TaxTMI 
TaxTMI 
2019 (6) TMI 346
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..../-: 1. On the facts and in the circumstances of the case and in law, the AO erred in following the erroneous direction of the DRP in making an adjustment of Rs. 1,79.190/- on account of commission on corporate guarantee provided on behalf of its Associated Enterprise ("AE'). The "TPO has charged commission @ 1.75% normally charged by banks for guarantees and 1.25% charged for risk involved on account of exchange rate risk, country specific risk and AE risk involved in giving guarantee on loans. 2. The AO failed to appreciate and ought to have held that, the transaction of a corporate guarantee is not an international transaction. 3. The Appellant therefore humbly prays that the addition of guarantee commission be deleted or be appropriately reduced. GROUND NO. II: INCORRECT COMPUTATION OF TAX DEMAND, INTEREST U/S. 2348 234C OF TILE ACT AND NON-GRANT OF REFUND: The AO erred in computing the tax demand, thereby wrongly computing interest u/s. 234B & 234C of the Act. 2. The AO also erred in stating that the refund has been issued to the Appellant, even though no refund was granted to the Appellant. 3. The Appellant the....
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....confirmed the finding of the TPO. The Ld. Representative of the assessee has argued that the corporate guarantee is not a international transaction, therefore, no guarantee is liable to be assessed. It is specifically argued that the amendment to Section 92B(1) is prospective in nature, therefore, the said amendment is applicable to the facts of the present case. The Ld. Representative of the assessee has also argued that the without prejudice the guarantee commission being restricted to the extent of 0.5% of the guarantee paid in view of the judgment of the CIT Vs. M/s. Everest Kento Cylinders Ltd. 232 Taxman 307)(Bom) and CIT Vs. Asian Paints (India) Ltd. (243 Taxman 348) (Bom). However, on the other hand, the Ld. Representative of the Department has refuted the said contention. The factual position is not in dispute, the assessee provided corporate guarantee to its subsidiary M/s. Northpoint DCO2 s.r.o. Czech Republic of Rs. 59.73 lakh for the period of 34 days. The TPO raised the addition @ 3% of guarantee, the total in sum of Rs. 1,79,190/- on the basis of the information received from the State Bank of India. The facts of the present case are quite similar to the fact of the ....
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.... (ii) That in such cases, LIBOR would have to be adjusted for country risk, currency risk, force market fluctuations, etc. (iii) That the element of commission for conversion of currency has to be considered, as the LIBOR based rates do not capture this clement. (3) Whether on the facts and circumstances of the case, the Hon'bie ITAT was justified in directing the AO/TPO to adopt the LIBOR rate as the benchmark without fully appreciating the factual matrix of the case. This direction of the Hon'ble ITAT issued without fully appreciating the factual matrix tantamount to being a direction which is "perverse in facts". (4) "Whether on the facts and circumstances of the case and in law, the Hon'ble DRP has erred in giving relief in respect of interest of Rs. 2,97,88,389/- having confirmed the addition with regard to investment of capital in AE." (5) "Whether on the facts and circumstances of the case and in law, the Hon'ble DRP has erred in not considering that the addition Rs. 2,97,88,389/- which is an adjustment emanating from the adjustment being the amount of additional investment of capital in the AE, over and above the ALP of sha....
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....ower should be considered as the place where transactions was carried out and the comparable unrelated transactions in the same foreign currency should be used to find out the Internal / External CUP in this regard. The CUP Method has been approved by various ITAT's Mumbai ITAT in the case of DCIT vs. Tech Mahindra 46 SOT 141(Mum) been so upheld implied by the Hon'ble Delhi High Court. Thus the CUP method the most appropriate method to ascertain the ALP of such international loan transactions after taking into account basis at which similar transactions with other (elated parties have been entered into." 11. On appraisal of the above mentioned finding, we noticed that the issue has been decided on the basis of decision of Hon'ble ITAT in the assessee's own case for A.Y. 2009-10 in ITA. No.1484/M/2014 vide order dated 22.08.2014 and ITA. No.7724/M/2014 dated 13.01.2016 for the A.Y.2010.11. Since the assessee has charged @ 9.5% of the per annum, therefore, there is no need for making the TPO adjustment in this regard. Accordingly, we are of the view that the DRP has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at....
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....etween a loan" and capital contribution" by way of equity. In this regard, attention is invited to the decision of the Hon'ble Punjab High Court in Pepsu Road Transport Co Vs. CIT (130 ITR 18) wherein it was held as under: wherein it was held as under: Though an element of refund or repayment is inherent in the concept of borrowing. in the instant case, the RTCA not only provided nothing for the repayment of the impugned loan, but it also made distinction between the 'capital provided" and the "capital borrowed" and the assessee's case fell under the former head. The word 'borrow" has not been denned in the statute and, therefore, its dictionary meaning has to be looked up. The meaning of the word *borrow' as given in the Shorter Oxford Dictionary (3rd edn.), is 'to take (a thing) on security given for its safe return. To take a thing on credit on the understanding of returning it or an equivalent Reference in this respect may also be made to CEPT v. Bhartia Electric Steel Co. Ltd. [1954)25 1 T 192 (Cal). In this also, the question was whether it was "money had and received"; or "borrowed money'. It was held that there has to b....
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....ourt in the case of Dexiskier Dhboal SA, ITA No. 776 of 2011 order dated 30th August. 2012 and by various other decisions. as cited by him. The Co-ordinate Benches of the Tribunal have been consistently holding that subscription of shares cannot be characterizes as loan and therefore no interest should be imputed by treating it as a loan. Accordingly, on this ground alone, we delete the adjustment of interest made by the Assessing Officer. x. Hon'ble Jurisdictional High Court in the case of Vodafone India Services Pvt. Ltd. v. Addl. CIT (368 ITR 1) has held as under: The transaction on capital account or on account of restructuring would become taxable to the extent it impacts income i.e. under reporting of interest or over reporting of interest paid or claiming of depreciation etc. It is that income which is to be adjusted to the ALP price. It is not a tax on the capital receipts. This aspect appears to have been completely lost sight of in the impugned order." Further, CBDT vide press release dated January 28, 2015 has decided to accept the order of Jurisdictional High Court in the case of Vodafone (supra) and decided not to file SLP against it befo....
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....est cannot exceed amount calculated based on LIBOR rate. 5.2 Discussion and Directions of the DRP: Following the Hon'ble Tribunal's order for A.Y.2009-10 in the Assesses own case and also respectfully following the Hon'ble DRP for A.Y. 2010-11, the AO is directed to delete the proposed addition." 13. On appraisal of the above mentioned finding, we noticed that the issue has been decided on the basis of decision of Hon'ble ITAT in the assessee's own case for A.Y. 2009-10 in ITA. No.1484/M/2014 vide order dated 22.08.2014 and ITA. No.7724/M/2014 dated 13.01.2016 for the A.Y.2010.11. Since the assessee has charged @ 9.5% of the per annum, therefore, there is no need for making the TPO adjustment in this regard. Accordingly, we are of the view that the DRP has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. Accordingly, these issues are decided in favour of the assessee against the revenue. ISSUE NO. 7:- 14. Under this issue the revenue has challenged deletion of addition on account of disallowance u/s 2(24)(x) r.w.s 36(1)(va) of the Act. The relevant finding has been given in....
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....s authorities which has been mentioned in the order. The facts are not distinguishable at this stage. Therefore, in the said circumstances, we are of the view that the DRP has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. ITA. NO.587/M/2017:- 16. The assessee has filed the present appeal against the order dated 09.09.2016 passed by the Dispute Resolution Panel-2, Mumbai [hereinafter referred to as the "DRP"] relevant to the A.Y.2012-13 17. The assessee has raised the following grounds: - "GROUND NO. I: VIOLATION OF PRINCIPLES OF NATURAL JUSTICE: On the facts and in circumstances of the case and in law, the U. AO, following directions of the 14. Dispute Resolution Panel ('DRP"), erred in rejecting the objection raised by the Appellant in relation to the proposed transfer pricing adjustment on account of treating Equity Investments in overseas subsidiary as a loan and thereby proposing addition of notional interest income. 2. The Ld. AO, following the directions of the Ld. DRP, ought to have held that: * The 14. DRP had rejected Appellants objection in this....
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.... be re-characterized as deemed loan and therefore, the question of charging notional interest on such investment do not arise. The Appellant prays that the aforesaid addition made by the Id. AO. pursuant to the directions of the I Hon'ble DRP, be deleted or be appropriately reduced. Without prejudice to 3 above the interest rate charged should be restricted to Libor + 2%. WITHOUT PREJUDICE TO GROUND NO.! & II: GROUND NO. IV: ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF GUARANTEE COMMISSION AMOUNTING TO Rs. 1.96,320/-: On the facts and in the circumstances of the case and in law, the Ld. AO, pursuant to the directions of Ld. DRP, erred in making an adjustment of Rs. 1,96,320/- on account of commission on corporate guarantee provided on behalf of its Associated Enterprise ("AE"). 2. The Ld. AO failed to appreciate and ought to have held that as there is no impact on the profits, income, losses or assets of the Appellant by giving guarantee on behalf of the AE, the said guarantee transaction does not fall within the purview of international transaction as defined under section 92B of the Act. 3. Without prejudice ....
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....issue is not liable to be adjudicated in the separately. ISSUE NO. 2:- 20. Issue no. 2 has not been pressed by the assessee, therefore, this issue is decided in favour of the revenue against assessee being not pressed. ISSUE NO. 3:- 21. Under this issue the assessee has challenged the addition on account of treating equity investment in overseas subsidiary as loan and thereby making an addition of notional interest income. At the very outset, the Ld. Representative of the assessee has argued that the issue has duly been covered by the decision of Hon'ble ITAT in the assessee's own case for the A.Y.2009.10 in ITA. No.1484/M/2014, therefore, in the said circumstances, the claim of the assessee is liable to be allowed. Copy of order dated 22.08.2014 passed in the assessee's own case bearing ITA.No.1484/M/2014 for the A.Y.2009-10 is on the file in which the following finding has been given as under.: - "8 We have considered the rival submissions and relevant material on record. As regards the issue regarding the primary lending rate or LIBOR rate to be taken as arm's length interest in respect of the transaction of giving loan by the assessee to M/s PMP Auto Compon....
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....ncome of the assessee is to be seen and considered and not effect on the cost or income of the AE. Therefore, the tested party is always the taxpayer and not the AE. None of the factors under the Transfer Pricing Regulations require to consider whether the AEs would have incurred or earned more or less; but it is always considered whether the assessee had earned more or less by doing a similar transaction with an unrelated parties. 8.11 Even under Rule 10B of the IT Rules, the factors prescribed for inclusion or exclusion of comparables to determine the ALP are also based on the comparison of the assessee with the chosen entities and the AE has no rule in the exercise of selecting the comparables. Thus, in our view, the interest that would have been earned by the assessee by advancing or placing the said amount with unrelated M/s PMP Auto Components P. Ltd, parties would be the Arm's Length interest in relation to the interest free loans/advances to the AE. The safest comparables, which can be taken as Arm's Length interest rate in such a case would be the interest on FD with the bank for a term equivalent to the term for which the loans given to the AEs. ....
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...., though it may be an objective behind the Transfer Pricing Regulation that the profits taxable in India are not shifted out of India by manipulating the price charged between the AEs; however, as per the Transfer Pricing Regulations, there is no such condition of existence or non-existence of commercial consideration between the assessee and the AEs. 8.1 Further, in the case in hand, the advance does not represent the credit period extended to the AEs in respect of the business transaction; but it is a transaction of advancing loans to the AEs. The transaction of advancing loans to the AEs falls under the ambit of international transactions as per the terms of Sec 92B whereby the "international transaction" means a transaction between two or more associated enterprises, inter alia lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprise. 8.2 Thus, the transaction of advancing loans to the AEs undoubtedly falls within the meaning of international transaction as per section 92B. Even otherwise, the Tribunal in the case of Tata Autocomp Systems Ltd(supra) as relied upon by the assessee....
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....made to para 1.37 of 1995 of OECD guidelines for the proposition that it is legitimate to consider that economic substance of the transactions. The transactions has been said to be commercially expedient and loan granted to support the subsidiary and obtain returns in future. The assessee had full control over its subsidiary which reduce the credit risk. The loan had been duly granted by the approval of the RBI. The Income Tax Act, 1961 and OECD guidelines support the contention that the effect of government control/ intervention should be considered while determining the arm's length price. Under the thin capitalization rules, no deduction was allowable to the Hungary entity for payment of interest therefore, there existed impossibility of performance with regard to payment of Hungary entity. Economic circumstances of the subsidiaries did not warrant the charging of interest from subsidiaries. The ld. Counsel for the assessee further relied upon the Apex Court decision in the case of M/s S.A. Builders Ltd. v. CIT(Appeals) and others 288 ITR 1 (SC). 9.1 The ld. DR for the revenue on the other hand relied upon the orders of the ld. CIT(A), he claimed that the l....
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....l provision relating to computation of income from international having regard to arm's length price. Other case laws cited by the assessee are not germane to the facts of this case. Hence in our considered opinion they do not help the case of the assessee." 17. The aforesaid decision of the Tribunal is an answer to the argument of the Assessee before us that the impugned addition could not have been made by the AO at all. Respectfully following the said decision, we hold that the AO was well within his powers in making the impugned addition. The justification for the quantum of notional income considered as taxable in the hands of the Assessee is a matter which we will examine in the subsequent paragraphs." 8.3 Accordingly, we do not have any doubt in mind that the transaction in question is an international transaction and subjected to the ALP as per the Transfer Pricing Regulations. 10. Therefore, it is clear that the transaction of loan given to the AE is an international transaction and subjected to ALP as per the transfer pricing provisions of Income Tax Act. The assessee has raised an alternative plea that even in case the transfer pricing prov....
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....g State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 7. Interest shall be deemed to arise in a Contracting State when the payer is that Contracting State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the interest, whether be is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the indebtedness on which the interest is paid was incurred, and such interest is home by that permanent establishment, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment is situated. M/s PMP Auto Components P. Ltd, Where, by reason of a special relationship between the payer and the recipient or between both of them and some other person, the amount of the interest ....
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....s were actually allotted, and partly as capital contribution, i.e. after the subscribed shares were allotted by the subsidiaries in which capital contributions were made. No doubt, if these transactions are treated as in the nature of lending or borrowing, the transactions can be subjected to ALP adjustments, and the ALP so computed can be the basis of computing taxable business profits of the assessee, but the core issue before us is whether such a deeming fiction is envisaged under the scheme of the transfer pricing legislation or on the facts of this case. We donot find so. We do not find any provision in law enabling such deeming fiction. What is before us is a transaction of capital subscription, its character as such is not in dispute and yet it has been treated as partly of the nature of interest free loan on the ground that there has been a delay in allotment of shares. On facts of this case also, there is no finding about what is the reasonable and permissible time period for allotment of shares, and even if one was to assume that there was an unreasonable M/s PMP Auto Components P. Ltd, 16 | P a g e delay in allotment of shares, the capital contribution could have, at bes....
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....said "loans" were in fact "quasi - equity" and made out of commercial expediency. It was also argued that notional income could not be assessed to tax. However, both of these arguments were rejected by a coordinate bench of this Tribunal. While doing so, the coordinate bench observed that there was no material on record to establish that the loans were in reality not loans but were quasi-capital and that there is also no reason why the loans were not contributed as capital if they were actually meant to be a capital contribution. It was observed that, "It is not the case that there was any technical problem that the loan could not have been contributed as capital originally, if it was meant to be a capital contribution". The argument of loan being in the nature of quasi capital was thus rejected on facts. It was not even a case of quasi capital, and, therefore, this case has no bearing on the question before us i.e. whether ALP M/s PMP Auto Components P. Ltd, 17 | P a g e adjustments can be made in respect of payments towards share application money in a situation in which the shares have been issued several months after the payments for share application money have been m....
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....of the Tribunal relied upon by the assessee are also on the similar lines as the decision in the case of Bharati Airtel Ltd was followed. Further the re-categorization of share application money as interest free loan is not M/s PMP Auto Components P. Ltd, 18 | P a g e permitted under the provisions of the Act as held by the Hon'ble Jurisdictional High Court in the case of Director of Income Tax (International Taxation) Vs. Besix Kier Dhabhol SA (210 Taxman 151). In the case in hand, the assessee is a 100% holding of the subsidiary and, therefore, the decision making body is the assessee itself being the sole share holder of the AE. Accordingly the abnormal delay in allotment of shares in the circumstances of the case when the assessee itself had to take the decision, cannot be held as reasonable or beyond the control of the assessee . The TPO has recorded that fact that the assessee has failed to bring on record any evidence regarding the terms and conditions of such share application money and allotment of shares. In view of the decision of co-ordinate bench on the issue even if arm's length price determination was to be done in respect of such transaction of payment of applicatio....
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....reproduced as under.: - "2. The revenue press the following question of law for our consideration: (a) Whether on the facts and in the circumstances of the case, and in law, the ITAT is justified in restoring the issue of disallowance u/s 14A to the file of the Assessing to decide afresh in view of the decision of the Hon'ble Bombay High Court n the case of Godrej & Boyce Mfg. Co. Ltd. (328 ITR 81) without appreciating the fact that the issue of disallowance u/s 14A read with Rule 8D, has not reached its finality as the Department has agitated the matter before the Hon'ble Supreme Court, which has agitated the matter before the Hon'ble Supreme Court which is pending for inal decision.? (b) Whether on the facts and in the circumstances of the case, and in law, the ITAT is justified in deleting the addition of Rs. 78,84,387/under clause (f) of Explanation 1 to Section 115JB relying upon the decision in the case of Goetze (India) Ltd. v/s. CIT (2009) 32 SOT 101 (Del.), which has been followed by ITAT, Mumbai in the cases referred to in para 5 of the impugned order without appreciating that the above decision in the case of Goetze (India) Ltd. was rendered by....