TaxTMI 
TaxTMI 
2019 (11) TMI 701
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....sing Officer ('AO' for short) passed an order u/s 144C r.w.s. 143(3) of the Act on 27.02.2012 determining the total income of the assessee at Rs. 132,40,54,628/- inter alia may be transfer pricing adjustments on account of interest on loan, interest on bond and fees for providing guarantee (Guarantee Commission). The AO carried the matter in appeal. The ld. first appellate authority allowed the appeal of the assessee for the AY 2008-09. 4. Aggrieved, the Revenue is before us challenging the deletion of adjustment made u/s 92CA(3) of the Act on account of interest on loan and on account of corporate guarantees. 5. For the AY 2010-11, the assessee filed a return of income on 13.10.2010 declaring nil income. The AO completed the assessment u/s 143(3) on 30.04.2014 determining the total income at Rs. 29,41,27,197/- inter alia disallowing the claim of additional depreciation on electrical installations, disallowing deduction of PF contribution by employees, making an adjustment on account of bank guarantee commission u/s 92CA(3) of the Act and an adjustment on loan advanced to AE u/s 92CA(3) of the Act. The AO also denied relief by computing profits u/s 115JB of the Act on disallo....
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....was not reflected in Form 3CEB filed by the assessee along with its return of income for A. Y. 2007-08. Further, the assessee did not charge any amount from INML for the service provided to the by way of this guarantee. 36. Further, it is also seen that the SBI, Sydney Branch has also provided a loan and bar guarantee facility to M/s NRE FCGL Pty Ltd, Australia ( hereinafter GNFL), another AE of the assessee vide sanction letter dated 03.07.2007. For this credit facility also, the assessee has stood guarantee. A guarantee and indemnity bond has been signed between SBI, Sydney Branch (as financier) and the assessee (as the guarantor) on 12.10.2007. In the agreement GNFL has been mentioned as the "Debtor". However, Clause 1 of the agreement mentioned that 1. Guarantee: The Guarantor unconditionally and irrevocably guarantees (as principal debtor) the due and punctual payment of the guaranteed money to the Financier. If the Debtor does not pay the guaranteed money then the Guarantor must pay the Guaranteed money to the Financier on demand. The Financier may make this demand at any time whether or not a demand has been made by the Financier of the debtor. ....
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.... facts in deleting arm's length price adjustment of Rs.2,97,86,393/- and Rs.89,22,433/- (assessment year-wise); respectively in respect of assessee's corporate guarantee provided to its overseas associate enterprises "AE" as proposed by the Transfer Pricing Officer and added in the course of the assessment in issue. We find that the instant as to whether a corporate guarantee amounts to an international transaction within the meaning of sec. 92B of the Act or not is no more res integra. This tribunal's co-ordinate bench's decision in assessee own case for assessment year 2012-13 ITA No.980/Kol/2017 decided on 28.09.2018 has adjudicated this very issue in it's favour as follows:- "5. Ground No. 2 is on the issue of determination of ALP on corporate guarantee on loans availed by AE. The Ld. 'CITCA) held that the TP Provisions do not apply to the transactions of providing corporate guarantee prior to the amendment brought in by way of an explanation to Section 92B of the Act, by Finance Act, 2012. Further at page 45 he held that the methodology applied by the TPO in computing the ALP of the transactions was without reasonable and justifiable basis. We fi....
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....omes- losses or assets of such enterprises. In our opinion, the condition precedent of a transaction having a bearing on profits, incomes, losses, or assets would apply to each of the aforesaid transactions namely purchase, sale, or lease of tangible or intangible property or provision of services, or lending or borrowing money or any such transaction. This understanding of ours gets further clarified by, way of insertion of Explanation in section 92B(1) by the Finance Act 2012 with retrospective effect from 01.04.2002 vide clause (a) to (d). We find that in the said explanation, clause (e) alone has been carved out as an exception wherein, the transaction thereon has been specifically mandated to be an international transaction where a transaction of business restructuring or reorganization, entered into by an enterprise with an AE irrespective of the fact that it has bearing on the profits, incomes, losses, or assets of such enterprises at the time of transaction or at any future date. 12.12. Thus, we hold that when a parent company extends an assistance to the subsidiary, being associated enterprise, such as corporate guarantee to a financial institution for lending mon....
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.... Bombay High Court, any support to the proposition that issuance of corporate guarantee is inherently within the ambit of definition of 'international transaction' under section92B irrespective of whether or not such transactions have any 'bearing on profits' incomes, losses, or assets of such enterprises'. Revenue, therefore, does not derive any help from the said decision. 12.14. The Id CIT DR would have had a case where a fee has been charged for the infra service which has been rendered (in the context of corporate guarantee), and, therefore, "the assessee or the Court has treated it as an international transaction, then the charge ot corporate guarantee has to.be.in accordance with Arm's Length principle. This means that the price for corporate guarantee should be that which would have been paid and accepted by independent enterprises in comparable circumstances. In that case transfer pricing adjustments are required. In that case, it has to be determined what will be the ALP of corporate guarantee commission paid by associate enterprise to the parent company providing corporate guarantee. Since that is not the case before us, we need ....
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....to payee. The facts of the case are brought out at page 2 and 3 of the appellate order which is extracted for ready reference: "(a) Interest on loan: In respect of the loan of Rs. 5.6 million AUD advanced to the foreign subsidiary company viz. Gujarat NRE Australia Pty Ltd. (GNAL) through loan facility agreement in F.Y. 2004-05, out of which loan of Rs. 2 million AUD remained outstanding throughout F.Y. 2007-08, the TPO determined the alleged Arm's Length Price of the loan advanced by the appellant to the aforesaid Associated Enterprise at BBSY + 750 basis points and made the consequent upward adjustment of the interest receivable thereon, of an amount of Rs. 35,69,109/-, which has been added back in the assessment. (b) Interest on bond: The appellant company had invested in Australian Dollar denomination fixed rate convertible bonds issues by its Associated Enterprise M/s Gujarat NRE Australia Pty Ltd. (GNAL). The interest available on these bonds was @ 6.5% (the bonds were redeemable at 100% plus the coupon rate). The TPO held that the appellant should expect a return on investment in these bonds at the rate of 13.95% (Cost of funds being 6.45% and spread sh....
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.... be held as benchmark. The ld. CIT(A) relied on the following decisions: i. Siva Industries & Holdings Ltd. vs. ACIT [145 TTJ (Chennai) 497] ii. Tata Autocomp System vs. ACIT [149 TTJ 233] iii. Aurinpro Solutions Ltd. vs. ACIT [36 CCH 006] 15. Thereafter in para 4 he held as follows: "4. I have also examined the contentions of the appellant wherein it has been argued that the impugned ALP computed by the Ld. TPO is erroneous and hence cannot be used as a benchmark. I find factual merit in the contention of the appellant that the Ld. TPO in computing the ALP has considered the average cost of borrowed funds to the assessee/ domestic interest rates and added a spread of 750 basis points to the same. However, for the case at hand, there is no dispute that loan to the AE was made out of own funds of the appellant-company and therefore there would be no cost appellant while extending such a loan. The order of the Ld. TPO has remained silent about such factual contention of the appellant, and he has held the average cost of borrowed funds as the cost of making loan to the AE, which in my considered view is without factual and legal justific....
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....coordinate Benches of the Tribunal. The Kolkata Bench of Tribunal in the case of DCIT vs. M/s. Manaksia Ltd. in ITA No. 980/Kol/2017 order dated 28.09.2018 at para 4.1 and 4.2 held as follows: 4.1. "Ground No. 1, is against the deletion of upward adjustment of Rs. 6,97,64,000/-, towards Arm's Length interest on loan given to associated enterprises. During the course of assessment proceedings, the Assessing Officer made a reference to the Transfer Pricing Officer [TPO] for calculation of arm's length interest rate in respect of loan advanced by the assessee company to its Associate Enterprise [AE], EuroAsian Ventures FZE. The TPO arrived at arm's length interest rate of 20.15%, by applying Comparable Uncontrolled Price (CUP] method and benchmarking the same against local interest rates and accordingly calculated the upward adjustment at Rs. 6,97,64,000/-. Before the Ld. CIT(A], the assessee submitted that it had charged interest @ 5% on the loan given to its AE i.e. EuroAsian Ventures FZE, which is at arm's length when benchmarked against LIBOR and hence no adjustment on this account was called for. He further relied on the decision of the Chennai Bench of....
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....ustment of interest on a loan issue by AE. The ld. CIT(A) has dealt with this issue at page 30 onwards. The facts of the issue are brought out at page 31 of the CIT(A)'s order: "28. GNAL has issued Australian Dollar Denomination Fixed Rate Convertible Bonds on 10.05.2006. The Issue Amount was $5,000,000. The assessee has invested in these bonds. These bonds carry a coupon rate of 6.5% p.a. The bondholder has the right to convert these bonds into newly issued fully paid ordinary shares of common stock of GNAL at 50 cents per share any time after 30.06.2009. On the other hand, the redemption value at maturity is stated as 100% of unpaid Principal Amount of outstanding Bonds plus the accrued interest on the maturity date (10.05.2011). The assessee in its Transfer pricing study has reported that the 'management believes that the rate of interest received from GNML (as GNAL was known at that time) is at arm's length and no further analysis is required for the same'." 19. The ld. CIT(A) at para 13.4 page 34 concluded as follows: "In my considered view in the given situation, it appears that the Ld. TPO has overlooked the fact that the said premium is p....
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....ign Currency Convertible Bonds) by the assessee. 3.5 With regard to the above, it is firstly submitted that interest charged @ 6.5% is at arm's length and hence no adjustment on this account is warranted. The aforesaid transaction can be benchmarked against the 1% unsecured FCCBs issued by the assessee-company (in USD) which is even listed on Luxembourg Stock Exchange. The said bonds are similar to the bonds issued by the AE as both are quasi-equity in nature. Since the coupon rate of 6.5% is higher than 1% charged by the assessee in US markets, it can be said that the bond transaction with the AE is at arm's length. 3.6 Similarly, the assessee-company has even issued zero coupon unsecured bonds which are convertible to equity. Thus, subscription to 6.5% FCCBs issued by the AE is at arm's length. 3.7 Further, it is submitted that proceeds from the 1% FCCB have been utilized in subscribing to the bond issue. Thus, following the cost plus method (as done by the TPO) also, the said bond transaction is at arm's length. The assessee has clearly earned a spread of 5.5% by investing the funds raised at 1% interest in 6.5% convertible bonds issued by the AE. ....
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....allurgical coke. It claimed additional depreciation at the rate of 20% u/s 32(1)(ii) of the Act, on the plant and machinery including electrical installations acquired during the year. The electrical installations in question are essential parts of the plant and machinery, without which the plant manufacturing low ash metallurgical coke cannot function. This plant is integrated with co-generation power plant. During the year a total addition of Rs. 24,58,98,728/- was made in the block "Plant and Machinery". Out of this total addition, an amount of Rs. 95,06,000/- represented new electrical installations installed during the year. The issue is whether the assessee is entitled to additional depreciation on this electrical installations u/s 32(1)(iia) of the Act. The AO's case is that, the various items of electrical equipment as claimed by the assessee do not fall under the definition of "Plant and Machinery" for claiming additional depreciation. Hence he disallowed the claim of additional depreciation. The ld. CIT(A) allowed the claim of the assessee by holding as follows: "3. I have carefully examined the factual matrix emanating in the case. I have also weighed the argume....
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.... plant in the case at hand. 4. The appellant has also relied on the judgment of the Hon'ble jurisdictional Tribunal delivered in the case of DCIT Vs Kumarhatty Company [2014] ITA No. 947/Kol/2012. In that case, the assessee had claimed additional depreciation on electrical installation acquired during the year. The assessee contented that electrical installation was a part of the plant & machinery newly installed. According to the assessee, section 32(1)(iia) of the Act specifically mentioned those items of plant and machinery on which additional depreciation could not be claimed. As per assessee electrical installation was not a prohibited item. However, the Ld. AO held that plant and machinery by its very nature did not include electrical installation and accordingly disallow the additional depreciation claimed by the assessee. The assessee filed an appeal before the Ld.CIT(Appeals) which was allowed wherein it was held that electrical installation which formed a part of plant and machinery was also eligible for claim of additional depreciation. Aggrieved by the order of the CIT(A), Revenue filed an appeal before the ITAT wherein dismissing the appeal of the Revenue,....
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....dertaking or enterprise during the period beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020 in the said backward area, then, the provisions of clause (iia)shall have effect, as if for the words "twenty per cent", the words "thirty-five per cent" had been substituted: Provided further that no deduction shall be allowed in respect of- (A) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or (B) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or (C) any office appliances or road transport vehicles; or (D) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year." 29. Applying the Section to the facts of the case we hold as follows: "A close observation of the aforementioned provision implies that an assessee is entitled to ....
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....(1)(iia) of the Income Tax Act, 1961, it is submitted that the said electrical installations stands very much eligible for additional depreciation of 20% of its actual cost in the A.Y. under consideration. In the case of the assessee, Electrical installation was a part of the plant & machinery newly installed. Section 32(1)(iia) of the Act specifically mentions those items of plant and machinery on which additional depreciation could not be claimed. In view of the above submission, it stands clear that electrical installation is not a prohibited item. In the present case, there is no dispute that the assessee is engaged in the manufacturing of low ash metallurgical coke." 30. Hence, we uphold the order of the ld. CIT(A) and dismiss the ground of the Revenue. 31. Employees' contribution towards PF: We find that the ld. CIT(A) has followed the judgement of the Hon'ble Supreme Court in the case of CIT vs. Alom Extrusions Ltd. [2010] 319 ITR 306 (SC) and judgement of the jurisdictional High Court in the case of ACIT vs. M/s. Vijay Shree Ltd. [Calcutta High Court, ITA No. 245 of 2011] and the decision of Hon'ble Calcutta High Court in the case of CIT, Central II vs. M/s. ....