TaxTMI 
TaxTMI 
2018 (5) TMI 797
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....l. 2. Assessee, Bartronics India Ltd., is engaged in the business of automatic identification and data capture technology. It has manufacturing facility for producing the smart cards. Assessee had two subsidiaries - one subsidiary is located in USA, known as Bartronics America Inc., USA [BAI] and the other subsidiary is located in Singapore and is known as Bartronics Asia Pte Ltd., Singapore [BAPL]. Assessee has filed return of income on 30-10-2008, admitting total income of Rs. 89,48,510/- under the normal provisions and the income of Rs. 41,03,77,040/- u/s. 115JB of the Income Tax Act [Act]. As the assessee had international transactions with its Associated Enterprises [AEs] during the year, the matter has been referred to Transfer Pricing Officer [TPO]. There are other corporate issues which will be dealt with later as this issue of Transfer pricing adjustment is common in all the appeals from AYs. 2008-09 to 2011-12 with varying amounts. I. Transfer Pricing Issue: 3. The only issue under the TP provisions is with reference to the advances to the subsidiaries totaling to Rs. 280.81 Crores. During the previous year, assessee had advanced funds to its sister concerns as u....
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....ies without transfer from India. It was the transfer from foreign country to foreign country which does not have any impact with reference to assessee. It was further submitted that these advances cannot be considered as loans or deposits and no interest is chargeable as assessee is not paying any interest. The DRP, however, did not agree with the contentions of assessee and directed the TPO to adopt rate of LIBOR + 2%. The directions of the DRP on the issue are as under: "2.8 The panel has considered the submissions of the tax payer and also considered the additional grounds submitted by the tax payer. The tax payer had given advances to its AEs out of the proceedings of the convertible bonds issued by it. The tax payer has agreed to pay interest rate of 7.25% and 6.65% on the bonds till such bonds are converted into equity shares. The TPO has adopted the CUP as the most appropriate method and compared the corporate bonds having 'B' rating as comparable and determined the interest rate of 17.26%. The loans were given by the tax payer to AEs located in USA and Singapore. The panel agrees with the views of the TPO that in respect of advances. Arm's Length interest rate requ....
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....the tax payer did not convert the advances into share capital within the regulations prescribed by the RBI under FEMA- 1999. 2.9 Therefore the nature of the investment during the financial year remains as advances/loans. Once the transactions are categorized as 'advances', a tax payer has to determine the Arms' Length Interest Rate for such advances. The lending or advances to AEs was done in the international market, external commercial borrowings should be considered as comparable transactions to the advance/loan transactions between the assessee and its overseas subsidiaries. The TPO adopted the CUP method but the transactions he compared were not the actual transactions. Therefore the comparison made by the TPO under the CUP method was inappropriate. The advances were given in the international market by the tax payer and the interest rate prevailing in the international markets can be adopted for the purpose of bench marking the international transactions. In the view of the panel the appropriate interest rate is the LIBOR. A mark up is also required on the LIBOR. The panel considers that a 2% markup on LIBOR is appropriate because the loans were unsecured. Therefore,....
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....or which the amounts were invested was already stated in the annual reports and in the permissions obtained from RBI etc., 5.2. Regarding the argument of DRP and TPO that assessee violated FEMA regulations, it was the submission that under Rule-5 of Foreign Exchange Management [transfer or issue of any foreign security] Regulations Act, 2004, it was mandated that no person resident in India shall make any direct investment outside India as equity without prior approval of the RBI. However, upto 400% of net worth of an Indian Party was permitted in automated route as per notification No. FEMA.173/2007-RB. It was submitted that during the AY. 2008-09, assessee net worth was about 242.36 Crores and an amount of Rs. 280.82 Crores was given as advances for investment, which is less than 400% of the net worth. Therefore, the investment made by assessee is in compliance with the notification issued under FEMA rules. Further, it was submitted that the advances given for investment cannot be re-categorised as loans for which assessee relied on the following case law: i. CIT Vs. EKL Appliances Ltd., ITA No. 1068/2011; ii. M/s. Vijay Electricals Ltd., Vs. Additional CIT, ....
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....t has not made any separate adjustment. It was further submitted that availability of interest free fund on business expediency is not a relevant consideration for determining the ALP of the international transaction. Further, the possibility of equity investment in future not borne out of the facts; it is only an after thought. 6.1. Coming to the argument that assessee has not violated FEMA Regulations, Ld.DR submitted that DRP has noted that transactions violate the FEMA regulations. While admitting that Regulation-5 of the FEMA rules permits the investment upto 400% of the net worth, it is submitted that this limit is for total financial commitment which includes equity, debt and guarantee. Thus, the submission of assessee that it is permitted equity investment is not correct. The only conclusion which could be drawn is that the assessee could have invested the amount as per the FEMA Regulations, but does not prove the nature of investment. It was submitted that money was advanced as a loan under Sub-Regulation-4 of Regulation-6. Therefore, it is to be categorised as loan and advance only. It was further submitted that assessee has not contested the factual finding of the DRP....
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.... It is also admitted that the funds were though raised as fully convertible foreign currency bonds, the shares were allotted to the ultimate bond holders which also establish that the intention of assessee is always to make investment and not to advance as a loan. 8. Coming to the decisions relied on by the Ld.DR, it was submitted that the orders were passed in favour of Revenue as the nature of advance was of loan and shares were never allotted by the subsidiaries. Whereas in the case of assessee, the advance was extended to AEs for the purpose of investment in subsidiaries and these advances were later converted to investment. Therefore, the case law relied on by the Ld.DR are not applicable. 9. We have considered the rival contentions and perused the documents placed on record and the case law relied upon. As can be seen from the orders of the authorities, as well as the submissions made, there is no dispute that assessee has raised funds only for the purpose of investments in its subsidiaries. These are Zero coupon bonds and there is no interest liability to assessee. It is also fact that these funds were raised abroad and transferred abroad and only entries have been pas....
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....ng on the profits, income, losses or assets of such enterprises', a classification which is required to subject the transaction to further analysis under the transfer pricing provisions. 9.2. One of the arguments of the DRP as well as the Ld.DR is that the transaction violates FEMA regulations. It is only the contention that the transactions violate FEMA regulations but as explained, assessee is entitled to invest upto 400% of the net worth in the form of equity, debt and guarantee. Even the written submissions filed by the Ld.CITDR also accepts this fact that Indian party can invest in wholly owned subsidiaries to the extent of 400% of the net worth. Even though various regulations were explained, no violation has been pointed out except that the amount stated to be for investment was classified as a loan. Since equity and debt are permitted on the regulations and since no proceedings under FEMA have been initiated against the assessee-company, the so called violations noted by the Revenue does not stand. It is admitted that the amounts are stated as loans and advances in all the annual reports on which there is no dispute, but it is the contention of assessee that the intentio....
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....has allotted the shares on 15/03/2012. Now, can these transactions be treated as international transaction, which qualifies for ALP adjustment. In our considered view, the amount $ 732.385 is towards investment in share capital of the subsidiary outside India and the transactions are not in the nature of international transaction referred to' section 92-B of the IT Act and transfer pricing provisions are not applicable as there is no income as well as there is no mutual agreement between the companies for such payment of interest. Moreover, the subsidiary company also disclosed as 'interest free. Moreover, in the similar situation with uncontrolled transaction, 'the allottee company in normal course of transaction will not be expected to receive any interest leave away the international transaction. Without any certainty or any agreement on receiving any interest but merely relying on the accounting method and disclosure of the subsidiary in their financial statement cannot lead to this transaction as international transaction which require ALP adjustment. Assessee had relied on the case of Prithvi Information Solutions Ltd. (supra) wherein on the similar set of facts a....
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....thorities to ( insist that the interest free loan towards its AE for capitalization the opportunity of cost of entering in new territories must necessarily by modified and re-characterized into a loan simplicitor and considered to be an activity for earning interest. The tax authorities must bring on record facts and evidences impacting the veracity of the claim of the assessee and demonstrate the hollowness of the assessee's claim. No such exercise has been done to counter the consistent claim of the assessee demonstrated by facts on record that the intention was to capitalize the opportunity cost and not to encash the opportunity to best utilize the available funds. In the facts as they stand, we find that the claim of the assessee has to be allowed. ......... 7.16.3 We find that the Co-ordinate Bench considering the term "quasi capital" has correctly understood II that a quasi-capital loan or advance is not a routine loan transaction simplicator. The substantive reward for such a loan transaction is not interest but opportunity to own capital. As a corollary to this position, in the cases of quasi capital loans or advances, the comparison of the quasi capital l....
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.... Since the funds were raised for the purpose of investment in subsidiaries and on the fact that these funds were interest free and ultimately, shares were allotted, we are of the opinion that no adjustment need be made, on the CUP method adopted by the AO/TPO, even if the transaction is considered as one that of international transaction. For all the reasons stated above, we are of the opinion that no adjustment is required in the impugned year. The orders of the DRP are accordingly modified and adjustment made by the TPO stands deleted. Grounds are accordingly considered allowed. AYs. 2009-10, 2010-11 & 2011-12: 10. In the three assessment years of 2009-10, 2010-11 & 2011-12, the issue is one that of interest levy as advances made to the sister concern. The facts are similar to earlier year and assessee has advanced the funds to the sister concern in AY. 2008-09 which were continuing as such in the books of account, with further advances during these years. As there is no liability of interest on the funds borrowed by the assessee through zero coupon bonds, it was the contention that there is no need to charge any interest as advances were made as investments for expansion o....
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.... date. 11.1. The AO, however, did not allow the claim u/s. 10B and assessee made an objection before the DRP. The DRP vide Ground No. 2 in para 3.1 relied on the insertion of proviso in Sub Section(i) of Section 10B stipulating that no deduction u/s. 10B shall be allowed to those who do not furnish return of income on or before the due date specified under Sub Section 139(1) of the Act. Relying on the above, since assessee's return was furnished u/s. 139(4) belatedly, the DRP confirmed the disallowance. 11.2. It was the submission that there was only a marginal delay of 30 days in filing the return of income and the return of income was accepted by the AO as valid one. It is also submitted that assessee's audit was completed within the due date but only uploading of the return was belated. It was also further contended that proviso to Section 10B(1) is directory in nature and not mandatory. Ld. Counsel relied on the judgment of the Hon'ble Supreme Court in the case of Bajaj Temop Limited Vs CIT (1992) [196 ITR 188] for the proposition that a provision in a taxing statute granting incentives for promoting growth and development should be construed liberally. Ld. Counsel al....
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....s under: "10. Coming to 'delay' part in filing of 'return' by the assessee, we find that per Assessing Officer's order, the return was filed on 31.12.08 whereas the IT(A) in para No.5.2 takes the date of filing return as 30.10.08. In the absence of any error pointed in CIT(A)'s order, wealso take the date of filing return as 30.10.08 ITA 74/Mds/12 i.r. after one month of due date i.e. 30.09.08. The assessee's explanation in support is that there was system's failure in uploading its electronic 'return'. We find from case law of Dhir Global (supra) that the provision of 'due date' under section 139(1) has itself been held to be a directory provision instead of mandatory. The other decisions of Chennai and Hyderabad ITAT benches also follow the same legal ten. Therefore, by placing reliance in the same, we also hold that since the operation of section 139(1) of the Act is directory in nature, therefore, the assessee's plea of system failure explaining delay of one month in filing return deserves to be accepted. At the same time, we have perused Hon'ble apex court judgement cited by D.R(supra). We find that in the said c....
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....6/Hyd/2011, the deduction u/s. 10B cannot be denied in the subsequent year without a valid reason. Since there is a reasonable cause, the return filed by assessee is to be considered as return filed u/s. 139(1). Accordingly, assessee is entitled to deduction u/s. 10B. AO is directed to allow the same. The ground is allowed. 2. Disallowance u/s 36(1)((v)/(va) Rs. 10,11,278/-: 12. AO had disallowed an amount of Rs. 10,11,278/- being the amount remitted with a delay which becomes income u/s. 36(1)(v)(va). DRP has confirmed the same even though assessee has objected to the same. DRP has relied on the judgements of Hon'ble Kerala High Court in the case of South India Corporation [103 Taxman 322] and Madras Radiators and Precincts Ltd., [364 ITR 620]. 12.1. In this regard it was submitted that it is an established position of law that no disallowance can be made u/s 36(1)(v)/(va), if the assessee has remitted the amounts before the due date of filing of Income tax return for the relevant assessment year. In the case under consideration, the relevant due date of filing of Income Tax Return was 30.09.2008 and the assessee company has remitted the entire dues towards PF/ESI bef....
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.... Assessee could claim deduction on actual payment basis. By Finance Act, 1988 Parliament inserted first proviso w.e.f. 01.04.1988 which inter alia provides that any sum payable by Assessee by way of tax, duty, cess or fee, if payment is made after closing of accounting year but before date of filing of Return under Section 139(1), Assessee would be entitled to deduction on actual payment basis. This proviso did not include within its ambit, contributions under labour welfare statutes. By Finance Act, 1988, Second Proviso thus Second proviso was further amended by Finance Act, 1989 w.e.f. 01.04.1989. 27. Court held that Assessee/employer thus would be entitled to deduction only if contribution stands credited on or before due date given in the Act 1952 or Act 1948. Second proviso created difficulties, inasmuch as under Act, 1981, due date was after the date of filing of returns and thus industries made representations to the Ministry of Finance. Court, looking to the history of amendments held, it is evident that Section 43B, when enacted in 1984, commences with a non obstante clause. The underlying object being to disallow deductions claimed merely by making a book entry b....
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....e. Otherwise view taken by Gujarat High Court and followed by Kerala High Court, with great respect, we find expedient to dissent therewith". 12.4. Though the Ld.DR relied upon the certain judicial precedents which are in favour of the Revenue, in view of the decision of the Hon'ble Supreme Court in the case of CIT Vs. Vegetable Products Limited [88 ITR 192] (SC), wherein Hon'ble Supreme Court held that where two reasonable constructions of a taxing provision are possible that construction which favour Assessee must be adopted, therefore, by respectfully following the decision of the Hon'ble Allahabad Court, we prefer to follow the view expressed by that Court which is in favour of Assessee. 12.5. Considering the facts and circumstance of this case and also following the judicial precedents as discussed above, we are of the view that there is no distinction between employee's and employer's contribution to PF/ESI, when the total contribution is deposited on or before the due date of furnishing of return of income u/s 139(1) of the IT Act then, no disallowance can be made towards employee's contribution alone. Accordingly, we agree with assessee's contentions and therefore set....
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.....3. We have considered the rival contentions and perused the submissions. There is no dispute that assessee has purchased Plant & Machinery which has categorized by him as pollution control equipment. What sort of evidence is required to establish that these are used in controlling the pollution is not specified by the DRP. In fact the DR's observation is not correct in the sense that 'specific question was put to the taxpayer, directing to prove that pollution control equipment was required for the purpose of business'. The use of machinery in the business has not been doubted even by the AO as he allowed depreciation at 15%. Assessee categorized certain equipment as pollution control equipment, the nature of the equipment is to be examined in the context of the business operations of assessee. Since this aspect has not correctly appreciated by the AO or DRP, we are of the opinion that this issue requires re-examination by the AO. Therefore, we set aside the issue to the file of AO to examine the nature of equipment purchased and its utilization in the business and if satisfied to allow depreciation claim at 100%. In case of any disallowance of depreciation, AO is also directed to....
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....ich makes a lot of difference. At the time of transaction, whether they are sister concerns or not is not established on record. Moreover, assessee is objecting to the contention that these are sister concerns. In view of that, we are of the opinion that this issue requires re-examination by the AO. In case, at the time of entering into agreement for purchase of the asset, both the parties are related, then Explanation-3 to provisions of Section 43(1) may come into play. There is no clear finding on this issue, therefore, we set aside the issue to the file of AO to examine afresh and give clear findings on both the issues: i. IRIS Smart Card Ltd is a related party; ii. Provisions of Section 43(1) Explanation-3 will apply; In case of any disallowance on this issue, AO is also directed to examine whether the machines are utilised for the purpose of business of the unit eligible for deduction u/s. 10B and if so, the profits of that unit would increase correspondingly. The deduction u/s. 10B also may have to vary accordingly. With these observations/directions, the grounds on this issue are set aside to the file of AO for fresh examination. Ground is considered all....