AI Drafter 
TaxTMI 
TaxTMI 
2015 (3) TMI 1320
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..... That the Ld. AO/TPO grossly erred in determining the ALP by inappropriately applying the CUP method based on presumptions and surmises. CORPORATE TAX MATTERS 4. That the Assessing officer/DRP erred on facts & in law in making a disallowance of finance expenses of Rs. 9,85,67,574 alleging that borrowed funds were utilized for giving interest free advances to its joint venture company 'Hindustan Max-GB Ltd'. 5. That the Ld. AO/DRP erred on facts & in law in making a disallowance of Rs. 8,284,573 out of commission expenses for the year under consideration based on a view formed in the immediately preceding assessment year on following transactions:- 5.1 disallowing sums of Rs. 4,54,744 and Rs. 44,09,664 paid as commission to Malachite Chemicals and Edward Keller (Phils)Inc. 5.2 disallowing commission expense of Rs. 34,20,165 being excessive and unreasonable by arbitrarily fixing an average rate of commission paid to Indian agents at 3%. 6. That the Ld. Assessing officer/DRP erred on facts & in law in making a disallowance of expenditure of Rs. 21,15,375 by invoking the provisions of section 14 A of the Act read with Rule 8 D of the Income Tax Rules, 1962. 7. Tha....
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.... an addition of Rs. 3,74,470 by treating the said amounts to be in the nature of capital expenditure. 14.1 Without prejudice to the above, the Ld. DRP and AO has erred in not even allowing depreciation on the said amount of Rs. 3,74,470 after considering it as capital expenditure. 15. That the Ld. AO/DRP erred on facts & in law in making a disallowance of Rs. 5,07,730being amount written off as discount allowed to the customers on the alleged ground that the amount of discount allowed does not pertain to current year, the same is not allowable. 16. That the Ld. AO/DRP erred on facts & in law in making a disallowance of Rs. 14,82,137under section 40(a)(i) of the Act on the alleged ground that the appellant was liable to deducttax under section 195 of the act on expenses incurred towards training of employees, treating the same as professional services. 17. That the Ld. DRP and AO erred on facts and in law in charging interest under sections 234B and 234C of the Act. 18. The Ld. DRP and AO also erred in proposing to initiate penalty proceedings under section271(i)(c) of the Act for concealment of income or....
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....these findings were recorded in paras 77, 95, 98 and 102. At the same time he admitted that ultimately in para 110, the Tribunal further held that amount paid has to be reduced by the amount of benefit received by the assessee on account of financial services. According to him, this is contrary to the findings recorded in para s 95 and 102. 6. On a query by the Bench that how much benefit the assessee has received in this year on account of financial services, he referred to page 5 of the synopsis of the case and pointed out that on account of financial services assessee has received benefit of Rs. 8.8 crores. 7. On the other hand Ld. DR submitted that basically the issue is covered by the order of Tribunal in ITA No. 1139/Chd/2011 and 1290/Chd/2012 for assessment years 2007-08 and 2008-09. He also referred to various paras like 95, 98, 102 & 110 and submitted that Tribunal has given a clear finding in para 110 that payment for total corporate services have to be restricted to the extent of 50% of the financial service benefit received by the assessee because assessee should have retained atleast 50% of the benefits on account of such financial service. He pointed out that as....
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....50% of benefit received on account of financial services. . Normally, the same had to be reduced from the corporate services charges paid by the assessee. This position was admitted by Shri K.M. Gupta who was present during the hearing of this appeal and who was also present during the original hearing of the appeal. The issue was finally adjudicated vide para 110 of the consolidated order in assessment years 2007-08 and 2008-09 which reads as under:- "110. In view of the abovesaid principles laid down, we find no merit in the adjustments made by the TPO. Another aspect is to be kept in mind while deciding the issue. The plea raised by the ld. AR for the assessee was that savings to the assessee as result of services provided by the AE should be considered while holding the transaction to be at arm's length. It was fairly conceded by the ld. AR for the assessee that under internationally accepted norms, savings are to be shared between the parties in the ratio of 50 : 50. The ld. AR for the assessee further pointed out that the savings on account of guarantee fee in assessment year 2007-08 were Rs. 1.40 Cr and the total savings in assessment year 2008-09 were Rs. 9.29 Cr. The TP....
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.... that in later years, the amount paid on account of Corporate Services is increasing from year to year substantially then a query was raised to determine the reason for such a big jump in the corporate service charges. At this stage, the Ld. Counsel has pointed out that the main reason for substantial increase in the amount of Corporate Services amount paid was on account of financial services. The assessee has started receiving financial services in the form of corporate guarantee as well as sanctions of the limit by banks on the recommendation of holding company because of which the assessee got the limits sanctioned from the bank at much lower rates than the market rates. At the instance of Bench the Ld. Counsel has also quantified the amounts of benefits received by the assessee company during these two years. The amounts of corporate service charges in various assessment years are as under:- Assessment year Amount (in Rs. ) 2007-09 22,700,000 2008-09 63,970,136 2009-11 79,931,741 2010-12 89,829,606 6. From the above figures the Bench agreed with the contention of the Revenue that service charges paid on account of corporate serv....
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....of guarantee form it associated enterprise, the appellant could have borrowed money at a significant premium to the Prime Lending Rate (PLR) prevailing during the relevant financial year. However, on a conservative basis, the interest savings availed by the appellant, due to guarantee provided by the associated enterprise has been computed on the basis of prevailing PLR. The PLR prevailing during financial year 2006-07 was 10.75% whereas the PLR during financial year 2007-08 was the relevant period was 12.75% whereas the appellant had borrowed money at 8.10%. Considering the above factors, the interest cost savings enjoyed by the appellant due to guarantee provided by the associated enterprise for financial year 2006-07 and 2007-08 is as under: Financial Year Amount of loan (INR in Cr) Interest rate PLR Savings % Savings (INRE in Cr) 2006-07 52.63 8.10% 10.75% 2.65% 1.39 2007-08 52.63 8.10% 12.75% 4.65% 2.45 Further, the associated enterprise has also provided guarantee to enable the appellant to avail Letter of Credit ('LC') facility from Royal Bank of Scotland ('RBS') without providing any security. D....
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....by another associated enterprise, DSM Finance B.V. In this regard it is respectfully submitted that DSM Finance B.V. is a part of corporate treasury division of the DSM group and has a mandate from DSM N.V. (now Royal DSM NV or Koninklijke DSM N.V) to manage/arrange/support the funding of DSM group companies. A power of attorney executed by DSM NV authorizing DSM Finance BV to sign any obligation / arrangement in the field of cash management is attached as Annexure 5. It is further submitted that the name of DSM NV was changed to Royal DSM NV on completion of 100 years of its existence in 2004. An extract from the Chamber of Commerce for Limburg, Netherland is attached as Annexure 6. In view of the aforesaid, it is respectfully submitted that the guarantee was issued by DSM Finance B.V. at the directions/instruction of DSM N.V. and accordingly, an arm's length guarantee fee was payable by the appellant to DSM N.V. in consideration for issuance of such guarantee." 7. From the above it become clear that assessee had started receiving some financial services also from the holding company which explained the increase in total payments on account of corporate services. The asse....
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.... provided by DSM N.V., an AE of DSM India, to the bank (Citibank International Plc.) on behalf of DSM India amounting to Euro 10 million (approx 68 crores) in connection with any overdraft, loan, credit facility etc. In this regard, a copy of the letter providing this inter-company guarantee facility to DSM India has also been submitted by the assessee to the Ld. TPO as Appendix 6B to the submission dated August 16, 2012 (placed at pages 300 to 303 of paperbook). Furthermore a letter by Royal Bank of Scotland, providing the details of credit facilities existing for DSM India in various financial years wherein security has been provided by Koninklijke DSM NV, was also submitted with the Ld. TPO as appendix 6 to the submission dated September 17,2012(placed at page 338 of the paperbook). * The detailed benchmarking report along with credit rating analysis is provided as Appendix 2. It is respectfully submitted that as per the analysis conducted by the appellant, the credit rating was calculated in a scientific manner and the same was determined at B3. * The results of the aforesaid benchmarking are as under:- Nature of facility Amount of facility Equivalent INR ....
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....ded this issue in favour of the assessee and has noted the facts as under:- "It is noted that HMGB Limited manufacturers and supplies Penicillin G which is a critical raw material for the appellant. The table below provide an overview of the total raw material (Penicillin G) purchased by the appellant from all suppliers and the raw material purchased from HMGB Limited during the previous year relevant to the assessment year 2003-04 under consideration:- Particulars Quantity in Kg % of total purchases Penicillin G- Imported (A) 1012686 38.37% Penicillin G Domestic *from HMGB Limited 120256 0 45.56% *Other suppliers 424098 16.07% (B) 1626658 61.63% Total(A+B) 2639344 100% It is seen from the above that the purchases of Penicillin BG from HMGB Limited constitutes about 45.56% of total purchases and about 73.93% of total domestic purchases, therefore, by advancing the sum of money, the appellant has in fact secured its own business and ensured tha....
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.... assessed. It is also not in dispute that the assessee had raised interest free loan of Rs. 95 crores from its parent company in the past which too has been put to use by the assessee in its business and it has been claim of the assessee before the lower authorities that the amount advances to HMGB is out of such amount. There is no finding in the assessment order that the advances made to HMGB in the past years, which are outstanding during the year, have been made out of the interest bearing loan from the parent company. In any case we are not going into this aspect. In our view, there is sufficient material to show that the relationship of the assessee with its subsidiary, HMGB was based on commercial expediency and the advancing of the amount was for business purpose. In this regard, we may make a reference to the order of the CIT(A) for assessment year 2004-05 which is also subject mater of appeal before us. The CIT(A) has tabulated the price advantage to the assessee on purchases made from HMGB, an uncontroverted fact, which clearly indicates commercial prudence apart from ensuring continuous and timely supplies. Thus, on the grounds of consistency and commercial expediency, ....
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.... 21. Before us Ld. Counsel for the assessee submitted that this issue has also been decided by the Tribunal in earlier years and commission paid to foreign parties has been remanded back to Assessing Officer in assessment year 2006-07 in ITA No. 1455/Chd/2010. He further pointed out that domestic commission was fully allowed by the Tribunal, therefore, issue may be decided in terms of order passed in assessment year 2006-07. 22. On the other hand Ld. DR simply supported the order of CIT(A). 23. After considering the rival submissions we find that this issue was adjudicated vide paras 86 & 87 of the order of Tribunal in ITA No. 1455/Chd/2010, which reads as under:- "86. We have heard the rival contentions and perused the record. The issue raised vide ground No. 4 is against the disallowance of commission expenses totaling Rs. 96,15,144/-. During the year under consideration, the assessee had claimed total expenditure of Rs. 2.60 crores under the head 'commission'. The said commission included both commission paid on account of exports and also the commission paid on domestic sales. The case of the revenue is that the assessee had made sales to certain part....
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....d no connection with the sales made to the said concerns and if the contention of the assessee is found to be correct, the Assessing Officer is directed to allow the claim of expenditure booked on account of commission paid on export sales. Reasonable opportunity of hearing shall be afforded to the assessee to put forward its contentions. In view thereof, this issue is set aside to the file of Assessing Officer with our directions. 87. The second aspect of the claim of expenditure under the head 'commission' relates to the commission paid on domestic sales. The Assessing Officer noted that the assessee had paid commission at varying rates starting from about 1% to 5%. The assessee has filed on record the details of the abovesaid commission totaling Rs. 155,27,136/-The assessee has tabulated the names of the parties alongwith the details of same value of sales, commission paid and the rates at which paid. The perusal of the said details reflect the commission @ 4.48% being paid to M/s Ace Corporation. The total amount paid to the said party is Rs. 1351,250/-. The Assessing Officer, on the other hand, vide para 5.12 has noted that the commission to the said party has been made @ 6....
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....nce of Rs. 21,15,375/- 27. Before us it was mainly submitted that this investment was written off during the year and, therefore, no exempt income was earned and hence disallowance u/s 14A could not have been made. 28. On the other hand Ld. DR strongly supported the order of Assessing Officer. 29. After considering the rival submissions we find that Hon'ble Punjab & Haryana High Court in the case of CIT, Faridabad Vs. Lakhani Marketing Faridabad in ITA 970 of 2008 (O&M) has clearly held that if there is no exempt income then provisions of section 14A cannot be invoked. Therefore, in our opinion, if there was no income during the year then no disallowance is called for. Since in the case before us investment itself has been written off, therefore, there could not be any income. Accordingly we delete this addition. 30. Ground No.7: After hearing both the parties we find that during assessment proceedings it was noticed that there is an outstanding capital work in progress as on 31.3.2009 amounting to Rs. 142.45 millions. Further, the assessee has paid interest amounting to Rs. 165.71 million on loan of Rs. 2056 million. Assessee was aske....
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.... On the other hand Ld. DR while supporting the order of Assessing Officer submitted that no details are available showing to which bank such charges were paid. 37. We have considered the rival submissions carefully and again agree principally with the contention of Ld. counsel of assessee that no tax is required to be deducted in respect of bank charges paid to the banks. However, it is not clear from the records whether these amount pertains to bank charges because Schedule 20 simply shows financial charges, therefore, we remit this matter back to the file of Assessing Officer with a direction to verify whether assessee has paid bank charges to different banks, then no disallowance is required to be made otherwise the issue may be decided in accordance with the law. 38. Ground No. 9: After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that assessee has claimed a sum of Rs. 98,90,766/- from taxable income on account of ex. gratia paid for earlier years u/s 43B read with section 36(1)(ii). According to Assessing Officer, ex. gratia was not covered u/s 43B, therefore, the sum of Rs. 98,90,766/- was disallowed in the draft asse....
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....fter considering the rival submissions we do not agree with the submissions that ex. gratia should be construed as part of the bonus. We have carefully perused the judgement of Hon'ble Calcutta High Court and in that case there is no such principle laid down. However, the Hon'ble Court has clearly held that ex.gratia payment made to employees which consists of bonus payment over and above the Bonus Act should be allowed as business expenditure. Therefore, if sum of the ex.gratia payment was payable for that year, the same was required to be allowed on accrual basis as part of the business expenditure. Since this aspect has not been examined by the Assessing Officer, therefore, we set aside his order and remand the matter back to his file for reexamination of the computation of the ex.gratia payment and if some of the ex.gratia payment pertains to the assessment before us i.e. Assessment year 2009-10, then the same should be allowed on accrual basis as business expenditure otherwise the issue may be decided in accordance with law. 44. Ground No.10: After hearing both the parties we find that during assessment proceedings the assessee has reduced a sum of Rs. 1,05,26,246/-....
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....he Assessing Officer disallowed this sum. 49. Before us Ld. Counsel for the assessee submitted that only a sum of Rs. 2 lakhs was shoawn as penalty which was shown under the head 'contingent liability' in the notes to the accounts whereas the Assessing Officer has taken the same to be a sum of Rs. 20 lakhs as actual penalty paid which is not correct. In this regard he referred to pages 455 and 456 of the paper book which is relevant portion of the notes of the account. 50. On the other hand Ld. DR strongly supported the order of Assessing Officer. 51. After considering the rival submissions we find that the following amount is shown under the head 'contingent liability':- (iii) Penalty on custom duty amounting to Rs. 0.20 (previous year Rs. 0.20) due to import of the duty free material against DEPB Licenses which was not in order." The above clearly shows that firstly the amount is Rs. 0.2 million i.e Rs. 2 lakhs and not Rs. 20 lakhs. Secondly, a contingent liability represents a liability which may arise or not arise on happening of a particular event and it is not the actual liability. Therefore, it cannot be said that assessee has claimed this amount a....
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.... always remained with the DAI BV. Therefore, it cannot be said that assessee had paid this royalty for acquisition of any capital asset or for any enduring benefit. In this regard, he mainly relied on the decision of Hon'ble Supreme Court in the case of CIT v I.A.E.C (Pumps) Ltd 232 ITR 316. He also relied on the following judgments:- i) Empire Jute Co. Ltd v CIT [1980] 124 itar 1) ii) Hero Honda Motors Ltd (TS-40-High Court-20115(DEL) iii) Assam Bengal Cement Co Ltd v CIT [1955] (27 ITR 34) iv) CIT v Alembic Glass Industries Ltdx [1969] 71 ITR 752 (Guj.) 55. On the other hand Ld. DR strongly supported the order of the Assessing Officer. 56. We have considered the rival submissions carefully. We find force in the submissions of Ld. Counsel for the assessee. The license agreement between the DAI BV and the assessee has been entered on 10.03.2006. Clause (2) of this agreement reads as under:- "2. LICENCE 2.1 For the duration of this Agreement and subject to the terms and conditions contained herein, DAIBV herby grants DAI-INDIA hereby accepts from DAIBV, a non-dividable, non exclusive, non transferable and non-sublicensable the Patents and the Technology s....
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.... was not to disclose to third parties any of the documents made available by the foreign company to the assessee without having received a written authorisation from the foreign company. The High Court held that these features of the agreement clearly established that what was obtained by the assessee was only a licence and what was paid by the assessee to the foreign company was only a licence fee and not the price for acquisition of any capital asset. On appeal by the Department to the Supreme Court it was held as under: "Held, affirming the decision of the High Court, that the High Court had applied the proper principles of law and had rightly held that the expendi-ture incurred by the assessee was only revenue expenditure." 59. In our opinion the case of the assessee is identical to the above noted case of the Supreme Court and the principle laid down by Hon'ble Supreme Court is clearly applicable. Therefore, we set aside the order the Assessing Officer and hold that expenditure incurred for payment of royalty is allowable and therefore, delete the addition. 60. Ground No. 13 : After hearing both the parties we find that during assessment proce....
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.... earlier period, therefore, the discount could not have been claimed during the year. The DRP also confirmed this disallowance; therefore, Assessing Officer disallowed this amount. 67 Before us it was submitted that actually the assessee could not recover the amount of dues from the parties listed by the Assessing Officer details of which has been filed in the paper book at page 642. He also referred to page 644 of the paper book which is a copy of the submissions made before the Assessing Officer in which it was clearly stated that this amounts though relates to the earlier years but the same are on account of sales made to various parties and could not be recovered. The Ld. Counsel submitted that at best this could be treated as short and excess recoveries and assessee could have easily claimed the same as bad debts because no recoveries could be made from these customers. 68. On the other hand Ld. DR strongly relied on the order of Assessing Officer. 69. After considering the rival submissions we agree with the submission of Ld. Counsel of the assessee. If amount could not be recovered from the customers despite efforts and the same could have been easily claimed as a b....
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....DRP is of the view that since tax has not been deducted while making payment, Assessing Officer action is as per law. The grounds of objection are rejected". In view of the above the Assessing Officer disallowed this expenditure. 71. Before us, Ld. Counsel for the assessee submitted that employee of the company Mr R.T. de Vries underwent business leadership training programme in Netherlands. The assessee company has simply reimbursed the expenses incurred on such training. This expenditure cannot be treated as fee for technical services and, therefore, no tax was deductible. He also relied on the decision of ITAT Mumbai Bench of the Tribunal in Raymond Ltd v DCIT 86 ITD 791 (Mum.) 72. On the other hand Ld. DR strongly supported the order of Assessing Officer 73. After considering the rival submissions carefully we agree with the contention of Ld. Counsel for the assessee. Merely reimbursement of expenses incurred on the training of a particular employee abroad cannot be termed as fee for technical services. Even if, assuming for the argument sake that this would amount to fee for technical services, then it is to be seen that such service was rendered in India, which has n....
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....side as provision for diminution in the value of any asset." The plain reading of the above provision would clearly show that adjustment can be made to the book profit under clause (i) to Explanation (1) only in respect of provision of diminution of value of any asset but in case before us it is a case of total write off. Perusal of Schedule 18 of the profit and loss account, copy of which is available at page 443 clearly shows that this amount has been written off by the following narration - "Writing off of investment" Thus, it becomes clear that it is a case of total loss of investment which is not covered by clause (i) to Explanation (1) of section 115JB which has been reproduced by us above, therefore, we set aside this order of Assessing Officer and delete this addition. 81. Ground No. 21: The Ld. Counsel for the assessee submitted that Assessing Officer wrongly made adjustment of wealth tax amounting to Rs. 52,493/- and provision of FBT amounting to Rs. 72 lakhs. He contended that this amount could not be treated as part of income tax. In this regard he relied on the decision of Hon'ble Bombay High Court in the case of CIT v Echjay Forgings Pvt. Ltd 251 ITR 1....