TaxTMI 
TaxTMI 
2019 (6) TMI 346
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....se 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 therefore humbly prays that the AO be directed to re-compute the demand as per law and issue refund due to t....
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....e 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 case titled as CIT Vs. Everest Kento Cylinder Ltd. (2015) 58 taxmann.com 254 (Bom) in which the Hon'ble High Co....
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....t 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 shares issued, has been upheld by the Hon'ble DRP." (6) "Whether on the facts and circumstances of the case and in law, the Ld DRP has erred is holding that the concept of ad....
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....ethod 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 this appellate stage. ISSUE Nos. 4 to 6:- 12. Under these issues the revenue has challenged the deletion of addition of notional interest on investment in subsidiary as deemed loan. Before going further, we deem it necessary to adv....
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.... 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 be a positive act of lending coupled with acceptance by the other side of the money, as a loan. Thus, it is clear that an element of refund or repayment is inherent in the concept of borrowing.' Applying the aforesaid observations, in the present case, it is not in dispute that the assessee subscribed to the share c....
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....one, 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 before the Supreme Court of India. Hon'ble Delhi Tribunal in the case of Bharti Airtel Ltd. v. Addl. CIT (161 TTJ 428) has held as under: 49. In any event, it is not open to the revenue authorities to characterize the transaction unless it is found to be a sham or bogus transaction. While there are no specific powers vested in the TPO to characterize the transaction, even under the jud....
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....ase 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 para no.7.1 which is hereby reproduced as under.: - "71 Submission of the assessee i. It is a settled law that in view of the statutory provisions of section 2(24)(x), section 36(1)(va) and section 4313(b) of the Income-tax Act, 1961 ("the Act"), contributions made by the assessee towards employees ESIC are allowable deductions even though made beyond stipulated period as contemplated under the mandatory provisions of section 36(1)(va), read with section 2(24)(x), provided s....
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....g 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 context only on the sole reason that the Revenue has preferred an appeal against the Ld. DRP objections and the issue be kept alive to protect interest of the revenue. * Further, the Ld. DRP had failed to adhere to binding precedents of the Hon'ble Income Tax Appellate Tribunal's (Tribunal") in Appellant's own case for A.Y. 2009-10 and 2010-I1 which was on tile same issue. * Failure to following binding judicial precedent tantamount to violation of principles of natural justice. 3. The Appellant prays the entire assessment order passed u/s. 143(3) r.w.s 144C of Act as bad....
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.... 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 to above, explanation to Section 9213 of the Act is prospective in nature: 4. Without prejudice to 2 & 3, the Id. AO be directed to restrict the addition to 0.5% of the guarantee given. WITHOUT PREJUDICE TO GROUND NO. I & II: GROUND NO. V: DISALLOWANCE U/S 14A OF THE ACT: Rs. 28.33,730/- 1. On the facts and the circumstances of the case and in law the Id. AO, pursuant to the directions of the Ld. DRP. erred in making a disallowance amounting to Rs. 28,33,730/- u/s 14A of the Act r.w.r Rule 81) of the Income Tax Rules, 1962 (-the Rules"). 2. The Appellant prays that the Ld. AO be directed to delete the disallowance u/s I4A of the Act amounting to Rs. 28,33,730/- or the disallowance shall be appropriately reduced. 3. ....
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....he 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 Components P. Ltd, 7 | P a g e its AE, we note that an identical issue has been considered by this Tribunal in series of decisions as relied upon by the Ld. Authorized Representative of the assessee. In the case of Aurionpro Solutions Ltd. vs. ACIT (supra), the co-ordinate Bench of Tribunal in which one of us Judicial Member is a party has considered and held in para 8.7 to 8.13 as under:- "8.7 Under the Transfer Pricing Regulations, an international transaction has to be compared with an uncontrolled transactions between unrelated parties which means that an international transaction is tested with the transaction, if the assessee could have entered into a similar transaction with unrelated third party and thereby the income of the assessee would have earned from a similar transaction with an uncontrolled party. Thus, the same inco....
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....e 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. 8.12 It is pertinent to note that in case of FD with the Bank, the investment is safe as it is free from risk of credit and interest. On the other hand, if the loan/advance is given to the unrelated party, then always there is some risk of credit and interest involved in such transaction. There is one more reason for taking the FD as an appropriate and good comparable because the lending rate by financial institutions/bank varies depending upon the credit rating of the borrower and further on the guarantee and security provided to secure the loans. 8.13 Though in principle we do concur with the view of DRP on this issue, however, since the issue of LIBOR has been considered and decided by the Tribunal in various cases as relied upon by the assessee (supra); therefore, to maintain the rule of consistency, we follow the decision of the coordinate Benches of this Tribunal, and accept LIBOR for....
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....erprise. 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 held in paras 16 & 17 as under: 16. Interest free loan extended to the associated concerns as at arm's length lending or borrowing money between two associated enterprises comes within the ambit of international transaction and whether the same is at arms length price has to be considered. The question of rate of interest on the borrowing loan is an integral part of arms length price re-determination in this context. The fact that the loan has the RBI's approval does not put a seal of approval on the true character of the transaction from the perspective of transfer pricing regulation as the substance of the transaction has to be judged as to whether the transaction is at arms length or not. The Delhi Bench of ITAT in the case of Perot Systems TSI (India) Ltd. v. DCIT (supra) had considered identical argument and held as follows: M/s PMP Auto Components P. Ltd, 10. Before us, the ld. Counsel of the assessee contende....
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.... 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 ld. CIT(A)'s order was a speaking order and it has rebutted all the arguments of the assessee. 10. We have carefully considered the submissions and perused the records. The primary contention before us, as submitted by the ld. Counsel of the assessee is that it was commercially expedient for assessee to advance interest free loans to the AEs and that since no interest has actually been charged, there is no real income exigible to tax. As observed by the ld. CIT(A) the agreements show that these are loan amount given by the assessee to Associated Enterprises (AEs). This in fact is an admitted position. There is no case that any special feature in the contract make the transaction as capital in nature. It is also an admitted proposition that the assessee has extended the loan to its AE's who are 100% subsidiaries. The Assessee's case is that it has actually not earned any interest and it was commercially expedient to extend these interest free l....
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....en 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 provisions are applicable in respect of the non charging of interest on loan given to AE, it is not taxable in India as per the provisions of Article 11 of Indo-Mauritius DTAA because the said interest was not paid to the assessee. We note that the provisions of Article 11 are applicable in the case of interest arising in the contracting state and paid to the resident of another contracting state. For the sake of ready reference, we quote Article 11 of Indo-Mauritius DTAA as under:- M/s PMP Auto Components P. Ltd, "ARTICLE 11 Interest 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, subject to the provisions of paragraphs 3 and 4 of this Article, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State. 3. Interest arising in a Contracting State shall be exempt from tax in that State provided it is derived and beneficially own....
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....hment 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 paid, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the recipient in the absence of such relationship, the provisions of this Article shall apply only to the last mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention." 11. It is contemplated under Article 11 of DTAA that the payment is a condition for taxing the interest only in the circumstances when the interest is arising in the contracting state and accrued to the resident of another contracting state and, therefore, the same is subjected to tax in the other state when it is paid. In other words, the provisions of Article 11 defers the taxability of the interest arising but not received and, therefore, it is taxed only when it is received. Article 11 does not exempt the interest arising in a contracting state....
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.... 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 best, been treated as an interest free loan for such a period of 'inordinate delay' and not the entire period between the date of making the payment and date of allotment of shares. Even if ALP determination was to be done in respect of such deemed interest free loan on allotment of shares under the CUP method, as has been claimed to have been done in this case, it was to be done on the basis as to what would have been interest payable to an unrelated share applicant if, despite having made the payment of share application money, the applicant is not allotted the shares. That aspect of the matter is determined by the relevant statute. This situation is not in pari materia with an interest free loan on commercial basis between the share applicant and the company to which capital contribution is being made. On these facts, it was unreasonable and inappropriate to treat the transaction as partly in the nature of interest free loan to the AE. Since the TPO has not brought on record anything to sh....
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....pect 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 made. Similarly, in VVF's case (supra), the transaction was admittedly in the nature of interest free loan between AEs and the commercial expediency in advancing interest free loans was on account of ownership and control of subsidiary being in the hands of the assessee, which was recognized as a significant factor for commercial expediency. However, as we have seen in the earlier discussions, such commercial expediency of granting interest free loans is wholly irrelevant because it is the impact of this interrelationship, on account of management, capital and control, which is sought to be neutralized by arm's length price adjustments. This was also not a case in which a capital contribution was deemed to be partly an interest free loan [i.e. for the period till the shares were actually allotted) and partly as capital contribution [i.e. when the subscribed shares were allotted by the subsidiary). Revenue, therefore, does not derive any advantage from these judicial precedents either. 49. In any event,....
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....f 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 application money and abnormal delay in allotment of shares, it was to be done on the basis as to what would have been interest payable to an unrelated share applicant. Even otherwise when the assessee has not produced the terms and conditions of application money, therefore, we remit this issue to the record of Assessing Officer/TPO to reconsider the same to determine the actual period of delay in allotment and arm's length interest to be received by the assessee in case the transaction of share application money would have been with an unrelated party. 23. By honoring the decision of the Hon'ble ITAT in the assessee's own case(supra), we remit the issue to the AO/TPO to determine the issue on the similar guideline as discussed above. This issue is decided in favour of the assessee against the revenue. ISSUE NO. 4:- 24. Issue no. 4 is in connection with the addition on account of transfer pricing adjustment of corporate guarantee commission. This issue has been already discussed and decided while deciding the issue no. 1 in ITA. N....