TaxTMI 
TaxTMI 
TaxTMI 
2018 (5) TMI 346
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....national transactions. The TPO did not dispute the ALP of any transaction except Commission payment of Rs. 1,11,72,735/-. In support of payment of commission to M/s Bull Moose Tube, its associated enterprise (AE), at the ALP, the assessee stated that it entered into an agreement for availing expert services of its AE and commission was paid as per the terms of the Agreement. In order to demonstrate that this international transaction was at ALP, the assessee applied Profit Split Method (PSM) as the most appropriate method. In the absence of any substantiation of the ALP of the international transaction of payment of commission under this method, the TPO observed that no sales were made through the AE for which the alleged commission was paid. The assessee was found to have made fixed payment of US $ 31,500 per month in performance of its Agreement. The TPO opined that no tangible and concrete benefit was reaped by the assessee. In his opinion, no independent party would get into such an agreement where it would incur cost on provision of no services. He, therefore, held that the assessee made payment of Rs. 1.11 crore for no intra-group services. The ALP of this international trans....
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....ab & Haryana High Court in Knorr-Bremse India P. Ltd. vs. ACIT (2016)380 ITR 307 (P&H) has held that the question whether a transaction is at an arm's length price or not is not dependent on whether the transaction results in an increase in the assessee's profit. A view to the contrary would then raise a question as to the extent of profitability necessary for an assessee to establish that the transaction was at an arm's length price. A further question that may arise is whether the arm's length price is to be determined in proportion to the extent of profit. Thus, while profit may reflect upon the genuineness of an assessee's claim, it is not determinative of the same. It went on to hold that business decisions are at times good and profitable and at times bad and unprofitable. Business decisions may and, in fact, often do, result in a loss. The question whether the decision was commercially sound or not is not relevant. The only question is whether the transaction was entered into bona fide or not or whether it was sham and only for the purpose of diverting the profits. 7. Reverting to the facts of the extant case, it is established beyond doubt that three employees were found t....
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.... we come back to the facts of the instant case, it turns out that the TPO proposed the transfer pricing adjustment equal to the stated value of the international transaction at Rs. 1.11 crore and odd, inter alia, by holding that no benefit was received by the assessee and hence no payment on this score was warranted. The AO in his order has taken the ALP of the international transaction at Nil on the basis of such recommendation of the TPO without carrying out any independent investigation for the deductibility or otherwise of such payment in terms of section 37(1) of the Act. This addition has been made by the AO in his order without invoking section 37(1) of the Act. As per the ratio decidendi of Cushman & Wakefield India (P.) Ltd. (supra), the TPO was required to simply determine the ALP of the international transaction, unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. As the TPO in the instant case initially determined Nil ALP by holding that no benefit accrued to the assessee etc. and the AO made the addition without examining the applicability of section 37(1) o....
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.... be any disallowance of interest paid on interest bearing loans. The Hon'ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), has held that where an assessee possessed sufficient interest free funds of its own which were generated in the course of relevant financial year, apart from substantial shareholders' funds, presumption stands established that the investments in sister concerns were made by the assessee out of interest free funds and, therefore, no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. In that case, the AO recorded a finding that a sum of Rs. 213 crore was invested by the assessee out of its own funds and Rs. 1.74 crore out of borrowed funds. Accordingly, disallowance of interest was made to the tune of Rs. 2.40 crore. The assessee argued that no part of interest bearing funds had gone into investment in those two companies in respect of which the AO made disallowance of interest. It was also argued that income from operations of the company was Rs. 418.04 crore and the assessee had also raised capital of Rs. 7.90 crore, apart from receiving inter....
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....pany, if the interest free funds were sufficient to meet the investment". Consequently the interest was held to be deductible in full. 15. From the above judgment, it is manifest that there can be no presumption that the shareholders' fund of a company was utilized for purchase of fixed assets. If an assessee has interest free funds as well as interest bearing funds at its disposal, then the presumption would be that investments were made from interest free funds at its disposal. Similar view has been taken by the Hon'ble Dehi High Court in CIT vs. Tin Box Company (2003) 260 ITR 637 (Del), holding that when the capital and interest free unsecured loan with the assessee far exceeded the interest free loan advanced to the sister concern, disallowance of part of interest out of total interest paid by the assessee to the bank, was not justified. 16. Applying the above proposition in the context of section 14A, the Hon'ble Karnataka High Court in CIT & Anr vs. Microlabs (2016) 383 ITR 490 (Kar) has held that when investments are made from common pool and non-interest bearing funds are more than the investment in tax free securities, no disallowance of interest expenditure u/s ....