TaxTMI 
TaxTMI 
2017 (1) TMI 1086
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.... the banks/AEs for the loans borrowed by the AEs without charge any fee and, having regard to business and economic circumstances, the provision of such guarantee was considered to be at arm's length. The TPO however, held that if there is an explicit guarantee then, under OECD guidelines, interest can be imputed. The main argument of the TPO in imputing an arm's length fee is that, by obtaining guarantee from taxpayer, the AE's credit rating almost equals to that of the taxpayer and thus there is benefit to the AE in terms of interest rate as well. Thus at arm's length, compensation is required to be imputed. Accordingly, the TPO has imputed a guarantee fee of 2% adopting the commission charged by Banks to similar entities. 3.1 The assessee aggrieved this treatment by the TPO, went before DRP and submitted that though the guarantee transaction is treated as an international transaction in view of the amended law under Finance Act 2012, it does not qualify as an intra-group service, hence no fee is required to be charged It was claimed that the corporate guarantee provided by the assessee on behalf of its AE is in the nature of shareholder activity and does not warrant a fee to ....
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.... rates is not admissible given the insufficiency of details to compute the benefit in terms of reduction in interest rates to the AE by virtue of the guarantee given by the taxpayer. The assessee has not done any separate TP study for the guarantee commission despite the matter being in litigation for several years. Without taking the first and mandatory step the assessee is merely objecting to the adjustment made by the TPO. The DRP observed that the action of the TPO is justified and the claim of the assessee company is not acceptable. Consequently, the AO passed the order as per the direction of the DRP. Against this, the assessee is in appeal before us. 4. We have heard both the parties and perused the material on record. Admittedly similar issue was considered by this Tribunal in the case of Redington (India) Ltd., Vs. ACIT reported in (2015) 41 ITR (Trib) 0646(Chennai) wherein held that: "5. We have considered the rival submissions on either side and also perused the material available on record. We have carefully gone through the decision of the Delhi Bench of this Tribunal in Bharti Airtel Ltd. [2014] 2 ITR (Trib)-OL 475 (Delhi). This Tribunal found that the corporate....
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....racting the third party made agencies directly by TVSM for advertising in Indonesia directly. The TPO observed that no such expenditure was incurred by the assessee in any other country even though the export functions/other functions of the assessee as well as independent enterprises placed in other countries and the AE are same. The assessee had submitted the party wise breakup of the advertisement and sales promotion expenditure incurred in Indonesia vide letter dater dated 16.12.2014 wherein the total amount of Rs. 10,93,77,742/- is directly related to advertisement and sales promotion expenditure incurred for the Indonesian AE namely PT TVS Motor company Indonesia. TPO observed that in this background, any excess expenditure incurred towards market advertisement and sales promotion should be reimbursed by AE along with markup, however the same has not been done. TPO asked the assessee to explain vide letter's dated 20.11.2014 and 13.01.2015 as to why the expenditure incurred for Brand promotion should not be considered as an international transaction and was also required to state why the said amount has not been reimbursed by AE and also to clarify whey the ALP has not to be ....
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....ent in the case of Sony Ericsson Mobile communications India Pvt. Ltd. & Ors. Vs. CIT (374 ITR 0118) wherein held that development of market for a 'Brand' is the responsibility of the owner of the brand and if the Ae has incurred any expenses for any such activities, then it should be compensated bythe owner of the brand. No independent party would be willing to undertake such expenses for a brand not owned by it. Hence, ld.A.R submitted that the assessee in the capacity of the economic owner of the brand has incurred brand building expenses for building a strong foothold in the Indonesian market. Further, the ld.A.R submitted that the arrangement of TVSM with non-AEs cannot be compared with the brand promotion expenses incurred by the company in Indonesia as the business model and the market catered to in these two arrangements are completely different. In non-AE cases, the third party dealers' incurred the advertisement expenses and the assessee compensate them for the same. In Indonesia, to gain access to this huge market, TVSM has set up its only manufacturing facility outside India in Indonesia through its subsidiary PT TVS. Therefore, to gain market share, the assessee has to....
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....diture incurred by the PT TVS Indonesia is less than what the other independent licensed manufacturer would have incurred in Indonesia, which implies that the expenditures which PT TVS Indonesia ought to have incurred towards AMP which was met by TVSM India. In other words, TVSM India is providing services to develop TVS brand in Indonesia and the benefit of that development of brand would be fetched by PT TVS Indonesia. Further, TVS product is sold in country like Bangladesh, Hong Kong, Japan, Nepal, Singapore and Sri Lanka. It means that due to the presence of AE, PT TVS Indonesia, the assessee company incurred huge amount as AMP expenditure which clearly indicates that TVSM India is a service provider in respect of AMP expenditure incurred in Indonesia. Further, not only TP adjustment to be made towards AMP expenditure, it has to be mark up as per independent search conducted by the TPO. Thus, the legal and economic ownership of the brand of TVS in Indonesia was exploited by AE, PT TVS Indonesia and risk associated with marketing distribution was to be borne by PT TVS Indonesia. The AMP expenditure to be borne by PT TVS Indonesia only and the TVSM India is not connected with the....
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....ere to invest and how much to invest necessarily involves considerable time, expertise and consequently the decision-making has to be at the highest levels. 9.2 According to DRP, the mandate of section 14A requires the assessee to maintain proper books of account in regard to the investments made from which the income can arise, which is tax-exempt and such books of accounts be produced before the Assessing Officer to ascertain the expenditure incurred in relation to income not includible in the total income of the assessee. In the instant case, the assessee has not maintained any separate accounts in this regard. This proves that the, assessee's claim of not incurring any expenditure in relation to the tax free income to be earned from its investments is not supported by doêumentary evidence as mandated in section 14A(2)/(3) of the Act. In other words, under the given facts and circumstances of the case, the assessee has not discbarg4 the onus cast upon it. 9.3 In the absence of accounts maintained by the assessee in regard to its investments, the Assessing Officer cannot be expected to examine the claim of the assessee having regard to its accounts. However, since the....
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.... income which is exempt shall be aggregate of expenditure attributable to tax exempted income, and where there is common expenditure, that cannot be attributable to either tax exempt income or taxable income. He also submitted that interest on borrowings which is available for specific purpose cannot be considered for disallowance u/s.14A r.w.Rule 8D. In our opinion, the Tribunal considered this issue in the case of Farida Shoes Pvt. Ltd. in ITA Nos.2102 & 2103/Mds./15 for assessment years 2011-12 & 2012-12 vide order dated 08.01.16 wherein held that:- "5.1 Coming to the merits of the issue regarding disallowance u/s.14A r.w. Rule 8D of the I.T.Rules, in our opinion, similar issue was considered by this Tribunal in the case of ACIT v. M/s. Best & Crompton Engineering Ltd. in ITA No.1603/Mds/2012 dated 16.7.2013, wherein it was observed that interest on borrowings used for the business purpose cannot be considered for the purpose of computing disallowance u/s.14A r.w. Rule 8D(2)(ii) of the IT Rules and the relevant portion is reproduced as below: "10. Heard both sides. Perused the orders of lower authorities and the decision of Calcutta Bench of this Tribunal relie....
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.... limb of rule 80 attributing the interest payments to the investments will not be applicable. Accordingly, interest on bank loan and term loan amounting to P 67,92,000/- and P 3,82,11,000/- respectively are to be excluded from the calculation to determine the disallowance under rule 8D(2)(ii). The AO is, therefore, directed to take into account only the remaining interest on other accounts amounting to P 1,29,43,000/- for computing the proportionate disallowance under rule 80(2)(ii)." 11. On going through the order of the Commissioner of Income Tax (Appeals), we find that the Commissioner of Income Tax (Appeals) excluded the interest on bank loan and term loans from the calculation of disallowance under Rule 8D(2)(ii) as the assessee has utilized the bank loan and term loan for the purpose of purchase of machineries and for expansion of projects and these loans were specifically sanctioned for specific project and such loans were also used for the purpose for which they were sanctioned. In the circumstances, we find that the Commissioner of Income Tax (Appeals) has rightly excluded such interest from the purview of computation of disallowance under Rule 8D(2)(ii). ....
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.... of following simple example: In the case of A & Co Ltd, total interest expenditure is P 1,00,000, out of which interest expenditure in respect of acquiring shares from which tax free dividend earned is P 10,000. Out of the balance P 90,000, the assessee has paid interest of P80,000 for factory building construction which clearly relates to the taxable income. The interest expenditure which is "not directly attributable to any particular receipt or income" is thus only P 10,000. However, in terms of the formula in rule 8D (2)(ii), allocation of interest which is not directly attributable to any particular income or receipt will be for P 90,000 because, as per formula the value of A (i.e. such interest expenses to be allocated between tax exempt and taxable income) will be " A = amount of expenditure by way of interest other than the amount of interest included in clause (i) [ i.e. direct interest expenses for tax exempt income] incurred during the previous year". Let us say the assets relating to taxable income and tax exempt income are in the ratio of 4:1. In such a case, the interest disallowable under rule 8 D(2)(ii) will be P 18,000 whereas entire common interest expenditure wi....
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.... will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.)............... The justification that has been offered in support of the rationale for r. 8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Supreme Court it is not possible for this Court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no 'madness in the method'. 16. Once the revenue authorities have taken a particular stand about the applicability of formula set out in rule 8 D(2)(ii), and based on such a stand constitutional validity is upheld by Hon'ble High Court, it cannot be open to revenue authorities to take any other stand on the issue with regard to the actual implementation of the formula in the case of any assessee. Viewed thus, the correct application of the formula set out in rule 8D(2)(ii) is that, as has been noted by Hon'ble Bombay High Court in the case of Godrej and Boyce (supra), "amount of expenditure b....
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....ule-8D. For this proposition we rely on the judgments of Tribunal in the case of Sun TV Networks in ITA No.1340 & 1341/Mds./15 & 1578 to 1579/Mds/15 wherein held that:- "12. We have considered the rival submissions on either side and perused the relevant material available on record. The main contention of the assessee is that the available share capital including reserves and surplus was P2385.7 Crores as on 31.03.2010. The available share capital is P1970.4 Crores and Reserves and surplus is P 21,886.7 Crores. The investments made in mutual funds including subsidiary companies are only P 541.11 Crores. Therefore, it cannot be said that the assessee has diverted the borrowed funds for making any investment either in the sister concerns or in the mutual funds. When the assessee has sufficient share capital, reserves and surplus, this Tribunal is of the considered opinion that there cannot be any disallowance towards the interest paid on the borrowed funds under Section 14A of the Act. For the purpose of disallowing interest income under Section 14A read with Rule 8D, there should be nexus between the borrowed funds and investment made by the assessee in the share capital a....
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....nsideration. Hence, this ground is allowed for statistical purposes." 10.1 Accordingly, this issue is remitted back to the file of AO for fresh consideration in similar line as decided by Co-ordinate Bench in the orders cited supra. 11. The next ground is with regard to charging of notional royalty to tax. 12. The facts of the issue are that The TPO has given a show cause in which the assessee was asked to justify the reason for non-receipt of royalty during the financial year 2010-11, whereas during F.Y2009-10,2% royalty was charged on ex-factory sale. In response, the assessee submitted that the licensee PT TVS Indonesia was continuously incurring losses and the assessee through an amendment to the agreement agreed that royalty will be waived till such time the Licensee achieves a monthly sales of 10,000 numbers of two wheelers (i.e. deferment). According to DRP, the reasons given by the assessee are not sufficient and nothing new has been submitted before the DRP. Hence, the DRP uphold the decision of the TPO. Against this, the assessee is in appeal before us. 13. We have heard both the parties and perused the material on record. In this case, assessee following the ....
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....er dated 27.04.2016 wherein held as follows:- "27. We have considered rival submissions and perused the materials on record. With regard to the issue as to whether the TDS has to be deducted or not when the commission payment made to the overseas agents, the isuse is squarely covered in favour of the assessee by the decision of the Hon'ble jurisdictional High Court in the case of CIT Vs. Faizan Shoes Pvt Ltd. [2014} 367 ITR 155, wherein by dismissing the appeal of the Revenue, the Hon'ble High Court has held as under:-- Held, dismissing the appeal, that on a reading of section 9(1)(vii) , commission paid by the assessee to the non-resident agents would not come under the term "fees for technical services". For procuring orders for leather business from overseas buyers, wholesalers or retailers, as the case may be, the non-resident agent was paid 2.5 per cent. commission on free on board basis. This was a commission simpliciter. What was the nature of technical service that the nonresident agents had provided abroad to the assessee was not clear from the order of the Assessing Officer. The opening of letters of credit for the purpose of completing the export obligation was an ....
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....t' settlement is a transparent accounting practice. In terms of this Instruction even actual losses i.e. hedge loss are allowable as nonspeculative only if the transaction quantity under clause (d) of the proviso to section 43(5). 'Marked to Market' losses claimed as notional losses prior to settlement has to be treated as speculative loss in terms of sec.43(5) of the Act. Hence, the DRP treated it as speculative loss in terms of sec.43(5) of the act. Against this, the assessee is in appeal before us. 18. We have heard both the parties and perused the material on record. We have carefully gone through the order of lower authorities. Ld.A.R submitted that the issue is squarely covered by the order of the Tribunal in the case of Cotton Blossom India Pvt Ltd Vs. ACIT in ITA No.2032/Mds./2012 vide order dated 21.02.2013 for assessment year 2006-07 and the judgement of Supreme court in the case of CIT Vs.Woodward Governor India Pvt Ltd. in 312 ITR 245(SC). In our opinion, the above judgements have no application to the facts of the case. Since the transaction is relating to acquisition of fixed assets and the profit or loss to be treated in capital field and it cannot be in Revenue i....
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....ctually benefited the Assessee in terms of saving of interest costs. We also notice that there is no dispute on the fact that the acquisition of capital assets / expansion of projects etc. from the term loans taken are already complete and the assets so acquired have been put to use. As a consequence, the loss occasioned from foreign currency loans so converted is a post facto event subsequent to capital assets having been put to use. We simultaneously notice that there is no adverse finding from the Revenue about the correctness or completeness of accounts of assessee on the touchstone of section 145 of the Act. In other words, the profits/gains from the business have been admittedly computed in accordance with generally accepted accounting practices and guidelines notified. 10.2 The assessee has inter alia applied AS-Il dealing with effects of the changes in the exchange rate to record the losses incurred owing to fluctuation in the foreign exchange. AS-11 enjoins reporting of monetary items denominated foreign currency using the closing rate at the end of the accounting year. It also requires that any difference, loss or gain, arising from such conversion of the liability at ....
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.... as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment- (a) towards the whole or a part of the cost of the asset; or (b) towards repm'menl of the whole or a part of the moneys borrowed by hun from am' person, direct/v or indirect/v. in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any. the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment. irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from-- (i) the actual cost of the asset as defined in clause (I) of section 43; or (ii) the amount of expenditure of a capital nature referred to in clause (iv) of subsection (I) of section 35: or (iii) the amo,mt of expenditure of a capital nature re/rred to in section 35A; or (iv) the amount of expenditure a/a capital nature referred to in clause (ix) ofsubsection (I) of section 36: or (v) the cost of acquisitio....
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....ssee, reduced by that portion of the costs as has been met directly or indirectly by any other person or authority. Several Explanations have been appended to S. 43(1). However, the section nowhere specifies that any gain or loss on foreign currency loan acquired for purchase of indigenous assets will have to be reduced or added to the costs of the assets. Thus, viewed from this perspective also, such increased liability cannot be bracketed with cost of acquisition of capital assets save and except in terms of overruthng provismns of S. 43A of the Act. 10.6 We also simultaneously note here that the Hon'ble Supreme Court in the & case of CIT vs. Tata Iron and Steel Co. Ltd. (1998) 22 ITR 285 held that cost of an asset and cost of raising money for purchase of asset are two different and independent transactions. Thus, events subsequent to acquisition of assets cannot change price paid for it. Therefore, fluctuations in foreign exchange rate while repaying installments of foreign loan raised to acquire asset cannot alter actual cost of assets. The relevant operative para is reproduced hereunder:- "Coming to the question raised, we find it difficult to follow how the manne....
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....inforces that utilization of loan for capital account or revenue account purpose has nothing to do with allowablity of corresponding interest expenditure. A proviso inserted thereto by Finance Act, 2003, also prohibits claim of interest expenditure in revenue account only upto the date on which capital asset is put to use. Once the capital asset is put to use, the interest expenditure on money borrowed for acquisition of capital asset is also treated as revenue expenditure. As also noted, S. 43A specifically and categorically calls for adjustments in cost of assets for loss or gain arising out of foreign currency fluctuations in respect of funds borrowed in foreign currency for acquisition of foreign assets. However, the same rationale of a deeming provision of S. 43A cannot be applied to loss or gain arising from foreign currency loss utilized for purchase of indigenous assets. Needless to say, impugned currency fluctuation loss has emanated from foreign currency loans. Besides AS-I 1, the claim of exchange fluctuation loss as revenue account is also founded on the argument that the aforesaid action was taken to save interest costs and consequently to augment the profitability or ....
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....or as a part of circulating capital embargo in business. However, if the foreign currency is held as a capital asset, the loss should be capital in nature. The aforesaid principle of law is required to be applied to the facts of case to determine whether the foreign currency is held by the assessee on revenue account or as a part of circulating capital. In the present case, fluctuation loss inflicted upon the assessee bears no nexus or relation to the acquisition to the assets. The action of the assessee is tied up to its underlying objective i.e. saving in interest costs, hedging its revenue receipts etc. which are undoubtedly on revenue account. Thus, the loss generated in impugned action bears the character of revenue expenditure. Similarly, decision of the Apex Court in the case of Tata Iron and Steel co. (supra) also weighs in favour of the assessee. We also note that reliance placed by the CIT(A) on Elecon Engineering Co. Ltd. (supra) is misplaced. The decision concerns applicability of S. 43A in the facts of that case and thus clearly distinguishable. 11. For the aforesaid reasons, in the absence of applicability of section 43A of the Act to the facts of the case and in t....
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.... of the benefit in the subsequent assessment year. The Tribunal, in our view, has rightly held that additional depreciation allowed under Section 32(i) (iia) of the Act is a onetime benefit to encourage industrialization, and the provisions related to it have to be construed reasonably, liberally and purposively, to make the provision meaningful while granting additional allowance. We are in full agreement with such observations made by the Tribunal. In view of the aforesaid, we do not find that any interference is called for with the order of the Tribunal, or that any question of law arises in this appeal for determination by this Court." Respectfully following the judgement of Karnataka High Court cited supra, this ground raised by the assessee is allowed. 24. No other grounds are argued before us. Accordingly, other grounds raised by the assessee in its appeal are not considered for adjudication and to be treated as dismissed. 25. In the result, the appeal of assessee is partly allowed for statistical purposes. Next, let us take up Revenue 's appeal in ITA No.1183/Mds./2016 as under : 26. On perusing the appeal, we find that the AO had filed the appeal with delay of ....