TaxTMI 
TaxTMI 
2016 (9) TMI 146
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....ed by the assessee. ITA/8173/Mum/2011: 2. First effective ground of appeal, raised by the AO, is about the deleting the TP adjustment made by him under the heads royalty charged, ii)interest charged on loan and iii)guarantee fee charged. During the TP proceedings, the TPO found that the total operating income of the assessee for the year under appeal was Rs. 1,371.67crores, that it had shown net profit of 150.79 crores. He found that the assessee had reported following ITs with AEs: SN. Nature of transactions FY 2006-07 Method 1. Sale of Bulk coconut oil 185,424,918 CUP 2. Royalty Income 17,359,290 TNMM 3. Interest on loan (received/receivable) 60,068,080 CUP 4. Guarantee fees (received/receivable) 4,726,602 CUP 5. Sale of Finished Goods 97,650,737 TNMM 6. Purchase of Intellectual Property Rights 2,629,000,000 CUP 7. Advances received from M/s. MME 678,561 NA 8. Reimbursement of expenses (received/ receivable) 4,547,145 At Cost 9. Reimbursement of expenses (paid/payable) 560,100 At Cost 10. Sale of Moulds 83,460 CUP 11. Ad....
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....ssessee, the TPO held that as per the provisions of section 92(1)income arising from IT.s had to be computed having regard to ALP, that no enterprise would charge lower rate of royalty under Arm's length circumstances, that the royalty charged by the assessee to MBL did not comply with its Arm's length standard, that transaction with other AE of an assessee can very well be considered for understanding the transaction and determining the ALP thereof, that Parachute brand was well tested in India and overseas market, that the benefits would be surely enjoyed by MBL in the near future without much brand development expenditure, that the argument of the assessee about non recognition of brand parachute could not be accepted, that the assessee was not justified in arguing that MBLwould have to incur brand development expenditure to popularise the parachute brand in Bangladesh. He further held that TNMM was not the most appropriate method to determine ALP of the royalty payment, that it would be reasonable and appropriate to benchmark the transaction by taking royalty rate charged to the other AE [email protected]%. Accordingly, he determined the ALP of the royalty to be charged to MBL as under-....
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....rom the AE was higher than the interest paid by the assessee to HSBC. He found that the AE had purchased the TM 'Fiancee' as well as shares of Egyptian American Investment and Industrial Developmental Company for a total consideration of USD 35.1 Million, that the assessee had agreed to finance the consideration initially to the extent of Rs. 17.6 million charging interest @9.5%, that the AE got part of its funding finance from ICICI Bank Behrain at the interest rate of 5.5%. The TPO observed that the assessee had charged interest at 9.5% to its AE i.e MME, that it should also have charged at least the rate of interest at the rate 9.5% p.a. to Sundari LLC, as well, that cost of funds had no relevance. In view of the above he concluded that the assessee should have charged the interest rate of 9.5% to Sundari LLC. He proposed following adjustment: Date Amount of outstanding loan amount (in USD) No. of days for which interest to be charged Arm's length interest to be charged @ 9.5% p.a. to M/s. Sundari, LLC 1.4.2006 32, 13, 973 365 305, 327 1.4.2006 15,97,842 365 151,795 4.4.2006 1,00,000 362 9,422 28.4.2006 1,00,000 338 ....
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..... M/s. MBLIL 16,31,25,000 4.80% 83 17,80,521 2,96,753 14,83,767 4. M/s. MME 87,00,00,000 4.80% 111 1,26,99,616 21,16,603 1,05,83,014 TOTAL 2,83,59,616 47,26,603 2,36,33,014 Accordingly, an adjustment of Rs. 2.36 crores was proposed by the TPO under the head guarantee fees. After receiving order of the TPO, the AO passed the order making addition of all the three proposed additions. 3. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA). It made elaborate submissions before him with regard to royalty. With regard to interest on loans, the assessee submitted, before the FAA, that it had made strategic investment by acquiring 63%equity stake in Sundari LLC, vide purchase agreement dt.26.2.2003, that it increased stake to 75.5% during FY.2004-05, that pursuant to the said agreement it extended revolving credit loan, that the rate of interest charged for loans given, prior to 9.6.2005, wasLIBOR+150bps, that vide amendment dated 9.6.2005 and 29.08. 2005 it increased the overall revolving credit loan amount, that the rate of intere....
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....ed to one of the AEs of the assessee by it, that, thus, it was a controlled transaction, that for the foreign currency loan the rate applicable should be LIBOR based, that the rate adopted by TPO and consequent bench - marking was not as per law, that there was no independent CUP rate available to benchmark the IT. Accordingly, he considered it reasonable to look into the RBI guidelines that were prevailing in respect of External Commercial Borrowings (ECB). He directed the assessee to provide certain details about ECB. Referring to the Master Circular No.07/2006-07 dated 1.7.2006, of the RBI, he held that rate of interest had to be fixed at 7.4012%. Partly allowing the appeal of the assessee, he restricted the disallowance to Rs. 18.66 lakhs. 4.2. Deciding the issue of guarantee commission, the FAA held that CG was an IT, that the assessee itself had shown the transaction as IT in form 3 CEB, that it had charged [email protected]% from its AEs, that in the earlie year GC @ 0.8% was accepted by his predecessors. Reversing the order of the TPO/AO, he held that rate of GC adopted by the assessee was justifiable. 5. Before us, Departmental Representative (DR) contended that the TPO had rig....
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....m two of its AEs, that one was located in Bangladesh and the other was in UAE, that the agreement with the Bangladesh AE was in respect of Parachute, that with the UAE the assessee had entered into agreement in respect to TMs of Parachute as well as of GGN, that MBL would sell pure edible coconut oil as per the agree - ment, that the UAE-AE was allowed to sell hair creams, hair gels hair oil etc., that as per the agreement it would use brand GGN, that there was issue relating to use of controlled transaction for the purpose of comparability, that there was geographical difference, that there was also difference in respect of brands as well as products, that on the same terms and conditions the brand royalty charged by it to MBL had been accepted by the TPO till the AY.2006-07, that during the year there had been increase in the rate of royalty charged to MBL, that it had been increased from 0.5% to 1% w.e.f. 1.10.2006, that the TPO had not specifically rejected assessee's benchmarking, that overall profitability of the assessee was much higher than the arithmetic mean of the comparables. Considering the above facts, the FAA had held that TP adjustment proposed/ made by the TPO/ AO ....
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....ssed a draft assessment order in line with the order of the TPO. 4. Being aggrieved, the respondent-assessee carried the draft assessment order to Dispute Resolution Panel (DRP). The DRP enhanced ALP i.e. the interest on loan given by the respondent-assessee to its German Associate Enterprise to 12%. Consequent to the direction of DRP, the Assessing Officer by an assessment order dated 19.9.2011 charged interest of Rs. 1.76 crores on the above account as a part of the respondent assessee's income. 5. Being aggrieved, the respondent-assessee preferred an appeal to the Tribunal. The Tribunal by the impugned order held: (a) that the interests the loan extended by a company or its Associated Enterprise comes within the ambit of International Transaction and the issue to be examined in such a case would be the ALP of such an International Transaction; and (b) with regard to quantum of addition on account of interest by ALP the impugned order held that as the amounts were advanced Associate Enterprises in Germany, the rate of interest is to be determined on the EURIBOR rate of interest i.e. rates prevailing in Europe. Thus partly allowed the respondent-assessee's appeal by ap....
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....In case of default by the borrow - er, the corporate guarantor is exposed to the same risk of a bank. In case of an AE the risk would not be as high as in case of an outsider. We find that the assessee argued that GC was not an IT. In the cases of Siro Clinpharm Private Limited(ITA No.2618 and 2876/2014);Bharti Airtel Limited (43 taxmann.com 150);Micro ink Limited (63 taxmann. com 353), Redington India Ltd. (513/ Mds/2014)it has been held that GC is not an IT. We are reproducing the relevant part of the order of the Bharati Airtel(supra) and same reads as under: "25. An analysis of this definition of ' international transaction' under Section 92 B, as it stood at the relevant point of time, and its break up in plain words, shows the following: 1. An international transaction can be between two or more AEs, at least one of which should be a non-resident. 2. An international transaction can be a transaction of the following types: a. in the nature of purchase, sale or lease of tangible or intangible property, b. in the nature of provision of services, c. in the nature of lending or borrowing money, or d. in the nature of any other transaction having a bea....
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....l or accounting service" which are anyway covered by 2 (b) and 3 above in "provision for services" and "mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises". That leaves us with two clauses in the Explanation to Section 92 B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92 B, namely borrowing or lending money. 29. The remaining two items in the Explanation to Section 92 B are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization, These items can only be covered in the residual clause of definition in international transactions, as in Section 92 B (1), which covers "any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises". 30. It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92 B, the transactions s....
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....e, deferred payment or receivable or any other debt during the course of business, as will have" a bearing on the profits, income, losses or assets or such enterprise". This pre-condition about impact on profits, income, losses or assets of such enterprises is a pre-condition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. The contents of the Explanation fortifies, rather than mitigates, the significance of expression' having a bearing on profits, income, losses or assets' appearing in Section 92 B(1). 32. There can be number of situations in which an item may fall within the description set out in clause (c) of Explanation to Section 92 B, and yet it may not constitute an international transaction as the condition precedent with regard to the' bearing on profit, income, losses or assets' set out in Section 92B (1) may not be fulfilled. For example, an enterprise may extend guarantees for performance of financial obligations by its associated enterprises. These guarantees do not c....
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....ture, it is an issue to be examined whether an enhancement of scope of this anti avoidance provision can be implemented with retrospective effect. Undoubtedly, the scope of a charging provision can be enlarged with retrospective effect, but an anti-avoidance measure, that the transfer pricing legislation inherently is, is not primarily a source of revenue as it mainly seeks compliant behaviour from the assessee vis-a-vis certain norms, and these norms cannot be given effect from a date earlier than the date norms are being introduced. However, as we have decided the issue in favour of the assessee on merits and even after taking into account the amendments brought about by Finance Act 2012, we need not deal with this aspect of the matter in greater detail . 35. When it was put to the learned Departmental Representative that there could be a view that issuance of guarantees could be outside the ambit of scope of ' international transaction' itself, he submitted that there are large number of decisions in India and abroad, notably in Canada, dealing with the determination of arm's length price of guarantees. His argument seemed to be that even such a view is to be uphe....
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....n pari materia. We need not, therefore, deal with those foreign judicial precedents. Suffice to say that we have reached our conclusions on the basis of the legal provisions under section 92 B and no judicial precedent, contrary to our understanding of these legal provisions, has been cited before us. There is a decision of the co-ordinate bench in the case of Mahindra & Mahindra (supra), referred to in the DRP order, but that decision does not deal with the scope of amended section 92 B and leaves the issue open by stating that post insertion of Explanation to Section 92 B, the matter will have to be examined in the light of the amended law. We have held that even after the amendment in Section 92 B, by amending Explanation to Section 92 B, a corporate guarantee issued for the benefit of the AEs, which does not involve any costs to the assessee, does not have any bearing on profits, income, losses or assets of the enterprise and, therefore, it is outside the ambit of' international transaction' to which ALP adjustment can be made. As we have decided the matter in favour of the assessee on this short issue, we see no need to address ourselves to other legal issues raised by....
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....ected the books of accounts of the assessee. It is also not clear from the order that as what was the basis for adopting 10% of the expenditure as not allowable. There is finding to show that the expenditure in question was not incurred wholly and exclusively for the business purposes. We find that the FAA had simply followed the order of his predecessor and had not met any of the arguments advanced by the assessee before him. Therefore, reversing his order, we decide ground no.2 in favour of the assessee. 10. Next two grounds(GOA3&4)pertain to claims that were made by way of filing revised computation and not by filing revised returns. These claims were about i)reduction of book profit, being depreciation on intangible assets, not charged to profit and loss account, ii)depreciation on non-compete fee treated as capital expenditure in earlier years and reduction of book profit being depreciation on intangible assets not charged to profit and loss account. 10.1. During the appellate proceedings, the FAA held that without filing a revised return the assessee cannot claim a fresh relief. He referred to the case of Goetz India, wherein it was held that the assessee had to file a ....
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....sing of a new plea in appeal and each case must be considered on its own facts. However, such cases include those, where the ground though available when the return was filed or the assessment order was made, was not taken or raised for reasons which the appellate authorities may consider valid. In other words, the jurisdiction of the appellate authorities to consider a fresh or new ground or claim is not restricted to cases where such a ground did not exist when the return was filed and the assessment order was made. Even assuming that the Assessing Officer is not entitled to grant a deduction on the basis of a letter requesting an amendment to the return filed, the appellate authorities are entitled to consider the claim and to adjudicate the same. It is not necessary that the deduction be allowed only if a revised return of income would have been filed....." From the above, it is clear that the FAA is empowered to entertain the claim made by way of submission/additional ground, that AO cannot allow such claim if an assessee does not file a revised return. Therefore, we are of the opinion that in the interest of Justice, the matter should be restored back to the file of the....
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....penses could not be allocated on the basis of ratio of turnover of the undertaking. He further found that the assessee had considered income from by products, sale of scrap and other items, sale of assets, insurance claim and lease rent, while claiming deduction under section 80 IB/80 IC. But, the AO did not agree with the assessee and excluded such income from the profit of the respective undertaking while computing the deduction on the ground that above income could not be said to be arising out of business of the assessee, that though the income was attributable to the business of the assessee it was not derived from the business carried out by it. 12.1. Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA. Before him, it was argued that the assessee had allocated rent and storage expenses on the basis of cost directly identifiable, that common rent and storage expenses were allocated in the ratio of turnover of each unit, that the AO had not assigned any reason for deviating from the basis of allocation made by the assessee, that it was consistently following the above method of a location in the earlier years. The AR pointed out the mistakes com....
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....the earlier years and allowed the appeal filed by the assessee. With regard to income from sale of by-products and scrap, the FAA held that in the case of Pandian Chemicals Ltd.(270 ITR 448)certain principles were laid down. Relying upon the said judgement, he upheld the order of the AO. Relying upon the judgements of Pfizer Ltd (supra) and Pandian Chemicals Ltd. (supra), the FAA allowed the claim made by the assessee with regard to insurance claim. He further held that lease rent income of blow moulding machine, provided to the sub-contractor, could not be considered to be the income derived from the eligible undertaking, that it was not the case of the assessee that it used the machine directly for purpose of business of eligible undertaking. He also held that receipts arising on account of exchange gain and money received from material return to the vendor were eligible for deduction, that such receipts had arisen out of the income derived from the eligible industrial undertaking. 12.2. Before us, the AR contended that by product and scraps were generated in the process of manufacturing, that the receipt from sale of such products was derived from industrial under....
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....rs, that he had not brought on record any fact/(s)that could distinguish such facts from the facts of the current year, that the orders of the FAA for the earlier years were not challenged before the Tribunal is also a fact. Considering this if the FAA has allowed the appeal of the assessee, then his order had to be endorsed. Issue regarding rent and storage charges is decided against the AO. 12.3.b. In the matter of Raghunath Exports Pvt. Ltd.(330 ITR 57)it has been held that surplus realisation due to fluctuation in foreign exchange rates is part and parcel of the export turnover for the purposes of s. 80HHC. Paragraph 12 of the judgment reads as follow: "We have considered the contentions of the learned advocates for the parties and checked the records. It is not disputed that tea was exported and payment was received in foreign currency and it is also admitted that when realisation of the export was made there has been fluctuation of foreign currency, as such, there was a surplus realisation in terms of Indian currency. The question is whether the aforesaid surplus realisation of Rs. 10,61,326 can be treated to be a part of export turnover or not. In our view, going by th....
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....sale of the stock-intrade. Insurance claim on account of the stock-in-trade does not constitute an independent income or a receipt of a nature similar to brokerage, commission, interest, rent or charges; hence, such a receipt would not be subject to a deduction of ninety per cent under cl. (1) of Expln. (baa)". Considering the above,we are of the opinion that the order of the FAA does not suffer from any legal infirmity as far as claim with regard to insurance receipt is concerned. We are aware that the judgment is about section 80HHC of the Act. But,it is applicable to the provisions of section 80IB/80IC too. Confirming the order of the FAA,we decide this issue also against the AO. 12.3.d. With regard to the eligibility of sale proceeds of by products and scrape for the 80IB/80IC deduction,we would like to refer to the case of Sadhu Forging (336 ITR444). In that matter the Hon'ble Delhi High Court has dealt with the issue of sale of scrap for claiming deduction u/s.80IB of the Act and has held as under: 13. Keeping in view the activities of the assessee in giving heat treatment for which it had earned labour charges and job work charges, it can thus be said that the appel....
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....oceedings, before the FAA, the assessee argued that no specific or material expenses were incurred to earn dividend income, that the AO had not brought anything on record to prove that expenses of Rs. 4.45 lakhs were incurred by the assessee. The assessee relied upon the case of Minda Investments Ltd.(52 DTR 1) and Hero Cycles Ltd.(233CTR74). After considering the submission of the assessee and the assessment order, the FAA held that assessee had made some investment against which it had earned an income which was not forming part of the total income, that the provisions of section 14A were clearly applicable in respect of disallowance of corresponding expenditure debited by the assessee in its P&L account, that apart from the direct cost that might have been incurred in respect of employee's salary and in the work in the company there would be costs associated with infrastructure facilities used for investment, that there would be certain direct/indirect expenses relating to the investments, that it could not be set that there were no costs/ expenses attributable to earning of the income, that disallowance had to be worked out in view of the provisions of section 14A. Referring....