TaxTMI 
TaxTMI 
2017 (4) TMI 1193
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of assessments under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for the assessment years 2009-10, 2010-11 and 2011-12 respectively. There is also a cross objection filed by the assessee for the assessment year 2011-12 but that is, for the reasons we will set out now, not maintainable. The scheme of the Act, as we understand it, does not permit filing of cross objection against the order of the Assessing Officer. A cross objection, in appropriate cases, can only be filed to challenge the order passed by the Commissioner (Appeals). This aspect of the matter is clear from the relevant statutory provision, that is section 253(4), which provides as follows: The Assessing Officer or the assessee, as the case may be, on receipt of notice that an appeal against the order of the Commissioner (Appeals), has been preferred under sub-section (1) or sub-section (2) by the other party, may, notwithstanding that he may not have appealed against such order or any part thereof, within thirty days of the receipt of the notice, file a memorandum of cross-objections, verified in the prescribed manner, against any part of the order of the Commi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... under the brand name 'Hyundai'- a brand which is legally owned by the HMC Korea, and that the assessee is to mandatorily, under the agreement with HMC Korea, "use the badge with trademark Hyundai in every vehicle manufactured by it". The TPO was of the view that by doing so "the assessee has significantly contributed to the development of Hyundai brand in Indian market" and the HMC Korea is thus "benefited due to brand promotion activity carried out by the assessee company". However, as noted by the TPO, "the assessee company has not shown any compensation received from the holding company (i.e. legal owner of the Hyundai brand) for developing the brand". The TPO then referred to the decision a special bench of this Tribunal, in the case of LG Electronics Pvt Ltd Vs ACIT [(2013) 22 ITR (Trib) 1 (Del)] which, according to the TPO, has "treated brand building in the local market as an international transaction". It was in this background that the TPO faulted the assessee for not having benchmarked "the international transactions relating to brand development" and proceeded to add, based on his analysis of certain observations in paragraph 1.42 of the OECD's Transfer Pricing Guidelin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g is a difficult task in India as the brand cannot be popularized just because of its global reputation". He went on to add that "had it been a reality that any foreign company can enter into the Indian market just y brand popularity, the Indian market should have been stacked with millions of foreign companies but there are many hints in history to illustrate the failure of prominent foreign companies in establishing their share in Indian market". As for the nature of brand promotion, the TPO, inter alia, stated as follows: Brand Value is the amount that a brand is worth in terms of income, potential income, reputation, prestige, and market value. Brands with a high value are regarded as considerable assets to a company, so that when a company is sold a brand with a high value may be worth more than any other consideration. It is a collection of perceptions in the mind of the consumer. A brand serves to differentiate competing products or services by highlighting what is unique about each. Both physical and emotional factors are triggered that create a relationship between consumers and the product/service. It is true that a customer is ready to pay a premium for the bran....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l". Similar was the fate of the assessee's plea that the assessee and the Hyundai Korea have "not entered into any contract for brand building services" and that "if there is no such arrangement, the holding company cannot be said to have benefited at the expense of the assessee company and, as such, the assessee is not entitled to any compensation". The TPO rejected this argument by observing that the agreement of the assessee with Hyundai Korea "requires the assessee company to use the badge with the trademark of Hyundai in every vehicle manufactured by the assessee company using the technology supplied by the holding company". It was held that there was thus a contract between the assessee company and the Hyundai Korea for use of brand name and logo without any consideration" and I is on the basis of this agreement that it can be easily inferred that there is an international transaction, without any consideration, between the assessee and Hyundai Korea- an associated enterprise. As for the next plea of the assessee, i.e. assessee's economic ownership of Hyundai brand name in India, even if assessee is economic owner of the brand Hyundai in India, it is beyond dispute that benef....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... for charity, the holding company would have not insisted the assessee company to pay a fee as royalty fee and to pay fees for technical knowhow and for technical services. The assessee company has compensated the holding company for the use of technology, knowhow and for the technical services rendered by the holding company. The compensation given is no way less than the compensation that has been paid by an entity to another independent entity for the same cause. It is true that the technology has been developed and licensed by the holding company. But it has been materialized by the efforts taken by the assessee company. The industriousness in understanding the customer requirements, the perfection in manufacture, the sincerity in production, the genuineness in marketing, the intensity in sales all are undertaken by the assessee company which play a major role in brand creation. As pointed out earlier, the perfection and sincerity can be exhibited only in the practical implications. The above statement undoubtedly substantiates that the assessee company has the competence to build its own brand name. But it has been deprived of such activity because of the mandatory requirem....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... would have understood the temperament of the Indian market, tried to bring out their product with maximizing the comfort and minimizing the cost. Those companies survived in Indian market and the others vanished from the market. The foremost step taken by the global companies to meet the expectations of the Indian market was either to have a manufacturing unit in India itself or to nave joint venture with any Indian company. This step is to cut down the production cost and marketing cost. The parent company of the assessee company has taken the step of establishing a manufacturing unit in India by creating a wholly owned subsidiary. The assessee company on its creation as a wholly owned subsidiary started to function from the scratch and penetrated into Indian market by introducing its vehicles which would suit the Indian market with minimum price and maximum comfort. The comfort level has been getting modified further by various versions of the same model and it shows how the assessee company competes to hold the market. After establishing a competitive share in the market, the assessee company started to export the same cars to other developing countries, where the expe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndra (2.53%), averaging to 2.62%, the TPO did accept that "the percentage of AMP expenses as a proportion of net sales is not an unreasonable high figure" and that "the arguments of the assessee that there is no excess over and above a market benchmark average in this financial year is accepted". Yet, the TPO proceeded with this stand as taken in the preceding year and observed that "however, this does not mean that there are no taxable marketing intangibles being brand value being created" since "as discussed earlier, brand building is a continuous activity carried out by HMIL through the instrument of sales". It was once again stated that a significant portion of this benefit accrues to the parent company and the parent company has not compensated for this benefit accruing to them through the efforts of the assessee company. The TPO then further observed as follows: The issue of the advertising expenses not being in excess of comparables has already been discussed above. However, it is considered position of this office that brand building activity is a conscious part of 'sales sub conscious', in that as and when selling and allied activities take place, brand building activit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rvice or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." The emphasis (bold italics) in the above has been supplied by this office. From a literal reading of the language of this part of the section, it is amply clear that the transaction in this instance involving Brand value is: a) A mutual agreement/arrangement between the assessee and its AE for a cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to the AE (being the economic value of brand enhancement). It is because that the provider of IP, knowhow and technology is an AE being its owner and parent that the assessee has come into being and....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... course of business; F. Provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; G. A transaction of business restructuring or reorganization, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date; The Explanation hence provides that transfer pricing provisions shall be applicable on all international transactions irrespective of the fact whether it has any bearing on the profit, income or losses or not. In addition to this, the capital/debt financing has also been included in the definition of international transaction. This amendment has been proposed with retrospective effect from assessment year 2002-03. The assessee has exceeded its authority and brief in misinterpreting the literality of the provisions for reasons best known to it and omitted to mention the transactions on COS issued to its international AEs 13. In comput....
X X X X Extracts X X X X
X X X X Extracts X X X X
....] Using the above exchange rate of INR 47.64113* to 1 USD, Sales of HMC during the F.Y. 2009 - 10 = USD 9885,82,66,000 = INR 470971,95,02,000 approximately. The sales of HMIL during the F.Y. 2009 - 10 = INR 19622,50,00,000. This means that the sales of HM1L as a proportion of HMC = 4.166% NB: In the assessment for the A.Y. 2009 - 10, the assessee had argued for adopting only the domestic sales (in India) in the computation of Brand value enhancement. The assessee has reiterated this argument this year too. The same is not accepted since the Hyundai brand is international and it is contribution of HMIL to this international brand that is being valued. The manufacturing activities of HMIL are aimed at an international market including India. Domestic sales in India alone will not capture the total value of the Hyundai" Brand enhanced by the business activities of HMIL. The proportion of International Sales of HMIL to the International Sales of HMC will be the symmetric, fair and accurate proportion of HMIL's influence and impact on the Brand value. Taking the domestic sales of HMIL alone will be distort the computations prejudicially in favour of the assessee. Increas....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ns. This change is approximately 23.7896% - If this has a positive 35.24% correlation with Brand Value, Change in Brand value of HMC = 35.24% x 23.7896% - 8.38%. This means that if the Market cap of HMC increases by 23.7896%, its Brand value will increase by 8.38% - This means that the increase in Brand value of HMC = 8.38% of the average brand value position of HMC during the F.Y.2009 - 10. This percentage is to be computed on the Brand value as it stands on 01.04.2009. This Brand value as on 01.04.2009 can be computed using the following proxy: "the weighted average employing 3 months weight of the Brand value as on 31.12.2008 - 9 months weight of the Brand value as on 31.12.2009 = 9/12 x 3857 millions + 9/12 x 370 millions = USD 3740 millions. 8.38% x USD 3740 millions = USD 313.41 millions = INR 1493,12,19,897. If the Sales of HMIL and HMC are considered to be the respective drivers of their changes in Brand values, this converts to an increase in Brand value of HMIL of 4.166% x INR INR 1493,12,19,897= 62,20,34,587. This means that the increase in Brand value of HMIL which needs to be compensated for is determined to be INR 62,20,34,587 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... had specifically noted that under Article 20 (Advertising, Marketing and Sales Promotion) of the agreement that the assessee company had with its AE, it was provided that "The licensee agrees to provide and make arrangements for advertising, marketing and sales promotion in the licensed territory for LG Products manufactured by the Licensor and those by the Licensee at their cost" and, on this basis, the special bench concluded as follows: From the above Article it can be seen that it is the assessee who agreed to make arrangements for advertising, marketing and sale promotion in India for the LG products manufactured by it as well as LGK. The cost of such advertising, marketing and sale promotion in India was also agreed to be exclusively borne by the assessee. It is not only the products manufactured by LGI for which the assessee has undertaken to incur AMP expenses but even for the products manufactured by LGK as well. When we view this Article, it is found that although there are sufficient hints but it falls short of decisively saying that there exists an express agreement for incurring of the AMP expenses in India by the assessee for creating marketing intangibles for and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al bench decision. As a matter of fact, if the criterion laid down in LGs case is to be adopted, there cannot at all be any justification for making impugned ALP adjustment on account of brand promotion. 22. It is also important to bear in mind the fact that in the present case, the emphasis is all along on the benefit accruing to the parent company, on account of increased brand valuation, as a result of cars being sold by the assessee company in India, and not as a result of conscious brand promotion by the assessee company. The trigger for the impugned ALP adjustment is not the expense incurred by the assessee company, or any efforts made by the assessee company, for brand building for its principal, but the mere fact of the sale of cars made by the assessee company. No services are thus rendered by the company, unlike, for example, in LGs case where brand building was due to conscious and focused efforts of the Indian assessee company to do so. Yet, the case of the TPO is that the assessee should be compensated for the increase in brand valuation, proportionate to sale of cars by the assessee company vis-à-vis the global sale of cars of that brand, as this increase in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the revenue that such an accretion to brand value is on account of any conscious efforts of the assessee to this end- such as, for example, in the case of advertising, marketing and sales promotion. A lot of emphasis is placed on the fact that if the assessee, instead of using 'Ford' name in the name of each of its brand of cars manufactured, was to use a name owned by the assessee, the advantage of adding value to a brand, as a result of sale of cars manufactured by the assessee, would have gone to the assessee, rather than going to the AE. It is this arrangement, for the benefit of the AE, which is stated to be international transaction. 28. The difference in these two kind of triggers to accretion in brand value is that while AMP is a conscious effort and an activity for achieving that goal, in case of brand building by increased market in India is by sales simplictor is a subliminal exercise and by-product of the economic activity of selling the products in the Indian market. 29. There are two basic aspects of this arrangement being an international transaction- first, what is the true nature, and proximate cause, of this arrangement about the use of foreign brand name-....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ially with a view to protect the intellectual property owned by the foreign AE, and, even in arm's length transaction, fully justified. This business practice is fully justified on the grounds of commercial expediency, which inherently operates de hors the compulsions of intra AE relationship of the AEs- the impact of which is sought to be neutralized by the transfer pricing legislation. 33. Ironically, however, there can never be a comparable controlled price input for this kind of a transaction, because, the moment use of an intangible like this is involved, the entities entering into the transactions will become AEs under section 92A(2)(g) and, being a transaction between the AEs, the transaction will cease to be a valid input. For the sake of completeness, we may mention that, for the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year, if, inter alia, "the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar na....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ional transaction" shall include- (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any type of long-term or shortterm borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he nature of purchase, sale or lease of tangible or intangible property, - in the nature of provision of services, - in the nature of lending or borrowing money, or - in the nature of any other transaction having a bearing on the profits, income, losses or assets of such enterprises 37. An international transaction, in terms of the provisions of Section 92B, shall include a 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, but then this aspect of the matter is not really relevant because it is not a case of allocation of, apportionment of, or contribution to, any costs or expenses in connection with a benefit, service or facility. We need not, therefore, deal with this aspect of the matter in much detail. The same is the situation so far as the transactions in the nature of 'lending or borrowing of money', included in the definition under section 92B, are concerned. There is no dealing in money in the present case, and, th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 39. Undoubtedly, 'provision for services' is included in the definition of 'international transaction' under section 92B, but then accretion in brand value due to use of foreign AEs brand name in the name of assessee's products cannot be treated as service either. It is not that the brand name owned by the AE is used in the name of the assessee's products as a service to the AE; it is, as we have seen in our discussions earlier in this order, included as a "privilege, a marketing compulsion and of direct and substantial benefits to the assessee". A privilege to the assessee cannot be a service by the assessee. 40. In any event, a service has to be conscious activity and it cannot be a subliminal exercise- as is the impact on brand value in this case. A service, by definition, is an act of helping, or doing something on behalf of, someone. A passive exercise cannot be defined as a service. Every benefit accruing to an AE, as a result of dealing with another AE, is not on account of service by the other AE. What I benchmarked is not the accrual of 'benefit' but rendition of 'service'. All benefits are not accounts or services by someone, just as all services do not result in b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion of service; and- second, of benefit accruing from such services. When the first condition is not satisfied, as in the present case, the matter rests there, and there is no question of benchmarking the benefit in isolation. In our considered view, an incidental benefit accruing to an AE, therefore, cannot be benchmarked unless it is result of a specific service by the assessee. 43. That takes us to last component of definition of 'international transaction' under section 92 B. This refers to a transaction in the nature of any other transaction having a bearing on the profits, income, losses or assets of such enterprises. An accretion in the brand valuation of a brand owned by the AE does not result in profit, losses, income or assets of the assessee company, and it cannot, therefore, result in an international transaction qua the assessee. Unless the transaction is such that it affects profits, losses, income or assets of both the enterprises, it cannot be an international transaction between these two enterprises. If the assets of one of the enterprises are increased unilaterally, without any active contribution thereto by the other enterprise, such an impact on assets canno....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and figures with respect to the assessment year 2009-10 and the appeal filed by the assessee. 48. The relevant material facts, in brief, are as follows. The assessee has taken certain loans from two Mauritius based entities, namely HSBC (Mauritius) Ltd (HSBC-M, in short) and Standard Chartered Bank (Mauritius) Limited (SCB-M, in short). It is in respect of these loans that the assessee paid interest said to be aggregating to Rs. 37,33,72,296. The assessee was of the view that in the light of the provisions of article 11 of India Mauritius DTAA, the interest on these loans is not taxable in India. Accordingly, no tax was deducted at source. However, the Assessing Officer did not agree with the stand of the assessee. He took note of the fact that the related agreements were signed in India, at local offices of these bank's affiliates, and the related discussions also took place there, the interest income was taxable in India. The AO further observed that "since the entire transaction has been carried out in Chennai, exchanging copies of agreement through the fax facility, it can be reasonably concluded that overseas bank transacted though the permanent establishment in Chennai an....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in appeal before us. 50. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 51. We consider it appropriate to first set out the relevant provisions of the India Mauritius Double Taxation Avoidance Agreement [(1984) 146 ITR (St) 214], as they stood at the material point of time, which are as follows: ARTICLE 5- PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of the enterprise is wholly or partly carried on. 2. The term "permanent establishment" shall include- (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a warehouse, in relation to a person providing storage facilities for other; (g) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (h) a firm, plantation or other place where agricultural, forestry, plantation or related activities are carried on; (i) a building site or construction or assembly....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y or almost exclusively on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph. 6. The fact that a company, which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise) shall not, of itself, constitute either company a permanent establishment of the other. ARTICLE 7- BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph (3) of this article, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Cont....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Contracting State to the extent approved by the Government of that State if it is derived and beneficially owned by any person (other than a person referred to in paragraph 3) who is a resident of the other Contracting State provided that the transaction giving rise to the debt-claim has been approved in this regard by the Government of the first mentioned Contracting State. 5. The term "interest" as used in this Article means income from debt-claims of every kind whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and, in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. 6. The provisions of paragraphs 1, 2, 3 and 4 shall not apply if the recipient of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by that permanent establishment, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment is situated. 8. Where, by reason of a special relationship between the payer and the recipient or between both of them and some other person, the amount of the interest paid, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the recipient in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention. 52. We find that there is no dispute about the fact that both the lender banks belong to MNEs which have global presence all over the world and that the lending was done by the Mauritius based entities, which are tax residents in Mauritius, and that the funds lent by them belonged to the respective entities. The case of the revenue i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ase that Standard Chartered Bank Chennai branch was acting exclusively, or almost exclusively, for SCB- Mauritius, or that SCB-Chennai has, and habitually exercises authority to conclude contracts on behalf of SCBN-M. The sweeping observations made by the authorities below are devoid of any legally sustainable merits. It is not the case of the revenue that the existence of the PE is because of any other specific deeming fiction or under any specific part of the definition which justifies the conclusion that mere presence of these affiliates in India, and the fact of some role being played by these affiliates, results in creation of PE in India and the income being attributed to such PE. In any event, having perused the definition of PE as reproduced earlier in this order, we find that if at all the HSBC-M and SCB-M can be said to have PE in India, it can only be under the basic definition under article 5(1), i.e. what is popularly known as fixed place PE. In terms of the provisions of art. 5(1), i.e., the basic rule a PE is said to exist in the other Contracting State when an enterprise of one of the Contracting States has a fixed place of business in that other Contracting State, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ace as a link between the place of business and a specific geographical point. It has to have certain degree of permanence. It is emphasized that to constitute a 'fixed place of business', the foreign enterprise must have at its disposal certain premises or part thereof. Philip Baker, in his commentary on Double Taxation Conventions (Third Edition), states that the fixed place is very much that of a physical location, i.e., one must be able to pinpoint to a physical location at the disposal of the enterprise through which the business is carried on. On the other hand, possession of a mailing address in a State without an office, telephone listing or bank account-has been held not to constitute a PE. Further, the fixed place of business need not be owned or leased by the enterprise provided it is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purpose of project undertaken on behalf of the owner of the premises." (Emphasis supplied by us now). 57. It is thus necessary that, in order to give a positive finding about existence of the PE, not only that there should be a physical locati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e. It is also not the case of the revenue that the three Mauritian companies, to which interest payments have been made, had any right to use the offices of its affiliates in Chennai. Therefore, even if it is assumed that there was indeed a place at which the Mauritian entities carried on any work, it cannot be treated as PE of these Mauritian companies, under the basic PE clause under article 5(1), unless it is demonstrated that these entities had any right to use these facilities at Chennai. As regards the functionality tests, i.e test regarding projection of the foreign enterprise, there is nothing to demonstrate that there was any projection of these Mauritian entities in India. The three tests, i.e. physical criterion i.e., existence of physical location, subjective criterion i.e., right to use that place, and functionality criterion i.e., carrying out of business through that place must be satisfied so as to result in creation of PE under the basic PE clause but none of these tests are satisfied on the facts of the present case. As for the onus to demonstrate the satisfaction of these conditions precedents for existence of PE, as is the settled legal position, this onus lies ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ant to bear in mind that a non-resident company having a PE in India, by itself, does not lead to taxability in India; there must be some profit attributable to such a PE which alone could be taxed in India because of the existence of the PE. When the PE carries on an activity which does not serve overall purpose of the foreign enterprise, or which does not contribute to profits of the enterprise, the existence of such a PE is wholly academic and does not have any tax implications in the source jurisdiction. To that limited extent, there is an inherent contradiction in the OECD approach inasmuch as on one hand PE provides threshold limits for triggering taxation in the source country, on the other hand the existence of the PE is decided de hors the activity in the absence of which taxability of profits in the source country cannot be triggered at all. On the face of it, when a PE is not engaged in a critical activity having some contribution to overall profits of the enterprise or a revenue generating activity, the exercise to ascertain whether or not a PE is in existence is a meaningless ritual and an empty formality. 61. Once we find that the provisions of article 5 and articl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....han Mauritian entities in question. In terms of Article 11(3), interest arising in a Contracting State (i.e. India, in this case) shall be exempt from tax in that State (i.e. India) provided it is derived and beneficially owned by, inter alia, by any bank carrying on a bona fide banking business which is a resident of the other Contracting State (i.e. Mauritius). There is no dispute that Mauritian entities in question were carrying out banking business in Mauritius, and there is nothing on record to show, or even indicate, that the beneficial owner of interest income were not these Mauritian entities. In addition to this undisputed position, neither a case has been made for existence of any PE nor for business having been carried out through such a PE. All that is established is the presence of some of the affiliates of the MNE group to which the recipient of interest income belongs, and some peripheral role played by such affiliates, but these facts donot establish, or even indicate, existence of the PE. The protection of article 11(1) cannot, therefore, be declined on the facts of the present case. We are, therefore, of the considered view that the income embedded in these intere....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... following the same, we uphold the grievance of the assessee. The assessee gets the relief accordingly. 69. Ground no. 3.2 is thus allowed 70. In ground no. 3.3, the assessee is aggrieved of the disallowance of Rs. 49,63,29,426. 71. So far as this grievance of the assessee is concerned, the relevant material facts are like this. During the course of assessment proceedings, the Assessing Officer noted that the assessee has worked out an unrealized loss of Rs. 49,63,29,426 on purchase of assets in India with the ECB loan of USD 100 million from Export Import Bank of Korea. It was claim of the assessee that section 43A applied only in the context of assets acquired outside India, this loss may be allowed as deduction under section 37(1). It was also pointed out that in the assessment years 2008-09, 2010-11 and 2011-12, the income offered to tax, on the same account, amounting to Rs. 16.01 crores, Rs. 25.69 crores and Rs. 78.79 crores respectively has been accepted. The Assessing Officer did not agree. He relied upon Hon'ble Supreme Court's judgment in the case of CIT Vs Woodward Governor India Pvt Ltd [(2009) 312 TR 254 (SC)] and held that the loss due to fall in value of for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssets 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-11 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 the closing rate should be recognized in the profit & loss account for the reporting period. In the same vain, CBDT notification S.O. 892(E) dated 31-03-2015 referred to also inter alia deals with recognition of exchange differences. The notific....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the moneys borrowed by him from any person, directly or indirectly, 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 andwhich 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 (1) of section 43; or (ii) the amount of expenditure of a capital nature referred to in clause (iv) of subsection (1) of section 35; or (iii) the amount of expenditure of a capital nature referred to in section 35A; or (iv) the amount of expenditure of a capital nature referred to in clause (ix) of subsection (1) of section 36; or (v) the cost of acquisition of a capital asset (not being a capital asset referred to in section 50) for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acqui....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 overriding provisions 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 manner of repayment of loan can affect the cost of the assets acquired by the assessee. What is the actual cost must depend on the amount paid by the assessee to acquire the asset. The amount may have been borrowed by the assessee, but even if the assessee did not repay the loan it will not alter the cost of the as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t 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-11, 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 reduce revenue losses of the assessee. The impugned fluctuation loss therefore has a direct nexus to the saving in interest costs without bringing any new capital asset into existence. Thus, the business exigencies are implicit as well explicit in the action of the Assessee. The argument that the act of conv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ccount 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 the absence of any other provision of the Income Tax Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the Assessee in accordance with generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f appeal but remit the matter to the file of the Assessing Officer for fresh adjudication in the light of above observations. Ordered, accordingly. 82. Additional ground of appeal is thus allowed for statistical purposes in the terms indicated above. 83. The appeal filed by the assessee for the assessment year 2009-10 is thus partly allowed in the terms indicated above. 84. We now turn to the appeal filed by the Assessing Officer for the assessment year 2009-10. 85. Ground no. 1 is general in nature and does not call for any adjudication. 86. In ground no. 2, the Assessing Officer has raised the following grievance: The DRP erred in deleting the disallowance of provision for warranty of Rs. 111,75,06,775/. The DRP failed to appreciate the fact that the actual warranty expenses incurred by the assessee are far less than the provision created and the excess provisions are written back at the end of the warranty period. The assessee arrived at the figure of warranty provision by multiplying the provision rate per car which will lead to an absurd inference that each car manufactured by the assessee is liable to be defective. Further this does not reflect the actual wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the same. The genuineness of the guarantee commission is not in dispute either. We, therefore, uphold the relief granted by the DRP, by deleting the disallowance of Rs. 1,37,37,537, and decline to interfere in the matter. 91. Ground no. 3 is thus dismissed. 92. In ground no. 4, the Assessing Officer has raised the following grievance: The DRP erred in deleting the disallowance of depreciation claimed on assets used for office purpose. These assets were actually installed in the workstations/car service centers attached to the Regional offices from where service income is generated. Though factory licenses have been obtained in respect of the said assets, they are not used in factories involved in manufacturing activities. They have been installed only in the workstations/car service centers attached to the Regional offices which are involved in generating service income (as stated by the assessee company itself). These assets are not connected to manufacturing activity and hence are not eligible for additional depreciation. 93. On this issue also, learned representatives fairly agree that the same is covered, in favour of the assessee, by a decision of this Tribunal i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or this assessment year. Respectfully following the view so taken we uphold the plea of the assessee and delete the impugned disallowance. 106. Ground no. 3.2 is thus allowed 107. In ground no. 3.3, the assessee has raised a grievance against the Assessing Officer's making a disallowance of Rs. 3,30,332 of depreciation on account of reduction of capital subsidy granted by SIPCOT form the cost of assets. 108. Learned representatives agree that identical issue, in respect of the assessment year 2007-08, was remitted to the file of the DRP for fresh adjudication on the nature of the subsidy. Whatever are the findings of the DRP for the assessment year 2007-08 will be equally valid for this assessment year as well. We, therefore, remit the matter to the file of the Assessing Officer for examining the matter afresh in the light of those findings of the DRP. While so deciding the matter, the Assessing Officer will give a due opportunity of hearing to the assessee. 109. Ground no. 3.4 is thus allowed for statistical purposes. 110. In ground no. 3.4, the assessee is aggrieved of the Assessing Officer's making a disallowance of Rs. 1,99,56,723 under section 14A of the Act ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessment year 2009-10, earlier in this order, we have confirmed the stand of the DRP on this point. We see no reasons to take any other view of the matter for this assessment year. Respectfully following our view for the assessment year 2009-10, and for the detailed reasons set out therein, we approve the stand of the DRP and decline to interfere in the matter. 125. Ground no. 4 is thus dismissed. 126. The appeal filed by the Assessing Officer for the assessment year 2010-11 is thus dismissed. 127. We will now take up the assessee's appeal for the assessment year 2011-12 128. Ground nos. 1 and 2 are general and donot call for any specific adjudication. 129. The first issue raised in this appeal, vide ground no. 3 to 8, is not pressed and is dismissed as such. 130. In the second issue raised in this appeal, vide ground nos. 8 to 26, the assessee is aggrieved of the Assessing Officer making an addition of Rs. 253.44 crores in respect of ALP adjustment for notional receipt on account of brand promotion fees. For the detailed reasons set out earlier in this order, and subject to the directions set out therein, we have deleted this adjustment. The assessee must su....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The assessee is aggrieved and is in appeal before us. 137. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 138. We find that this issue is covered against the assessee by direct decision, on this point, by Hon'ble Uttarakhand High Court, in the case of CIT Vs Kisan Sahkari Chini Mills Ltd [(2009) 318 ITR 218 (Uttarakhand)]. No direct decisions, in favour of the assessee and on this point, have been brought to our notice. In this view of the matter, we uphold the stand of the Assessing Officer and decline to interfere in the matter. 139. Ground nos. 32 to 34 are thus dismissed. 140. The assessee has raised an additional ground of appeal that "subsidy received from the Government of Tamilnadu in the form of refund of output VAT is a capital receipt not chargeable to tax" and to that extent the stand of the authorities below is incorrect and needs to be vacated. 141. While there cannot indeed be any objection to the appellant raising any new issue before the Tribunal, in view of the decision of Hon'ble Supreme Court in the case of NTPC Ltd Vs CIT [(1998) 229 ITR 383....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uty credit based on incremental exports which should be substantially higher than the general annual export target that is fixed. The incentive on focus market scheme is to offset high freight cost and other externalities to select international market with a view to enhance India's export competitiveness in those countries. It is pertinent to note that the assessee will be entitled to such benefit only after verification of the claim of the assessee by relevant governmental authorities and issuance of licence by such governmental authorities. Therefore, the facts of the assessee's case are similar to the facts decided by the Hon'ble Apex Court cited supra. Therefore, respectfully following the decision of Hon'ble Supreme Court, we hereby hold that the notional income computed by the assessee cannot be treated as taxable income of the assessee during the relevant previous year. However, the same shall be taxed in the previous year in which the assessee has received the licences and derived such income. Thus, this issue is also decided in favour of the assessee. 150. The DRP has simply followed the above stand of the Tribunal, and rightly so. We see no reasons to take any other v....