TaxTMI 
TaxTMI 
2018 (4) TMI 1742
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....iled questionnaire was issued vide notice u/s 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 inte....
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.... section 92B of the Act and he collected the information from SBI by issue of notice u/s 133(6), as per which, loans upto Rs. 5 crores, the bank guarantee charges are 2.10% per annum, 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,....
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....se of car & capital assets (term loans). Loan processing charges are incurred for cash credit, finance of cars/capital assets & other borrowing costs. As such, for AY 2013-14, the same is apportioned on the basis of interest paid i.e. Rs. 88,38,25,403/- (interest on cash credit, other borrowing cost) and 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/- &nbs....
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....ee has not given any explanation as to the amounts given to M/s Silver Point Infratech of Rs. 534,76,478/- and Rs. 5,79,00,000/- and no commercial expediency has been made out on such payments as well as no documentation was filed in support of such plea. 7. The AO has passed the final assessment order implementing the directions of the DRP. 8. Against the final order of AO, the assessee is in appeal before us raising 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 tran....
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....see is not carrying banking business. Hence, the comparable taken by the TPO is not in accordance with the provisions of the Act. 2.4.e. Erred in not appreciating the fact that the rates taken by the TPO are quotations and not an actual uncontrolled "transaction" which can be compared to the assessee. 2.5 Erred in not appreciated that the Credit rating of the country of AE (Singapore) is higher than the country of Assessee Company (India), thereby implying no benefit is derived in the form of low 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,....
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....rred in not considering the fact that the interest cost is relating to the funds applied by the assessee for normal business operations for which loan is sanctioned and it may include all the expenditure debited to profit and loss account during the course of business and the same are paid during the year. 3.9 Erred in observing that only the interest bearing funds are utilized only for purchases without appreciating the fact that the assessee has reserves and surplus of Rs. 4,041,396,356/- 3.10 Erred in concluding a major portion of purchase as bogus and disallowing the proportionate interest cost without rejecting the books 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 sh....
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....power transmission wherein mobilization advances are common and it has received certain amount as advance from parties which is pending as on 31-03-2013. 4.3 Erred in not appreciating the fact that the sub contract expenditure incurred by the assessee is in its regular course of business activity as a matter of business expediency and has direct nexus with the business. 4.4 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. 4.5 Erred in not appreciating the fact that the assessee 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 ....
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....enalty notices along with the draft assessment order. Since the facts are not identical to the facts of the case laws relied on by the assessee, moreover, the AO has to pass draft assessment order as per provision and was accordingly passed by him. The accompanying notices along with the draft assessment order are only procedural mistakes, it cannot tantamount to passing of final assessment order. Accordingly ground raised by the assessee is dismissed. 12. As regards ground No. 2 regarding addition of Rs. 4,79,143/- in respect of corporate guarantee provided to AE, ld. AR submitted that the corporate guarantee given to AE does not fall within the scope of international transaction u/s 92B. He submitted that the corporate guarantee is provided to AE for commercial, business expediency and promoter obligation. 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 corporat....
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....r the expanded definition of international transaction post amendment to international transaction. Further, the Hyderabad Benches consistent with the view that corporate guarantee provided by the taxpayer prior to amendment are not international transaction. Hence, it meant that post amendment, corporate guarantee provided by the taxpayer are international transaction. Therefore, corporate guarantee provided by the assessee will fall within the expanded definition of international transaction. 14.1 With regard to quantum of guarantee fee to be charged, it is consistent view of the bench that the corporate guarantee provided by the assessee cannot be equated with a bank guarantee provided by third party banks. Therefore, the rate charged by banks cannot be applied to determine the 'ALP' for the guarantee provided by the assessee. The coordinate bench in the case of 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 co....
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....transactions. The Banks have sanctioned the credit limits to the assessee on the basis of feasibility and technical study wherein the stock and debtors were considered for grating the funds. Further they have granted funds on certain terms and conditions, wherein one of the condition made is that the credit facilities shall be utilized only for the purpose for which same are granted and said facilities shall not be diverted or siphoned off or used for any other purposes. The loan was obtained for the purpose of business and the assessee has utilized the same wholly and exclusively for the purpose of business. In the present case, the bank has not found any discrepancies in the transactions entered by the assessee. Additionally, the assessee is required to submit/maintain certain documents such as month end complete Stocks/Debtors statement before 10th of the following month wherein 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....
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....and has disallowed the interest which is not correct. However, the AO has incorrectly calculated the disallowance from the date of purchase to the 31.03.2013 without appreciating the fact that the DRP has directed to calculate the disallowance considering cash flow of the receipts/payments. In this regard, it is submitted that the AO is bound to follow the directions of the Honorable DRP and in this regard, he relied on the following case laws: 1. Alumeco India Extrusion Ltd. Vs. ITO, 1929/Hyd/2011 2. Toshiba India P. Ltd. Vs. DCIT, 944/Del/2016 15.8 Ld. AR submitted that the assessee has already submitted a statement showing profit earned of Rs. 2,33,98,662/- by purchase and sale with the alleged parties in Page 52 of Paper book-l and also made a calculation of interest disallowance on day to day basis of Rs. 1,34,25,171/-. However, the assessee has already admitted profit of Rs. 2,33,98,662/- which is more than the 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 cour....
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....gus purchases reduced the addition to 8% as against 25% adopted by the Ld. CIT(A). The Tribunal confirmed the view of the Ld. CIT(A) of not separately taxing the sum of Rs. 61.05 lakhs admitted in the statement recorded during survey action. He submitted that Hon'ble Gujarat High Court vide order dated 01-8-2017 concurred that adding the amount of bogus purchases would give a completely distorted figure and held that the Tribunal did not commit any error in accepting the gross profit rate of 8% while also agreeing with decision of the Ld. CIT(A) & the Tribunal with regard to disclosure of Rs. 61.05 lakhs. The details of purchases made by M/s BS Ltd for AY 2013-14 & AY 2014-15 are as under: AY 2013-14 AY 2014-15 Total Total purchases (related concerns) 377,64,15,403/- 348,55,27,588/- 726,19,42,991/- Other purchase ( un related concerns) 102,92,43,281/- 530,06,37,751/- 632,98,81,032/- Total purchases debited to P&L A/c 480,56,58,684/- 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 dec....
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....terest cost in proportion to the purchases with related and unrelated parties. 17.2 However, DRP remitted this issue of disallowance of interest back to the AO to recalculate the interest properly and by following cash flow on day to day basis. 17.3 AO recalculated the interest, after DRP's direction, on the basis of calculating no. of days of each purchase transaction and date of year end i.e. 31/03/2013. In our considered view, this is not the proper way of calculating interest on this kind of transaction particularly, after accepting the purchases and sales as proper transaction. DRP has given direction to AO to verify the transaction and calculate the interest on day to day basis. The proper way to calculate interest in this transaction, are as under: " In order to calculate interest in each transaction of buying and selling, period involved in this transaction are: Scenario 1 : 'A' buys goods from 'B' at the cost of Rs. 100 on (say) 10/04/2012 and sells the 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....
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....ns for considerable period of time. In this case, these are regular business transactions and there is no such huge outstanding with these concerns. 17.6 Coming to ld. DR's submission, he relied on the case law of Hon'ble Gujarat High Court in ITA No. 410 of 2017 in the case of Sri Jagadish H. Patel, in which, it was found that assessee made bogus purchases to the extent of Rs. 5.66 crores. Accordingly, AO disallowed 100% purchases. However, ld. CIT(A) has reduced to 25% and ITAT at 8%. Whereas in the given case, AO has not disallowed any purchases. Therefore, this case cannot be applied to the case on hand. 17.7 Further, ld. DR tried to apply the above decision of Shri Jagdish H. Patel i.e. 8% of total purchases of two AYs i.e. 2013 & 2014-15 which comes to Rs. 58.09 crores. He submitted that against the above, AO has already made the disallowance of Rs. 60 crores in AY 2014-15. We find there is no relevance for this submission in this AY and moreover, AO has not made any disallowance in purchases in AY 2013-14. 17.8 Considering the above discussion, in our view, AO has not made any disallowance in purchases even though he satisfied himself that these are sham tra....
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....nsider afresh as directed. Grounds are considered allowed for statistical purposes." He submitted that applying the above ratio the AO had to verify the transaction and if he has found any discrepancy a small portion of that sub contract expenditure can be disallowed and not any other expenditure. 18.3 Ld. AR submitted that the assessee has received contract works and has given the same as sub-contract to various parties. There is no business policy of either the assessee or the contractors to charge interest on the outstanding amounts because the contract works are entered for a certain period and cannot be compared with the transaction of sale. He submitted that the assessee company has received amounts from Maco Corporation India Pvt. Ltd. and Vishwaraj Infra on various dates and has subsequently made payment to Silver Point Infratech Ltd. on various dates, details of which has been in table below: Date Particulars Receipts Payments 12-11-2011 Sunag Engg. Pvt. Ltd. 15,13,316 04-11-2012 Sunag Engg. Pvt. Ltd. 11,89,034 02-03-2012 Maco Corporation India Pvt. Ltd. 25,94,256 05-03-2012 Silver Point Infra....
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....796/-, work amounting to Rs. 5,34,76,748/- was given on subcontract to Silverpoint Infratech Ltd for which M/s B S Ltd has paid Rs. 1,13,83,335/- in AY 2012-13 and Rs. 4,10,23,613/- in AY 2013-14. Apart from the above, M/s BS Ltd has made payments of Rs. 5,79,00,000/- in AY 2013-14 and the amount is still outstanding as on date. He submitted that Assessee was not able to substantiate as to why interest expenses should not be disallowed on account of diversion of funds for non business purpose inspite of issuing show cause notices. The assessee could not substantiate the genuineness of the transactions with M/s Silver Point Infratech Ltd during assessment proceedings. The assessee has paid Rs. 1,13,83,335/- in AY 2012-13 and Rs. 4,10,23,613/- in AY 2013-14 and also paid excess amount of Rs. 579,00,000/- in AY 2013-14 which is still shown as advance without any prudent business reason. In view of the above, ld. DR submitted that the payments to M/s Silver Point Infratech Ltd have been made without any business prudence & exigency thus entailing financial cost to the assessee company. Therefore, interest @ 12.5% attributable to such amounts of Rs. 11,03,06,948/- i.e. Rs. 1,37,88,3691-....