TaxTMI 
TaxTMI 
2018 (11) TMI 1744
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.... Transfer Pricing Officer (TPO) / Assessing Officer's action making arm's length price's (ALP) adjustment of interest on loans and corporate guarantee(s) in case of assessee's overseas associate enterprise treated as international transactions u/s 92B of the Act. Relevant to adjustment amounts qua former head of loan interest are 57,52,409/-,Rs.35,23,720/- and Rs.36,60,695/- as against the latter component of corporate guarantees(s) sums of Rs.2,47,79,679/-; Rs.3,57,20,816/- and Rs.1,96,69,635/- (assessment year-wise) respectively. The CIT(A)'s identical discussion on former limb of loan interest adjustment component in AY 2009-10 reads as follows:- "07.DECISION 1. I have carefully considered the submissions of the appellant-company in the light of the adjustments made by the Ld. TPO/AO. The international transaction in question in these grounds is the interest charged by the appellant on the loans advanced to its AE, BAMPL which was denominated in USD currency. During the relevant year the appellant had charged interest rate of 6% on the loans advanced to the AE and it was not a case of granting interest free advance/loan as discussed in the TPO's order. Fr....
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....f appellant's submissions and TPO's order, I find that the observations made by the Ld. TPO in the impugned transfer pricing order suffered from apparent infirmities & contradictions. I note that the Ld. TPO discussed in great detail as to why the method adopted by the appellant was not appropriate and why CUP Method was the most appropriate method. I however find that even the appellant had applied the CUP method for benchmarking the transaction and therefore the Ld. TPO's argument that the method applied by the appellant was not appropriate is apparently without logic and contrary to his own findings. I also note that the Ld. TPO has elaborated on the business interest argument. The Ld. TPO also observed that the appellant had argued that loans were advanced for business purposes and therefore no interest was charged thereon. This assertion of the Ld. TPPO is found to be contrary to the facts on record because undeniably the appellant did charge interest on loan given to AE and it was benchmarked applying CUP method. It was not the appellant's case that the loan advanced was a shareholder activity. I therefore find merit in the appellant's contention that the Ld. TPO framed the t....
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....IBOR rate, which is the present case is US LIBOR. The relevant judicial precedents in this regard are as follows:- * Cotton Naturals (I) Pvt Ltd [TS-117-HC-2015(DEL)-TP] * Tata Autocomp Systems Ltd. (TS-45-HC-2015 (BOM)-TP) * Varroc Engineering Pt. Ltd. vs., ACIT (ITAT Pune) ITA No.2482/PN/2012) * Bhansall & Co. (TS-461-ITAT-2014 (Mum)-TP) * M/s Four Soft Ltd vs DCIT (ITA No.1495/HYD/2010) * DCIT vs. Tech Mhindra Ltd (ITA No.1176/Mum/2010) * Mahindra & Mahindra Ltd. vs DCIT (ITA No.7999/Mum/2011) * Cotton Naturals (I) Pvt. Ltd. vs DCIT, Circle 3(1) (ITA No.5855/Del/2012) * Tata Autocomp Systems Ltd. vs. ACIT, (2012-(052)-SOT-0048-TBOM) * Hinduja Global Solutions Ltd. vs. Addl. CIT, (ITA No.254/Mum/2013) * Aurinopro Solutions Ltd. vs. Addl. CIT 9ITA No.7872/Mum/2011) * VVF Ltd. vs. DCIT (2010-TIOL-55-ITAT-M(UM) * M/s Ajthent Technologies Pvt. Ltd. v/s ITO (2010-TII-134-ITAT-Del-TP) 7. In view of the above and respectfully following the judgments of the High Courts & Income-tax Appellate Tribunal, I hold that the interest rate charged by the appellant from AE ....
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....ernational transaction within the meaning of Section 92B of the Act. 5. Mr. Srihari vehemently contends at this stage that the relevant explanation in Sec. 92B inserted in the Act by the Finance Act 2012 covers corporate guarantee as well. We find that this tribunal's co-ordinate bench's decision in EIH Ltd. vs. DCIT/Kol/2016 holds that the said explanations applies from financial year 2012-13 only without having any retrospective effect. We are also informed that the department's special leave petition on the very issue stands admitted its honble apex court. We find no merit in the instant plea as mere admission of a special leave petition does not amounted to change in law. We therefore conclude that CIT(A) has rightly treated the corporate guarantee in question to be not in the nature of international transactions in all three assessment year(s). The Revenue failed in its corresponding substantive ground in these three appeal(s) therefrom. 6. Next comes Revenue's second substantive ground in former two assessment year(s) challenging the CIT(A)'s order deleting proportionate interest and administrative expenditure disallowance u/s 14A r.w.s. 8D involving corresponding figur....
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....erest expense of Rs. 570.07 lacs was incurred for mixed purpose which was liable to be considered for applying Rule 8D(2)(ii). Accordingly with reference to net interest expense of Rs. 570.07 lacs, the AO worked out interest disallowance of Rs. 1,44,25,599/-. 2. In their oral & written submissions, the Ld. ARs have strongly contested the invocation of Rule 8D(2)(ii) by the Ld. AO in the impugned order. Referring to historical facts of the appellant's case, the Ld. ARs pointed out that the appellant ha consistently been investing its surplus funds in acquiring shares, securities & units of mutual funds from which the assessee has been earning dividend income. In the course of appellate proceedings, the Ld. ARs filed a comparative chart of investments made by the appellant for the period AY 2005-06 to 2008-09 and corresponding figures of the own funds, loan funds, dividend earned & interest paid. Referring to the said chart, the Ld. ARs pointed out that in the past assessments for AYs 2005-06 to 2008-09, the appellant had held substantial investments and these investments were made out of the appellant's own funds which always substantially exceeded the cost of investments. ....
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....therefore find force in the Ld. ARs submissions that the borrowed funds were not used in making or acquiring investments in dividend yielding assets during the year under consideration. 5. As regards the opening investments having cost of Rs. 24.72 crores, I find that in the assessment u/s. 143(3) for AY 2008-09, the AO had not found any evidence that these investments were acquired out of borrowed funds and in that view of the matter no disallowance out of interest paid was made by invoking Rule 8D(2)(ii) in the assessment for AY 2008-09. In the circumstances if at the time of making of investments, no proximate cause or nexus was found between use of borrowed funds and making investments; then in the later years interest disallowance is not permissible merely on theoretical application of Rule 8D(2)(ii). I also find that the appellant's own funds as on 31.03.2009 were to the order of Rs. 824.54 crores whereas investment capable of yielding exempt income were only Rs. 367.27 crores. The appellant own funds in form of capital & reserves were thus substantially more than the investments capable of yielding dividend income and therefore presumption that had to be applied on ....
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....above, we confirm the order of CIT(A) on the common issue.... ...' We find that this case has yielded concurrent findings of facts regarding expenditure incurred y the assessee for the purpose of earning the exempt income, by the Appellate Authority and the Tribunal. As such there is no scope for interference with such concurrent findings of facts. We, therefore, are not satisfied that the case involves any substantial question of law. The application and appeal are thus dismissed." 6. In the light of above decision of the jurisdictional High Court which squarely applies to the appellant's facts, no disallowance of Rs. 144,25,599/- out of interest paid was called for and accordingly the same is directed to be deleted. 7. As regards disallowance of Rs. 1,53,74,495/- made Rule 8D(2)(iii), I note that the said disallowance has been made by the AO by applying it on the entire cost of investments which were capable of yielding tax free income. I note that the appellant had suo moto offered disallowance of Rs. 37,75,120/- at the time of filing of return. In the course of assessment the assessee had substantiated the basis adopted for offering the disallowance u....
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....ergy Pvt Ltd. (223 taxman 130) and CIT vs. Shivam Motors (P) Ltd (230 Taxman 63) respectively. 8. In the course of appellate proceedings, the Ld. AR was therefore directed to file statement of amount disallowable as per the ratio laid down by the Calcutta High Court in the case of CIT vs. REI Agro Ltd (supra). On perusal of the said statement, it was noted that the assessee earned dividend income only from 23 investments and average cost of investments which actually produced tax free income was Rs. 140,,43,96,000/-. Applying 0.5% to the said average cost of investments, the amount disallowable under Rule 8D(2)(iii) works out to Rs. 70,21,978/-. The AO is accordingly directed to restrict the overall disallowance under Rule 8D(2)(iii) to R.70,21,978/-. Ground No.17 is partly allowed." 7. Mr. Srihari vehement argument regarding this issue is that the Assessing Officer had rightly made the impugned disallowance as per prescribed formula under Rule 8D(2)(ii) and (iii) of the IT Rules, 1962. There can hardly be any dispute about the basic principle that sec. 14A r.w.s. Rule 8D of the IT Rules comes into play in case of assessee deriving exempt income without disallowing corr....
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....nufacturing Marie & Tiger Biscuits for the appellant. The repairs & overhauling work was conducted in FY 2007-08 the appellant's cost. Within two months of such overhaul, the production line producing Tiger Biscuits developed trouble due to unforeseen circumstances. Vinpack (I) Pvt Ltd, the contract manufacturer, initially incurred the repairing costs for setting right the troubles but requested the applicant to reimburse the cost of such repairs. The request for reimbursement was initially rejected by the appellant since such cost was unforeseen and not intended to be incurred. However, in view of the extraordinary circumstances in which the expenditure was required to be incurred, joint deliberations were conducted and ultimately in December 2008; it was mutually agreed that the repairs had to be carried out due to extraordinary circumstances which were not anticipated and beyond the control. Accordingly in December 2008, the appellant agreed to reimburse the repairs cost to Vinpack (I) Pvt Ltd. 3. I find that the same explanations and supporting documents were furnished before the Ld. AO in the course of assessment. These documents provide the historical background in w....
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....d substantive ground as well. 9. The Revenue's last substantive ground raised in the first AY 2009-10 reverse the CIT(A)'s findings treating assessee's compensation received from M/s Danone as a capital receipt not chargeable to tax. Its case is that assessee is the owner of the relevant "Tiger" trademark and therefore the Assessing Officer had rightly taxed the impugned receipts as long term capital gains (LTCG) as deleted in CIT(A)'s order as follow:- "27. DECISION: 1. I have carefully examined the submissions of the Ld. ARs and perused the assessment order wherein the Ld. AO has discussed his reasons for assessing Rs. 22.79 crores as appellant's Income by way of Long Term Capital Gains. From the Impugned order it appeared that on 14.04.2009; the appellant entered Into a Settlement Agreement with Group Danone ('GD') to settle the pending litigations relating to infringement of IP rights connected with the Trademark & Logo "TIGER" litigation was pending before the Courts at Singapore & Malaysia. Pursuant to the said Agreement, GD paid sum of Euro 3.5 million to the appellant which it claimed as capital receipt not liable to tax. In the impugned ord....
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....uffers from apparent infirmities and contradictions. It appears that the Ld. AO did not correctly appreciate the true purport and nature of the Settlement Agreement and the covenants which the Parties agreed thereunder. From the submissions of the Ld. ARs, it is apparent that both the appellant as well as GD were carrying on business of manufacture, sale & marketing of bakery products. The appellant which Is one of the leading biscuit manufacturer in India, was also selling Its bakery products outside India and for that purpose the appellant had contemplated of registering IP rights connected with the logo "TIGER" under which It was selling its glucose biscuits In India & abroad. When the appellant attempted to obtain IP rights connected with the logo "TIGER" In the jurisdictions of Singapore & Malaysia, Its applications were blocked by the authorities since Similar logo had been registered in the name of Generale Biscuit & Danone Singapore Pte ltd which were the affiliates of GD. As a consequence the appellant could not register its trademark TIGER and market its TIGER biscuits In South Asian markets. Aggrieved by the acts of GD, suits were filed against the GD affiliates and Indi....
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...., domain name, service mark, trademark or brand similar to or likely to be confused with such business name, logo, domain name, service mark, trademark, tradedress, product, packaging or container shape or brand, including, without limitation, "Britannia" and the trademark(s) and brand(s) that are the subject of the IP Disputes. Within three months after the Completion Date, Danone will procure that none of its Affiliates will Include "Britannia" in its company name. 6. Danone (on its own behalf and on behalf of its Affiliates), agrees that neither it nor Its Affiliates will use the word "tiger" or any mnemonic depicting a tiger In India, Pakistan, Sri Lanka, the GCC countries of the Middle East or any countries contiguous with India other than the PRG (the Restricted Territories). " 5. From the foregoing clauses, it is evident that in addition to making payment of Euro 3.5 million, GD had represented that it had ceased to use TIGER logo which was the subject of IP dispute. GO had also agreed that It would not use BIL's TIGER logo anywhere In the world thereafter. In the circumstances I find that under the Agreement, the appellant had secured a concession or b....
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....to use TIGER logo. In the circumstances if there was any case for release, relinquishment or surrender of rights then such surrender or release was by GD and not by the appellant. The ld. AO has rightly made reference to provisions of Section 2(47) of the Act which define the expression "transfer". According to Section 2(47) of the Act, any release, relinquishment or extinguishment of any rights in any property, constitutes "transfer" of a "capital asset". Even If it is assumed that under the Settlement Agreement, GD and Its affiliates agreed to release or relinquish their right to use TIGER logo and permitted BIL to use such logo, even then it can only lead to conclusion that such release of relinquishment resulted in transfer of a capital asset by GD and not by the appellant. Plain reading of the Settlement Agreement, shows that for releasing or relinquishing their rights in TIGER logo, the appellant did not pay any consideration. I also note that under the Settlement Agreement, the appellant did not release or relinquish his rights in any of the IP rights which the appellant held and which were connected with TIGER logo. In the circumstances when there was no release or relinqui....
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....hts connected with TIGER trademark and logo, the appellant additionally received Euro 3.5 million for withdrawing or settling its legal suits under the Settlement Agreement. Since the "right to sue" did not have any cost of acquisition measurable in monetary terms, computation provisions relating to capital gains were not capable of being invoked. In view of the judgment of the Supreme Court In the case of CIT Vs. B.C. Srinivasa Shetty (128 ITR 194), no capital gain was chargeable to tax when the appellant received Settlement amount of Euro 3.5 million. In the said judgment the Supreme Court observed as follows: "... Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. This inference flows fro....
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.... of any agency or agreement for non-competition and thus, the compensation neither fell in the ambit of section 28(ii)(c) nor under section 28(va). In our considered view the compensation In question was meant, Intended and paid (or withdrawal of aforesaid litigation instituted by assessee which could have resulted In many adverse consequences for the reputation of Coca Cola/Atlantic besides entailing huge cost and efforts of litigation. Relinquishment of right to sue is neither a capital asset nor taxable u/s 28 which provides specific: types or receipt to be held taxable as business Income. Relinquishment of right to sue does not find any mention therein. In this eventuality we have no hesitation to hold that the Impugned amount of Rs. 8,16,22,040/- Is a capital receipt not liable to Income Tax." 10. The same principle was again stated by the Authority for Advance Ruling in the case of Aberdeen Claims Administration Inc. (65 taxmann.com 246) wherein it held as follows: "Similar question was Involved In Lead Counsel of Qualified Settlement Fund (QSF), In re [2016J 65 taxmann.com 197 (AAR - New Delhi)] wherein venous arguments were analyzed relating to ta....
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....d.AO. Additional Ground Nos. 1 to 3 are therefore allowed." 10. We have given our thoughtful considerations to rival contentions. We make it clear first of all that there is no dispute between the parties about the nature of assessee's litigation pending in courts at Malaysia and Singapore. The question between the parties is about the nature of assessee's compensation received amounting to Rs.22.79 crores. The Revenue's case is that the Assessing Officer had rightly assessed the same as LTCG since derived against usage of "Tiger" trademark. We find no merit in Revenue's instant arguments since CIT(A)'s detailed discussion in light of the relevant agreement clause(s) has made it clear that the assessee had received the impugned settlement sum in lieu of surrendering its right to sue than former any transfer giving rise to capital receipt only as held in hon'ble Gujarat high court's decision in Baroda Cement & Chemicals Ltd. ( 158 ITR 636 (Guj) followed by various tribunals' decisions. We thus conclude that CIT(A) has rightly held the assessee to have received the impugned sum not in lieu of conceding its right to sue in foreign courts. We thus confirm the CIT(A)'s order unde....
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....11.02.2010 further modified the terms of High Court's order and required the appellant to deposit additional sum of Rs. 300 lacs with the District Judge, AIipore 24 Paraganas South and furnish bank guarantee for Rs. 100 lacs. The additional sum of Rs. 300 lacs was further deposited during the relevant year. In this factual background the appellant made aggregate payment of Rs. 563.44 lacs and the same was debited In the Profit & Loss Account and deduction therefor was claimed. 2. From the documents on record, it therefore transpires that the payment of Rs. 563.44 lacs had to be made to comply with the orders passed by the Hon'bre Calcutta High Court & Hon'ble Supreme Court and the payments were not made in compliance with any agreement or arrangement between the appellant and KPT. It is true that the appellant had occupied the premises belonging to KPT which were used for carrying on assessee's manufacturing business. However the appellant had continued to occupy the premises after the expiry of lease and revised terms were not agreed upon between the parties. During the relevant year KPT, a local authority, had unilaterally passed an order requiring the ap....
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....South who did not have any economic interest in the amount deposited. In the circumstances although the District Judge, Alipore 24 Paraganas South was the 'payee', but the Income represented by the payment made did not belong to the District Judge, Allpore 24 Parganas South. Provisions of Chapter XVII of the Act provide for collection & recovery of taxes and Chapter XVII-B deals with deduction of tax at source. However before tax is deducted, It is necessary to ensure that the tax is deducted on behalf of the payee who in law is assessable in respect of the Income represented by the payment. In the circumstances unless the payment received by the payee is found to be legally chargeable to tax as his Income, then the tax deduction provisions are not applicable. In the present case admittedly the disputes between the appellant and KPT were sub-judice and the Courts had required the appellant to make payments with the District Judge Alipore who was adjudicating the disputes. Although the High Court and the Supreme Court required the appellant to make payments against the demand raised by KPT, the payment was directed to be deposited with the District Judge, Alipore 24 Paragana....
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....ur thoughtful considerations to rival contentions. Learned CIT-DR vehemently contends during the course of hearing that the Assessing Officer had rightly disallowed assessee's payments made to District Judge of Alipore on account of non-deduction of TDS thereupon. He fails to rebut the basic fact that the assessee's payments made to "KPT" are on account of interlocutory directions passed in the ongoing litigation which is always subject to final outcome. The same is therefore in the nature of an interim measure to protect the interest of litigating parties. Chapter-XVII-B of the Act however prescribes TDS deduction on such amount of payments under various heads. We make it clear that there is no clarity as rightly held by the CIT(A) about the application of the TDS charging provision since the assessee has made payments in favour of district civil court registry only. We accordingly express our agreement with the CIT(A)'s findings deleting the impugned disallowance in this reason above. The Revenue's second appeal ITA No.1391/Kol/2017 is accordingly declined. 13. Mr. Damle at this invites our attention to assessee's Rule 27 of the Income Tax Appellate Tribunal Rules filed in ass....
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....of the Act on 5th August 2010 authorizing the assessee to deduct tax at source at the rate of 1% upto the Invoice value of Rs. 400 lacs. In light of the said certificate I therefore find that the appellant's liability u/s 194C in respect of RKM Foods was only Rs. 3,98,666 whereas the appellant had actually deducted tax of Rs. 5,78,193/- in view of certificate issued u/s 197. Even though the appellant had placed such certificate u/s 197 before the Ld. AO, he had not taken into account the certificate issued by the Departmental authorities. Similar lower deduction certificates were also furnished from other parties as well but in arriving at the, amount disallowable u/s 40(a)(ia), the Ld. AO had not taken cognizance of all such certificates, except in the case of Real Bakers Pvt Ltd. I therefore find force in the Ld. A.Rs submissions that the amount of short deduction of tax as computed by the Ld. AO was factually Incorrect resulting In excessive disallowance. 3. I also note from the details furnished before the Ld. AO that the appellant had furnished the PANs of the payees while furnishing the break-up of various expenses from which it was evident that In many Instances....
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....ed tax at source. It is however the Ld. AO's case that there was a short deduction of tax as compared with which the appellant should have deducted at the rates prescribe XVII-B. In other words, the default allegedly committed by the short deduction of tax. In law, short deduction of tax cannot be equated default of nondeduction of tax. In the circumstances therefore I find force in the submissions of the Ld. AR that the appellant had not committed any provided for by Section 40(a)(ia) of the Act and therefore entire disallowance of Rs. 12,00,98,294/- was legally untenable. 5. I find that this Issue also stands covered by the judgment of the Calcutta High Court In the case of CIT Vs S.K. Tekrlwal (361 ITR 432) wherein upheld the following findings of the Hon'ble ITAT, Kolkata which are now binding precedent: " ... We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs one is where, Inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay Into Government Account. There is nothing section to treat, inter alia, the assessee as defaulter where there is a shortfall in with....