TaxTMI 
TaxTMI 
2018 (4) TMI 1742
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.... 142(1), dated 20/05/2015. A reference was made to the Transfer Pricing Officer (TPO) as the assessee had entered into international transaction worth Rs. 12,68,25,000/- with its Associate Enterprise M/s BS Global Resources Pvt. Ltd. for determination of arm's length price. 2.1 Assessee's Profile: The assessee company is engaged in the business of providing a range of services to power transmission companies for setting up transmission lines and sub-stations. The company has two manufacturing facilities which are located near Hyderabad with an annual installed capacity of 2,40,000 MTPA. Company is certified with quality management (ISO 9001:2008), Environmental Management (ISO 14001:2004) and occupational Health and Safety (OHSAS 18001:2007) 2.2 International Transactions: As per 3CEB report/TP Document submitted, the international transactions are as under: Investment in subsidiary Rs. 12,68,25,000 2.3 Examination of TP study conducted by assessee: The assessee has carried out the economic analysis and has summarized it as under: Nature of international transaction Amount (Rs.) MAM PLI Margin of assess....
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....um, from Rs. 5 to 10 crores is 1.60% and above Rs. 10 crores the charges are 1.30% per annum. He, accordingly, computed the ALP of corporate guarantee fee as under: Amount of corporate guarantee extended to AE (Corporate guarantee issued on 22/12/2012) Rs. 13,58,87,500 Corporate guarantee fee @ 1.30% (for 3 months 9 days) Rs. 4,79,143/- Thus the arm's length price of corporate guarantee fee is Rs. 4,79,143/- and the shortfall of the same amount is treated as an adjustment u/s 92CA of the Act and the total income of the assessee was enhanced by Rs. 4,79,143/- u/s 92CA(3) of the Act. 3. When the assessee objected the same before the DRP, the DRP upheld the action of the TPO. CORPORATE MATTERS 4. Apart from the adjustment to international transactions, disallowance of interest was also made by the AO as under: 1. Interest disallowance on account of sham transactions Rs. 71,33,23,290/- 2. Interest disallowance on payments made to Silverpoint Infratech Ltd., Rs. 1,37,88,369/- 5. As regards disallowance of interest on account of sham transactions, during the year under consideration, the assessee had purchases and sales from so many concerns and it includes purchases of ....
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.... Rs. 1,72,60,428/- (interest on car loan/term loan) the ratio being 98.08%. Thus, 98.08% of Rs. 2,43,78,681/- i.e. Rs. 2,39,10,610/- only is considered for computing disallowance of interest. Particulars AY 2013-14 Interest on cash credit 38,95,48,064 98.08% of interest on term loan 2,39,10,610 Other borrowing costs 49,42,77,339 Total finance cost to be considered for disallowance on account of sham transactions 90,77,37,013 The details of purchases in the books of BS Ltd for AY 2013-14 are as under: S. No. Related concerns Purchases 1. SB Metals Pvt. Ltd. 263,43,72,667/- 2. Adarsh Global & Trade Pvt. Ltd. 72,52,13,258/- 3. Resources Metals Pvt. Ltd. 41,68,29,478/- 4. Vedika Steels Pvt. Ltd. - 5. United Minerals Pvt. Ltd. - Total purchases (related concerns) 377,64,15,403/- Other purchases (unrelated concerns) 102,92,43,281/- Total purchases debited to P&L A/c 480,56,58,684/-. Thus the disallowance of interest was worked out by the AO as under: = 377,64,15,403 Disallowance 480,56,58,684 x 90,77,36,013 = 71,33,23,290/- 5.4 Aggrieved, the assessee raised objections befor....
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....aising the following grounds of appeal: "Each of the grounds of appeal is mutually exclusive of, independent and without prejudice to other. Based on the facts and the circumstances of the case and in law, the learned Assessing Officer (AO), learned Transfer Pricing Officer (TPO) and the Honourable Dispute Resolution Panel (DRP) 1. Erred in not issuing Draft Assessment order as per procedure laid down u/s. 143(3) r.w.s 153A & 144C(1) of the Act by issuing the notice of demand u/s. 156 of the Act & penalty notices u/s. 271(1)(c) and 271AAB along with Draft assessment order dated 30-12-2016, which tantamount to passing of Final Assessment Order. 2. Erred in making adjustment u/s. 92CA(3) of the Act for Rs. 4,79,143/- in respect of transaction of Corporate Guarantee provided to DCO Bank, Singapore on behalf of loan to BS Resource Pte Limited, Singapore by charging rate of 1.30% on Outstanding amount of Rs. 13,58,87,500/- on hypothetical and notional basis without there being any material on record. 2.1 Erred in making the ALP adjustment u/s. 92CA(3) of the Act for Rs. 4,79,143/- in respect of Corporate Guarantee without issuing any show cause notice and without allowing an o....
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.... interest rates. 2.6 Erred in calculating the guarantee fee on the entire amount of the guarantee instead of restricting the amount to the extent of the withdrawal of guaranteed amount by the AEs. 2.7 Without prejudice, ought to have applied reasonable percentage of fee of corporate guarantee instead of 1.3% which is very high and unreasonable. Corporate Tax Matters: 3. Erred in disallowing an amount of Rs. 27,94,43,971/- towards proportionate amount of Interest (being the finance cost claimed in profit and loss account) of Rs. 71,33,23,290/- by concluding that the purchases with various parties such as Vedika Steels Private Limited, SB Metals Pvt Ltd, Adarsh Global Traders and services Private Limited, Resource Metals & Minerals Private Limited & United Mineral Resources Private Limited are Paper transactions and non-genuine. DRP Directions are not followed: 3.1 Erred in not following the directions of DRP in para 2.5 wherein the honourable DRP has directed to compute the interest after examining payments and receipts with the alleged parties in the cash flow/fun....
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....and results (profit) as admitted in the Return of Income. 3.11 Erred in disallowing the interest by disbelieving certain portion of purchase but taking into account the entire profit which includes profit relatable to so called bogus purchases. 3.12 Erred in disallowing the interest expenditure without appreciating the fact that the manner the assessee should conduct his business is best left to the discretion of the assessee and the Assessing Officer cannot sit in the arm chair of the businessman to decide, how the funds should have been utilized. 3.13 Erred in calculating the disallowance of interest expenditure on the basis of proportion of the purchases without considering the ageing of debtors and creditors. The period of transaction between purchase and sale with the parties is very short which shows that no interest bearing funds were used. 3.14 Without prejudice, the Ld. AO has taken two divergent views on the issue that: 3.14.1 The entire trading activity between the alleged companies as sham and in disallowing interest allegedly relating to bogus purchases. 3.14.2 Accepted the profit arrived at basing on the entire sales Turnover admitted in P&L a/c by the ass....
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....sessee is having similar kind of sub contract expenditure with the same party in the earlier years wherein the same was allowed. 4.6 Erred in not considering the fact that the assessee has already admitted profit of Rs. 25,37,318/- in respect of transaction with the Silver point Infratech Limited and the same was offered to tax. 4.7 Erred in observing that the assessee has used only the interest bearing funds for the payment to Silver point Infratech Limited. 5. Erred in initiating penalty proceedings ul s. 271(1)(c) r.w.s 274 of the Income Tax Act. The appellant may add, alter or modify any other point to the Grounds of appeal at any time before or at the time of hearing of the appeal." 8.1 Before hearing, the bench asked the ld. AR to specify the grounds of appeal, which are contested, reason being there are so many sub-grounds. Ld. AR submitted that he will press only the main grounds and press the argument placed before the Bench. The bench will adjudicate only the main grounds of appeal and not its sub-grounds. 9. As regards ground No. 1, the ld. AR of the assessee submitted that the AO erred in not issuing draft assessment order as per procedure laid down u/s 1....
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....n. Also, It is different from the bank guarantee. Further, he submitted that TPO has adopted the rate of SBI, whereas the assessee has extended the bank guarantee to the foreign AE. Therefore, he should have adopted rates available in the international market. He also submitted that TPO should have charged the rate on the actual loan, availed by the AE, not on the corporate guarantee extended by the assessee and the assessee has not incurred any cost for providing such guarantee. Without prejudice, to the above, he submitted that the AO ought to have applied reasonable rate of corporate guarantee fee percentage, say 0.20%. He relied on the following cases: 1. Bharati Airtel Ltd. Vs. ACIT, ITA No. 5816/Del/2012 2. Aban Offshore Ltd. vs. DCIT, ITA No. 585/Mds/2015 3. Videocon Industries Ltd. Vs. ACIT, ITA No. 6145/Mum/2012/55 Taxmann.com 263 4. Manugraph India Ltd., Vs. DCIT, [2016] 69 Taxmann.com 400(Mum. Trib) 5. Rusabh Diamonds Vs. ACIT, 68 Taxmann.com 141 ( Mum.Trib) 6. Asian Paints Ltd. Vs. ACIT, ITA No. 7801/Mum/2010 7. Lanco Infratech Ltd. Vs. DCIT, ITA No. 450/hyd/2016 8. Aster Pvt. Ltd., Vs. DCIT, ITA No. 220/Hyd/2015. 13. Ld. DR submitted that corpora....
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....f Four Soft (P.) Ltd. (supra) referred to the decision of Mumbai ITAT in the case of Glenmark Pharmaceuticals v. Addl. CIT [2014] 43 taxmann.com 191 (Mum. - Trib.) (URo) wherein distinction was made between bank guarantee and corporate guarantee and 0.53% was held to be appropriate 'ALP' for guarantee commission. 14.2 Further, ld. AR submitted that the assessee has extended the corporate guarantee to the AE whereas AE has not utilized the full financial facility during the year, hence, the quantum cannot be determined in full value of corporate guarantee. We are in agreement with the assessee that corporate guarantee is contingent liability, relevant consequence depends upon future event. However, the quantum of exposure should be on the basis of actual exposure. In this case, it is not clear from the document submitted before us the actual exposure. Therefore, we find it appropriate to remit this issue back to the file of TPO/AO to determine the actual exposure of contingent liability for this AY and apply the rate of 0.53% as per the ratio of Glenmark Pharmaceuticals Ltd. (supra) on the actual contingent liability. It is needless to say that assessee may be given proper ....
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....the details such as location where stocks are kept, old, un-saleable and unpaid stocks, including stocks received under DA-LC separately are to be submitted. In the present case the assessee has regularly submitted the details and the bank authority has not found any discrepancies in the same. 15.3 Ld. AR submitted that the AO erred in disallowing the interest expenditure without appreciating the fact that the manner the assessee should conduct his business is best left to the discretion of the assessee and the Assessing Officer cannot sit in the arm chair of the businessman to decide, how the funds should have been utilized. The AO ought to have appreciated the fact that it is well settled law that the AO cannot sit in the arm chair of the businessman and substitute his views for that of the businessman. In this regard, reliance is placed on the decision of High Court of Delhi in the case of CIT v. Oracle India (P.) Ltd. [2011] 11 taxmann.com 139 (Delhi) (Mag.). 15.4 Ld. AR submitted that the AO erred in disallowing the interest expenditure without appreciating the fact that the purchases and sales with the above referred parties were made in the earlier assessment years also wh....
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....he interest disallowance of Rs. l,34,25,171/-. Hence, no disallowance is required to be made in the present case. 16. Ld. DR, on the other hand, submitted that the transactions related to purchases with related parties were examined during the course of assessment proceedings and after detailed analysis as mentioned in the assessment order, AO came to the conclusion that the trading purchases with related concerns were paper transactions, non genuine and sham. He submitted that funds may be granted by the bank for specific purpose but the assessee has not pointed specific nexus to its utilization. The disallowance of interest expenses were made considering the purchases made with related concerns. He pointed out that this issue was duly considered by the Hon'ble DRP-1, Bengaluru and disallowance was made in pursuance to directions issued. AO has not estimated the disallowances and for which the books need not be rejected. 16.1 Ld. DR submitted that the Assessee has stated income from trading at Rs. 80,18,23,430/- and claimed that if Rs. 377,64,18,403/-being purchases from related parties are added back, then how assessee can earn income of Rs. 80,18,23,430/- from sale of good....
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....0,56,58,684/- 878,61,65,339/- 1359,18,24,023/- 16.5 Ld. DR submitted that the cumulative purchases with related concerns for AY 2013-14 & AY 2014-15 amount to Rs. 726,19,42,991/-Having regard to the decision of the Hon'ble Gujarat High Court discussed above, GP rate of 8% on Rs. 726,19,42,991/- works out to Rs. 58,09,55,439/-. Against this the AO has already made addition of Rs. 60,00,00,000/- as admitted by Shri Shri Rajesh Satyanarayana Agarwal with a view to take care of the inconsistencies, in respect of the purchase transactions. This addition of Rs. 60 crores is made by the AO in A Y 2014-15 with regard to purchases, the basis for which is described elaborately in the assessment order under the head "Interest disallowance on account of sham transactions" (para 4 of Asst. order for AY 2013-14 & para 6 of Asst. order for AY 2014-15). 16.6 He submitted that it is pertinent to note that M/s BS Ltd is a listed Company with declared Turnover of more than Rs. 1500 crores. The assessee had claimed that Rs. 60 crores declared during search (FY 2013-14) is included in business income. However, the Annual Report makes no mention of any such extraordinary income if any earned by ....
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....same to 'X' on 17/04/2013. In this case, 'A' invested Rs. 100/- for a period of 7 days. (In this case cash to cash basis.) Scenario 2: On the same example of above, 'A' buys goods from 'B' with the credit period of 15 days and sells the same to 'X' on cash basis, there is no finance cost to Mr. 'A' as the transaction was done on buyer's credit. Scenario 3: On the above example, Mr. 'A' buys on cash basis and sells the same to 'X' on one moth credit, then, Mr. 'A' has financial burden of 37 days." From the above, it is clear that the financial cost depends upon the terms of payment between the parties. In the given case, AO has not understood the above aspect and calculated the interest for the complete year from the date of purchase in each case. The proper way of calculating interest on outstanding balance of supplier on day to day basis. Since, AO has not disallowed any purchases that means these transactions are considered to be genuine. Therefore, AO cannot disallow any associate cost of purchase. 17.4 We find that assessee has entered into transaction with the alleged related parties and kept a m....
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....7.8 Considering the above discussion, in our view, AO has not made any disallowance in purchases even though he satisfied himself that these are sham transactions. Further, he proceeded to disallow interest on purchases, which is not proper, even though, he proceeded to disallow the interest with improper data and improper method. Therefore, the disallowance made by the AO on interest is deleted. 18. As regards the disallowance on interest payments to M/s Silver Point Infratech Ltd., ld. AR submitted that AO has disallowed the interest of Rs. 1,37,88,369/- stating that assessee has used borrowed funds for making payment to Silver Point Infratech Limited, which is not correct as explained in the above paras. 18.1 Without prejudice to the above, He submitted that the AO has calculated interest for the entire year (12 months) which is not correct, interest disallowance if at all is made, it should be calculated on day to day basis from the date of payment and not for the entire year. Accordingly the disallowance of notional interest of Rs. 1,37,88,369/- towards amount paid to M/s. Silver Point Infratech Limited is not correct. 18.2 Ld. AR submitted that the assessee has received co....
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....sp; 02-03-2012 Maco Corporation India Pvt. Ltd. 25,94,256 05-03-2012 Silver Point Infratech Ltd. 25,94,256 20-03-2012 Maco Corporation India Pvt. Ltd. 20,00,000 21-03-2012 Silver Point Infratech Ltd. 20,00,000 24-03-2012 Maco Corporation India Pvt. Ltd 23,66,998 26-03-2012 Maco Corporation India Pvt. Ltd 44,85,901 26-03-2012 Silver Point Infratech Ltd. 23,89,391 27-03-2012 Silver Point Infratech Ltd. 43,99,944 Total A 1,41,49,505 1,13,83,591 04-06-2012 Viswaraj Infra 90,00,000 04-06-2012 Viswaraj Infra 80,00,000 04-06-2012 Viswaraj Infra 70,00,000 04-06-2012 Viswaraj Infra 60,00,000 05-06-2012 Silver Point Infratech Ltd. 3,00,00,000 08-06-2012 Viswaraj Infra 90,00,000 08-06-2012 Viswaraj Infra 80,00,000 08-06-2012 Viswaraj Infra 70,00,000 08-06-2012 Viswaraj Infra 60,00,000 13-06-2012 Viswaraj Infra 90,00,000 13-06-2012 Viswaraj Infra 80,00,000 13-06-2012 Viswaraj Infra 70,00,000 13-06-2012 Viswaraj Infra 60,00,000 &nbs....