TaxTMI 
TaxTMI 
TaxTMI 
2017 (5) TMI 477
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....h the AE were referred to the Transfer Pricing Officer [TPO] u/s. 92CA(1) who has proposed adjustments in respect of assessee's international transactions for the year as under: Transaction Adjustment (in Rs.) Interest received on loans 2,39,69,300 Corporate Guarantee 90,19,30,000 Interest of receivables 1,45,21,83,968 Total 2,37,80,83,268 2.1. Assessee had filed certain objections against the TP order before the AO. However, AO finalized the draft order by incorporating the adjustments proposed. Assessee then preferred objections before the DRP on 30-04-2015. DRP vide their order dt. 31-12-2015 has given directions in which only one of the objections raised by assessee with reference to bank guarantee adjustment was accepted partly. Pursuant to the directions of DRP, the AO passed a final order with total addition of Rs. 1,71,51,64,718/- summarized as below. S.No. TP Additions as proposed in the assessment order Amount (Rs) 1. Adjustment u/s. 92CA of the IT Act, 1961 171,51,64,718 a) Interest received on loans 2,39,69,300 b) Corporate Guarantee fee 23,90,11,450 c) Interest on Receivables 145,21,83,968 2. Dis....
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....e based company i.e. the loan was consumed/received in Singapore and also the loan was in foreign currency and repaid in foreign currency. Hence, the ALP should be determined using Singapore PLR. It was the contention that TPO/DRP, incorrectly equated the transaction of providing loan to subsidiary situated outside India with bank rates prevailing in India without appreciating the fact that loans are made outside India and same should be compared with foreign market prime lending rates. Hence, the comparison is not in accordance with the provisions of the Act and the Rules. Assessee relied on the following case law: i. CIT Vs. Tata Autocomp Systems Ltd., Bombay High Court (ITA No.1320 of 2012) ii. Siva Industries & Holdings Ltd. Vs. ACIT (ITA No. 2148/MDS/2010) iii. Marico Ltd. Vs. ACIT [2016 70 taxmann.com 214 (Mumbai Trib.) / (ITA No. 8713 & 8858/Mum/2011) iv. CIT Vs. Cotton Naturals India Pvt. Ltd., Hon'ble Delhi High Court ((2015) 276 CTR 445 (Del) v. Everest Kanto Cylinder Ltd. Vs. ACIT [2015] 56 taxmann.com 361 (Mumbai-Trib.) / (ITA No. 1386/Mum/2014) vi. Transport Corporation of India Vs. ACIT, ITA No. 117/Hyd/ 2016 4.3. With respect the DRP's observation that....
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....ransactions that are legitimate cannot be restructured. * The transaction of lending of money by the respondentassessee to the subsidiary, should not be seen in isolation, but also for the purpose of maximizing returns, propelling growth and expanding market presence. * This ratio and rationale, when applied to the facts of the present case, would mean that the transfer pricing determination would decide what an independent distributor and marketer, on the same contractual terms and having the same relationship, would have earned/paid as interest on the loan in question. What an independent party would have paid under the same or identical circumstances would be the arm's length price or rate of interest. What the assessed would have earned in case he would have entered into or gone ahead with a different transaction, say with a party in India, is not the criteria. What is permitted and made subject matter of the arm's length determination is the question of rate of interest and not re-classification or substitution of the transaction. 5.1. Respectfully following the principles laid down by the Co-ordinate Benches as relied on by the Ld. Counsel and also by various jud....
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....ed. 6.4. It was the submission that LITL provided guarantee to its subsidiaries to enable the acquisition of a coal mine through bank loans. LITL being successful bidder is under obligation to pay for acquisition of the coal mines. LITL did not charge any fees for providing guarantee, as the purpose of obtaining loan by the subsidiaries was to discharge LITL obligation in acquisition of coal mines which will accrue benefits to the entire group. Guarantee provided by assessee was part of the procedural compliance for availing the banking facilities i.e. loan by the subsidiaries. Corporate guarantee was given by assessee for its own commercial expediency and for the overall benefit of LITL. The corporate guarantee was provided by assessee as it is having shareholding interest in the subsidiaries. Aseessee relied on the following case law: i. Marico Ltd. Vs. ACIT (ITA No. 8713 & 8858/MUM/2011 / [2016] 70 taxmann.com 214 (Mumbai - Tribunal) ii. Micro Ink Ltd Vs. ACIT (ITA 2873/Ahd/10) iii. Manugraph India Ltd. Vs. DCIT (I.T.A. No.2631/Mum/2015) iv. Tega industries Ltd Vs. DefT (ITA No. 1912/Kol/2012 Relevant Case laws: Commercial expediency : i. M/s Knorr Bremse India Pvt Ltd [....
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.... Australia) 18th February 2011 LITL and Barclays Bank (in relation to LIPL, Singapore) 1st September, 2010 LITL and DBS Bank (in relation to LIPL, Singapore) 10th June 2010 LITL and Standard Chartered Bank (in relation to LIPL, Singapore) 6th May 2010 6.9. Ld.DR however submitted that corporate guarantee is an international transaction and relied on the provisions of Section 92B and the order of the Co-ordinate Benches at Hyderabad, in the case of M/s. Foursoft Ltd., in ITA No. 1903/Hyd/2011 and other cases in which corporate guarantee is considered as international transaction. With reference to the rate of corporate guarantee fee Ld. DR referred to the order of the TPO to submit that 2% is a nominal fee which should be upheld. He also referred to the Revenue grounds on this issue contesting that decision of the DRP to reduce it to 0.53%. 7. We have considered the rival contentions and perused the documents placed on record. There is a difference of opinion as far as in the corporate guarantee fee to be considered as international transaction. However, the Hyderabad Benches of ITAT is consistently following the principle that corporate guarantee is to be considere....
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....ion advance. It was submitted that LITL has not done any export of goods or services to its foreign AEs and hence, there are no trade receivables outstanding in its books from foreign AEs. LITL sub-contracted EPC contracts to its AE namely Lanco International Pte. Ltd (LIPL) (Formerly known as Lanco Enterprises Pte Ltd) in respect of which mobilization/ material advance was paid by LITL to Lanco International Pte. Ltd (LIPL) for the execution of the projects. As the EPC contracts for power plant are long term contracts with involvement of huge capital base, it is submitted that it is an accepted practice in industry to release advances for mobilization of resources like man, material and machinery for execution of contract which are given as non-interest bearing advances and the same will be adjusted against supplies made or work executed by contractor over the period of contact. As an EPC contractor, LITL has also received as well as given mobilization/material advance. Since LITL had placed some of the contracts amongst AEs, it had paid advances as per the terms of contract, which were being adjusted from supplies or works made on regular basis. The outstanding mobilization advan....
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....d, and the AE and non-AE transactions are compared, no adjustment can be called for. Relevant case laws : i. Indo American Jewellery Ltd. Vs. CIT, Hon'ble Bombay High Court (ITA No. 1053 of 2012) ii. Mastek Ltd. Vs. ACIT (I.T.A. No.3120) iii. Nimbus Communications Ltd. Vs ACIT (ITA No. 6597/Mum/09) iv. Sony Ericsson Mobile Communications India Pvt. Ltd. (ITA No. 16/2014) The outstanding mobilization/ material advances from AEs and Non-AEs are as below: Particulars Outstanding receivables Outstanding payables AEs 11,88,18,38,737 52,92,82,68,321 Non-AEs 4,80,92,70,245 10,85,32,67,385 Total 16,69,11,08,982 63,78,15,35,706 III) Domestic PLR of 12.25% cannot be applied and the transaction cannot be equated to investment in bank deposit, stocks, mutual funds or real estate. Relevant Case law: i. CIT Vs. Cotton Naturals India Pvt. Ltd. (2015) 276 CTR 445 (Del) / ITA No. 233 of 2014 IV) Without prejudice, the TPO/AO has not taken into consideration the fact that there are amounts payables to same AE i.e. Lanco International Pte. Limited, Singapore (AE) while making adjustment towards alleged outstanding receivables as on March 31st 2011. The total outstan....
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....est for the advances received. Following the principles laid down by the Hon'ble Bombay High Court in the case of Indo American Jewellery Ltd. Vs. CIT, Hon'ble Bombay High Court (ITA No. 1053 of 2012), we are of the view that there is no need for charging any interest on the amounts advanced as receivables. Since this amount is part of contract work, in our view it does not attract any adjustment under TP provisions. Moreover, advances given as part of contract work does not require any special addition, when the TPO was already examined and held that the transaction relating to 'work contract expenses' are within the ALP during the year. Thus, when the whole work contract is considered within the ALP, we are of the opinion that the advances given in the course of contract does not call for special adjustment. Moreover, these business advances cannot be categorised as 'loans and advances' so as to consider them for adjustment. Relying on the various case law relied upon by the Ld. Counsel, we are of the opinion that since assessee-company is not charging any interest from the AEs and non-AEs and also not paying any interest on the amounts received by it from the main contra....
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....med against 9 companies is as under: Sl. No. Name of the Company Amount Rs. 1. NKG Infrastructures Limited 41,08,00,000 Total(A) 41,08,00,000 2. Makesworth Projects Pvt Ltd 33,37,97,879 3. Pioneer Prodev Pvt Ltd 30,47,68,611 4. Link Point Infra Pvt Ltd 30,79,96,487 5. Suryamukhi Projects Pvt Ltd 34,30,19,698 6. Subhsree Hirise Pvt Ltd 30,77,37,072 7. Subhadristi Complex Pvt Ltd 24,08,10,819 Total(B) 1,83,81,30,566 8. Jain Infra Projects Ltd 37,80,29,798 9. Horizon Infrastructures Ltd 23,30,79,284 Total(C) 61,11,09,082 Total(B+C) 2,44,92,39,638 10.2. A statement stated to have been recorded from Shri Pravin Kumar Agarwal on 12-11-2012 has been extracted by the AO in the assessment order and vide para 5.5 of the order, AO records that some employees of the said person are operating the companies. The statements of Shri Pramod Ramdin Sharma, Shri Vishal Sharma, Shri Pulak Bagchi and Shri Umesh Singh were extracted in the order. In addition to that, AO also notices the fund flow and he was of the opinion that majority of the funds were diverted from the said companies and in view of those findings, the claim....
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....not produce the documents before AO, since the AO did not give a reasonable time for submitting the above documents during the course of assessment proceedings. 11.2. It was submitted that Lanco Babandh Power Limited (LBPL), Lanco Amarkantak Power Limited (LAPL) and Lanco Kondapalli Power Limited entered into memorandum of understanding / implementation agreements with State Governments for development of thermal power projects in the states of Odisha, Chhattisgarh and Andhra Pradesh. For execution of the above contracts, the aforesaid mentioned entities awarded Engineering, Procurement and Construction (EPC) contract to M/s. Lanco Infratech Limited (L1TL/assessee) on lnternational Competitive Bidding (ICB). The scope of work included civil works contract, Offshore BTG supply contract and onshore supply contract and Services contract. 11.3. The EPC work sub-contracted to assessee along-with consideration is summed up as below: Project Name Civil Works Contract (INR Cr) Off-Shore BTG Supply Contract (USD Mn) On-shore Supply contract (INR Cr) Services Contract (INR Cr) Babandh 1005.10 485 (USD Mn) 1479.88 297.87 Amarkantak 1016.30 450 (USD Mn) 1597.00 290.40 Kondapa....
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....carried out without incurrence of any costs against the same. Further, VAT/Service obligations have been duly complied with by assessee and the concerned Government Authorities have accepted these transactions. Therefore, if one arm of the government has accepted the transactions, the other arm of the government must also respect the same- (Apollo Tyres Ltd Vs. CIT (2002) 255 ITR 273 and Vadilal Chemicals Vs. State of AP (2005) 6 SCC 292). 11.6. It is submitted that a perusal of the Reports generated by Independent Engineers appointed by Lender Banks clearly shows a substantial amount of work being carried out by the assessee' sub-contractors on ongoing basis. There is no allegation in the assessment order or the DRP order that no work has been carried out. Therefore, it is absolutely clear that such huge amount of work (as also certified by Lender Bank's Engineers and independent auditors) cannot be carried out without incurring substantial expenditure. If the allegation of the AO is to be accepted then no work would have been carried out through these sub-contractors and expenditure has not been incurred in the first instance. In this regard reliance is placed on the fol....
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....ished all the details and supporting evidence. In this regard reliance is placed on the following case laws: a. Judgement of Hon'ble Bombay High Court in the case of CIT Vs. Nikunj Eximp Enterprises (P) Ltd. (2013) [372 ITR 619] (Mum) wherein it was held as under: "The Tribunal records that the Books of Accounts of the respondentassessee have not been rejected. Similarly, the sales have not been doubted and it is an admitted position that substantial amount of sales have been made to the Government Department i.e. Defence Research and Development Laboratory, Hyderabad. Further, there were confirmation letters filed by the suppliers, copies of invoices for purchases as well as copies of bank statement all of which would indicate that the purchases were infact made. In our view, merely because the suppliers have not appeared before the Assessing Officer or the CIT(A), one cannot conclude that the purchases were not made by the respondent-assessee. The Assessing Officer as well as CIT(A) have disallowed the deduction of Rs. 1.33 crores on account of purchases merely on the basis of suspicion because the sellers and the canvassing agents have not been produced before them. We fi....
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....le in their hands. Thus, they have filed their ROI's and admitted the receipts. The gross receipts have already suffered tax in sub-contractors hands. The basic commercial principles are that one person's income is other person's expenditure. It may be noted that the payment had also been made through banking channels. In this regard, reliance is placed on the decision of ITAT, Mumbai in the case of ITO Vs. Growel Energy Co. Ltd (2014) 47 taxmann.com 371 (Mumbai - Trib). The AO relied on extraneous and irrelevant factors for making the disallowances such as low profit margins of sub-contractors, having common auditor, common addresses etc. without appreciating the production of documentary evidence in support of the work that has actually been executed. The AO erred in relying on the statements of external parties who are not concerned with the assessee: 11.10. It was stated that the basis of the disallowance are the statements of certain persons which were not even recorded by the AO himself. Such statements have no evidential value. The AO, for making the disallowance, has relied on the statement of Sri Praveen Agarwal who is not connected to the assessee and whose s....
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....of service tax which was never claimed as expenditure. Ground No. 17 (Additional Ground) - That without prejudice, in view of facts and circumstances of the case, the AO has wrongly made the disallowance of entire service tax amount of Rs. 11,31,32,746/- in context of said sub-contractors, without appreciating the fact that service tax amount is not claimed as deduction. 12.1. It is submitted that AO while passing the final assessment order has erred in disallowing the amount incurred as service tax as part of the total amount paid to-aforesaid subcontractors without appreciating that the assessee has not claimed service lax as expenditure in the Profit and Loss A/c of the subject year. Further, as per the accounting method followed by assessee it may be mentioned that such service tax is routed through Balance sheet and no deduction in respect of the same is being claimed in the Profit and Loss A/c. In view of the above, it was requested to vacate the addition in respect of service tax amounting to Rs. 11,31,31,746/-, since the same is bad in law and on facts. 13. Ld.DR, however, supported the orders of the AO and TPO. It was his submission that those companies are paper compan....
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.... the AO and DRP. 14. We have considered the rival contentions and perused the documents placed on record. It is a fact that the so called statement recorded by the Investigation Unit in Calcutta has not been furnished to assessee in the course of assessment proceedings. The copies filed before us are also are not fully legible and the CIT-DR has filed another copy as legible copy, but still it is also not fully readable, as some of the parts of the statement were missing in the Photo copies furnished on record. Prima-facie as seen from the statement, those statements are recorded, not in the case of assessee but in proceedings pertaining to L&T and PACL and in either case, it seems no action has been taken as submitted by assessee. Revenue also has not placed anything on record to show that necessary disallowances have been made in the case of L&T and PACL in whose cases mainly, the enquiries were conducted. Even as seen from the so called funds flow statement, it is obvious that AO could only allege about small amount of money that these were diverted. For example in the case of Makesworth Projects and Developers Private Limited, AO acknowledges that assessee-company has paid an ....
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....ed as income and so the sub contract expenditure can not be bogus. It was however submitted that various tribunal decisions have estimated only the profit in those contracts, but no disallowance of the entire amount. 14.2. As seen from the submissions and the orders of the authorities, it is noticed that assessee was given no opportunity to justify the expenditure. A survey was conducted on 17-03-2015 at two places whereas assessee's projects were spread all over India. Draft assessment order has been passed on 31-03-2015. In the short period available, assessee's MD placed on record that obtaining the information pertaining to earlier years, that to from various project sites will take lot of time. It is also submitted that no cross-examination was provided and principles of natural justice have been violated. When assessee has furnished additional evidence before the DRP such as work orders, RA bills, service entry sheets, invoices/vouchers, Form 16A etc. in respect of the above referred sub-contractors in order to prove the genuineness of the sub-contract expenditure, it is noticed that the DRP instead of remitting the matter to the AO for fresh examination has refused to enter....
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....ue considering that no action was taken either in those companies or in the companies in whose cases the said enquiries were conducted( L& T, PACL), we direct the AO to independently examine the claim of sub contract expenditure. In case assessee billed and offered the said contract receipts, AO is directed to accept the sub contract payments, as assessee received the corresponding amounts from main contractor and offered the same for taxation. In case there is any failure or the nexus was not fully established, Assessee agrees that being a subcontractor a small percentage of the expenditure can be estimated for disallowance, following the principles laid down by the Coordinate Benches as relied upon above. In that event, AO is directed to disallow only a certain percentage of the above amount, if necessary. The addition made is accordingly deleted and the issue of examination of impugned sub contract payments is restored to AO to consider afresh as directed. Grounds are considered allowed for statistical purposes. 15. Ground No. 6 - Disallowance of Rs. 24,99,777/- on account of License Membership, Subscriptions & Access Fee . It was submitted that the DRP/AO erred in making a dis....