TaxTMI 
TaxTMI 
2022 (7) TMI 780
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....w and on the facts of the case in confirming the action of the AO of disallowing employee's contribution towards ESIC amounting to Rs.2,29,053/- u/s 36(l)(va) of the Act. 2. The learned CIT(A) has erred both in law and on the facts of the case in holding that giving loan which is in the nature of "quasi capital", is an "international transaction" falling within the purview of transfer pricing provisions. 3. Alternatively and without prejudice, the learned CIT(A) has erred both in law and on the facts of the case in confirming the action of the AO of making an addition of Rs.43,04,408/- as proposed by TPO on account of interest free loans and advances to Lambda Therapeutic Ltd., UK. 4. Alternatively and without prejudice, the learned CIT(A) has erred in confirming the marking up of LIBOR rate by average comparable rate and by Forex risk. 5. The learned CIT(A) has erred both in law and on the facts of the case in holding that Corporate Guarantee given to associate enterprise is an "international transaction" falling within the purview of transfer pricing provisions. 6. Alternatively and without prejudice, the learned CIT(A) has erred b....
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....e referred to in section 28 with respect to such sum credited by the assessee to the employees' account in the relevant fund or funds on or before the "due date" mentioned in explanation to section 36(1)(va). Consequently, it is held that the learned tribunal has erred in deleting respective disallowances being employees' contribution to PF Account / ESI Account made by the AO as, as such, such sums were not credited by the respective assessee to the employees' accounts in the relevant fund or funds (in the present case Provident Fund and/or ESI Fund on or before the due date as per the explanation to section 36(1)(va) of the Act i.e. date by which the concerned assessee was required as an employer to credit employees' contribution to the employees' account in the Provident Fund under the Provident Fund Act and/or in the ESI Fund under the ESI Act. 4.1 Therefore, respectfully following the same we confirm the addition made by the AO in this regard. Accordingly the ground of appeal raised by the Assessee is hereby dismissed. 5. The second issue raised by the assessee vide ground No. 2 to 4 in its appeal is that the learned CIT-A erred in confirming the addi....
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.... based in Europe EURIBOR plus 390 bps and made the upward adjustment aggregating to Rs. 2,17,41,980/- to the total income of the assessee. 7. Aggrieved assessee preferred an appeal to the Ld. CIT-A. The assessee before the ld. CIT-A submitted that interest free loans and advances given to the associated enterprises based in foreign countries were in the nature of quasi capital which is akin to shareholders fund. While making equity investments in the foreign subsidiaries, there was the need of taking prior approval from the RBI but no such approval was required for giving loans and advances to foreign subsidiary. 8. Furthermore, there was no cost incurred by the assessee on such loans and advances given to the foreign subsidiaries as there was surplus fund available with it. 9. The assessee also submitted that it was able to achieve lot of business from the countries outside India as a result of establishment of the foreign subsidiaries. Therefore, the transaction for advancing the loan to the foreign subsidiaries should not be seen in isolation rather the other benefits received by the assessee from these foreign countries should also be taken into consideration. As such,....
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....assessee from such AEs. Accordingly, the learned CIT (A) confirmed the upward adjustment made by the AO/TPO for the interest amounting to Rs. 43,04,408/- on account of interest free advances made to these AEs. Hence the learned CIT (A) allowed the grounds of appeal of the assessee in part. 12. Being aggrieved by the order of the Ld. CIT-A both the assessee and the Revenue are in appeal before us. The assessee is in appeal before us against the confirmation of the addition made by the AO for the amount of interest of Rs. 43,04,408/- with respect to the interest free loans and advances given to its UK AE whereas the Revenue is in appeal against the deletion of the addition made by the AO for the amount of interest of Rs. 1,74,37,572/- with respect to the interest free loans and advances given to M/s Lambda Poland and M/s Jina Pharma USA and Lambda Therapeutic Research Canada respectively. The ground of appeal of the Revenue in ITA No. 409/AHD/2018 stands as under: The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs. 2,17,41,980/- made by the TPO on account of loans/advances extended to various AEs. 13. The Ld. AR before us filed a paper book runn....
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....althy volunteers for dose-ranging India, Canada and Poland since Inception Phase II Testing of drug on patients to assess efficacy and safety India, Canada and Poland since Inception Phase III Testing of drug on patients to assess efficacy, effectiveness and safety India, Canada and Poland since Inception Phase IV Postmarketing surveillancewatching drug use in public. UK and India since Inception. 10.2 On perusal of the activities of the assessee along with its group associated enterprises, it is revealed that there are different activities which are carried out by the different associated enterprises. For example, the preclinical phase activity is carried out in India and Canada. Similarly, the phase-0 activities carried out in India, Canada and Poland so on and so forth. In other words, the project of the research activity can be ended upon the completion of process of the different phases as discussed above. 10.3 Once the activities of the assessee and its associated enterprises are so interrelated and interconnected then the transactions should be seen in aggregation for working out the ALP. In this regard we find Para 3.9 of OECD....
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....nn.com 240 (Delhi) as under; Bundled/Inter-Connected Transactions ■ Clubbing of closely linked transactions, which would include continuous transactions, may be permissible and not excluded. Aggregation of closely linked transactions or segregation by the assessee should be tested by the Assessing Officer/TPO on the benchmark and the exemplar; whether such aggregation/segregation by the assessee should be interfered in terms of the four clauses stipulated in section 92C(3), read with the rules. It would, among other aspects, refer to the method adopted and whether reliability and authenticity of the arm's length determination is affected or corrupted.[Para 82] 10.6 Now proceedings further, we find that the associated enterprise based in UK has got the business from the USA for which the clinical study was conducted in India. The assessee for such activity received its service charges from the USA company. The details of the same stand as under: S.N. Name of Sponsor Study held on Drug Name Country of Origin Country of Sponsor No. of Patient Enrolled Currency Quote Value 1. Stason Pharma India Diclofenac Epol....
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.... 7,439,597 28,928,072 033-12 8,985,249 8,985.249 039-11 506,850 506,850 053-11 442,500 442,500 056-09 2,650,400 2,196,800 4,847,200 063-12 891,800 891,800 1,783,600 069-1 1 * 603,200 603,200 072-10 8,336,100 8,336,100 073-10 10,306,570 10,306,570 081-11 16,471,482 16,471,482 085-08 3,452,600 3,366,200 6,818,800 089-06 2,041,500  ....
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....sed/elaborated in the preceding paragraph. In our view, the generation of the benefit in terms of money in the year under consideration only cannot be a criteria for making any adjustment under the transfer pricing provisions in the given facts and circumstances. Such income may arise in subsequent years. 10.10 It is also important to note that the assessee has given advances to Lambda Therapeutic Research Z.O.O. Poland which have been converted into equity. Thus, what is inferred is this that the loans and advances were given primarily as the investment in equity. In such cases there cannot be any adjustment on account of interest free loans/advances. In holding so we draw support and guidance from the order of this Hon'ble tribunal in the case of Micro Inks Ltd. vs. ACIT reported in [2013] 144 ITD 610 where it was held as under; "In the present case, there are two important factors pertaining to this interest free loan, and both these aspects deserve to be examined in detail. The first important aspect of this interest free advance is that the loan was said to be in the nature of quasi-capital, and it was so given out of EEFC (Exchange Earners Foreign Currency) ....
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.... facts and circumstances. Hence, the ground of appeal of the assessee is allowed and the ground of appeal of the revenue is dismissed. 16.1 Before us, no material has been placed on record by the Revenue to demonstrate that the decision of Tribunal as discussed above has been set aside / stayed or overruled by the higher Judicial Authorities. Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of earlier years nor has placed any contrary binding decision in its support. Thus, respectfully following the order this tribunal in own case of assessee the ground of appeal raised by the assessee is hereby allowed whereas ground of appeal of the revenue is hereby dismissed. 17. The next issue raised by the assessee vide ground no. 4 to 8 of its appeal is that the learned CIT (A) erred in confirming the upward adjustment of Rs. 6,45,748 made by the TPO/AO with respect to corporate guarantee provided by the assessee. 18. During the year under consideration, Axis Bank of India has issued a standby letter of credit for Rs. 32.75 crores in favour of assessee's AE namely M/s L....
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.... u/s. 92CA{3) has discussed the rational for adopting the profit margin of 24.7% on cost plus method in banking entities. I agree with the findings of the TPO that services of guarantee fee etc. falls in the domain of financial services and the risk assumed by the appellant in the present fact of the case is similar to the entities engaged in the business of providing financial services. !n the arm's length scenario, when the appellant company has incurred the cost to the tune of 0.9% of credit extended which is Rs.2*6rl 4,368/-, it would be expecting return equal to what is earned by such entities engaged in providing financial services. The TPO was required to make upward adjustment of 24.7% of Rs.26,14,368/-, which is Rs.6,45,748/-. However, he has made adjustment" of Rs.35,09,5171- including the fee of Rs.26,14,368/- paid by appellant. In view of above, the upward adjustment is restricted to Rs.6,45,748/-. 20. Being aggrieved by the order of the learned CIT (A), both the Assessee and the Revenue are in appeal before us. The assessee is in appeal against the confirmation of upward adjustment for Rs. 6,45,748/- whereas the Revenue is in appeal for addition deleted of Rs. 2....
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....t defines the parameters of what constitutes an international transaction. Although the ambit of international transaction was wide enough, yet due to judicial interpretation, certain classes of transactions were being left out of the transfer pricing net. To tackle the same, by the Finance Act of 2012 an Explanation to Section 92B[2] of the Act was brought on the statute with retrospective effect from 1st April 2002. The explanation is clarificatory in nature and added certain categories of transactions, inter alia, the transaction as specified under clause (c) of explanation (i) to section 92B of the Act within the ambit of international transactions which is reproduced as under: [Explanation.-For the removal of doubts, it is hereby clarified that- (i) the expression "international transaction" shall include- (a) *********** (b) ************* (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; 52.2 It can be seen t....
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....idiary and hence the assessee has rendered a service to its US subsidiary for which it must charge fees at an arm's-length. This same logic was applied in Asstt. CIT v. Nimbus Communications [2013] 34 taxmann.com 298 (Mum.). We also note the introduction of retrospective amendment in Section 92B Explanation (i)(c) which specifically covers such guarantee payments. Furthermore the decision of Swarnadhara IJMIT Integrated Township Development Co. (supra) (Tax Sutra) was in an altogether different factual matrix concerning the assessee (an Indian Joint Venture) reimbursing corporate guarantee fees paid by its Malaysian AE. We draw support from the order of Mumbai Tribunal in Glenmark Pharmaceuticals v. Asstt. CIT [ITA No.5031/Mum/2012 dated 13-11-2013) which has analyzed this issue in detail and held that 0.53% corporate guarantee rate in that case was appropriate. We therefore set aside the issue to the TPO to decide the quantum of corporate guarantee rates in the instant case following the method adopted in Glenmark Pharmaceuticals (supra). 52.4 In this regard we also find support and guidance from the order of the Bangalore ITAT in case of Advanta India Ltd. vs. ACIT r....
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....ilable at www.moneYControl.com. The average margin (OP/OC) of such entities was computed at 24.1 % using data available on Capitaline database as under: Sr. No. Company Name Total Income [201303] Profit Before Tax|201303] Total Cost Margin 1 Kotak Mah. Bank 9203.15 1972.03 7231.12 27.3% 2 Karur Vysya Bank 4694.99 72f.44 3969.55 18.3% 3 Federal Bank 6832.01 1193.76 5638.25 21.2% 4 HDFC Bank 41917.49 9750.62 32166.87 30.3% 5 ICIC1 Bank 48421.3 11389.69 37031.61 30.8% 6 Induslnd Bank 8346.19 1575.87 6770.32 23.3% 7 Axis Bank 33733.68 7552.7 26180.98 28.8% 9 South ind.Bank 4769.22 655.85 4113.37 15.9% 10 City Union Bank 2462.39 403.02 2059.37 19,6% 12 Yes Bank 9551.43 1925.73 7625.7 25.3% 24.1% 6.5 Applying the mark-up of 24.1% on the amount of Rs 2352607/- paid to the Axis Bank, the ALP of international transaction of corporate guarantee extended to the AE was determined at Rs 29,19,586/- and accordingly, the assessee compa....
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....enterprise. As such, no fee was charged by the assessee on account of corporate guarantee provided by the assessee. Thus the ITAT has directed to make the upward adjustment for Rs. 1,17,630/- being 5% of the cost incurred by the assessee in providing the corporate guarantee to the associated enterprise. However, in the case on hand, there is no clarity arising from the order of the authorities below whether the assessee has claimed reimbursement of the actual expenses incurred by it in providing the corporate guarantee from the associated enterprises. If nothing has been charged by the assessee by way of reimbursement from the associated enterprises, then addition that needs to be sustained is actual cost incurred by the assessee in providing the corporate guarantee +5% markup of such charges in the light of the ITAT finding as given above otherwise only 5% has to be added. With this observation, the ground of appeal of the assessee is partly allowed and the ground of appeal of the Revenue is hereby is also partly allowed subject to the above direction. In the result, the appeal of the assessee is partly allowed. Coming to ITA No. 409/Ahd/2018 an appeal by the Revenue for the....