TaxTMI 
TaxTMI 
2019 (11) TMI 800
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....ng the AO/TPO to work out the ALP of interest by applying only LIBOR instead of LIBOR + credit spread on account of the risk profile of the borrower. 2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in considering the limits on rate of interest chargeable by the AE to its borrower whereas the comparable transactions are loans given to borrowers in the AE's country, where no restrictions on interest rate is shown. 3. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in not appreciating that LIBOR represents the inter bank interest rate, which is of highest credit rating, whereas the loan was given to the AE whose credit profile is certainly lower than borrowers and a risk margin would be certainly applied to LIBOR in arm's length situation. 4. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO/TPO to adopt only LIBOR rate as ALP and deleting the adjustment u/s.92CA of Rs. 4,27,78,520/- made in this regard, relying on the order passed u/s.92CA(3) for A.Y. 2012-13 and A.Y. 2013-14, whereas in the said orders the assessee has ....
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....sallowances, as made by Ld. AO in the assessment order but deleted by Learned first appellate authority, are the subject matter of revenue's appeal before us: - No. Nature of Addition Amount (Rs.) 1. Transfer Pricing Addition on account of interest on Loan 427.78 Lacs 2. Disallowance u/s 14A 7678.52 Lacs 3. Depreciation on Capital Expenditure 101.50 Lacs First, we deal with corporate tax issues. Corporate Tax Issues (Ground Nos. 5 & 6) 2.2.1 During assessment proceedings, it transpired that the assessee made suo-moto disallowance u/s 14A for Rs. 11.75 Lacs which comprised-off of Salaries of Finance Department & Secretarial Department personnel & Administrative Expenditure etc. The assessee submitted that suo-moto disallowance offered by the assessee was sufficient. However, not satisfied with assessee's workings and keeping in view the magnitude of investments made by the assessee, Ld. AO proceeded to re-compute the same in terms of Rule 8D. The aggregate disallowance as per Rule 8D worked out to be Rs. 76.78 Crores which comprised-off of interest disallowance u/r 8D(2)(ii) for Rs. 64.15 Crores and indirect expense disallowance u/r 8D(2)(iii) for Rs. 12.62 Cr....
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....06-07, similar disallowance was deleted by first appellate authority for AYs 2008-09 & 2009-10. Aggrieved the revenue is under appeal before us. 2.3.1 The issue of depreciation on capital expenditure stem from the fact that during earlier AYs 2008-09 & 2009-10, the assessee had claimed to have procured certain services from an entity namely M/s Gremach Infrastructure Equipments & Projects Ltd. for execution of certain projects. It was found in the earlier years that no work was done by the said entity and therefore, the said payments were not for the purpose of assessee's business and the same could not be allowed as deduction to the assessee. Since the assessee had capitalized those amounts in its books of accounts and claimed depreciation against the same, the depreciation claimed for the year under consideration amounting to Rs. 101.50 Lacs was disallowed and added back to the income of the assessee. 2.3.2 The Ld. CIT(A) allowed the assessee's depreciation claim by relying upon the decision of its predecessor in assessee's own case for AYs 2008-09 & 2009-10. Aggrieved, the revenue is in further appeal before us. 2.4 Upon hearing rival submissions, it is admitted fact that bot....
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.... would not survive since we have, in the preceding para, has already deleted the disallowance u/s 14A in view of the fact that the assessee has not earned any exempt dividend income. Nevertheless, we find that this issue also already stood covered in assessee's favor by the order of this Tribunal for AY 2006-07 rendered after following the decision of Tribunal in the case of Essar Teleholdings Ltd. V/s DCIT, ITA No.3850/Mum/2010 dated 27/07/2011. The department's appeal against the order of Tribunal for AY 2006-07 has already been dismissed by Hon'ble Bombay High Court in ITA No.1468 of 2013 dated 30/04/2015. Noticing the same, the Tribunal in AY 2008-09 vide ITA No. 1334/Mum/2015 order dated 02/06/2017 held that no adjustment u/s 115JB would be warranted on account of disallowance u/s 14A. Similar is the view of the Tribunal in AY 2010-11 vide ITA No. 1336/Mum/2015 order dated 22/07/2016. Nothing on record would suggest any change in material facts and nothing has been demonstrated before us to establish that the aforesaid ruling is not applicable to the facts of the present case. Keeping in view the consistent view of the Tribunal, no infirmity could be found in the impugned ord....
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....ber of days for which the loan was used by the AE. 2.9.2 The assessee explained that non-residents who wished to invest in South Africa by means of loan capital needs approval from South African Reserve Bank particularly with reference to intended repayment dates and interest rates. The Reserve Bank will not agree to interest rates in excess of prime rate being charged by non-resident shareholders on loans to the South African subsidiaries but loans from non-residents other than shareholder may be allowed to carry interest at prime +2%. The relevant extracts of the regulations were provided to Learned TPO. It was submitted that intra-group loan advanced to Mauritius Entity was ultimately utilized in South Africa since JSWEMML further advanced the said loan to JSW Energy South Africa Ltd. [JSWENRSAL] and in view of the South African Reserve Bank regulation, the Mauritius entity would not be able to charge any interest more than LIBOR from South African Entity. In the aforesaid background, it was submitted that the intra group transaction was to acquire the asset is South Africa and therefore, transaction was at Arm's Length Price as prescribed in the Indian Regulations. In nutshell....
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.... that the search process was not proper and was required to be rejected. The argument that the loans were advanced from internal accruals was also rejected since the assessee, in the opinion of Ld. TPO, failed to prove nexus between interest free funds available with the assessee vis-à-vis loans advanced to its AE. 2.9.6 The Ld. TPO also came to a conclusion that interest on outbound loan was not to be benchmarked with LIBOR since no company would like to advance loans outside India without security as the interest rate in India would be higher than those prevailing in the developed country. Therefore, the rates prevailing in India would be an appropriate benchmark to determine the ALP of loans advanced by Indian entities. Although the assessee placed reliance on certain judicial pronouncements for the submission that LIBOR would be appropriate benchmark rate, however Ld. TPO opined that certain vital aspects remained to be considered in the cited decisions. Rather reliance was placed on the decision of Tribunal rendered in Aurionpro Solutions Ltd. [ITA No 7872/Mum/2011] for the conclusion that lending should not be below the cost of the borrowings of the assessee and the a....
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.... appellate proceedings, has also been tabulated on page nos. 18-19 of the appellate order. Concurring with assessee's submissions, Ld. CIT(A) allowed assessee's ground by observing as under: - I have considered the submissions of the assessee, the views of the AO in the assessment order and the material on record. It is apparent from the above that the end use of intra-group loan was to acquire the asset company in South Africa and it is clearly evident that the JSWEMML was not able to charge the interest more than LIBOR from JSW South Africa Ltd. (JSWENRSAL), which had a direct impact on the interest repayment capability of JSWEMML to JSWEL of not more than LIBOR. Further, the assessee submitted that with respect to cross border transactions, the interest rate is determined by using foreign currency rate (LIBOR/EURIBOR) and the same has been upheld as an appropriate benchmarking rate in variolous judicial decisions which have been mentioned above. Thus, considering the above view taken by the appellant and the view taken by the TPO in appellant's own case for later years i.e. AY 12-13 & AY 13-14, the transaction of interest on loan has been benchmarked using the LIBOR Rate....
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....lia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. v. Dy. CIT [IT Appeal No. 673 (Mum.) of 2006] and Dy. CIT v. Tech Mahindra Ltd. [2011] 12 taxmann.com 132/46 SOT 141 (Mum.) (URO) to reach the conclusion that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr. Suresh Kumar the learned counsel for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra) on the above issue. No reason has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). The Revenue not having filed any appeal, has in fact accepted the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). 8. In view of the above we see no reason to entertain the present appeal as in similar matters the Revenue has accepted the view of the Tribunal which has been relied upon by the impugned order. Accordingly, we see no reason....
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....IT(TP) No. 2316/Mum/2017 3.1 The assessment for this year was framed on 30/01/2017 u/s 143(3) r.w.s. 144C(13) pursuant to the directions of Ld. Dispute Resolution Panel-1, Mumbai [DRP] u/s 144C(5) dated 23/12/2016. The final assessment order was passed by Ld. Deputy Commissioner of Income Tax-Central Circle 8(3), Mumbai [AO]. Aggrieved by certain additions / adjustments in the final assessment order, the assessee is before us with following grounds of appeal: - 1) In the facts and circumstances of the case and in law, the Hon'ble DRP erred in confirming the action of Learned Assessing Officer in making an upward adjustment of Rs. 12,22,63,704/- on account of interest receivable on loans to its associated enterprises. 2) In the facts and circumstances of the case and in law, the Hon'ble DRP erred in confirming the action of Learned Assessing Officer in making an adjustment of Rs. 3,41,26,622/- on account of reimbursement of expenses. 3) In the facts and circumstances of the case and in law, the Hon'ble DRP erred in confirming the action of Learned Assessing Officer in making a disallowance of deduction u/s. 801A of Rs. 1,53,64,35,918/- in respect of its SBU II. ....
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.... Nos. 1 & 2 are related with Transfer Pricing Adjustments. Ground Nos. 3 to 5 are related with issue of deduction u/s 80-IA. Ground Nos. 6 to 10 are related with disallowance u/s 14A while computing income under normal provisions as well as while computing book profits u/s 115JB. Ground No.11 contest levy of interest u/s 234C. The same being mandatory and consequential in nature, would not require any interference on our part. In Ground No.12, the assessee is aggrieved by non-grant of TDS Credit of Rs. 5,34,630/-. Ground No.13 is general in nature. 3.2 As evident from final assessment order, the income of the assessee has finally has been determined at Rs. 112.47 Crores under normal provisions after certain adjustments / disallowances as against Nil income filed by the assessee on 29/11/2012 after claiming deduction u/s 80-IA for Rs. 86.53 Crores. The Book Profits u/s 115JB were computed at Rs. 305.25 Crores after disallowance u/s 14A for Rs. 10.47 Crores as against Rs. 294.78 Crores computed by the assessee in the return of income. The quantification of adjustments / disallowances, as made by Ld. AO in the assessment order and which are the subject matter of assessee's appeal, a....
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....on of Rs. 41.98 Crores whereas another unit i.e. SBU-2 (2x300 MW) claimed deduction of Rs. 153.64 Crores during the year under consideration. The dispute before us is only with respect to unit SBU-2. Upon perusal of Annual Accounts for financial year 2008-09, it transpired that aforesaid unit SBU-2 (2x300 MW) being M/s JSW (Vijaynagar) Ltd. (hereinafter referred to as JSWEVL) was, in fact, merged with the assessee under a scheme of amalgamation that became effective from 11/12/2008. 3.4.2 Noticing that in view of the insertion of new sub-section (12A) by The Finance Act, 2007 with effect from 01/04/2008, the provisions of Section 80-IA(12) would not apply to any undertaking or enterprise which is transferred in a scheme of amalgamation or demerger after 31/03/2007, Ld. AO opined that deduction u/s 80-IA in respect of unit SBU-2 belonging to merged entity i.e. M/s JSWEVL would not be available to the assessee and accordingly, the said fact was confronted to the assessee. 3.4.3 The assessee, vide submissions dated 21/03/2016, inter-alia, submitted that unit SBU-2 comprised-off of 2 power generating undertakings of 300 MW each. This was the third year of claiming the said deduction ....
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....nd the same would be available till 15 years from such commencement. Further, the starting point of deduction to be claimed would be at the option of the assessee and it has to be claimed for 10 consecutive years out of 15 years from the year in which the enterprise / assessee commences the operation of eligible business. It was further submitted that sub-section (12A) denies deduction only to those entities which were already entitled to claim the deduction and are transferred by way of amalgamation or demerger during the prescribed period which would be nothing but the block period of ten consecutive years in which the deduction is claimed. Further, the power generating undertaking would be entitled to claim deduction only after it begins generation of power and not prior to that. Since both assessee as well as the merged entity i.e. JSWEVL were not entitled to claim deduction on the effective date of amalgamation i.e. 01/04/2008, the aforesaid provisions would not be applicable to the assessee. 3.4.4 However, these submissions could not find favor with Ld. AO who denied the deduction of Rs. 153.64 Crores in respect of SBU-2 in the draft assessment order. 3.4.5 The Ld. DRP con....
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....) apply to only the "entitled" undertakings and not to "eligible" undertakings, whether these are entitled or not. The circular very categorically states that if an undertaking or enterprise is transferred in a scheme of amalgamation or demerger after 31.03.2007, the benefit of deduction u/s 80IA will not be available to the amalgamated or demerged undertaking or enterprise. 5.4 The AO us bound by the Circular of the Board. Hence, since in this case, the demerger has taken place after 31.03.2007, the provisions of sub-section (12) of the Section 80IA will not apply. Deduction claimed by the assessee u/s 80IA, would, therefore, not available to it. The A.O. has rightly denied the benefits of deduction claimed by the assessee u/s 80IA of the IT Act, 1961. His action is upheld. The objection filed by the assessee is dismissed. Aggrieved, the assessee is in further appeal before us. 3.4.6 The Ld. AR, putting forth factual matrix before us, submitted that the merged entity i.e. JSWEVL, a subsidiary of assessee, was in the process of setting up 2x300 MW powerplants at Vijaynagar at an estimated cost of Rs. 1,860 Crores. As on 31/03/2008, these plants were under construction stage w....
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.... SBU-II for the first time starting from AY 2010-11 and this was the third year of claiming the said deduction. The assessee's eligibility as well as quantum of deduction was examined thoroughly by Ld. AO during scrutiny assessment proceedings of earlier years and the claim was allowed after due verification and after calling for extensive details, documents, explanations etc. Therefore, if the deduction was allowed in initial assessment year, there being no change in facts, the revenue was debarred from denying the same in subsequent years as per the judgment of Hon'ble Delhi High Court in CIT V/s Tata Communications internet Services Ltd. [17 Taxmann.com 241] which has subsequently been followed in CIT V/s International Tractors Ltd. [84 Taxmann.com 132 20/07/2017] & also in Pr.CIT V/s Macquarie Global Services Ltd. [102 Tamxann.com 272 04/12/2018]. 3.4.9 The Ld. AR also drew our attention to the fact that revisional proceedings u/s 263 were invoked, on the said issue, for AY 2011-12. However, finding merits, the said proceedings were quashed by the Tribunal vide ITA No. 3659/Mum/2017 order dated 15/12/2017. A copy of the order has been placed on record. In the above backgroun....
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....titled to claim the deduction with respect to unit SBU-II. Rather, it was the assessee, who upon commissioning of the plant, became eligible to claim the stated deduction for the first time starting from AY 2010-11. Accordingly, we find substantial force in the arguments advanced before us by Ld. AR, in this regard. 3.4.13 Another aspect of issue would be that the impugned year is the third year of claiming aforesaid deduction by the assessee u/s 80-IA against SBU-II. The deduction was claimed for the first time during AY 2010-11 which was allowed after thorough examination of the claim after considering various details, documents, explanations furnished by the assessee. From assessment order for AY 2011-12, it is quite evident that the said claim was initially allowed to the assessee in that year also. Accepting the objections raised by Comptroller & Auditor General (CAG), learned CIT, invoked revisional jurisdiction u/s 263 for AY 2011-12, the validity of which came up under challenge before the coordinate bench of this Tribunal vide ITA No. 3659/Mum/2017 order dated 15/12/2017. One of the issues to trigger jurisdiction u/s 263 was irregular allowance of deduction u/s 80IA wi....
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....which were subjected to determination of Arm's Length Price before Ld. TPO: - No. Nature of Transaction Amount (Rs.) Benchmarking Method used by assessee 1. Interest Received on Loans given to Associated Enterprises 81.16 Lacs CUP 2. Recovery of Expenses (reversal) 341.27 Lacs TNMM Interest Received on Loans given to Associated Enterprises 3.7.1 Apart from existing loan of Rs. 115.19 Crores as advanced by the assessee in AY 2011-12 pursuant to loan agreement dated 26/07/2010, the assessee has advanced a further loan under the same agreement for US Dollars 13.82 Million [INR 62.98 Crores approx.] in 4 tranches during the year under consideration. The assessee, in similar manner, as per contractual terms, had charged interest against the same on the basis of LIBOR which ranged between 0.25% to 0.47%. The total interest thus determined, on aggregate loans advanced in AY 2011-12 as well as in AY 2012-13, worked out to be USD 156572 (INR Rs. 81.15 Lacs). The working of the same has been tabulated on pages nos. 3 & 4 of learned TPO's order. During proceedings before Ld. TPO, the assessee, without prejudice, benchmarked the same in similar fashion as done in AY 2011....
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.... the contractual terms agreed to between the parties could not be rewritten or obliterated and reclassification or substitution of the transaction was not permitted. Nothing on record rebut the facts that as per the terms of the contract, the borrower had agreed to pay the lender interest at rates equal to 3 months' LIBOR prevailing on the date of each interest payment up to 31/03/2012. The said fact has also been noted by Ld. DRP at para 2.29 of its directions. The only allegation is that the original agreement dated 26/07/2010 was not produced before Ld. DRP. However, the same would not make much difference since we have already confirmed the application of floating rates of interest for AY 2011-12. Since in AY 2011-12, we have upheld the working made by assessee, taking the same view, we upheld the workings made by the assessee during proceedings before learned TPO. Accordingly, we direct lower authorities to accept alternative TP adjustment of Rs. 491.07 Lacs as worked out by the assessee during proceedings before Ld. TPO based on LIBOR + spread of 243.88 bps / 163.8 bps for AYs 2011-12 & 2012-13 respectively. The interest already charged by the assessee would be adjusted from....