at source u/s 195 of the Act. Accordingly, the same amount cannot be disallowed by invoking section 40(a)(i) of the Act." 33. We further find that revenue took the matter to Hon'ble Delhi High Court and Hon'ble Delhi High Court vide decision delivered on 17.2.2011 dismissed the appeal of revenue. Para 10 to 14 of Hon'ble Delhi High Court judgment deals with the issue and the relevant findings of the Hon'ble Delhi High Court as contained in above paras ....
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.... facts involved for the year under consideration for this issue are similar to the facts involved in the preceding assessment year 2006-07. So, respectfully following the aforesaid referred to earlier order dated 28.11.2013 for the assessment year 2006-07 in assessee's own case in ITA No. 4095/Del/2010. The impugned disallowance made by the AO is deleted. 21. The Ground Nos. 2.2 to 2.2.2 are co-related and the issue relates to the addition on account of deemed dividend u/s 2(22)(e) of the Act amounting to Rs. 3,28,10,658/-. 22. The facts related to this issue in brief are that the assessee during the year consideration received a loan of Rs. 98,000,000/- from M/s Cargill Global Trading (India) Pvt. Ltd. (CGTIPL). This loan was repaid by the assessee during the same year. The AO observed that CGTIPL was a subsidiary with 99% of share holding by Cargill International Trading Pte. Ltd. (CITPL), a tax resident of Singapore who was engaged in the trading of commodity of products such as crude palm oil, wheat etc. The AO further observed that the CITPL was 100% subsidiary of Cargill Group and the assessee is wholly owned subsidiary of Cargill Mauritius Ltd. (CML) which is a tax residen....
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....ant provisions of the Income Tax Act made vide the Finance Act, 1987, has also overruled the decisions of the Hon'ble Supreme Court pronounced on the subject in the years prior to 1987. 5.7 it is pertinent to point out that the case laws relied upon by the assessee pertain to years very much prior to the year 1987 and thus, these decisions have been duly overruled in view of the amendment of the Act in the year 1987. The law at the time when these judgments were pronounced by the Hon'ble Supreme Court was that any payment by way of an advance or a loan to a shareholder, being a person who has substantial interest in the company was to be treated as "deemed dividend". At that time, the definition of the term "shareholder" was not specified and so the Hon'ble Court took the meaning of these terms as understood in common parlance. Thus, at that time, the apex Court held that a "shareholder" means a person, whose name appears in the Register of Shareholder of the company i.e. the Registered Shareholder. Post amendment from 1-4-1988 onwards, this situation has now changed and the term "shareholder" has now been defined in section 2(22)(e) itself as "being a person who is the beneficia....
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....end only to the extent of accumulated profits up to the date on which loan is given. In this connection, please find enclosed the summary of addition made in the earlier years under section 2(22)(e): Additions Accumulated profits at the year end AY 2004-05 22,747,013 24,523,547 AY 2005-06 120,544,125 120,544,128 AY 2006-07 217,400,000 408,999,750 Total 421,627,803 The accumulated profit in CGTIPL as on March 31, 2007 is Rs. 454,438,461/-. From the above, it may be seen that the addition under section 2(22)(e) has already been made to the extent of Rs. 421,627,803/- thus, accumulated profit left is Rs. 32,810,658/- of CGTIPL till end of the relevant financial year i.e. 2006-07. Therefore, without prejudice to our submission that no addition should be made under section 2(22)(e) of the Act, the addition should be restricted to the balance accumulated profits of CGTIPL." 26. The AO although mentioned that the DRP had not given any legal finality on this matter since this issue is pending before the Hon'ble Supreme Court for the assessment years 2004-05 and 2005-06 and before the ITAT for the assessment year 2006-07, how....
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.... because as per his opinion Cargill Inc. USA i.e. ultimate holding company of both assessee company and lender company was the beneficial owner of shares and therefore he held that assessee was indirectly holder of shares in the lender company. We find that the Assessing Officer has arrived at this conclusion on the basis of surmises and conjectures only as he himself at page 10 of his assessment order recorded the following findings:- "Thus though the assessee company is not holding shares in CGIPTL directly, indirectly the assessee company is holding substantial interest in CGIPTL though the Cargill Inc. the holding company." In view of the above, we find that Assessing Officer himself arrived at the conclusion that assessee was not a direct registered shareholder in the lender company, therefore, relying upon various judgments as relied upon by Ld AR the loan received by assessee cannot be treated as deemed dividend u/s 2(22)(e) of the Act. Therefore, ground No.2.2. to 2.4 are allowed. 29. Since facts for the year under consideration are similar to the facts involved in the preceding year. So, respectfully following aforesaid referred to order dated 28.11.2013 in asse....