TaxTMI 
TaxTMI 
2018 (1) TMI 799
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....ment proceedings, the AO found that the assessee had entered into international transactions(IT. s)with its Associate Enterprise(AE). To determine the arm's length (ALP)of the transactions, he made a reference to the Transfer Pricing Officer(TPO). Vide his order, dt. 28/03/2008, the TPO proposed total adjustment of Rs. 52. 51 crores. ITA/178/Mum/2011, AY. 2006-07: First ground of appeal, raised by the assessee for the year under appeal, is of general nature, hence, it is not being adjudicated. 3. Second ground of appeal is about disallowance of interest paid to the head office(HO)/ overseas branches on deposits placed with the assessee u/s. 40(a)(i) of the Act. During the assessment proceedings, the AO found that the assessee had paid interest of Rs. 2. 99 crores to the HO/overseas branches (OB. s) on deposit placed with it by those entities, that it had debited the interest payment to the P&L account for the year under appeal , that it had claimed a deduction in respect of the same. On being queried as to whether tax was deducted at source on the said interest payment, the assessee admitted that no tax was deducted on the payment made to HO/ OB. s. Referring to the Circular No....
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....h head office, it ought to have deducted tax under section 195(1). Having not so deducted the appellant is not entitled to claim the benefit, of such deduction, under section 40(a)(i). 24. Under article 7 read with definition of article 5, the permanent establishment is to be taken as an assessee for the purpose of computation of business profits. Further, under sub-article (3)(b) of article 7 payment of interest can be claimed as a deduction. 25. An unnecessary complication has been created by the interpretation made of section 40(a)(i) of the Income-tax Act read with section 195 of the Act by both the appellant and the respondents. First of all, a proper meaning has to be ascribed to the expression "chargeable" under the provisions of this Act. Section 195(1) says that, if any interest is paid by a person to a foreign company, which interest is chargeable under the provisions of this Act tax should be deducted at source. The word "chargeable" is not to be taken as qualifying only the phrase "any other sum" only but it qualifies the word "interest" also. This interpretation is supported by the phrase in parenthesis, namely, not being income chargeable under the head "Salarie....
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.... by the TPO. 4.1. During the TP proceedings, the TPO found that the assessee was engaged in the business of structuring of asset liability, risk management services, underwriting for domestic rupees/debt instruments in India through the investment banking businesses stream of its India branches, that it had coordinated activities for ECB's raised by Indian companies from its overseas branches. After considering the explanation of the assessee in that regard, the TPO held that it had played an active role in ECB deals, that it was engaged in provision of substantial support service to its AE in connection with the ECB's. He made an adjustment of Rs. 1. 25 crores based on revenue split method, applying the rate of 25%. The AO, accordingly, passed the final order making an addition of Rs. 1, 25, 18, 349/- to the total income of the assessee. 4.2. Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA and made detailed submissions. After considering the order of the AO/TPO and the submissions of the assessee, he held the assessee played its role in ECB's granted by its foreign branches to the Indian borrowers, that the TPO/AO had rightly held that overseas ....
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....ontact with Indian entities and acting as a liaison between the AE and the customer. It is a fact that loan was granted by the AE. s and all the gains and risks of the transaction was with them only. The assessee was compensated by the AE. s for the job done by it. As far as interest income is concerned, it is clear that there was no contract /agreement between the assessee and the AE. s to share the interest amount. The assesse is objecting to the adjustment made under the head interest income. It has no objection with regard to the other portion of the adjustment. So, we direct the TPO/AO that only 20% of the agency fee should be attributed to the assessee and the interest attributed to its income should be deleted. Here, we would like to refer to the case of M/s Credit Lyonnais (supra), wherein identical issue has been discussed as follows: "8. 8 Having held that para 4 of the Protocol does not apply to the case of the assessee, now, the question arises as to whether the adjustment made by the authorities below is justified. For making the adjustment, the authorities below have taken into consideration, the income towards interest as * well as the fee charged by the foreig....
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....iness, that Barclays India branch would get compensated for its market effort. He found that in accordance with the Global TP Policy(GTPP) of Barclays the Indian entity was being compensated at around 24. 40% of the Initial Net Present Value (INPV) in respect of the marketing support it provided to its overseas AE. s, that it had stated that no internal uncontrolled comparable transaction was available for determining the ALP of the services rendered by it. The TPO called for further details in that regard. After considering the same, he held that the primary onus of benchmarking the transaction of marketing of derivative products, by citing uncontrolled comparables, was on the assessee, that it had not discharged its primary onus, that it had only furnished the GTPP with respect to marketing of derivative products, that the derivative products were very unique financial products dealt by the branches of selected few foreign banks, that those products were not dealt by any Indian company, that the data of such services providers were not available in the public domain, that the external comparable selected by the assessee to benchmark the transaction using TNMM was not as per the p....
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....sidered by the assessee was far better than the average of cost plus margin of comparables, that the TPO had not accepted the TP study made by the assessee, that he fixed the ALP on the basis of a foreign bank in India which charged @ 60 percent of the INPV for the derivative product, that he was not justified in comparing the two entities. Finally, he allowed the appeal filed by the assessee. 5.2. Before us, the DR argued that in absence of uncontrolled data it was permissible to use controlled data for determining ALP of IT. s, that the method used by the TPO i. e. PSM was better than the method used by the assessee, that the assessee had not conducted any FAR analysis, that the matter could be remanded to the TPO for carrying out fresh benchmarking, that the matter could be restored back to the file of the TPO if it was found that he had not followed the prescribed method. The AR supported the order of the FAA and stated that the assessee had carried out TP study, that it had rightly applied TNMM, that it was following global policy for determining ALP of derivative transactions, that no defect in the policy adopted by it was pointed out by the TPO, that comparable rate fixed ....
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.... provisions and the Rule 10 of the Rules The TPO had also violated the principles of natural Justice by not confronting the assessee with the comparables used against it. He proposed an addition of Rs. 51. 12 crores to the income of the assessee without affording an opportunity to it, so that it could become aware of the basis for the adjustment. Only on this count the adjustment could be validly deleted. 5.4. But, we would like decide the issue on merits also. It is found that the assessee had followed GTPP for TP purposes, that as per the global policy the Indian branches-rendering the services and arranging for the sales of the derivative products for its customers from its foreign brancheswere to get at 24. 40 percent of the INPV. The Appellant had carried out a TP study and had applied TNMM for determining the ALP. We find that the average cost plus margin of the uncontrolled comparables was 19% and in the assessee's case, cost plus margin was 424%. If we look at these figures, it becomes clear that compensation received by the assessee from its AE for derivative deal was at arm's length. INPV of a derivative transaction is calibrated based on projection of expected cash flow....
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....ice properly and is infallible. If the view of the Revenue that a controlled transaction should not be shunted out for the purposes of benchmarking is accepted, then all the relevant provisions contained in Chapter X in this regard, will become otiose. If such a contention oj making comparison with a comparable controlled transaction is taken to its logical conclusion, then there will never arise any need to take up any case for transfer pricing scrutiny. The reason is obvious. ALP is determined for application in respect of transactions between two AEs so that the profit likely to arise from such transactions is not under-reported vis-a-vis from similar transactions with third parties. If the comparison is made again with net profit margin realized from transactions between two AEs, instead of third parties, it may demonstrate the same cooked results in both the situations, thereby leaving no scope for any adjustment. In this eventuality, the very object of such provisions will be frustrated. Thus it follows that the ALP can be determined only by making comparison with a comparable uncontrolled transaction and not a comparable controlled transaction. " We are of the opinion that....
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....ropos the ld. DR's contention asking for remitting the matter to the Assessing Officer, it must be noted here that such a course is neiher required, nor appropriate to be adopted. As an appellate authority, the Tribunal has to see whether the assessment framed has been framed in accordance with law and if there is sufficient material to support it. If that is so, it is not for the Tribunal to start investigation suo moto and to thereby fill up the lacunae if there is material to support the assessment, the assessment, as confirmed or upheld by the CIT(A) needs to be sustained by the Tribunal If not, the assessment falls. It is for the department to gather material and make proper assessment and the Tribunal is not in that manner, an income-tax authority. The income-tax Act does not envisage the ITAT as an income-tax authority, rather in the scheme of the Act, it is a purely appellate authority. That being so, as observed in Raj KumarJain v. Asstt. CIT [1994] 501TD I (All. )(TM), the object of the appeal before the Tribunal is whether the addition or disallowance sustained was in accordance with law. If there is sufficient material, the addition must be upheld. If not, the addition ....