TaxTMI 
TaxTMI 
2018 (11) TMI 990
X X X X Extracts X X X X
X X X X Extracts X X X X
....appellant's income on account of the alleged difference in arm's length price of exports made by the appellant to its associated enterprises. 3. That the assessing officer erred on facts and in law in making an addition of Rs. 98,88,047 to the appellant's income on account of the alleged difference in arm's length price of interest charged by appellant from its associated enterprises. CORPORATE TAX ISSUES 4. That the assessing officer erred on facts and in law in reducing the deduction claimed by appellant under the provisions of section 10B of the Income-tax Act, 1961 ('the Act') to NIL in respect of eligible unit at A-164, Noida by setting off the losses of other units. Date of Hearing 05.07.2018 Date of Pronouncement 03 .10.2018 5. That the assessing officer erred on facts and in law in not allowing deduction under section 10B of the Act in respect of foreign exchange gain of Rs. 2,53,81,255 by holding the same to be income not derived from the industrial undertaking. 6. That the assessing officer erred on facts and in law in not allowing deduction under section 10B of the Act in respect of scrap sales of Rs. 1,33,96,944 by holding the same to be income not derive....
X X X X Extracts X X X X
X X X X Extracts X X X X
....spect of foreign exchange gain of Rs. 23,87,05,343 by holding the same to be income not derived from the industrial undertaking. 6. That the assessing officer erred on facts and in law in not allowing deduction under section 10B of the Act in respect of scrap sales of Rs. 1,49,48,144 by holding the same to be income not derived from the industrial undertaking. 7. That the assessing officer erred on facts and in law in disallowing a sum of Rs. 6,87,14,859 (net of depreciation), being 25% of the expenditure on royalty of Rs. 36,64,79,248 paid to various parties, as capital expenditure relying upon the decision of Supreme Court in the case of Southern Switchgear Ltd.: 232 ITR 359. 8. That the assessing officer erred on facts and in law in disallowing a sum of Rs. 2,57,60,916 invoking provisions of section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 ('the Rules'), holding the same to be expenses attributable towards investments made for earning of exempt dividend income, though, the appellant had not earned any dividend/ exempt income during the relevant assessment year. 9. That the assessing officer erred on facts and in law in disallowing deduction of a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the associated enterprise as loan. CORPORATE TAX ISSUES 5. That the assessing officer erred on facts and in law in reducing the deduction claimed by appellant under the provisions of section 10B of the Income-tax Act, 1961 ('the Act') in respect of eligible unit at A-164, Noida by setting off the losses of other units. 6. That the assessing officer erred on facts and in law in not allowing deduction under section 10B of the Act in respect of scrap sales of Rs. 8,61,23,941 by holding the same to be income not derived from the industrial undertaking. 7. That the assessing officer erred on facts and in law in arbitrarily reducing a sum of Rs. 12,13,80,604 on account of royalty disallowance from the profit of the eligible undertaking. 8. That the assessing officer erred on facts and in law in disallowing a sum of Rs. 19,58,46,433 (net of depreciation), being 25% of the expenditure of royalty of Rs. 1,04,45,14,309 paid to various parties, as capital expenditure relying upon the decision of Supreme Court in the case of Southern Switchgear Ltd.: 232 ITR 359. 9. That the assessing officer erred on facts and in law in disallowing a sum of Rs. 5,12,96,791 invoking provision....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The Ld. AR submitted that Ground No. 1 is general in nature. Hence Ground No. 1 is dismissed. 7. As regards Ground No. 2 relating to exports to AE, the Ld. AR submitted that during the relevant assessment year, the assessee supplied CD's, Floppies etc. to its overseas AEs, viz., Global Data Media FZ LLC, Dubai ('GDM'), European Optic Media Technology Gmbh ('Europtic'} and OM&T BV ('OM&T') worth Rs. 544.76 crores. The AEs were engaged in re-selling/ distribution of such products. For benchmarking the aforesaid international transaction, the assessee selected TNMM as the Most Appropriate Method ('MAM') applying Operating Profit/Sales ('OP/Sales') as the Profit Level Sl. Particulars Amount in INR 1 On A/c of exports made to the A.E 73,95,75,860/- 2 On A/c of interest on loan to Subsidiary co 1,58,81,963/- TOTAL 75,54,57,823/- Indicator ('PLI') and selected its overseas AEs as tested party, since the same were least complex. The benchmarking analysis of assessee is as under: Particulars Results No. of Comparable Companies 9 Average OP/Sales 2.75% AEs (GDM, Europtic and OM& TOP/Sales -1.61%, -44.89%-134.20% Thus, the tested party, i.e., the overseas AEs have earned less pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee filed before Ld. TPO sufficient evidence to substantiate its claim of ALP not exceeding maximum amount received by Associated Enterprises from customers and actual value of international transactions. However in the present case having regard to our observation from financials of AE, assessee has failed to establish by way of sufficient evidence before Ld. TPO, regarding actual value of international transaction received by AE. It is also observed from the relevant para 21 (supra) reproduced hereinabove this Tribunal refrained from dealing with the other objections raised by assessee therein since the Hon'ble Bench was convinced with the arguments of Ld. AR regarding actual value of transactions received by AE therein. 7.9. Considering totality of facts, we find it is necessary to set aside this issue back to Ld. TPO for due verification of argument advanced by Ld. AR in the 2nd limb on the basis of documents filed by assessee in respect of the same. Ld. TPO is directed to accept assessee's contention of foreign AE to be a tested party in the event assessee is able to provide complete financials of GDM Dubai along with complete financials of relevant comparables requir....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re available easily on public domain. Thus, we are remanding back this issue to the file of A.O/TPO. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 2 is partly allowed for statistical purpose. 10. As regards to Ground No. 3 relating to Transfer Pricing addition in respect of interest on loan given to foreign A.E, the Ld. AR submitted that the assessee had granted loan to its foreign AE, viz., Peraround Ltd., Cyprus and received interest of Rs. 99,17,287 thereupon @ Euribor + 200 basis points, which was equivalent to 6.41%. The assessee for the purpose of benchmarking the aforesaid transaction and computing ALP thereof, considered returns available on investment opportunities in India (bank FD, certificate of deposit, commercial paper etc.) as reduced by the country risk premium of investing in the Indian market, which was equivalent to 4.69% (7.88%- 3.19%). The TPO benchmarked the aforesaid transaction @ 17.26% by applying the yield rate on corporate bonds. The said rate was computed by TPO on the basis of information received by him from various banks/ investment companies in India. The DRP directed the TPO to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an advanced to foreign AE should be computed based on interest rate applicable to currency in which loan has to be repaid. The assessee had granted loan to its foreign AE, viz., Peraround Ltd., Cyprus and received interest of Rs. 99,17,287 thereupon @ Euribor + 200 basis points, which was equivalent to 6.41%. The assessee for the purpose of benchmarking the aforesaid transaction and computing ALP thereof, considered returns available on investment opportunities in India (bank FD, certificate of deposit, commercial paper etc.) as reduced by the country risk premium of investing in the Indian market, which was equivalent to 4.69% (7.88%- 3.19%). The aforesaid loan was granted by assessee in preceding assessment year, viz., A.Y. 2007-08, wherein, the interest rate charge by assessee was accepted to be at arm's length price. Thus, the TPO was not correct in deviating its own decision from the previous year as per the rule of consistency. Besides this, the Ld. AR's reliance on the decision of Jurisdictional Delhi High Court in the case of Commissioner of Income-tax -I v. Cotton Naturals (I) (P.) Ltd. 231 taxman 401 is very apt. The Hon'ble High Court held as under: "28. We do not agre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssment Order. 15. We have heard both the parties and perused all the relevant material available on record. The issue of claiming deduction u/s 10B of the Act in respect of eligible unit without setting off losses of other units stands settled in favour of the assessee by the decision of Supreme Court in the case of CIT vs Yokogawa India Ltd.: 391 ITR 274, wherein, it has been held that, the state of deduction for section 10A would be while computing across total income of eligible undertaking under Chapter IV of the Act and not at the state of computation of total income under Chapter VI of Act, i.e. before setting off losses of other units. Ground No. 4 is allowed. 16. As regards Ground No. 5 relating to reduction of deduction u/s 10B on account of sale of forward exchange contract, the Ld. AR submitted that the issue of eligibility of profits arising on sale of forward exchange contract towards deduction under section 10B of the Act stands covered in favour of assessee by the decision of this Hon'ble Tribunal in assessee's own case for the assessment years 2003-04, 2005- 06 & 2006-07. Since the above mentioned receipts had direct nexus with business/ industrial undertaking of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....AT). 20. The Ld. DR relied upon the Assessment Order. 21. We have heard both the parties and perused all the relevant material available on record. Scrap sales are sales made by assessee's existing exports business only and the Revenue was not able to point out any other business from which such sales were made. The decisions relied by the Ld. AR are applicable in the present case. The Hon'ble Karnataka High Court in case of GE BE (P) Ltd. (supra) held as under: "11. Keeping in mind the principle laid down by the Apex Court, no doubt the assessee is not in the business of export of scraps but is in the business of export of X-ray equipments, high voltage tanks and detectors used in CT scanners and after manufacturing these products, they are exported. In the process of manufacturing, the unutilized raw materials forms part of scraps and that scraps also has value. But it is not exported and hence, they are eligible for the benefit under Section 10B of the Act. The assessee should have earned profits and gains from such export of articles or thins. The said articles or things should have been manufactured or produced by the assessee. The Section does not require that the profits....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... activities and sale of products where the use of such know-how is applicable. 9.8 Further Ld. AO observed that assessee has been using know-how since 2003. Ld. TPO observed that agreements entered into by assessee with these parties have been renewed from time to time automatically and assessee is allowed to sell products manufactured with the help of such know-how worldwide. Further agreement with M/s HP grants assessee an exclusive sub-license to reproduce, use and display the HP trade marks in the territory assigned to assessee and assessee is free as per terms of agreement to contract out the manufacturing of HP branded products to HP approved 3rd parties and to appoint distributors for sale or distribution of HP branded products within the territory. 9.9. From the clauses referred to by Ld. AO in his order, it appears that, assessee acquired merely right to draw upon technical knowledge of foreign companies for a limited purpose of carrying on its business, and that foreign companies did not part with any of their assets absolutely for ever or for a limited period of time, that they continued to have the right to use their knowledge and, even after agreements had run th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....C) * Associated Law Advisers Vs. ITO : 87 taxmann.com 148 (Delhi ITAT) Further, in absence of earning of exempt dividend income, the provisions of section 14A of the Act cannot be applied. In the present case, no exempt income has been earned by the assessee during the relevant Assessment Year. The Ld. AR relied upon the following decisions: * Cheminvest Ltd. Vs CIT: 378 ITR 33 (Delhi HC) * CIT vs Lakhani Marketing Inc.: 226 Taxman 45 (P&H HC) * CIT vs Chettinad Logistics (P.) Ltd.: 248 Taxman 55 (Madras HC) Accordingly, disallowance made by the assessing officer under the provisions of section 14A of the Act is unsustainable and calls for being deleted. 26. The Ld. DR relied upon the Assessment Order. 27. We have heard both the parties and perused all the relevant material available on record. The Ld. AR submitted that there is no exempt income earned by the assessee during the present assessment year. But the applicability of Rule 8D can not be done away by the assessee. The Ld. AR relied upon the decision of Maxopp Investment Ltd. (supra) wherein it is held as under: "41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Assessing Officer/ DRP disallowed the aforesaid FCCB issue expenses by holding that the same to be incurred on issue of shares and hence capital in nature. The Ld. AR submitted that, the FCCB's under consideration are liable for conversion into equity at the option of the bondholder and the same is not mandatorily required to be done. The bond-holder may opt to continue being a bond-holder instead of being a shareholder. Accordingly, the FCCB's under consideration, both in accounting books as well as tax returns, are required to be treated as debt till they are converted into equity by the bond-holder (the assessee has no control over conversion/ non-conversion of FCCB's into equity, while, the same is dependent totally on the discretion of the bond-holder). The Ld. AR further submitted that, the window for conversion of bonds into equity expired on 11.06.2012. As on date, as per the real data available qua conversion, not more than 1% of bond-holders exercised the right of conversion and balance, viz., 99% of bond holders always remained in the capacity of a bond-holder only. The issue under consideration, the Ld. AR submitted, is no more res-integra and stands decided in fav....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eduction in the return of income as a separate line item. The Hon'ble Delhi High Court in the case of CIT vs. Havells India Limited 352 ITR 376 had held that expenditure incurred on issue of debentures is to be allowed as revenue expenditure despite indications to effect that debentures are to be converted in near future into equity shares. Thus, the issue is squarely covered by the Hon'ble Delhi High Court decision. Ground No. 9 is allowed. 31. As regards to Ground No. 10 relating to disallowance of redemption premium amortised in respect of FCCB, the Ld. AR submitted that the assessee, for the purpose of payment of redemption premium to bond-holders in future, amortized the same in books of accounts over the tenure of bonds, on a prudent basis, as the same was an ascertained liability. The premium amortised every year, in accordance with the Company Law provisions, was also debited to Securities Premium account and not charged to P&L account. Accordingly, the same was claimed as deduction in the return of income as a separate line item. During the relevant assessment year, the assessee charged an amount of Rs. 30,47,84,267 towards provision for redemption premium. Out of the sam....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat case, the assessee had issued zero interest unsecured redeemable convertible debentures of Rs. 100 each redeemable after 10 years at a premium of 100%. Assessee claimed before the assessing officer a spread over. Assessee claimed that the premium payable by it was Rs. 5,47,50,000 after expiry of 10 years. However, the assessee claimed deduction of Rs. 54,75,000 p.a. The Assessing Officer disallowed the assessee's claim for deduction of Rs. 54,75,000 on the ground that the liability was not ascertainable. The Assessment Order was confirmed by the CIT(A). However, the Tribunal overruled the CIT(A)'s order in view of the judgment of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT: 225 ITR 802. On further appeal, the High Court affirmed the decision of the Tribunal by holding that, since, during the relevant assessment year, no conversation was made, the redemption premium amortization was allowable as deduction. The Ld. AR also relied upon the following decisions: * CIT vs Shree Rajasthan Syntex Ltd.: 269 ITR 461 (Rajasthan High Court) * CIT vs Torrent Pharmaceuticals Ltd.: 393 ITR 625 (Gujarat High Court) * DCIT vs UAG Builders (P) Ltd.: 53 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... return of income. Thus, the Assessing Officer was not correct in disallowing the same. Ground No. 10 is allowed. 34. In result, ITA No. 6042/DEL/2012 for A.Y. 2008-09 filed by the assessee is partly allowed for statistical purpose. 35. The Ld. AR during the course of hearing submitted that the other Assessment Years i.e. 2009-10 and 2010-11 are identical. The Ld. DR submitted that the grounds of assessee's appeal in all the three assessment years are identical. 36. We have heard both the parties and perused all the relevant material available on record. The issues are identical in the appeals filed by the assessee for A.Ys. 2009-10 and 2010-11. Hence, ITA No. 2395/DEL/2014 and 1617/DEL/2015 are partly allowed as per the direction given in ITA No. 6042/DEL/2012 for 2008-09 for each identical ground separately. 37. In result, ITA No. 2395/DEL/2014 and 1617/DEL/2015 are partly allowed for statistical purpose. 38. As regards, the Revenue's appeal for Assessment Year 2009-10 being ITA No. 1200/DEL/2014, the Ld. AR submitted that As regards Ground No. 1 & 2 of the Revenue's appeal, the same is already dealt while dealing with the assessee's appeal. Hence, the Ground No. 1 and 2 of ....