TaxTMI 
TaxTMI 
2019 (1) TMI 345
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....ny 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 inputs, the adjustments are made in sale prices of Cety....
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....ficient 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 material change in the facts and circumstances of the case so....
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....ilable, 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 the TPO, are inappropriate inasmuch as the size of the i....
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....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 uncontrolled transaction and between the enterprises entering into such transactions; (e....
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....s 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 than benchmark. To give one example, at page 221 of the paper-book, margin of 14.15 per cent (4 invoices), 13.95 per c....
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....a 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 reliable CUP inputs are not available on the facts of this case. that In the light of these discussions, as also bearing in mind en....
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.... 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 of section 92B. Learned representatives fairly agree that the issue is thus covered, in favour of the assessee and in assessee's own cases, by....
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....vities 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 value to enhance its commercial position". The benefit test is interlinked with the arm's length test in the sense that it seeks an answer to the question whethe....
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....s 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 realizing it from the underlying security and the client. Even when such guarantees are backed by one hundred percent deposits, the bank charges a guarantee fees. In a situation in which there is....
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....ndicating 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 relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner'. No bank would be willing to issue a clean gu....
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....ation, 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 transaction in the sense that even when guarantees are issued as a shareholder activity but costs are incurred for the same or, as a measure of abundant caution, recoveries are made for this non-chargeable activity, these guarantees will fall in ....
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.... 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 as to have beating on profits, incomes, losses or assets of such enterprise. xxi. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expr....
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.... 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 definition of 'international transaction' under section 92B. Taking note of the insertion of Explanation to section 92B, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92B of the Act but since such issuance of corporate....
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....uired 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 record, we see no need to interfere with the findings of the CIT(A) on this ground either. The law is by now well settled. There is no impact on profitability whether the assessee follows the exclusive method or inclusive method, and there cannot be an addition, thus, on that score. That is what the c....
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....tes 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 Rs. 24,50,70,500/-to Dishman Europe Ltd., and Rs. 5,36,70,000/- to Dishman Pharma Solution AG. The assessee has charged total interest of Rs. 40,93,995/- at the rate of LIBOR plus 1%. The ld.TPO has observed that one of the AEs. borrowed funds from European bank at the rate of EURIBOR plus 3.75%. The ld.TPO confronted the assessee as to why this rate be not ....
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....e 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 prevailing for borrowing funds, but at what rate the loan could be made from India in dollar denomination ?. The assessee has pointed out that LIBOR is the prevailing rate and it has charged LIBOR plus 1%. No defect has been pointed out in this rate. Only thing is that one of the AEs has obtained loan from European market, therefore, the ld.TPO has applied that rate. ....
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....ate 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 year 2005-06 and 2006-07. In the assessment year 2006-07, the assessee has prior period income at Rs. 46,50,648/- and it has debited prior period expenditure of Rs. 43,11,114/-. The net differential amount of Rs. 3,39,534/- has been credited to profit & loss account and offered for taxation. The AO did not allow set off prior period expenditure and taxed the gross income. The issue came up b....
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....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/additions so made. 41. Learned representatives fairly agree that the issues so arising in connection with the claim under section 10B are also covered, in favour of the assessee and in assessee's own case for the earlier years, by decisions of the coordinate benches including the decision dated 20th June 2018 which was filed before us. This decision, inter alia, observes as follows: 61. Ground Nos.25 to 27, ground no.16 to 19 and 14 ....
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....nce, 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 incurred by the assessee on the imports of raw-material meant for EOU units cannot be allocated. We do not any merit in this fold grievance raised by the Revenue. It is rejected. 49. Next three fold grievances are common. The grievance of the Revenue in these folds of grievances relates to allocation of expenditure incurred towards packing material, clearing and forwarding expenses, administrative and interest expenses. It is pertinent to observe that where mixed accounts and common management is th....
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....nd 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 to be eligible for grant of deduction under section10B of the Act. The ITAT in the case of Sonic Technology has further observed that order of the Special Bench Indore Bench has been upheld by the Hon'ble Delhi High Court. Discussion made by the ITAT qua this issue reads as under: "11. We also find that the decision of Special Bench of Tribunal in the case of Maral Overseas Ltd. (supra) was upheld by Hon'ble Delhi High Court in the case of Hritnik Export Pvt. Ltd.(ITA No. 219/2014 & 239/2014 order dated 13.11.2014) wherein Hon&....
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....y 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 Officer as business income. The CBDT Circular No. 564 dated 5th July, 1990 reported in 184 ITR (St.) 137 explained the scope and ambit of section 80HHC and the mode of determination of profits derived by an assessee from the export of goods. I.T.A.T., Special Bench in the case of International Research Park Laboratories v. ACIT, 212 ITR (AT) 1, after following the aforesaid Circular, held that straight jacket formula given in sub-section (3) has to be followed to determine the eligible deduction. The Hon'ble Supreme Court in the case of P.R. Prabhakar; 284 ITR 584 ha....
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.... 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 Central Excise Duties Draw Back Rules, 1971 is deemed to be profits and gains of business or profession. The said provision has to be given full effect to and this means and implies that the duty draw back or duty benefits would be deemed to be a part of the business income. Thus, will be treated as profit derived from business of the undertaking. These cannot be excluded. Even otherwise, when we apply Sub-section (4) to Section 10B, the entire amount received by way of duty draw back would not become eligible for deduction/exemption. The amount quantified as per the formula would be eligible and qualify for deductio....
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....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 us no disparity of the facts has been pointed out by the ld.DR in these years in this behalf. Therefore, following our order for the assessment year 2006-0 in assessee's own case we direct the AO to allow the claim of the assessee under section 10B in accordance with our directions contained in order for the assessment year 2006-07. Accordingly, we allow the grounds of appeals of the assessee and reject that of the Revenue. 42. No distinguishing features were pointed out to us. Learned Departmental Representative has also fairly accepted this position. In view of these discussions, as also bearing in mind entirety of the case, we direct the Assessing Officer to allow the cl....