AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (11) TMI 1573
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....ly one issue has been raised. The assessee has raised the grievance with regard to the order of the Dispute Resolution Panel (DRP) in confirming the adjustment of Rs. 87,27,27,128/- to the International Transactions pertaining to exports/imports to/from AEs (i.e. Associated Enterprises), mainly, in holding that similar issue was there before the predecessor DRP for the Assessment Year(AY) 2007-08 and AY 2008-09; whereas in fact impugned AY- 2009-10 was the first year in which this kind of adjustment has been made by the AO/TPO and no such adjustment was never made in any of the previous years, in the case of the assessee-company. It has also raised other numerous grounds challenging the adjustment on merits also. For the sake of ready reference, these grounds are reproduced below:- "Grounds in respect of international transactions pertaining to the exports/imports to/from AEs: Ground No. 2: Erroneous directions of the Hon'ble DRP based on incorrect facts' pertaining to previous assessment years The Hon'ble DRP erred in confirming the adjustment of Rs. 87,27,27,128 to the international transactions pertaining exports/imports to/from AEs by holding that similar issu....
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....ed errors in computing the PLI of certain comparable companies. The Hon'ble DRP / Ld. AO / Ld. TPO also erred in computing the PLI of Kriti Industries (India) Ltd, Mahindra Composites Ltd. and Prima Plastics Ltd. at entity level instead of PLI for comparable segment. Ground No 9: Rejection of use of multiple year data for comparables The Hon'ble DRP / Ld. AO / Ld. TPO erred in considering the single year data for the comparables i.e. data for Financial Year (FY) 2008-09 only and disregarding multiple year data which was considered by the Appellant in accordance with the provisions of Rule 10B (4) of the Rules. 4.1. During the course of hearing, our attention was drawn by the ld. counsel on the relevant part of the order of the DRP, and argued that the DRP has misunderstood the facts and under some wrong impression, it was presumed by it that similar issue was involved in the preceding two years, whereas no such issue was involved in any of the earlier years, it was further submitted that the DRP decided such a big issue in just three lines by stating that similar issue was involved in earlier years, and following the order of earlier years, claim of the assessee was r....
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....-speaking and cryptic manner, and no reasoning, whatsoever, has been given, no facts have been discussed, no comparison with the issue claimed to be involved in the earlier years, if at all any similar issue were involved in the earlier years, has been made. The order is disregardful of any minimum standards that should be followed while adjudicating an appeal by an appellate authority. 4.4. Further, on careful examination of all the facts, it is noted by us that no such issue was involved in the preceding years i.e. AYs 2007-08, 2008-09 or any other preceding year. The minimum, the DRP could have done was to at least reproduce or discuss some of the relevant findings from the orders of earlier years while disposing the appeal of this year. It is further noted that the assessee has also submitted a rectification petition dated January 13, 2014 under Rule 13 of the Income Tax (Dispute Resolution Panel) Rules, 2009, requesting for rectification of inadvertent mistake apparent from record in the directions given by the DRP. Relevant portion of the rectification petition is reproduced below:- "All the above grounds were disposed off together by the Hon'ble DRP by way of follo....
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....profitability statement explaining the methodology and the allocation keys adopted in respect of sale of finished goods to AEs were submitted to the Ld. TPO (Paper Book Page No. 322 to 325). Further, the copy of audited segmental profitability, certified by an independent auditor, was again submitted to the Hon'ble DRP vide our submission dated December 9, 2013 (paper Book Page No 466 to 477). * The Ld. TPO committed errors in computation of Profit Level Indicator CPU') of comparable companies and erroneously considered certain companies at entity level as against comparable segments. The Ld. TPO had also committed certain errors in computing the entity level PU of the assessee [Paper Book Page No 52 to 54]. * Without prejudice to any of the contentions raised by the assessee, it is submitted that the adjustment should be made only on a proportionate basis to the extent of value of international transactions and accordingly the TP adjustment would work out to Rs, 1.52 crores. The principle of proportionality has been upheld by the Hon'ble ITAT in various cases including the jurisdictional Mumbai bench in the case of T. Two International Private Limited vs DCIT (IT....
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....round No. 12: Disregarding the consideration of EURIBOR/LIBOR based interest rate for application of the CUP method Without prejudice to the above, the Hon'ble DRP / Ld. AO / Ld. TPO disregarded the use of EURIBOR/LIBOR based interest rate for application of the CUP method despite the presence of ruling of the Honourable Jurisdictional Mumbai Income Tax Appellate Tribunal ('ITAT') and the directions of the Hon'ble DRP in Appellant's own case for AY 2007-08 and AY 2008-09 respectively." 5.1. These grounds deal with the common issue pertaining to action of the DRP in confirming the action of AO/TPO in making a Transfer Pricing Adjustment of Rs. 77,98,656/- to the income of the assesseecompany, by holding that the assessee should have charged interest on the international loan extended to its A.E. 5.2. During the course of hearing, it was submitted by the ld. counsel of the assessee that no interest was charged by it on the amount of loan given to its subsidiary. It was held by the AO that interest should be charged at SBI PLR +3%, whereas the DRP capped it to SBI PLR at 12.25%, holding that additional charge of risk premium was not justified. It was submitte....
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....e High Court and therefore, legal position has not attained finality in this regard, as far as assessee is concerned, since this decision was given by the Tribunal and confirmed by the Hon'ble High Court on the factual matrix of that year, and even ITAT had given its decision referring to the facts and circumstances of that year only. It was submitted by him that, thus, the question of adding some BPS point was still left open. With respect to the rationale for adding some BPS points, it was submitted by him that AE of the assessee-company was in financial crisis and therefore it should rather increase the BPS, and further, since financial position of the AE in this year may have been further deteriorated, therefore, these facts needs examination to decide that how much BPS should be added. 5.4. On the other hand, in reply to the submissions of the Ld. CIT (DR), it was submitted by the Ld. Counsel that the Tribunal in AY 200708 has clearly said that the notional interest rate to be charged should be EURIBOR rate, and that the order of the Tribunal has been upheld by the Hon'ble High Court by accepting the same and that too by passing a detailed order, independently. The order of....
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....R rate + BPS basis. The reasoning given by the ld. CIT(DR) is that decision in AY 2007-08 has been taken on the decision of factual matrix of that year and that in this year the assessee had himself suggested the rate of 4.37% + 0.8%, aggregating to 5.17%. 5.7. We have carefully analysed the submissions of the Ld. CIT (DR). To resolve this controversy, let us first refer to the order of the Tribunal in AY 2007-08 in ITA No. 7354/Mum/2011 order dated 30th April 2012, holding vide paragraph 19 as under:- "In the present case the AE is a German company. Euribor rates are based on the average interest rates at which a panel of more than 50 European banks borrows from one another. There are different maturities, ranging from one week to one year. These rates are considered to be the most important rate in the European money market. The interest rates do provide the basis for the price and interest rates of all kinds of financial products like interest rate swaps, interest rate futures, saving account and mortgages. We find that the RBI in respect of export credit to exporters at internationally competitive rates under the scheme of pre-shipment credit in foreign currency (PCFC) an....
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....issue. We find force in the contention that EURIBOR rate is that at which banks and other large financial institutions deal with each other, inter se. Retail borrower do not get finance at this rate, because lending bank/institution would add some margin/premium to cover their risks/profits, which ranges to be generally between 1 to 2%. But, keeping in view peculiar facts of this case, and particularly when no contrary evidence has been brought on record by the Revenue, we find it appropriate to accept the submissions of the assessee, and hold that 0.8% should be added upon EURIBOR, and thus total interest to be charged would be 5.17%. We direct accordingly. 5.10. As a result, these grounds are partly allowed in terms of our directions as given above. 6. Ground Nos. 13 & 14:- These grounds are reproduced below for ready reference: Grounds pertaining to the international transaction of provision of corporate guarantee Ground No. 13: Disregarding the commercial and economic circumstances for providing corporate guarantee without charging guarantee fee The Hon'ble DRP / Ld. AO / Ld. TPO erred in not appreciating the commercial and economic circumstances under which ....
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....er vs. DCIT (ITA No. 542/M/2012 for AY2007-08 order dated 23.11.2012), wherein the TPO had applied the rate of 3% but assessee had charged the rate of 0.5% from its AE, and Hon'ble bench found the rate of 0.5% to be reasonable and at ALP. It was further submitted that aforesaid decision has been upheld by the Hon'ble High Court. Our attention was drawn on page no. 169 to 171 of the Paper Book comprising of detailed objections made before the DRP, wherein it was submitted that no cost has been incurred by the assessee in this regard and that assessee has huge own funds. In response to our query, it was submitted by the ld. counsel that no details were available with respect to the cost, the AE (i.e. TKT), would have incurred if it would have taken loan/guarantee from some other independent party. 6.3. On the other hand, it has been submitted by the Ld. CIT (DR) that, there is no doubt on the legal proposition that some amount on account of guarantee commission has to be charged by the assessee for extending corporate guarantee on behalf of its AE, because any transaction of guarantee involves costs, for example, there are some costs necessarily to be incurred for administration a....
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.... and any other independent party. But, no information in this regard was available. Thus taking into account all the facts and circumstances as well as submissions made by both the parties before us, and in the interest of justice, we find that this case should be sent back to the file of the TPO. Therefore, we send this issue back to the file of the TPO for deciding the rate of commission. He will give opportunity to the assessee to submit all the details and documents as may be considered appropriate by it, and shall decide this issue after taking into consideration all the facts and circumstances of this case, and by exercising his suitable powers under the law to get the required information from the concerned agencies, and thereafter he shall take a judicious view of the matter, taking into account all the judgments available including the judgment of the Tribunal as confirmed by the Hon'ble High Court in the case of Everest Kanto (supra). Thus, these grounds are allowed for statistical purposes. 7. Ground No. 15 to 19:- Deal with the disallowance made u/s 14A r.w.s Rule 8D of the Income-tax Rules, 1962, and these are reproduced hereunder for the sake of ready reference: ....
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....nt proceedings it was noticed by the AO that the assessee has calimed exempt income of Rs. 14,69,16,869/- and the assessee had made disallowance of Rs. 2,59,85,604/- for earning exempt income. The AO was of the view that the disallowance was neither proper nor in accordance with rule 8D. It was the claim of the assessee that reasonable has disallowance been made. The AO was not satisfied with the working of the assessee. He worked our total disallowance of Rs. 14,72,27,181/- after giving deduction of Rs. 2,55,40,604/-( i.e. disallowance made in the return), an addition of Rs. 12,16,86,577/- was made by the AO. 7.3. Before the DRP, detailed submissions were made by the assesseecompany and various arguments were taken covering various aspects of the issue involved. But, the DRP confirmed the disallowance without dealing with the specific arguments of the assessee-company. It is noted by us that in support of each and every argument, the assessee-company had placed reliance on various judgments of Tribunal as well as High Courts, but the DRP, without distinguishing or dealing with these judgments, upheld the disallowance made by AO. 7.4. Before us, Ld. Counsel made detailed argu....
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....e ld. counsel in the submissions made before us and before the lower authorities, in support of the propositions argued by him. Thus, after analysing the latest position of law, we find it proper to send this issue back to the file of the AO to re-compute the amount of disallowance after taking into account following directions:- (i) All the investments made in joint ventures, subsidiaries and other companies as strategic investment, should be excluded for computing the average amount of investment for the purpose of Rule 8D. (ii) Those investments should be excluded on which no dividend income has been received during the year. (iii) All those investments should be excluded which have been made in the foreign companies whose dividend income would be taxable as per law, as and when received by the assessee-company. (iv) If the assessee is able to demonstrate that a particular amount borrowed by it has been used directly for the purpose of its business and has not been utilized anywhere for earning tax free income, than interest paid on such borrowing should be excluded from the amount of interest paid to be considered for computation of disallowance u/s 14A. 7.7. ....