AI Drafter 
TaxTMI 
TaxTMI 
2022 (8) TMI 1272
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....that the assessee had entered into several international 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 in....
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.... (i) Upholding that the international transaction pertaining to payment of royalty cannot be aggregated under the manufacturing 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 ha....
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....essee benchmarked the transaction of payment of royalty by aggregating it with certain other transactions. The assessee had also done a separate benchmarking study using CUP method, to justify 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....
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....with respect of all comparables vide letter dated 27.11.2018. In response of the same the submission was filed by the assessee on 12.12.2018 which have been considered. As per submission, assessee has stated that out of the total 17 comparable agreements, 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 d....
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.... have failed to appreciate the difference between the services for which technical service fee is being paid and the technology for which royalty payment is being made and thereby erred in concluding it to be a duplicate payment. 15. The Hon'ble DRP / learned TPO have erred in not taking cognizance of the fact that 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; ....
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....solation. Lastly, it was contended that TPO has erred in determining the adjustment without following any of the prescribed method. In this context, the learned AR relied on the following judicial pronouncements:- (i) Knor Bremse India Pvt Ltd. v. ACIT reported in (2016) 77 taxmann.com 101 (Del-Trib) (ii) Bosch Ltd. v. DCIT in IT(TP)A No.1581/Bang/2014 (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 ....
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....€¢ Review of process safety analysis; • Review of critical operating parameters and operational safety standards; • Critical equipment selection; and • Driox system design. (a) Mechanical Design and Engineering - This comprises of:- • Final pipe sizing calculations; • Safety valve sizing and calculation; • Manual valve specification and sizing; • Basic design and verification of layout; and • Preparation of line index. b)Control System Design and Engineering - This comprises of:- • Process 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 Manage....
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....ss, (c) to use trademarks in connection with the Industrial gas business. Clause 3.06 of Article III of the said agreement specifically provides that performance of engineering and technical services by the AEs are not covered by the above agreement and the same may be agreed separately on mutually acceptable terms and conditions. The above clause reads as under:- "3.06 Notwithstanding the foregoing provisions of this Article III, nothing herein shall be construed or interpreted as requiring Praxair Technology or any company of the Praxair Group to perform engineering and technical services in connection with the design, construction, expansion or maintenance of any plant employed or to be employed within the filed of the Industrial Gas Business to Affiliate other than such terms and conditions as are mutually 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 licens....
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....ating the fundamental difference between a CCD and an ECB and thereby erred in applying the 6 Month US London Inter-Bank Offered Rate ("LIB OR") with all-in-celling rate of 500 basis point as a basis for benchmarking the payment of interest on CCD. 18. The Hon'ble DRP / learned TPO has erred in not appreciating the fact that in an ECB the borrower carries the risk related to foreign exchange fluctuation whereas the risk is borne by the lender in case of CCD and thereby failed to appreciate the importance of assumption of foreign exchange risk in the fixation of interest rate. 19. The Hon'ble DRP / learned TPO have erred in stating that the Appellant has not provided any comparable details to demonstrate the arm's length nature of interest payment on CCD and thereby erred in disregarding the independent benchmarking analysis 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 E....
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.... 21. The learned Departmental Representative supported the orders of the TPO and DRP. 22. 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 decided the issue in favour of the assessee. The relevant finding of the Tribunal reads as follows:- "17. We have heard the rival submissions and perused the materials on record. We notice that the coordinate bench of the Tribunal in assessee's own case (Supra) on the issue of interest on CCDs has held that - 8.6 We have heard rival submissions and perused the material on record. The assessee during the financial year 2009-2010, entered into a debenture subscription agreement with its AEs, Praxair International Finance. In the agreement, the term "issue price" is defined as "CCD will be issued at par 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....
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....d., ITA No. 23312014 (Deli-HC); iii. M/s. Brahma Center Development Pvt. Ltd., Vs. [TO, ITA No. 3 73/Del/2016 (ITA T Del). By respectfully following the Co-ordinate Bench and Hon 'ble High Court decisions, we agree with the assessee 's contentions that the CCDs cannot be categorised as a loan and LIBOR plus two hundred basis points benchmark cannot be accepted on the facts of the case." 8.6.2 The Hon'ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Put. Ltd. (supra) had held that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. The relevant finding of the Hon'ble High Court reads as follows:- "39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was 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 ....
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....ere to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Alt. 11 (6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence 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 ....
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....e Rules, despite the fact that no expenditure has been actually incurred! debited to the profit and loss account on this account. The learned AO ought to have observed that applicability of section 14A of the Act is triggered only if there is any expenditure incurred in this regard. 22.2. The learned AO erred in not appreciating that the investments made in Praxair Carbon Dioxide Private Limited ('PCPL') (currently merged with the Appellant) and Jindal Praxair Oxygen Company Limited ("JPOCPL") (now known as JSW Industrial Gases Private Limited) are historical in nature and as such no expenditure has been incurred towards the same. 22.3. '''The learned AO erred in not appreciating the fact that investment in JPOCPL was acquired by way of swap of shares in earlier year and not by way of actual cash outflow 22.4. The learned AO failed to appreciate the fact that no additional investments in the subsidiaries were made during the year, instead JPOCPL has brought back portion of 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 t....
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....2 (refer pages 3 and 4 of the final assessment order). The DRP rejected the objections of the assessee and affirmed the disallowance (refer page 8 to 10 of the DRP's directions). 25. Aggrieved, the assessee has raised this issue before the ITAT. The learned AR submitted that, firstly, before making a disallowance u/s 14A of the I.T.Act, the A.O. is mandatorily required to record his dissatisfaction as to the claim of the assessee, having regard to the accounts of the assessee. It was stated that in the present case, no such satisfaction is recorded and the AO merely proceeds on the basis of conjectures and surmises. Therefore, it was submitted that the disallowance made is liable to be set aside. Reliance in this regard is placed on the following decisions: (i) Godrej & Boyce Manufacturing Company Ltd. v. DCIT (reported in [2017] 81 taxmann.com 111 (SC)); (ii) Eicher Motors Ltd. v. CIT ([2017] 86 taxmann.com 49 (Delhi)); (iii) Hindustan Aeronautics Ltd. v. ACIT and Anr. (Order dated 09.12.2020 passed by the Hon'ble High Court of Karnataka in ITA No. 404/2016). 26. The learned AR stated that the investments made in respect of which the disallowan....
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....erused the material on record. During the year, vide letter dated 31.08.2016, the A.O. asked the assessee to furnish the details of disallowance u/s 14A of the I.T.Act, the assessee vide letter dated 14.09.2016 submitted that no expenditure is incurred and debited to the profit and loss account on account of investment in its subsidiaries and hence no disallowance is warranted u/s 14A of the I.T.Act read with Rule 8D of the I.T.Rules. However, the AO held that the company has to incur expenses in maintenance of registers stipulated under the Companies Act, audit fees, professional fees, compliance to filing requirements under the Companies Act besides the sharing of resources such as manpower, office space etc in relation to such investment portfolios. It was held by the AO that considering the fact that the investments are made in the subsidiary companies and related concerns, the man hours spent by the directors and management in the affairs of such companies in the capacity of being a representative of the company in their management also needs to be factored in. Considering all these aspects, the AO made the disallowance under section 14A read with rule 8D totally amounting to ....
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....le (Rs. 270.51 crores as on 1.4.2001 and Rs.280.64 crores as on 31.03.2002) remains unproved by any material whatsoever. While it is true that the principle of res judicata would nor apply to assessment proceedings under the Act. the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt our which conspicuously is absent in the present case. In this regard we may remind ourselves of what has been observed that this Court in Radhasoami Satsang v CIT (1992) 193 ITR 321/ 60 Taxman 248 (SC). "We are aware of the fact that strictly speaking res judicata does not apply to income lax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in The following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year." 39. In the above circumstances, we are of the view that the second question formulated mus....
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.... it was stated that the assessee obtained a foreign currency loan from Kelvin Finance Company and the borrowing was to be used for "general Corporate Purposes". It was submitted that the assessee obtained approval from the Reserve Bank of India ("RBI") for remitting the interest and the principal amount. In terms of the approval granted by the RBI dated 20.05.2003, the loan had to be utilized only for the purpose for which it is agreed upon. It is submitted that the loan was utilized for general corporate working capital purposes, and therefore the loss arising on restatement of the loan on account of fluctuation of foreign currency was claimed as a deduction under Section 37 of the Act by the assessee. 31. The Assessing Officer disallowed the loss claimed on the ground that the Kelvin loan was utilized towards making investment and purchase of fixed assets, which was affirmed by the DRP (please see pages 2-3 of the final assessment order and pages 5-8 of the DRP's directions). 32. Aggrieved, the assessee has raised this issue before the ITAT. The learned AR submitted that the loan was obtained for general corporate working capital purposes as is evident from the loan agr....
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.... the case of CIT(A) Vs. Woodward Governor (2009) 312 ITR (P.) Ltd. (2011) 200Taxman 179. The first aspect examined by the Hon'ble Supreme Court was as to whether the additional liability due to exchange rate fluctuation was a liability. The Hon'ble Supreme Court held that the expression "expenditure" as used in s. 37 may, in the circumstances of a particular case, cover an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee. The Court explained that the word "paid" in s. 43(2) means actually paid or incurred according to the method of accounting on the basis of which profits or gains are computed under s. 28/29 and that Sec. 37(1) has to be read with ss. 28, 29 and 145(1). Therefore, loss suffered by the assessee in respect of a revenue liability ITA Nos.2547 and 2548/Bang/2018 on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable under s. 37(1). The Court explained that under para 9 of AS-11, exchange differences arising on foreign currency transactions have to be recognized as income or expense in the period in which they arise, except as stated in para 10 and para....