TaxTMI 
TaxTMI 
2016 (10) TMI 1211
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....not charging a guarantee fee to its Associated Enterprises. 2. The learned TPO and the learned AO have erred, in law and in fact, by ignoring the corporate guarantees obtained from overseas subsidiaries/ parent company for which no guarantee fee has been paid by the Assessee. 3. The learned TPO and the learned AO have erred, in law and in facts, by not giving proportionate effect to the guarantees which existed only for a part of the year. 4. The learned TPO and the learned AO have erred, in law and in facts, by considering corporate guarantee transaction as an intra-group service, warranting an arm's length remuneration by ignoring the fact that such a transaction is a mere shareholder activity. 5. The learned TPO and the learned AO have erred, in law and in facts, by considering the outstanding dues from the AEs to be in the nature of loan and not considering the business/ commercial expediencies of the arrangement. 6. The learned TPO and the learned AO have erred, in law and in facts, in imputing interest on the loans advanced to the AEs, by completely disregarding the fact that loans given to AEs are in the nature of quasi equity and were commercially expedient f....
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....fund claim by INR 3,98,089 together with applicable interest under Section 244A of the Act. The Petitioner submits that the above additional grounds are being raised by way of abundant caution. The additional grounds raise issues which are fundamental to the appeal and the nonadmission and non-adjudication of the same would result in an incomplete appreciation and adjudication of the matter. The Petitioner submits that the failure to raise these grounds at an earlier stage is neither wilful nor wanton but due to the reasons stated above. No prejudice would be caused to the Respondent by reason of the above additional grounds being admitted and adjudicated and accordingly, the balance of convenience is in favour of such an order being passed by this Hon'ble Tribunal." Admissibility of Additional Grounds. 4. The assessee has filed a petition under Rule 11 of the ITAT Rules for admission of the additional grounds. 5. The learned Authorised Representative of the assessee has submitted that the additional grounds are being raised by way of abundant caution. The additional grounds raised are fundamental to the appeals and non-adjudication of the same would result in an incomp....
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.... regarding these additional grounds are that these are being raised by way of abundant caution which suggest that the assessee is raising some additional plea by way of the additional grounds whereas the Ground Nos.12 & 13 are fresh grounds before the Tribunal without raising any objection before the DRP. Further the claim was made by the assessee only in the revised return which was not considered by the Assessing Officer. Accordingly, when this issue requires examination of relevant facts of loss arising on account of amalgamation, we are of the considered opinion that this issue ought to have been raised before the DRP for proper adjudication. Accordingly in the facts and circumstances of the case, we set aside this issue to the record of the DRP for consideration and adjudication of the issue after giving an opportunity of being heard to the assessee. 9. AS regards the additional ground No.14, this issue was also not raised before the DRP. Further this is not an issue which requires any adjudication but it is only at the most a mistake of computation of tax. Therefore the assessee ought to have taken appropriate step either before the DRP or filing petition under Section 154....
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.... Act, 2012 with retrospective effect from 1.4.2002. The ld. AR has submitted that this amendment has an effect of expending the scope of the section and introduced new principle upon which liability arises. Such amendment though claimed as clarificatory but in fact substantive amendment and incapable of being given retrospective effect. Thus the ld. AR has submitted that a subsequent retrospective amendment in Section 92B cannot bring the transaction of providing guarantee under the ambit of international transactions as per the amended provision of Section 92B. In support of his contention, he has relied upon the decision of Mumbai Bench of the Tribunal dt.31.3.2016 in case of Siro Clinpharm Pvt. Ltd. Vs. DCIT in IT(TP)A No.2618/Mum/2014 and 2876/Mum/2014. The learned Authorised Representative has submitted that the Mumbai Bench of this Tribunal had held that scope of charging provision can be enlarged with retrospective effect but the anti avoidance measure that the T.P. Legislation inherently is not primarily a source of revenue vis-à-vis certain norms and these norms cannot be given effect from a date earlier than the date when norms are being introduced. Thus the explan....
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....he assessee provides software development and information technology enabled services (ITES) to its AEs. During the FY 2005-06 the assessee provided a corporate guarantee to a third party bank on behalf of an AE but failed to charge a fee for the guarantee. The assessee conducted a TP study and concluded that this transaction was at arm's length however during audit proceedings the TPO rejected the analysis of the assessee and made adjustments to this transaction. The taxpayer cites the order of Four soft Ltd wherein the Hon'ble ITAT Hyderabad observed as under: "We find that the TP legislation provides for computation of income from international transaction as per section 92B of the Act. The corporate guarantee provided by the assessee company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. In our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compa....
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....ted the commission changed by ICICI Bank at 3.75% arms length price for the corporate guarantee provided by the assessee to its AE worked out the TP adjustment of Rs. 2,61,79,350/-. The DRP also rejected assessee's objection on the issue. 25. We have heard the parties and perused the material on record. The sum and substance of the submissions made by the learned AR is, the corporate guarantee provided by the assessee cannot be equated to bank guarantee and resultantly the commission rate for bank guarantee cannot be appl ied to the corporate guarantee. It was submi tted that the corporate guarantee is nothing but an additional guarantee provided by the parent company and it does not involve any cost or risk to the share holders. It was submitted that since the corporate guarantee was given keeping in view paramount business interest of the parent company it has to be allowed as business expenditure. It is the further submissions of the learned AR that the retrospective amendment ef fected to section 92B of the Act, by Finance Act, 2012 by insertion of Explanation (i)(c) to section 92B also has not enlarged the scope of the 'international transaction' to include the corporate gu....
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.... the ITAT Hyderabad or the amended provision of the Act in this regard. If the Finance Bill of 2012 is passed by the Parliament amending the provisions of section 92B, with effect from 1st April, 2002, he will have to ignore the decision of the ITAT Hyderabad. In case section 92B is not amended with retrospective effect, he should grant relief to the appellant." 25.4 In the aforesaid view of the matter, we agree with the TPO that ALP of the corporate guarantee has to be determined as it falls within the scope and ambit of an international transaction after the retrospective amendment to section 92B. However, it appears that the TPO has applied the rate of 3.75%, which is applicable to bank guarantee issued by the bank. As the corporate guarantee is not in the nature of bank guarantee, the rate applicable to bank guarantee provided by the bank cannot be applied to corporate guarantee which is provided by a group company. In case of Glenmark Pharmaceuticals Vs. ACIT in ITA No. 5031/Mum/2012, dated 13/11/2013, the Mumbai Bench of the Tribunal after analysing the facts in that case had held that 0.53% corporate guarantee rate in that case was appropriate. The ITAT Hyderabad Bench in....
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.... not considered by the Delhi Bench of the Tribunal. In the case of M/s. Nimbus Communication Ltd. Vs. ACIT in ITA Nos.6816/Mum/2010 and 7105/Mum/2011, the Tribunal vide order dt.7.8.2013 has considered an identical issue in paras 4 & 5 as under : " 4. As regards the issue raised in ground No. 2 relating to TP adjustment made on account of guarantee commission in respect of corporate guarantee given by the assessee to its Associated Enterprises (AEs) for obtaining bank loans, the ld. representatives of both the sides have agreed that a similar issue was involved in assessee's own case for the immediately preceding year i.e. A.Y. 2005-06 and the Tribunal vide its order dated 12-06-2013 passed in ITA No. 3664 & 2359/Mum/2010 has already decided the same vide para No. 9 & 10 which read as under:- "9. We have considered the rival submissions and also perused the relevant material available on record. For the guarantee given to the bank against the financial assistance given to its AEs, no commission was charged by the assessee company on the ground that the said AEs were not benefited by the guarantee so given and it was the assessee who benefited as a result of commercial ben....
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....rating of Associated Enterprise is due to a guarantee by another group member, such association positively enhances the profit making potential of that Associated Enterprise. We, therefore, find ourselves in agreement with the contention of the ld. D.R. that there was a clear benefit accrued to the Associated Enterprises by the guarantee provided by the assessee and when such benefit was passed on by the assessee to the said Associated Enterprises, guarantee commission should have been charged at arm's length price. The commercial relationship between the assessee and its Associated Enterprises is distinct and separate from the transactions of giving guarantee and such transactions have to be considered and examined independently in order to determine the arm's length price. 10. As regards the rate of guarantee commission, it is noted that the arm's length price of guarantee commission was determined by the TPO by applying CUP method and the arithmetic mean of 1.5% of the guarantee commission charged by the HSBC Bank in the range of 0.15 to 3% was taken as arm's length price. The ld. CIT(A) upheld the CUP method applied by the TPO but adopted the rate of 0.25% of....
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....ength be granted. In para 2.9 of the said direction of DRP as under : " 2.9 As far as the argument of corporate guarantee received by the taxpayer is concerned the same carries merit. In the interest of fairness, the TPO is directed to provide adjustment for the value of corporate guarantees received by the taxpayer form its AEs after verification of individual transactions." Accordingly, we set aside this issue to the record of the A.O./TPO to recomputed the ALP by considering the arm's length guarantee fees at 0.5% and further by providing appropriate adjustment for corporate guarantee received by the assessee from its arm's length. 17. Ground Nos.5 to 7 and 9 are regarding T P Adjustment in respect of the loan provided to AE. 18. The ld. Counsel for the assessee has submitted that the transaction of loan provided to the AE is Shareholder Act to protect its investment interest in the subsidiary and in furtherance of its own interest. Therefore this transaction cannot be considered as an international transaction. In support of his contention, he has relied upon the decision dt.21.9.2016 of Kolkata Bench of the Tribunal in the case of Tega Industries Ltd. Vs. DCIT in I....
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....Siva Industries (supra). We do not find any merit in the arguments of the learned counsel for the assessee that the DRP should have adopted the EURIBOR for the purpose of the TP adjustments, as we find that the mostly used and recognised benchmark rate for international loan is LIBOR based. Hence, the DRP rightly directed the assessing officer to adopt the LIBOR rates. We confirm the directions of the DRP. However, by considering the contentions of the learned counsel for the assessee that the actual LIBOR was 4.42% as against the 5.78% approved by the DRP, we find it proper to restore this issue to the file of the assessing officer, to verify the correctness of the claim made by the assessee company. In view of this matter, we remit this matter to the file of the assessing officer to verify the actual average LIBOR prevailed in the financial year relevant to the assessment year under consideration and adopt the interest rate 4.42% if the claim of the assessee is found correct. The ground raised by the assessee on this issue is partly allowed for statistical purpose". Similar view has been taken by the Tribunal in a series of decisions which are also relied upon by the ld. AR of....
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....nsaction of sale or purchase between the assessee and the AE. However, it was held that it cannot be treated as an independent international transaction de horse the main international transaction between the parties. We further note that an identical issue was considered and decided by the Mumbai Bench of this Tribunal in the case of Information Systems Resource Centre Pvt. Ltd. Vs. ACIT in ITA No.7757/Mum/2012 and C.O. 282/Mum/2013 vide order dt.29.5.2015 in paras 11 to 13 as under : "11. We have considered the rival submissions as well as the relevant material on record. In the present case, the sale transaction of the assessee with its A.E. have been accepted by the Transfer Pricing Officer / Assessing Officer at arm's length and no adjustment has been made in respect of the sale transaction. However, the Transfer Pricing Officer has made the adjustment on account of credit period provided by the assessee to the A.E. on realisation of sale proceeds. At the outset, we note that an identical issue has been considered by the co- ordinate bench of the Tribunal, Mumbai Benches, in Goldstar Jewellery Ltd. (supra), vide Para-8, held as under:- "8. We have conside....
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.... of closely linked transaction are permitted under said rule. This concept of aggregation of the transaction which is closely linked is also supported by OECD transfer pricing guidelines. In order to examine whether the number of transactions are closely linked or continuous so as to aggregate for the purpose of evaluation what is to be considered is that one transaction is follow-on of the earlier transaction and then the subsequent transaction is carried out and dependent wholly or substantially on the earlier transaction. In other words, if two transactions are so closely linked that determination of price of one transaction is dependent on the other transaction then for the purpose of determining the ALP, the closely linked transaction should be aggregated and clubbed together. When the transaction are influenced by each other and particularly in determining the price and profit involved in the transactions then those transactions can safely be regarded as closely linked transactions. In the case in hand the credit period extended to the AE is a direct result of sale transaction. Therefore no question of credit period allowed to the AE for realization of sale proceeds without h....
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....taken a view that the transaction of allowing the credit period to the A.E. on realisation of sale proceeds has to be considered along with the main international transaction in respect of sale to A.E. A similar view has been taken by the Tribunal, Delhi Bench, in Kusum Healthcare Pvt. Ltd. (supra), wherein the Tribunal, vide Para-7 to 10, held as under:- " 7. We have heard rival submissions and perused the material on record. An uncontrolled entity will expect to earn a market rate of return on its working capital investment independent of the functions it performs or products it provides. However, the amount of capital required to support these functions varies greatly, because the level of inventories, debtors and creditors varies. High levels of working capital create costs either in the form of incurred interest or in the form of opportunity costs. Working capital yields a return resulting from a) higher sales price or b) lower cost of goods sold which would have a positive impact on the operational result. Higher sales prices acts as a return for the longer credit period granted to customers. Similarly in return for longer credit period granted, a firm should be will....
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....rking capital adjusted margin of the comparables. Hence, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified." 13. Following the orders of the Tribunal, we set aside this issue to the record of the Assessing Officer / Transfer Pricing Officer and direct to re-do the exercise of determination of arm's length price in the light of the above decisions of the Tribunal. The grounds raised in this cross objection are allowed for statistical purposes." Following the earlier orders of this Tribunal, we set aside this issue to the record of the A.O./TPO with the direction to redo the exercise of determination of ALP by considering the proper working capital adjustment in the comparable prices in respect of transaction of software development services provider to the AE. We make it clear that if after giving the necessary adjustment the international transaction of the assessee is found at arm's length then there is no question of any separate adjustment on account of allowing the credit period on the receivable from AE. We further clarify that the normal credit period allowed for the receivable....
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....AEs are in the nature of quasi equity and were commercially expedient from XSL's perspective. 7. The learned TPO and the learned AO have erred, in law and in facts, in not objectively selecting the interest rate to determine the arm's length rate of interest applicable for outstanding dues from the AEs. 8. The learned AO has erred in law and on facts, by reducing Rs. 39,07,208 (foreign travel expenses) from export turnover of Bangalore BPO unit in the formula prescribed under section 10A(4) of the Act, even though the Company is not rendering technical services outside India. 9. The learned AO has erred in law and on facts, by placing incorrect reliance on the ruling of the Hon'ble Supreme Court in the case of CIT vs HimatsingikeSeide Ltd, since the ruling is on the fact of an eligibleunit having only unabsorbed depreciation and such unabsorbed depreciation of the eligible unitis to beset-off with the profits of the same eligibleunit, which is not the facts of the Appellant. 10. Further, the learned AO by placing incorrect reliance on the ruling of the Hon'ble Supreme Court in the case of CIT vs HimatsingikeSeideLtd, has also disregarded the jurisdictional ruling of the....
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....ing interest of Rs. 6,01,152 under Section 234C of the Act on the demand raised as against Rs. 61,448 calculated on the returned income bythe Appellant in its Return of Income. 25. The assessee has also raised an additional ground as Ground No.21 as under : 17 : The learned TPO and the learned AO have erred, in law and on facts, by considering the outstanding dues from AEs a separate international transaction under Section 92B subject to transfer pricing. 18 : Without prejudice to Ground No. 17 above, the learned TPO and the learned AO have erred, in law and on facts, by not considering the impact of working capital adjustment and making an addition in this regard. 19 : Without prejudice to Ground No. 1, the learned TPO and the learned AO have erred, in law and on facts, in not objectively selecting the arm's length rate of fee/commission applicable for corporate guarantees issued to AEs. 20 : Without prejudice to Ground No. 6, the learned TPO and the learned AO have erred, in law and on facts, in not objectively selecting the arm's length rate of interest applicable for loans issued to AEs. 26. Ground Nos.1 to 4 & 21 are regarding the T.P. Adjustment in respect o....
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....excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assxcessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turn....
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.... of the IT Act, has decided this issue in favour of the assessee. By following the decision in the case of M/s Yokogawa India Ltd (341 ITR 385)(Supra) the Co-ordinate Bench of this Tribunal in the case of M/s Safran Aerospace India Pvt. Ltd Vs DCIT in ITA No.1261(B)/2010, had considered and adjudicated an identical issue in para-4.4 and 4.5 as under; "4.4 Having regard to the rival contentions and the material on record, we find that it is not clear from the record as to whether brought forward losses and depreciation loss pertain entirely to non-STPI unit only or part of it also pertains to STPI unit. The Hon'ble Karnataka High Court in the case of Himatsingika Siede (supra) was considering the case of an assessee which was 100% export oriented unit in terms of sec.10B of the Act and was claiming exemption u/s 10B. In the case of the said assessee, unabsorbed depreciation available to the assessee in the assessment year 1988-89 was carried forward to the assessment year 1994-95 (relevant assessment year) and was claimed by the assessee to be adjusted against income from other sources, thereby reducing the assessee's income for assessment purposes at 'nil'. The AO accepted the s....
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....gainst the profits of the undertaking engaged in the business of computer software for purposes of determination of the allowable deduction u/s 10B of the Act. The Revenue, therefore, filed appeal before the Hon'ble High Court and the High Court framed the following question for determination: "Whether the Tribunal was correct in holding that the deduction u/s 10A or 10B of the Act during the current assessment year has to be allowed without setting off brought forward unabsorbed losses and the depreciation from earlier assessment year or current assessment year either in the case of non-STP units or in the case of the very same undertaking?" The Hon'ble High court has considered the issue at length and at para 31 of its order has held that as deduction u/s 10A has to be excluded from the total income of the assessee, the question of unabsorbed business loss being set off against such profits and gains of undertaking would not arise and in that view of the matter, the approach of the AO was quite contrary to the aforesaid provision and the appellate Commissioner as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of....
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.... say the assessee be afforded an opportunity of hearing to the assessee. 35. Ground Nos.13 & 14 are regarding disallowance of lease charges on the ground of unascertained liability as well as non-deduction of taxes at source under Section 40(a)(ia) of the Act. 36. The assessee claimed to have created a provision for rental liability in respect of Guindy and Pune facilities. The Assessing Officer found that this amount of Rs. 6,41,61,438 has been added back in the computation under regular provisions of Act as an uncertained liability but was not added back while computing book profit under Section 115JB of the Act. Accordingly, the Assessing Officer increased the book profit under Section 115JB by the said amount of Rs. 6,41,61,438. The assessee raised the objection before the DRP and submitted that due to presence of a lock in period clause in the agreement made in respect of Guindy and Pune facilities whereby the premises were highered for 72 months and 60 months respectively the provision created represents a certain liability which has to be accounted under Mercantile System of Accounting. The DRP did not accept the contention of the assessee and observed that there was n....
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....be paid by the assessee in respect of the premises in question is not a present obligation to be settled in future. The assessee has not produced any record to show that a decision was taken by the assessee to vacate the premises prior to the lock in period as per the lease agreement. Once there is no decision of vacating the premises prior to the lock inperiod then making the provision in respect of the future rent which is otherwise an allowable expenditure for the relevant year does not fall under the concept of recognizing the provision as per the A.S. 29. The DRP has recorded the fact that the assessee has retained the premises beyond the lock in period and therefore the liability for future year not accrued during the financial year under consideration. The concept of disclosure in notes to Accounts would amount to disclosure in the financial statement is applied if an item of income or expenditure is required to be part of profit and loss account as per Part II of Schedule VI of the Companies Act but the same was not disclosed in the profit and loss account and has been disclosed in thenotes forming part of financial accounts. Therefore the said disclosure in the notes to ac....