TaxTMI 
TaxTMI 
2022 (8) TMI 1272
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....rnational transactions with its Associate Enterprises (AEs). The international transactions entered by the assessee with its AEs exceeded Rs.15 crore. The assessee had made payment of royalty, payment towards technical and support services and payment of interest on CCDs. The transaction of payment of royalty and towards technical and support services were aggregated with certain other transactions and all the transactions were benchmarked on application of Transactional Net Margin Method (TNMM). The margin of the assessee on aggregating the transactions stood at 13.38%. Accordingly, the assessee sought to justify the Arm's Length Price (ALP) of the transaction in respect of payment of royalty and towards technical support services (since comparable margin stood at 11.03%). With respect to the transaction of payment of interest on Compulsorily Convertible Debentures (CCDs) at 9% and 12%, the assessee benchmarked the same using an independent CCD benchmarking study and concluded the transaction to be at arm's length. 3. The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) to determine the ALP of the said international transactions. The TPO vide order date....
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....uring operations of the Appellant with the application of Transactional Net Margin Method ("TNMM") for the transfer pricing analysis without appreciating the fact that the principle of aggregation of closely linked transactions is a well-established rule prescribed by the Organisation for Economic Co-Operation and Development guidelines ("OECD Guidelines") and referred to for guidance in various rulings of Income Tax Appellate Tribunal ("ITAT"): (ii) Not appreciating the fact that the international transaction pertaining to payment of royalty cannot be tested in isolation as the same is interlinked to the primary operations of the Appellant; and (iii) Upholding the contentions of the learned TPO that the CUP Method is the most appropriate method in determining the ALP of payment of royalty to AE despite the learned TPO not following the provisions prescribed in clause (a) of the subrule (I) of Rule 10B of the Rules for determination of ALP in relation to an international transaction under CUP. 6. The Hon'ble DRP / learned TPO have erred in not appreciating the evidences submitted in respect of the payment of royalty by the Appellant to prove that the Appellant has derived....
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....fy the arm's length nature of the transaction. The TPO rejected the method adopted by the assessee and proceeded to benchmark the transaction in an independent manner. The TPO determined the ALP of the transaction at 1% in an adhoc manner (refer pages 15-18 of the TPO's order). The DRP rejected the objections of the assessee by relying on the directions issued in the case of the assessee for the assessment years 2011-2012 and 2012-2013 (refer pages 2-3 of the DRP's directions). 8. Aggrieved, the assessee has raised this issue before the ITAT. The learned AR submitted that identical issue is covered in favour of the assessee by the order of the ITAT for the assessment years 2009-2010 to 2012-2013, wherein the payment of royalty at 4% was accepted as being at arm's length. 9. The learned Departmental Representative supported the orders of the TPO and the DRP. 10. We have heard rival submissions and perused the material on record. We find that on identical facts, the Tribunal in assessee's own case for assessment year 2012- 2013 in IT(TP)A No.2209/Bang/2016 (supra) decided the issue in favour of the assessee. The relevant finding of the Tribunal reads as follows:- "9. The first i....
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....greements, the related party relationship between licensor and licensee existed in 07 comparable agreements and remaining 10 comparables agreements have unrelated party relationship for which the average royalty rate is computed at 4.10%. Submission of the assessee has been considered. As the average rate of royalty paid by the comparables is more than payment made by the assessee, i.e., at 4%, payment towards royalty is being treated to be at arm's length. Taking all these into consideration, the Royalty payment @ 4% made by the taxpayer to its AE is considered at Arm's Length, hence no adjustment on account of royalty payment is required to be made 7.6 In view of the above orders of the TPO, accepting the payment of royalty at 4% to be at arm's length, we hold that the payment of royalty at 4% in the year under consideration is to be treated as being at arm's length. Accordingly ground 3 is allowed." 13. Considering the decision of coordinate Bench in assessee's own case (supra) we allow this ground in favour of the assessee and hold that payment of royalty @ 4% is at arm's length." 11. In view of the above order of the Tribunal, in assessee's own case (supra), we hold that ....
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....t the payment of technical service fee amounting to INR 36,31,40,980/- formed part of 'capital work in progress' as on 3lst March, 2013 which was not claimed as a business expenditure during A Y 2013-14 and therefore, the same cannot be added to the total income of the Appellant." 13. As regards the above issue, it is submitted that the assessee is engaged in the business of manufacture and supply of industrial gases. It was stated that the assessee supplies industrial gases via advanced air separation plants and delivery systems and the assessee's business model for distribution of the manufactured gases primarily falls into three main categories, namely - (i) Bulk liquid gases, that are delivered by large transport tankers to the customers site and stored in storage units which are installed by the assessee at the customer's site; (ii) Packaged gases, that are supplied in cylinders to construction sites, engineering companies, hospitals, etc.; and (iii) Large onsite plants, that supply gases via pipeline to the customers. Where the customers require a large quantity of gases on a continuous basis, the assessee constructs / builds a plant either in the premises of t....
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....014 (order dated 31.05.2022) 16. The learned DR submitted that the TPO has elaborately discussed and has come to a conclusion that the payment of technical fees is primarily a duplication of payment of royalty. Further, the learned DR contended that the assessee has not been able to prove the nature of services rendered by the AE's in respect of payments of technical service fees. 17. We have heard rival submissions and perused the material on record. During the relevant financial year, the assessee made payments in the nature of technical and related services fees to following AEs. Sl. No. Technical and related service fees paid Amount (Rs.) 1. Praxair Inc 2,60,91,944 2. Praxair Surface Technology SAS 42,90,204 3. Praxair Asia Inc 32,22,21,276 4. Praxair NV 55,88,845 5. SAID Machine Impianti SpA 89,358 6. Praxair China Investment Co. Ltd. 7,52,349 7. Praxair Surface Technology Inc 41,07,004 Total 36,31,40,980 17.1 For the purpose of computation of ALP, the assessee was of the view that the above transactions are closely linked to the manufacturing operations of the company accordingly, benchmarked using aggregation approach with the application....
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....rocess and instrumentation diagram; * Schematic wiring diagram and single line diagram; and * Control valve sizing and specification. c) Advanced Computerised Control System - * This comprises of:- * Advanced control system design of the plant. d) Safety Engineering - This comprises of:- * Review of design safety checklist; * Support in review of layout and process safety issues; and * Review of construction safety procedure. e) Project Management - This comprises of:- * Co-ordination with engineering, procurement, vendors and related departments during project execution; * Cost update, monitoring and control; * Schedule update, monitoring and control; and * Co-ordination with client. f) Start - Up - This comprises of:- * Review of plant operation manual; * Review of initial plant evaluation and final plant evaluation; and * Continued engineering report for the first year operation. 17.3 During the transfer pricing assessment, the assessee vide letter dated 8.10.2016 [page 212 of the paper book] submitted the break-up of technical services fees payment and explained the nature of services provided by the AEs. In order to demonstrate the factum o....
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....ly acceptable to both parties. " 17.5 From the above it is evident that the engineering and technical services rendered by the AEs in connection with the design, construction, maintenance of the plant at the customer site are not dealt or governed by the technology license agreement for which royalty payment is made. Further, when the agreements for technology license and the engineering services are juxtapose, it is evident that royalty is paid for use of technical information, patent rights and trademark in connection with manufacture and sale of licensed products and licensed processes whereas technical services fees is paid specifically for availing the technical and engineering services rendered by the AEs for design, construction, maintenance etc of the industrial gas plants based on the customer requirements. The payment of royalty and technical services fees is made for different deliverables and there is no duplication as held by the TPO. 17.6 In view of the above, there is no merit in the finding of the TPO that the payment of technical services fees is already covered by the royalty payment. Similarly, the TPO has not explained on what basis and under which method of c....
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....s identifying the comparable transactions involving the CCDs which was submitted by the Appellant. 20. The Hon'ble DRP has erred in stating that conversion price has not been fixed upfront either by a fixed method or formula based and thereby erred in concluding that the nature of Appellant's borrowing are closer to ECB. 21. The Hon'ble DRP / learned TPO have erred in not taking cognizance of the fact that a part of the interest paid on CCD amounting to INR 118,54,82,351/- formed part of 'capital work in progress' as on 31st March, 2013 which was not claimed as a business expenditure during A Y 2013-] 4 and therefore, the same cannot be added to the total income of the Appellant." 19. During the financial year 2012-2013, the assessee paid interest of Rs.166,32,46,020 to Praxair International Finance (PIxF Ireland) at interest rate of 9% and 12% on CCDs which have been transferred to Praxair Luxembourg S.A.R.L. with effect from March 2013, the assessee, in its TP study, benchmarked the transactions of payment of interest by applying CUP method. Using a CCD benchmarking study, the assessee selected certain companies as comparables, and since the arithmetic me....
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....at Rs.10 each". Further, the subscription considered shall be converted into INR as per the prescribed exchange rate and the number of CCDs allotted to the holders will be the subscription consideration as converted into INR, divided by face value of the CCD instrument. The debenture certificates issued clearly reflect the face value of debenture at INR at Rs.10 each. The CCDs are recorded in the financial statements in INR. The CCDs were also subsequently repaid in INR. The true copy of the statement setting out the details of payment and demand deposit transaction clearly demonstrate that the remittance is in INR. 8.6.1 The TPO and DRP erred in treating CCDs as ECBs and benchmarked the interest rate against LIBOR rate. The CCDs is a hybrid instrument and cannot be per se treated as ECB / loan. The Hyderabad Bench of the Tribunal in the case of Adama India (P.) Ltd. v. DCIT (supra) had held that CCDs cannot be categorized as a loan. The relevant finding of the Tribunal reads as follows:- "8. We have considered the issue and examined the rival contentions. There is no dispute with reference to the fact that the CCDs were issued in Indian Rupees. Accordingly, following the princ....
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....as a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specfic loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- "The existing differences in the levels of interest rates do not depend on any place but rather on the currency c....
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....nce of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money. 40. The aforesaid methodology recommended by Klaus Vogal appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also tobe repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency and different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be ma....
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.... its shares on which capital gain was computed by the Appellant and offered to tax. 22.5. The learned AO has erred in invoking provisions of section 14A of the Act, inspite of the fact that the investments were made in subsidiaries for strategic business reasons and not for earning any exempt income. 22.6. The learned AO erred in holding that investment to the tune of Rs.217 crores has been made on 31.03.2013 in subsidiary companies when no fresh investments were made during the year in its subsidiary companies. 22.7. The Honourable DRP erred in holding that the Appellant has admitted during hearings before the Panel that its accounts are maintained in a consolidated manner whereby all funds and receipts are intermingled in a common pool and attribution of specific expenditure and investment out-flow to specific receipts is not possible to co-relate or verify. The Appellant had not accepted any such statement. Moreover, the Honourable DRP ought to have appreciated that the Appellant has not incurred any expenditure during the year towards the investment. Further, the Appellant has not made any investment during the year. Accordingly, there is no question of having a common po....
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....arned AR stated that the investments made in respect of which the disallowance is made pertains to the investments made in Praxair Carbon Dioxide Pvt. Ltd. and Jindal Praxair Oxygen Company Ltd. It was submitted that as regards the investment made in Praxair Carbon Dioxide Pvt. Ltd., the investment were made during the financial years 1999-2000 to 2003-2004 and thereafter no investments were made during the relevant year. Further, it was stated that the assessee did not earn any exempt income during the year under consideration. Moreover, with effect from 01.04.2013, the said entity stood merged into the assessee and therefore, there is no scope for earning any dividend income. Hence, it was submitted that in any absence of earning any exempt income, no disallowance is warranted. As regards the investments made in Jindal Praxair Oxygen Company Ltd., it was submitted that the same was not made out of cash, but was made by way of share swap arrangement, wherein the assessee issued shares to Praxair Pacific Ltd., in exchange for the shares in Jindal Praxair Oxygen Company Ltd. Moreover, during the financial year 2012-2013 under consideration, the said company bought back its shares fr....
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....e disallowance under section 14A read with rule 8D totally amounting to Rs. 5,99,10,687 and added the same to total income under regular provisions and book profits u/s 115JB of the I.T.Act. The DRP confirmed the findings of the A.O. 28.1 The Hon'ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd v DCIT reported in [2017] 81 taxmann.com 111 deleted the disallowance made u/s 14A of the I.T.Act, where the AO did not record the satisfaction regarding the incorrectness of the claim of the assessee having regard to the accounts of the assessee. Relevant observations of the Supreme Court are as under:- "37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure Incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or ill the best judgment of tile ....
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....ew that the second question formulated must go in favour of (he assessee and it must be held that for the Assessment Year in question i.e. 2002-2003, the assessee is entitled to the full benefit of the claim of dividend income without any deductions." 28.2 The Hon'ble Karnataka High Court in Hindustan Aeronautics Ltd v ACIT, ITA No 404 of 2015 in judgment dated 9.12.2020 following the Supreme Court's decision in Godrej and Boyce Manufacturing Ltd (supra) deleted the disallowance made under section 14A without recording the satisfaction having regard to the accounts of the assessee. 28.3 In the present case, the AO has recorded vague, stereotyped reasons de hors the accounts of the assessee for making the disallowance under section 14A. There is no satisfaction of the AO having regard to the accounts of the assessee. Further, the Hon'ble Karnataka High Court in the case of CIT v. Gokaldas Images P Ltd. reported in (2020) 122 taxmann.com 160) has held that disallowance u/s 14A of the I.T.Act cannot be added to book profits of assessee under section 115JB. Thus, we delete the disallowance made under section 14A amounting to Rs. 5,99,10,687 in computing the total income under reg....
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....and the RBI's approval dated 25.03.2003. Therefore, it is submitted that since the loan was obtained for working capital purposes, the loss arising on account of fluctuation in foreign currency ought to be allowed as a deduction. Further, it is submitted that in the assessment years when the assessee realised gains in respect of the said loan, the same were offered to tax, which was accepted by the Revenue. Therefore, it is submitted that the Revenue having accepted the gains to tax, and thereby having accepted the loans to be obtained for working capital purposes, cannot disallow the loss in the year under consideration. Therefore, the loss claimed by the assessee ought to be allowed. It is submitted that this issue is covered in the assessee's favour in the assessee's own case for assessment year 2012-13 (Order dated 25.02.2022 passed in IT(TP)A No. 2209/Bang/2016). 33. The learned Departmental Representative supported the orders of the TPO and the DRP. 34. We have heard rival submissions and perused the material on record. We find that on identical facts, the Tribunal in assessee's own case for assessment year 2012- 2013 in IT(TP)A No.2209/Bang/2016 (supra) decided the iss....