TaxTMI 
TaxTMI 
2019 (1) TMI 345
X X X X Extracts X X X X
X X X X Extracts X X X X
....cts are like this. The assessee before us is a company engaged in the business of manufacturing bulk drugs and fine chemicals. During the relevant financial period, the assessee has sold some of these drugs to its associated enterprises (non AEs) abroad. The method on the basis of which these sale transactions have been benchmarked is transactional net margin method (TNMM). It is on the application of this method of benchmarking the arm's length price that the dispute has arisen. The view of the Transfer Pricing Officer (TPO) is that since the assessee has sold identical products to the non AEs, i.e. independent parties, and, therefore, the prices at which such sales to the independent parties has taken place provides valid inputs for application of Comparable Uncontrolled Price (CUP) method. The TPO has also highlighted the principle that when a direct method like CUP method can be pressed into service, such a method must be preferred over any indirect method such as TNMM. A detailed analysis is then done of the transactions with the non AEs and based on such analysis, the CUP method is adopted. Accordingly, by adopting the arm's length prices on the basis of such internal CUP inp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....appropriate method on the facts of this case, that sufficient internal CUP inputs are available, and, therefore, disregarding the TNMM benchmarking by the assessee, we should uphold the stand of the Assessing Officer and uphold the addition made to the ALP by adopting internal CUP method. Learned Commissioner also submits that there is no res judicata in the tax proceedings and a fresh call can be taken on the facts of each assessment year. He thus urges us to uphold the order of the Assessing Officer, which takes into account CUP method for determining the arm's length price, and reverse the stand of the CIT(A) on this point. 6. Shri Tushar Hemani, learned counsel for the assessee, submits that this issue is not only squarely covered by the decisions of this Tribunal in assessee's own cases for the earlier years, Hon'ble jurisdictional High Court is in seisin of the matter as Their Lordships have admitted questions of law on this issue. He submits that the decisions of the coordinate benches deal with the issue in appeal in a very fair and comprehensive manner, takes us through these decisions and justified the same on merits. Learned counsel then submits that there is no mater....
X X X X Extracts X X X X
X X X X Extracts X X X X
....later, the benefit of Their Lordships' views will be available, there is no point in this ritualistic exercise of taking a call on correctness of that earlier view. It is submitted that a division bench cannot depart from the view taken by another division bench and, no matter how large a bench of the Tribunal decides an issue on reference to the special bench, it is subject to the views of Hon'ble Courts above. Such views of Hon'ble High Court being likely to be available soon, a reference for larger bench, which is what learned Commissioner's argument can at best aim at, will be meaningless formality. Learned counsel then joins the issue with the learned Commissioner (DR) on selection of CUP method, as most appropriate method, on the facts of this case. He submits that selection of a method of ascertaining the arm's length price cannot be an academic exercise de hors the facts of each case and it does not, as such, take place in vacuum. Therefore, it cannot be said the CUP method will always be most appropriate methods in the case of bulk drugs whether or not sufficient CUP inputs are available. Learned counsel then points out that whatever internal CUP inputs are relied upon by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a particular method in case of a particular type of product or service. While rule 10B(1) of the Income Tax Rules 1962, provides that arm's length price in relation to an international transaction shall be determined by any of the methods, "being the most appropriate method", set out therein, Rule 10 C(1) provides the mechanism for selecting the most appropriate method "which is best suited to the facts and circumstances of each particular transaction" and "which provides the most reliable measure of arm's length price of the international transaction". Rule 10C(2) further provides that in selecting the most appropriate method as specified in rule 10C(1), certain factors are to be taken into account: (a) the nature and class of the international transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction and the un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rprise on what can be termed as 'global basis', essentially in respect of same or similar property or services though, the benchmark so arrived at cannot be applied on the global basis i.e. the average of gross profit earned from same or similar transactions with AEs. The application of CPM has to be on transaction basis rather than on global basis, and this fundamental scheme of cost plus method is also evident from the plain wordings of Rule 10 B as well. Any other view of the matter will result in incongruities. For example, if our average mark up to unrelated enterprises is 20 per cent. and we charge a mark-up of 2 per cent in one transaction with AE and 38 per cent in another transaction with the AE, both these transactions, by applying the mark up on global basis, will meet the test of ALP whereas in the first case, the mark up charged is certainly not a mark-up resulting in an ALP. In this particular case, for example, the normal mark up in transactions with has been computed at 16.31 per cent. and the average of mark up on sales to AEs having been taken at 17.08 per cent. entire sales to AEs has been taken at ALP, but, the mark up in the many cases is clearly less t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....which could materially affect the price in the open market". As regards the decision of coordinate bench in the case of Serdia Pharmaceuticals (supra), that was a case in which no dispute was raised with respect to the comparables cases except on account of quality for which suitable adjustment was allowed. This precedent, therefore, does not offer any help to the case of the revenue. All that has been relied upon is internal CUP and for the detailed reasons set out by the CIT(A), which meets our approval, these CUP inputs were not reliable enough. In any case, differences due to variations in FAR due to nature of trade relationship with AEs have not been accounted for and suitable adjusted. The external CUP inputs are not even referred to and relied upon by the TPO. There are no other independent comparable transactions brought to the analysis by the TPO or the learned Commissioner (DR). All these factors put together donot make out a case for application of CUP in this case. Not only that there is no justification, beyond vague generalities, for CUP in the present case and not only that that CUP method application mechanism is incorrect, we find that sufficient quantity of reliab....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... analysis, he was also the view that 2.98% of the amount of the corporate guarantee is an arm's length price for the same. On this basis, and having noted that the assessee did not charge any consideration for the issuance of corporate guarantees, he made an ALP adjustment of Rs. 11.63 crores in respect of the same. However, when the matter travel in appeal before the CIT (A), learned CIT (A) deleted the ALP adjustments relying upon the decision of this Tribunal, in the case of Micro Ink Ltd Vs ACIT [(2016) 157 ITD 132 (Ahd)]. Aggrieved by the relief so granted by the CIT(A), the Assessing Officer is in appeal before us. 14. We are hardly rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position. 15. We find that this issue is now covered, in favour of the assessee, in assessee's own case for the preceding assessment years. In this decision dated 20 June 2018, a coordinate has analysed the issue in great detail and taken note of decisions by various coordinate benches, and then come to the conclusion that issuance of corporate guarantees does not constitute an international transaction with the meanings o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ities which benefit the group entities but these activities need not necessarily be 'provision for services'. The fact that the OECD considers such activities in the services segment does not alter the character of the activities. While the group entity is thus indeed benefitted by the shareholder activities, these activities do not necessarily constitute services. There is no such express reference to the benefit test, or to the concept of benefit attached to the activity, in relevant definition clause of 'International transaction' under the domestic transfer pricing legislation. It is also essential to take note of the legal position, in India, in this regard. No matter how desirable is it to read such a test in the definition of the international transaction' under domestic transfer pricing legislation, as is the settled legal position, it is not open to Court to infer the same. [Para 37] iv. One more thing which is clearly discernible from the above discussions is that the tests recognized by these guidelines are interwoven twin tests of benefit and arm's length. Benefit test implies the recipient group member should get "economic or commercial....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uarantees. A bank guarantee is a surety that the bank, or the financial institution issuing the guarantee, will pay off the debts and liabilities incurred by an individual or a business entity in case they are unable to do so. By providing a guarantee, a bank offers to honour related payment to the creditors upon receiving a request. This requires that bank has to be very sure of the business or individual to whom the bank guarantee is being issued. So, banks run risk assessments to ensure that the guaranteed sum can be retrieved back from the business. This may require the business to furnish a security in the shape of cash or capital assets. Any entity that can pass the risk assessment and provide security may obtain a bank guarantee. viii. The consideration for the issuance of bank guarantee, so far as a banker is concerned, is this. When the client is not able to honour the financial commitments and when client is not able to meet his financial commitments and the bank is called upon to make the payments, the bank will seek a compensation for the action of issuing the bank guarantee, and for the risk it runs inherent in the process of making the payment first and reali....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s from these banks. The guarantees were prima facie in the nature of the shareholder activity as it was to provide, or compensate for lack of, core strength for raising the finances from banks. No material, indicating to the contrary, is brought on record in this case. xii. Going by the OECD Guidance also, it is not really possible to hold that the corporate guarantees issued by the assessee were in the nature of 'provision for services' and not a shareholder activity which are mutually exclusive in nature. In the light of these discussions, it is opined and said view is fully supported by the OECD Guidance in this, that the issuance of corporate guarantees, in the nature of quasi capital or shareholder activity - as is the uncontroverted position on the facts of this case, does not amount to a service in which respect of which arm's length adjustment can be done. [Para 41] xiii. It is thus clear that even if one accepts the contention of the revenue that issuance of a corporate guarantee amounts to a 'provision for service', such a service needs to be re-characterized to bring it in tune with commercial reality as 'arrangements made in rel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ks at the examples given in the OECD material or even in Explanation to section 92B, the thrust is on the services like market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, and scientific research, legal or accounting service or coordination services. As a matter of fact, even in the Explanation to section 92B guarantees have been grouped in item 'c' dealing with capital financing, rather than in item 'd' which specifically deals with 'provision for services'. When the legislature itself does not group 'guarantees' in the 'provision for services' and includes it in the 'capital financing', it is reasonable to proceed on the basis that issuance of guarantees is not to be treated as within the scope of normal connotations of expression 'provision for services'. xvii. Under section 92B, corporate guarantees can be covered only under the residuary head i.e. "any other transaction having a bearing on the profits, income, losses or assets of such enterprise". It is for this reason that section 92B, in a way, expands the scope of international tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....egal or accounting service" which are anyway covered in "provision for services" and "mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises ". xx. That leaves the Tribunal with two clauses in the Explanation to section 92B which are not covered by any of the three categories discussed above or by other specific segments covered by section 92B, namely borrowing or lending money. The remaining two items in the Explanation to section 92B are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in section 92B(1), which covers "any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises". It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92B, the transactions should be such....
X X X X Extracts X X X X
X X X X Extracts X X X X
....provides that the bearing on profits, income, losses or assets could be immediate or on a future date. These guarantees do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. When an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B(1). [Para 44] xxiv. In the present case, as already held that the issuance of corporate guarantees were in the nature of shareholder activities- as was the uncontroverted claim of the assessee, and, as such, could not be included in the 'provision for services' under the def....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct. 19. So far as this ground of appeal is concerned, the issuing appeal lies in the narrow compass of material facts. During the course of assessment proceedings, the assessing officer observed that the assessee has not added the proportionate amount of CENVAT credit (i.e. 1,44, 29, 469) as required under section 145A, to the closing stock of Rs. 3, 52, 64, 950 as on 31 March 2010. When the assessee was asked as to why the value of closing stock should not be worked out on inclusive method as per the requirements of section 145 a, it was clarified by the assessee that the method being followed was exclusive method of accounting. It was in this backdrop that the assessing officer made an addition of Rs. 1,44, 29, 469. Aggrieved, assessee carried the matter appeal before the CIT(A). Leonard CIT(A), relying upon consistent stand being taken by the coordinate benches of the Tribunal and having given the finding that the treatment given by the assessee is completely tax neutral, deleted the said addition. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us. 20. Having heard the rival contentions and having perused the material on r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment of Rs. 18,46,660/- in respect of interest on loan to Associated Enterprises made consequent to adopting interest rates at US LIBOR + 3.83%, Euro LIBOR + 3.35% and 7.2% on such loans. 2. Both the lower authorities failed to appreciate that appellant has provided loan to its Associated Enterprises and therefore, lending rates should be applied and not borrowing rates. 3. In any case, transactions in respect of lending funds to Associated Enterprise are not international transactions and hence, the same are not required to be benchmarked. Accordingly, addition made on that count is illegal and without jurisdiction. 29. Learned representatives fairly agree that this issue is also now covered, in favour of the assessee and in assessee's own case, by order dated 20th June 2018 wherein the coordinate bench has, inter alia, observed as follows: 10. Next common item in all these three years is adjustment recommended in ALP of interest rate required to be charged by the assessee from its AE on the loans given by it. 11. Brief facts of the case are that in the assessment year 2007-08, he assessee has extended foreign currency loan amounting to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an from these accounts to Dishman Pharma Solution. The assessee has given loans in dollar. These loans have been given from Singapore Branch. The question before us is whether the interest rate charged by the assessee at LIBOR plus 1% is at market rate or it has given some undue benefit to its AEs and thus, its rate could not be considered as arm's length price. The ld.TPO has not made much discussion on this aspect. He harboured a belief that since one of the AEs. borrowed funds from European bank and paid higher rate of interest, thus funds given by the assessee should also carry that very rate of interest. In our opinion, the ld.TPO failed to appreciate the fact that the assessee is the tested party and not the AE. The factum of business requirement in a foreign country at what rate of interest funds are being borrowed by the AE is totally irrelevant aspects. The question before the TPO was at what rate an Indian concern should provide loans in dollar denomination to an unrelated party from India. The AE has obtained loans from European market, which is altogether a different currency and the requirement of AE could be different for that. There may be higher rate of interest pre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the income of Rs. 1,23,32,898, he declined to give deduction of Rs. 13,32,845 to earn this income. In appeal, learned CIT(A) has confirmed this disallowance. Aggrieved, assessee is in appeal before us. 34. Learned representatives fairly agree that this issue is also covered, in favour of the assessee and in assessee's own case, by order dated 20th June 2018 wherein the coordinate bench has, inter alia, observed as follows: 24. The case of the Revenue is that the income pertaining to any period has to be accounted for either on receipt basis or accrual basis. Once the assessee has shown income, it is to be taxed. But expenditure could be allowed if the assessee is able to demonstrate that such expenditure was incurred for earning of such income. According to the ld. Revenue authorities, the assessee has failed to demonstrate that this expenditure was incurred for earning such prior period income. Accordingly, the ld.AO did not allow set off expenditure against prior period income. 25. With the assistance of ld. representatives, we have gone through the record carefully. It is pertinent to note that along with this appeal, we have heard appeals for the assessment....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e will take up together, grievance of the assessee is as follows: 6. The learned CIT(A) has erred in law and on facts of the case in confirming the action of AO in not excluding unrealized export out of total turnover of the undertaking while working out eligible profit for deduction u/s 10B of the Act. 7. The learned CIT(A) has erred in law and on facts of the case in confirming the action of AO in not granting deduction u/s 10B of the Act on other income. 8. Alternatively and without prejudice, both the lower authorities failed to appreciate that only profit/income element embedded in other income can be reduced and not gross amount of income while determining eligible profit for the purpose of section 10B of the Act. 9. Both the lower authorities ought to have appreciated that on account of disallowances/additions made to the business income of the appellant, eligible profit for claiming deduction u/s 10B of the Act has also increased to that extent and therefore, both the lower authorities have erred in law and on facts of the case in not allowing further deduction u/s 10B of the Act on enhanced eligible profit on account of disallowance/addi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....order of the ld.CIT(A) on issue no.1 and 2 whereas Revenue is challenging order of the CIT(A) on issue nos.3 to 6. 48. With the assistance of the ld.representatives, we have gone through the record carefully. There is no dispute with regard to the proposition that assessee is entitled for grant of deduction under section 10B of the Act. The dispute relates to quantification of the deduction. First we take the issue agitated by the Revenue in its grounds of appeal. In the first fold of grievance, the Revenue has contended that the AO has rightly allocated custom duty on the basis of raw-material imports in EOU and non-EOU units. The AO was of the view that custom duty paid by the assessee and debited in the accounts ought to be allocated on the imports made for the EOU units. The ld.CIT(A) after making a detailed analysis held that there was no custom duty on the imports made required to be consumed in EOU units. If that be a fact, then how the AO could allocate such amount to such units ? The assessee has been maintaining separate books of accounts and debited actual expenditure in each unit. Therefore, the ld.CIT(A) is justified in holding that custom duty which is not in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction 10B. The ld.counsel for the assessee at the very outset submitted that this issue is squarely covered in favour of the assessee by the order of Special Bench of the ITAT in the case of Maral Overseas Ltd. Vs. CIT, 136 ITD 177. He further contended that ITAT, Ahmedabad has followed this decision in the case of Sonic Technology P.Ltd. rendered in ITA NO.2665 & 2720/Ahd/2011. On the other hand, the ld.DR relied upon the orders of the ld.CIT(A). 54. We have duly considered rival submissions and gone through the record. We find that Special Bench of ITAT in the case of Maral Overseas Ltd. (supra) has considered this issue. The ld.AO has been harping upon the decision of Hon'ble Supreme Court in the case of Liberty India Ltd. Vs.CIT, 317 ITR 218 in coming to the conclusion that other incomes viz. sale of scrap etc. are not to be considered as derived from export activities. It is pertinent to observe that in the case of Sonic Technology P.Ltd. the assessee has claimed deduction after including interest income, sale of scrap, sundry balance written off, exchange rate fluctuations and incremental turnover and disbursement of subsidy from the government. These items were held....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iness of the eligible undertaking, there is no further mandate in the provisions of section 10B to exclude the same from the eligible profits. The mode of determining the eligible deduction u/s 10B is similar to the provisions of section 80HHC inasmuch as both the sections mandates determination of eligible profits as per the formula contained therein. The only difference is that section 80HHC contains a further mandate in terms of Explanation (baa) for exclusion of certain income from the ''profits of the business'' which is, however, conspicuous by its absence in section 10B. On the basis of the aforesaid distinction, sub- section (4) of section 10A/10B of the Act is a complete code providing the mechanism for computing the ''profits of the business'' eligible for deduction u/s 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act. As per the computation made by the Assessing Officer himself, there is no dispute that both these incomes have been treated by the Assessing Office....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tware. We do not see any conflict between Sub-section (1) and Sub-section (4) to Section 10B, as Sub- section (1) states that deduction of such profits and gains as are derived by a hundred percent export-oriented undertaking from the export of articles or things or software would be eligible under the said Section. Sub- section (1) is a general provision and identifies the income which is exempt and has to be read in harmony with Sub-section (4) which is the formula for finding out or computing what is eligible for deduction under Sub-section (1). Neither of the two provisions should be made irrelevant and both have to be applied without negating the other. In other words, the manner of computing profits derived from exports under Sub-section (1), has to be determined as per the formula stipulated in Sub-Section (4), otherwise Sub-section (4) would become otise and irrelevant. The issue in question in this appeal which pertains to the Assessment Year 2009-10, relates to duty draw back in the form of DEPB benefits. As per Section 28, clause (iii-c), . A.Y. 2007-08 any duty of customs or excise repaid or repayable as drawback to a person against exports under Customs and Ce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n view of the aforesaid provisions, it is clear that, what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking." In view of the aforesaid position, the appeals have to be dismissed. We order accordingly. 12. We thus find that the decision of Special Bench of Tribunal in the case of Maral Overseas (supra) wherein the ratio that once on income forms part of the business of the income of the eligible undertaking of the Assessee, the . A.Y. 2007-08 same cannot be excluded from the eligible profits for the purpose of computing deduction u/s. 10B of the Act, has been upheld by Hon'ble Delhi & Karnataka High Courts in the case of Hritnik Exports Pvt. Ltd. & Motorola India Electronics Pvt. Ltd." 55. Respectfully following the above, we allow second fold of grievance raised by the assessee in its ground no.27 and direct the AO to include this other income in the eligible profit for the purpose of grant of deduction under section 10B of the Act. 56. In view of the above discussion, we do not find any merit in the appeal of the Revenue. It is dismissed." 63. Before....