TaxTMI 
TaxTMI 
TaxTMI 
2019 (7) TMI 1316
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....of the information, the AO referred the matter to TPO u/s 92CA of the Act, with the prior approval of the Pr.CIT-2, Hyderabad for determination of arm's length price in respect of international transaction reported by the assessee for the AY 2014-15. 3. Profile of the taxpayer: Adama India was incorporated on 27 July 1998 as a wholly owned subsidiary of Makhteshim Agan Holdings BV under the provisions of Companies Act, 1956. The company commenced its commercial operation from 13 July 2009. It is engaged in the manufacture and supply of agricultural crop protection products in India. ADAMA India is offering comprehensive solutions to the farmers by providing broad product portfolio with high international quality standards. ADAMA India has established a very good logistic infrastructure for enabling the availability of its products to the farmers. These warehouses are equipped with well developed SAP system, which are operated by experienced and professional people. 3.1 Examination of TP study conducted by assessee: The assessee has carried out the economic analysis and has summarized it as under: S. No. Nature of international transactions Amount in Rs. 1. Purchas....
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....ked to the overall business of the Appellant and the same was aggregated under Transactional Net Margin Method ('TNMM'). 1.4. On the facts and in the circumstances of the case and in contrary to law, the Ld. AO / Ld. TPO, having considered the transactions aggregated under manufacturing function to be at ALP, erred in not considering an aggregate benchmarking approach for receipt of management services from AE, being a closed linked transaction, in line with the TP documentation maintained by the Appellant. 1.5. On the facts and in the circumstances of the case and in contrary to law, the Ld. AO/TPO further erred in not appreciating the fact that the operating profit earned by the Appellant after considering management services as operating I cost falls within the arm's length range of the comparable companies. 1.6 On the facts and in the circumstances of the case and in contrary to law, the Ld. AO/ ld. PO erred in ignoring the documentation, factual and legal submissions provided by the Appellant to substantiate the benefit, corresponding economic or commercial value derived on receipt of management services. 2. Re-characterization of Compulsory Convertible....
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....ng adjustment by imputing interest amounting to INR 8,812,925 on receivables from AEs by ignoring various rulings as submitted by the Appellant. 3.2 Without prejudice to above ground, the Ld. AO / Ld. TPO erred in bringing notional interest to tax without appreciating the fact that neither the AE nor the Appellant has the practice of charging interest on overdue balances from each other. Without prejudice to the fact that no arm's length determination and consequential TP adjustment is warranted on outstanding receivables, the Appellant would like to raise the following grounds against the computation methodology of the Ld. TPO: 3.3 On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO further erred by adopting the Term deposit rates of State Bank of India ('SBI') as an arm's length rate for calculating interest on the receivables from AE by treating the trade receivables as short term funding. 3.4 On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in adopting 30 days as arm's length credit period based on Appellant's intercompany agreement with AEs on an ad-hoc basis withou....
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....es, would be prepared to pay for it. If no profit has been provided (or was expected to be provided), the service cannot be charged for. d) Whether the services are actually rendered. If yes please quantify such services in terms of actual expenditure incurred and commensurate benefits derived there from. e) The determination of an arm's length charge must take into consideration the amount that an arm's length entity is prepared to pay for such a service in comparable circumstances. f) The taxpayer's level of documentation and evidence to show that the services are actually rendered by the AEs to the taxpayer. If the services are actually rendered, the level of documentation and also evidence to show that a tangible and direct benefits derived by the taxpayer in paying the above amounts to the AEs. g) The allocation key based on which your AE has charged the amount on you. As also whether the AE has provided the same services to all other group concerns. 6.1 The TPO observed that just by describing various sectors, it will not suffice to justify the price charged in intra group services. The assessee has to prove with proper documentation and evidence tha....
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....t. 2. The application of the arm's length principle would be to see whether the amount paid by the taxpayer for the management services reflect the same charges for the intangible that would have been, or would reasonably be expected to be, levied between independent parties dealing at arm's length for comparable circumstances. 3. How much a comparable independent benefit recipient, under comparable circumstances, would be willing to pay for that service? 4. Whether as a result of such payment, the recipient of the service, the taxpayer, resulted in any economic or commercial value to enhance its commercial position. The expected benefit must be sufficiently direct and substantial so that an independent recipient, in similar circumstances, would be prepared to pay for it. If no benefit has been provided (or was expected to be provided). 5. What is the benefit received / receivable on account of such services for which the amount was paid by the taxpayer. Also quantification of the benefit in terms of value addition achieved by the usage of such services, to the final value of the product and thereby justification for the amount paid. 6. The tangible benefit a....
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..... ITA No. 2730/Ahd/2017 in the case of Sabic Innovative Plastics India Pvt. Ltd. 6.8 Before us, ld. DR filed written submissions as under: "1. The additions in this case are on account of adjustment to ALP. DRP has considered the objections of the assessee and granted due relief. It is submitted that the assessee aggregated management services with manufacturing function. It is not proper on the part of the assessee to aggregate functions like assistance in accounting matters, assistance in process and quality control matters, support services, assistance in procurement and sales and assistance in HR matters with manufacturing activity. Even on first principles of accounting, the assessee cannot club such functions with manufacturing activity. Also, the claim that contemporaneous documents were maintained and FAR analysis was done for management services is not borne out by facts. No documentation or evidence for receipt of such services could be furnished by the assessee. The assessee filed additional evidence before DRP, which is in the nature of vague e-mails and the claim was duly rejected. 2. It is humbly submitted that margins have to be worked out separately for diff....
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....ement services. TPO has considered the ALP of management services as 'NIL'. We do not agree with the TPO that ALP is 'NIL' and he analysed the management services on benefit test. There is no such method in the TP study. You cannot adopt a method which is not embedded in the study. It is difficult to prove the services in terms of numbers but it can be seen only in ease of doing business in India and satisfaction of the farmers who are availing the services. Without the integrated services, the assessee would not have achieved the results. In our considered view, when TPO accepts the other international transaction under TNMM and it can also accept the management services also under TNMM. It is an integrated solution offered by the AEs for the overall benefit and performance of assessee. The ALP itself cannot be NIL. The various judicial pronouncements in this regard are as under: 1. In the case of Sabic Innovative Plastics India Pvt. Ltd., ITA No. 2730/Ahd/2017, vide order dated 8th March, 2019, the coordinate bench of ITAT, Ahmedabad Bench, observed as under: "11. As learned representatives fairly agree, even as the learned Departmental Representative dutifully relies upon ....
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....be, are rendered and find out consideration for the same, the CUP method cannot have any application. His perception that these services are worthless is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble jurisdictional High Court in the case of CIT v. EKL Appliances Limited (345 ITR 241), "Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same". 16. The very foundation of the action of the TPO is thus devoid of legally sustainable merits. There is no dispute that the impugned payments are made under an arrangement with the AE to provide certain services. It is not even the TPO's case that the payments for these services were not made for specific services under the contract but he is of the view that either the services were useless or there was no evidence of actual services having been rendered. As for the services being useless, as we hav....
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.... "much" use. The TPO has travelled much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of its AEs. The DRP is also in error, in the light of these discussions, evaluating the worth of services on the basis of benefit of these services. The very foundation of the impugned ALP adjustment was thus devoid of any legally sustainable basis. 10. In any case, we have carefully perused the evidence of services rendered and the nature of services in question, on random sample basis. In our considered view, there is reasonable evidence of the rendition of service and it cannot be open to TPO to proceed on the basis that the services were not rendered. The method of ascertaining the arm's length price, on the basis of TPO's subjective perception about worth of services, is not sustainable in law either. In view of these discussions, as also bearing in mind entirety of the case, we deem it fit and proper to delete the impugned ALP adjustments." 2. In the case of Siemens Gamesa Renewable Power Pvt. Ltd., ITA No. 1420 & 376/Mds/2017, the ITAT, Chennai Bench observed as under: "20.6 In our considered opinion, ALP of manag....
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....rder of CIT (A) on this point and delete the addition made." 3. In the case of Schneider Electric India Private Limited (ITA No. 2091 Ahd/2015, the ITAT, Ahmedbad Bench observed as under: "'9 ... The TPO has rejected the determination of arm's length price on the basis of TNMM, at entity level, but then he has not adopted any other permissible method for determination of arm's length price. Such a course of action, as noted above, is not permissible in law. Just because these services are worthless in the eyes of the revenue authorities, the arm's length price of these services cannot be held to be NIL. Similarly, the findings that no services were rendered and that the Appellant could have performed these services on its own are contradictory. Coming to the question of business expediency, which has been questioned by the authorities below, in our considered view it was also not for the TPO to bother about business expediency of these services; all he was to see was what would be arm's length services of these services in an uncontrolled situation. That has to be done on the basis of a permissible method of ascertaining the arm's length price. It c....
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....n aggregate method, where the transactions were so interconnected and intertwined, when an independent analysis would not give reasonably fair results" 5. In the case of AWB India Pvt. Ltd (ITA No.4454/DeI/2011), the ITAT, Delhi Bench observed as under: "23. It is also noteworthy in this regard that the TPO has nowhere disputed the Appellant's contention to the effect that it was not possible for the Appellant to document every record of receipt of the services in question, since the services were received by the Appellant in the form of directions and recommendations through e-mails/phone calls/some reports, etc. In spite of the nature of the services received, the Appellant had, along with its reply, appended as Annexure-1, samples of evidence of availment of such services. Copies of the said Annexure-1 to the Appellant's reply have been filed before us. Having gone through the same, we find the contents thereof to be amply supportive of the claim of the Appellant. The TPO's Order is found to have been passed in 'utter oblivion of these details also. 27 In 'CIT vs. EKL Appliances Ltd.', vide order dated 29.03.2012 passed in ITA Nos.1068/2011 and 1....
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....ement fees without availing the services from the AE. Even otherwise when the management fees paid under the agreement and there is no finding by the authorities below that the same services also availed by the Appellant separately from 3rd party and booked the expenditure in the profit and loss account then determination of the ALP at NIL is not acceptable." 6.11 Considering the ratios laid down in the above cases, we are inclined to accept the contention of the assessee. However, we also noticed from the records that assessee entered into agreement with other AEs to get the services and to compensate for the services. But, the compensations made by assessee are USD $ 134,000 for 3 quarters and USD 148,000 for 4th quarter. As read from the agreement, it gave an impression that it is on actual basis. The relevant clauses of the agreement are reproduced below: "3. Compensation: As compensation for the services to be provided by the Service Provider pursuant to this Agreement, the Services Provider shall be entitled to receive from the Company compensation as specified in Annex 2 and as updated from time to time by the agreement of the parties. The Service Provider shall furn....
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....than the interest charged by the assessee company to it's AE. A show cause notice was issued on dt.13.10.2017 as to why LIBOR should not be applied to its case as LIBOR is usually applied as a bench mark for all the international loans and advances. The assessee was asked to furnish certain information on this. In response to which, the assessee replied that the assessee had allotted 18,56,25,815 CCDs at a face value of INR 10 per CCD to it's AE Celcius Property B.V. at an interest rate of 12% per annum. These funds were obtained from AE for the expansion of the business. At this juncture the paid interest on CCDs was at the rate of 12% amounting to Rs. 18,14,93,230/-. 7.1 The assessee further stated that the Hon'ble ITAT, Hyderabad in the assessee in case for the AY 2011-12 vide ITA No.497/HYD/2016, has granted relief to the assessee by considering the fact CCDs were denominated in Indian currency and consumed in India , the appeal against which is still pending before High court. Further the assessee has provided benchmark results from the information available from NSDL website, in which average coupon rate range from 0.50% to 16.50% with an arithmetic mean of 12.5....
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....cisions of Hon'ble ITAT which support that CCDS are in the nature of debt and hence the interest is amenable to TP adjustment. In the case of Granite Gate Properties Pvt Ltd [2029] 101 taxmann.com 38 (Delhi - Trib.), interest on FCCDs was treated as international transaction and the dispute was on the rate adopted for adjustment to ALP. 4. Reliance is also placed on the decision of Hon'ble Delhi High Court in the case of Zaheer Mauritius (230 Taxman 342) where in it was held that "There is no dispute as to the nature of Compulsorily Convertible Debentures. A debenture indisputably creates and recognizes the existence of a debt and till it is discharged, either by payment or by conversion, the debenture would essentially represent a debt. A Compulsorily Convertible Debenture is a debt which is compulsorily liable to be discharged by conversion into equity. Any amount payable by the issuer of debentures to its holder would usually be interest in the hands of the holder". It is humbly submitted that the decision in case of Zaheer Mauritius was not brought to the notice of Hon'ble ITAT in the proceedings for the earlier year in case of the assessee. The decision is squar....
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....various judicial forums did not consider the above facts. Hence, once the transaction is an international transaction then the Arm's Length Price has to be determined. It is not the case of aggregation of transactions which the taxpayer is projecting. Reliance is placed on Chiel India Pvt. Ltd [TS145-ITAT-2014(DEL)-TP1, which also took into account judgement dated 07-10-2010 of ITAT Bangalore Bench in the case of M/s Logix Micro Systems Ltd. Vs. ACIT (ITA no. 524/Bang/2009). In view of these observations, the TPO charged interest as per the rate of interest available on SBI website given on short term deposits. Accordingly, the TPO worked out the interest on outstanding receivables received beyond due date at Rs. 88,12,925/- and the same is made as adjustment u/s 92CA(3) of the Act. 8.3 When the assessee raised objections before the DRP, the DRP upheld the action of TPO. 8.4 The ld. AR brought to our notice the details of outstanding from the TPO order in page 12 and except few invoices, all other outstandings are less than 6 months. He relied on the case of C3i support Services in ITA no. 503/Hyd/2017, the Hyderabad ITAT allowed the outstanding period of 6 months. He submi....
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....has huge outstanding in receivables and made adjustment on interest receivable on such outstandings. We noticed that TPO has allowed the credit period at 90 days as per agreement and wherever assessee allowed the credit period beyond 90 days, he made the adjustment. In our view, TPO has made the adjustment wherever assessee has allowed the credit period beyond 90 days and failed to acknowledge that assessee has received certain payment within 90 days also. We are in agreement with ld. AR that we need to consider the overall average credit period for the AY or should be compared with the industry average. TPO has applied 90 days period selectively. In our view, we need to calculate the average period of collection for the period and in case any deviation noticed that the period allowed beyond reasonable period should alone be considered for making adjustment. 9.1 In the given case, ld. AR also disputed the fact that no such period was agreed between the parties that the credit period was fixed at 90 days. Therefore, in our view, TPO should calculate the average of collection for the year under consideration of all the transactions carried on by the assessee. In case, it is found ....
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....expense on the borrowings, disallowance u/s. 14A of the I.T. Act, 1961 is squarely applicable. 10.1 During the course of scrutiny proceedings, the assessee was asked to explain why disallowance U/s. 14A should not be made. In response, the assessee submitted as under: "The company has earned dividend from mutual funds amounting to Rs. 55,91,455/- which is exempt u/s 10(35) of the Act. However, the said investments in mutual funds were made by the company in the earlier years and no fresh investments were made by the company during the year under consideration. Accordingly, there is no expenditure incurred in relation to the said investment. Hence, the provisions of section 14A of the Act read with Rule 8D of the IT Rules are not applicable." 10.2 The AO observed that the contention of the assessee is not tenable having regard to the accounts of the assessee. The assessee's above submissions are also not satisfactory in explaining the correctness of the claim in respect of expenditure incurred in relation to earning of exempt income. Though there is no fresh investment, the assessee could not establish that the investment made earlier were out of its own funds. In the abs....
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.... direct and proximate nexus with investment activity which yields exempt income. Therefore, disallowance under Rule 8D(2)(iii) of Income Tax Rules, 1962, is warranted in this case. 10.5 In view of the above observations, the AO computed the disallowance u/s 14A as under: 1. The amount of expenditure directly relating to exempted income (interest paid on loan for investment in shares & MF Nil 2. Interest expenditure which is not directly attributable to particular receipt is worked out as per the formula AXB/C, where A. Interest expenditure during the year (though the assessee has claimed an Amount of Rs. 37,36,48,729/- towards interest, since the TPO in his order u/s 92CA(3), dated 30/10/2017 has proposed adjustment to the tune of Rs. 14,17,15,964/-, the emaining interest viz., Rs. 23,19,32,765/- (Rs. 373648729-141715964) is considered for calculating disallowance) Rs. 23,19,32,765 B. The average value of investment : 9,30,00,600 + 9,30,00,600 = 2 Rs. 9,30,00,600 C. The average value of total assets: 9145600059+8460765980 = Rs. 880,31,83,020 2 AXB = 231932765 x 930006000 = Rs. 24,50,237 3. One half percent of the....
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....#39;) 181,493,230 2 Interest on working capital loan 176,001,103 3 Interest on others- Interest on income tax - Interest on indirect taxes 7,077,395 128,776 4 Interest on customer deposits 8,948,225 Total 373,648,729 The Ld. AO after removing the impact of transfer pricing adjustment of INR 14,171,5964 from the total interest cost of INR 373,648,729, has considered the balance interest cost of INR 231,932,765 as interest not directly attributable to any taxable receipt and computed the disallowance as per Rule 8D(ii) of the Rules. In this regard, the Company submits the following for your Honours kind consideration: 1. Interest on CCDs (Refer S.No. l in above mentioned Table) - During the FY 2012-13, the Company has borrowed funds to the tune of INR 1,856,258,152 by issuing CCDs. As per the terms and conditions of the CCD agreement, the amount received by issuance of CCD can be only utilized for business expansion plans in India. Accordingly, the Company had utilize the amount borrowed in the form of CCDs for its business purpose and not for making investments in the mutual funds. The rate of interest chargeable on CCDs is around 12%, while the di....
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....nce, the said interest cost not being in the nature of interest on 'borrowings', should not be considered for the purposes of computing disallowance as per Rule 8D(ii) of the Rules. From the above submission, it can be inferred that each of the interest cost debited to the profit and loss account is directly related to a particular receipt! income, which has a specific end-use. The same are not in the nature of any general borrowing and therefore should not be considered for the purposes of computing disallowance as per Rule 8D(ii) of the Rules. At this juncture, the Company also wishes to reiterate the fact, mentioned in the foregoing paragraphs, that the investments in mutual funds as on 31 March 2014 have remained status-quo as at 31 March 20 13.That is there are no movements in investments as of 31 March 2013 and 31 March 2014. The table belowsummarized the same: Particulars FY 2012-13 FY 2013-14 Opening balance of investments - 93,000,000 Add: Purchases made during the year 93,000,000 - Less: Sale made during the year - - Closing balance of investments 93,000,000 93,000,000 From the above table it can be inferred that no fresh investment....
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.... the case of CIT vs. HDFC Bank Ltd. [2014J 366 ITR 505 (Bombay High Court). In view of above, the Appellant Company submits that its internal surplus funds have been used for the purposes of making investments in mutual funds. Without prejudice to above, relying on the above judicial precedents, since the amount of own funds (i.e. INR 62,850,000) is less than the total investments in mutual funds (i.e. INR 93,000,000), then the investment to the extent of INR 62,850,000 may be assumed to be out of owned funds and accordingly, disallowance under Section 14A of the Act should at least be restricted to the differential amount (i.e. difference between shareholder funds and investments in mutual funds) of investment. Further, as regards the disallowance computed by the Ld. AO as per Rule 8D(iii) of the Rules, the Company submits that it is a well-settled principle that the intent of Rule 8D(iii) is to disallow overheads/administrative expenditure incurred for purchase/ sale of investment portfolio. As discussed supra, in the instant case, there has not been any fresh investments made during the year. So, no overhead expenses, management fee salary cost etc. have been incurred g....