TaxTMI 
TaxTMI 
2022 (12) TMI 534
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....RP") has erred in not considering the fact that the impugned order passed by the learned AO is beyond time limit prescribed in the Act and is therefore bad in law and void-ab-initio. Transfer Pricing 2. The learned AO, learned Transfer Pricing Officer ("learned TPO") and the Hon'ble DRP grossly erred in adjusting the transfer price by INR 271,48,94,872/- with respect to the international transaction rendered by the Appellant under section 92CA of the Income-tax Act, 1961 ("the Act"). 3. The learned AO/ learned TPO/ Hon'ble DRP have erred in not accepting the transfer pricing analysis undertaken by the Appellant in accordance with provisions of the Act read with Income-tax Rules, 1962 ("the Rules"). 4. On facts and in the circumstances of the case and in law, the action of the learned AO of making reference to the learned TPO without giving an opportunity of being heard, is in violation' of the provisions of section 92CA of the Income-tax Act, 1961 and needs to-be quashed. The Appellant submits that the reference made to the TPO is not in accordance with law and hence the Order passed pursuant to the illegal reference is bad i....
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.... of the Appellant b. Erred in stating that no direct/primary evidences was furnished to justify the payment of royalty to its Associated Enterprise. c. Failed to appreciate that the transfer of technology is a continuous process and thereby erred in stating that technology was transferred only during the initial year of operation and the Assessee has not received any new technology which necessitates the payment of royalty. d. Erred in rejecting the justification of ALP of royalty payment using TNMM as provided in the TP Report. e. Erred in not appreciating the fact that the OECD guidelines and the Tribunal rulings have approved of aggregation of closely linked transactions by applying Transactional Net Margin Method ("TNMM"). f. Erred in disregarding the external CUT search performed by The Appellant which is provided as a supplementary analysis to demonstrate the arm's length nature of the international transaction pertaining to payment of royalty. g. Erred in disregarding the internal CUT search performed by the Appellant which is provided as a supplementary analysis to demonstrate the arm's length nature of the inter....
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....the Appellant. 10. Disallowance of foreign exchange loss amounting to INR 17,15,12,176 under section 37 of the Act 10.1. The learned AO/ Hon'ble DRP erred in disallowing the foreign exchange loss amounting to INR 17,15,12,176 under section 37 of the Act as not being revenue in nature. 10.2. The learned AO/ Hon'ble DRP erred in not appreciating the fact that the Kelvin loan has been utilized for general corporate purposes which is revenue in nature. 10.3. The learned AO/ Hon'ble DRP erred in concluding that the short term borrowings which, are repaid by Kelvin loan are not utilized for working capital. 10.4. The learned, AO/ Hon'ble DRP failed to appreciate the fact that the foreign exchange gain on the same loan have been offered to tax in earlier year. 10.5. The Hon'ble DRP erred in relying on its own directions for AY 2013-14 without appreciating the arguments of the Appellant. 10.6. Without prejudice to the above, the learned AO himself has indicated that the surplus cash of the Appellant had been utilized for investment in purchase of fixed assets and investments. Hence, even if the loan had been....
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....ct that no fresh investments were made during the year in its subsidiary companies. 11.6. The learned AO has erred in invoking the provisions of Rule 8D of the Rules without giving any show cause notice to the Appellant as to why the expenditure incurred in relation to exempt income should not be disallowed under section 14A of the Act. 11.7. The learned AO erred in stating that no submissions were filed in this respect by the Appellant, considering that no such opportunity was provided. 11.8. The learned AO/ Hon'ble DRP has erred in not considering the order of the Commissioner of Income-tax (Appeals) in Appellant's own case in AY 2008-09 which directed the learned AO to delete the disallowance under section 14A of the Act on the basis that original investments in the Appellant's case were not geared or intended for earning exempt income such as dividend. Being commercial expedient investments they are to be treated on a different footing from investments made only for earning exempt income. 11.9. The Hon'ble DRP erred in holding that the Appellant has not maintained separate books of account in regard to the investments made tha....
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....of the Commissioner of Income-tax (Appeals) in Appellant's own case in AY 2008- 09 which directed the learned AO to delete the disallowance under section 14A of the Act in computation of book profits under section 115JB of the Act on the basis that section 115JB of the Act is a complete code by itself and the importing of such disallowances into the scope of adjustment of book profit is not permissible. 13. Disallowance of other expenses 13.1. The learned AO erred in disallowing 25% of the expenses under the subhead miscellaneous expenses which is under the broad head miscellaneous expense in the statement of profit and loss amounting to INR 10,02,063 (being 25% of INR 40,08,250) on the basis that Appellant has not provided any ledger extract or proper evidences in this regard. The learned AO erred in not appreciating the fact that the Appellant had provided ledger extract of miscellaneous expenses vide e-mail dated 27 December 2017. 13.2. The learned AO erred in treating miscellaneous expenses amounting to INR 55,25,705 being product purchase expenses as capital in nature and allowed depreciation @ 15% on the same without appreciating that these expe....
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....ng the ALP for payment of interest on CCDs as 'Nil' as against the interest payment made at 9% and 12%. c. Erred in not appreciating the fundamental difference between a CCD and an Equity while determining the ALP for payment of interest on CCD. d. Erred in not appreciating that CCDs are nothing but debt till the date of conversion. e. Erred in placing reliance in FEMA/FDI Regulations to re-characterize the CCDs to Equity thereby failed to appreciate that the treatment of CCDs under FEMA/FDI Regulations cannot determine/change the character of the instrument when it comes to other regulations including the Act. f Failed to appreciate that the CCD were already accepted as debt in the scrutiny assessment proceedings for the assessment years of AY 11-12 to AY 13-14 and erred in not following the principles of Res Judicata having already accepted the requirement for payment of interest in the same CCDs during the previous assessment years of AY 11-12 to AY 13-14. g. Erred in disregarding the independent benchmarking analysis undertaken by the Assessee identifying the comparable transactions involving the CCDs to demonstrate the arm&#....
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....n considering the Transfer pricing adjustment as INR 51,55,15,606, instead of INR42,95,93,838 as per the rectified order passed under section 92CA read with section 154 of the Act II. Corporate Tax 8. Disallowance of expenditure under section 14A of the Act by applying the provisions of Rule 8D of the Income-tax Rules, 1962 ("the Rules") 8.1. The learned AO/ Honourable DRP erred in disallowing expenditure amounting to INR 89,27 *0 under section 14A of the Act read with Rule 8D of the 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. 8.2. The learned AO/ Honourable DRP erred in not appreciating that the investments made in JSW Steel Limited of an amount of INR 100,000 and in Jindal Praxair Oxygen Company Private Limited ("JPOCPL") (now known as JSW Industrial Gases Private Limited) of an amount of INR 1,78,31,00,000 are historical in nature and as such no expenditure has been incurred towards the same. 8.3. The learned AO/ Honourable DRP er....
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....it and loss account) which is relatable to the exempt income should be added to the book profits. ii. Section 115JB is a complete code by itself and no adjustments other than those which are prescribed in section 115JB of the Act itself can be made to the book profits. 9.2. The learned AO/ Honourable DRP erred in not placing reliance on the decision of Special Bench of the Delhi Tribunal in the case of ACIT Vs. Vireet Investment Pvt. Ltd. [2017] 82 taxmann.com 415. 9.3. The learned AO/ Honourable DRP erred in applying the provisions of section 14A to Chapter XII-B of the Act without having regard to the restriction that the provisions of section 14A of the Act is restricted to computing the total income under Chapter IV of the Act. 9.4. The learned AO/ Honourable DRP erred in not considering the order of the Commissioner of Income-tax (Appeals) in Appellant's own case in AY 2008- 09 which directed the learned AO to delete the disallowance under section 14A of the Act in computation of book profits under section 115JB of the Act on the basis that section 115JB of the Act is a complete code by itself and the importing of such disallowances into the scope of adju....
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....ndependent benchmarking analysis undertaken by the Assessee identifying the comparable transactions involving the CCDs to demonstrate the arm's length nature of interest payment on CCDs. AY 2015-16: 3. The learned TPO erred in law and facts by holding that the payment of interest to Associated Enterprise ("AE:) on Compulsory Convertible Debentures (-CCD-) is not at arm's length and thereby erred in making an addition of INR 255,76,70,520/- thereby: a) Erred in transgressing their jurisdiction by questioning a genuine transaction and referring to irrelevant arguments and BEPS action plans, and thereby, concluding that CCDs are colorable instrument used to erode the base and shift profits. b) Erred in determining the ALP for payment of interest on CCDs as 'Nil' as against the interest payment made at 9% and 12%. c) Erred in not appreciating the fundamental difference between a CCD and an Equity while determining the ALP for payment of interest on CCD. d) Erred in not appreciating that CCDs are nothing but debt till the date of conversion. e) Erred in placing reliance in FEMA/FDI Regulations to re-character....
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....y the appellant on the interest paid was rejected by the TPO. Also, the TP Officer examined whether the 'interest' paid of Rs. 7,68,26,983 was in the nature of `interest' at all. The Assessing officer concluded that the CCDs were actually equity and not debt since it was compulsorily convertible to equity shares and that the Reserve Bank of India also recognised CCDs as equity instruments. Also, the TPO was of the view that the appellant had junk credit rating, having no operating income or source of cash flow to service the interest payable at 15% and that no third party would make investment in CCDs and that the arrangement amounted to this capitalisation. Holding this, the amount of Rs. 7,68,26,983 was held to be not in the nature of 'interest' and ALP of the transaction by CUP method was held as Nil and adjustment of Rs. 7,68,26,983 was determined u/s 92 CA (3) of Income tax Act, 1961. As grounds No. 1 and 2 are general in nature these do not require adjudication. The relevant grounds of appeal raised by the appellant are "3. That on the facts and in the circumstances of the case, the Learned AO/Learned TPO erred in making adjustment to the....
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....cing Officer. In the case of Besix Kier Dabhol, SA vs DDIT (I Tax),Circle-3(2), Mumbai, ITAT, Mumbai in their order in ITA No.4249/Mum/07 dated 20.11.2010 have held on similar facts that in absence of specific thin capitalisation rules in India, recharacterisation of debt capital as equity capital and accordingly disregarding the interest payments as tax deductables is not in order. Drawing support from the above, I hold that the conclusion of the AO that the CCDs is equity and that interest payment is not allowable cannot be upheld. i. Whether rate of interest charged is at arm's length? It is on record that the funds which have been raised by the appellant through CCDs and have been utilised for the business of the appellant. The appellant has paid 15% as the rate of interest to its AEs for this purpose. It is been that PLR for A.Y.2008-09 as seen from SBI corporate website varies from 12.25% as on 1.1.2009 to 13.00% as on 10.11.2008. At an average, the same can be taken at 12.6% as against 15% claimed by the appellant. Under such facts, the interest paid of Rs.7,68,26,983/- at @ 15% is certainly not at arm's length and is also evidently in exce....
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..... under India Belgium tax treaty WHT rate on interest, other than bank interest, as also dividend is at uniform 15 per cent, interest is tax deductible and that results in lower corporate taxes in respect of PE profits. These tax benefits could be further optimized by hybrid financing instruments such as profit participating loans, convertible loans or where instrument is treated as debt in the source country of the income (i.e. resulting in tax deductible interest) and as equity in the residence country of the lender (i.e. where lender may claim the participation exemption of interest income because of its characterization as distribution of profits). That is how tax considerations at times do result in a company being too thinly capitalized, or, to put it differently, financed by a disproportionate ratio of debts. In order to protect themselves against such erosion in their legitimate tax base, several tax jurisdictions enact rules to counter this vulnerability and these rules are termed as 'thin capitalization rules'. 20. It is for this background that many jurisdictions take several legislative anti-abuse measures including limiting deduction on interest when the compa....
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....tion, i.e. art. 26 BITC; art. 54 BITC; art. 198, 11° BITC, art. 18, 4° BITC and the Belgian GAAR. Articles 26, 54 and 198 belong to the first group of aforementioned rules. The deduction of interest is denied if the statutory conditions for deductibility are not satisfied. Articles 26 and 54 are not concerned with the question whether the borrower is undercapitalized but only whether the interest charged is at arm's length. Excessive interest (i.e. interest charged above the prevailing market conditions) is not deductible. Article 198, 11° is concerned with undercapitalized companies. Interest is not deductible if the statutory 7 . 1 debt/equity ratio is exceeded. Article 18, 4° BITC belongs to second group of aforementioned rules; it recharacterizes certain interest payments into dividends both for corporate tax purposes of debtor and for withholding tax purposes, while curiously it does not recharacterize debt into equity (neither for corporate tax, nor for capital duty purposes). In certain circumstances, the Belgian GAAR may have the potential to recharacterize purported debt into equity. In that case, it also belongs to the second set of rules." 22. It....
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....se of Union of India & Anr. vs. Azadi Bachao Andolan & Anr. (2003) 184 CTR (SC) 450 . (2003) 263 ITR 706 (SC) wherein their Lordships have, inter alia, observed as follows . "111. In para 3.3.1 after noticing the growing practice amongst certain entities, who are not residents of either of the two Contracting States to try and avail of the beneficial provisions of the DTAAs and indulge in what is popularly known as 'treaty shopping', the report says . '3.3.1 ..there is a need to incorporate suitable provisions in the chapter on interpretation of DTAAs, to deal with treaty shopping, conduit companies and thin capitalization. These may be based on UN/OECD Model or other best global practices.' 112. In para 3.3.2 the working group recommended introduction of antiabuse provisions in the domestic law. 113. Finally, in para 3.3.3 it is stated 'the working group recommends that in future negotiations, provisions relating to anti-abuse/limitation of benefit may be incorporated in the DTAAs also.' 114. We are afraid that the weighty recommendations of the working group on non-resident taxation are again about what the law ought to be, and a point....
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.... the case of UCO Bank vs. CIT (1999) 154 CTR (SC) 88 . (1999) 237 ITR 889 (SC), their Lordships of Hon'ble Supreme Court had an occasion to survey the judicial precedents on the question of binding nature of the CBDT circulars. After elaborately dealing with Hon'ble Supreme Court's judgments in the cases of Navnit Lal C. Jhaveri vs. K.K. Sen, AAC (1965) 56 ITR 198 (SC) and K.P. Varghese vs. ITO & Anr. (1981) 24 CTR (SC) 358 . (1981) 131 ITR 597 (SC), their Lordships concluded that the CBDT circulars inter alia can tone down the rigour of the law and such benevolent circulars are binding on the field authorities. It cannot therefore be open to a Revenue authority to disregard the CBDT circular even if it deviates from the law-as long as it is beneficial to the assessee. Thus, where a DTAA provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the IT Act. Where there is no specific provision in the agreement, it is the basic law, i.e., the IT Act, that will govern the taxation of income. When no such limitations on benefits or anti-abuse provisions are set out in the tax treaty, it cannot be open to the Revenue authorit....
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....f things, as it exists in the Indian IT Act, 1961, the treaty override over domestic law is much wider in scope. We cannot interpret the treaty provisions in such a manner so as to curtail, dilute or otherwise tinker with this comprehensive treaty override over the domestic tax law. 29. It is also important to bear in mind that when there are no thin capitalization rules vis-a-vis domestic thin capitalization situations and in the light of the s. 90(2) as it exists at present any attempts to neutralize thin capitalization vis-a-vis PEs of Belgian enterprise will be clearly contrary to the scheme of non-discrimination envisaged by art. 24(5) which provides that, "enterprises of a Contracting State, the capital of which is wholly or partly-owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other, or more burdensome, than the taxation and connected requirement to which other similar enterprises of that first-mentioned State are or may be subjected in the same circumstances and under the same conditio....
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....m a taxdeductible expense of interest into an expense that is non-tax deductible. In view of these discussions, it is clear that the impugned disallowance is indeed contrary to the scheme of the law as it exists; the grievance of the taxpayer deserves to be upheld. We, therefore, direct the AO to delete the impugned disallowance." 23. As per above paras of this tribunal order, it comes out that even if Thin capitalization Principle is on Statute book of the other country, no disallowance can be made in India by applying this Principle. To this extent, we uphold the finding of CIT (A) by respectfully following this tribunal order. But the issue still remains because, the objections of AO/TPO are not merely on the basis of Thin capitalization Principle. Their basic objection is this that since the interest is paid on CCDs, this is not an interest on debt but on equity and hence, not allowable. On page 11 of his order for A. Y. 2009 - 10, the TPO has reproduced certain comments of RBI in 2007 Policy on convertible debentures in which it is stated that fully and mandatorily convertible debentures into equity within a specified time would be reckoned as equity under FDI policy.....
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....l Commercial Borrowings (ECB) and benchmarked the interest rate paid against LIBOR rate of 4.13% (being LIBOR + 350 basis points). (Refer page 25 to 29 of the TPO's order). 8.2 Aggrieved, the assessee filed objections before the DRP. The DRP rejected the assessee's objections and upheld the TPO's order (refer pages 3 and 4 of the DRP's directions). 8.3 Aggrieved, the assessee has raised this issue before the Tribunal. It is submitted that the TPO and DRP grossly erred in treating the CCDs as ECBs and benchmarking the interest rate against LIBOR rate. It was submitted that CCDs being a hybrid instrument, cannot be treated as an ECB/loan. Reliance in this regard is placed on the order of the Hyderabad Bench of the Tribunal in the case of ADAMA India (P.) Ltd. v. DCIT ([2017] 78 taxmann.com 75 (Hyderabad- Trib.). It is further submitted that the CCDs having been denominated in INR, the interest having been paid in INR, and the CCDs having been repaid in INR, the same cannot be benchmarked against LIBOR. In this context, the learned AR relied on the following case laws:- (i) CIT v. Cotton Naturals (I) (P.) Ltd. (2015) 65 taxmann.com 523 (Delhi). (ii)....
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....oration Limited and Sahara Housing Investment Corporation Limited & Ors. Vs. Securities and Exchange Board of India & Anr. in Civil Appeal No. 9813 of 2011 dt. 31-08-2012 (supra) while assigning the jurisdiction to SEBI as an 'equity instrument'. Further, the policy of Govt. of India and also RBI effective from 01- 04-2010 also indicate that issuance of CCD is part of FDI being quasi-equity in nature and considering the same as a loan would be completely against regulations laid by DIPB, RBI and FEMA. It is to be reiterated that issuance of CCDs was denominated in Indian Rupees and not foreign currency. Therefore, TPO has erred in considering LIBOR as benchmark rate which is in complete contradiction to the principles on the issue. The following judicial precedents supports that the rate interest has to be considered in the currency in which loan has originated: i. India Debt Management Pvt. Ltd., IT(TP)A No. 7518/Mum/2014; . CIT Vs. Cotton Naturals (I) Ltd., ITA No. 233/2014 (Del.HC); . M/s. Brahma Center Development Pvt. Ltd., Vs. ITO, ITA No. 373/Del/2016 (ITAT Del). By respectfully following the Co-ordinate Bench and Hon'ble High Court decisions, we agree with....
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....ncy and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were 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....
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....ng rate is correct. It is ordered accordingly. 8.6.4 Hence, ground 4 is allowed." 5.3 Further, in assessment year 2012-13 in IT(TP)A No.2209/Bang/2016 vide order dated 25.2.2022 the Tribunal has held as under: 14. "The next issue is the adjustment made by the TPO with regard to payment of interest on compulsory convertible debentures (CCDs) by re-characterizing the same to be External Commercial Borrowings (ECB). 15. The Ld.AR submitted that this issue is also covered in assessee's own case (supra) wherein the coordinate bench of this Tribunal has allowed the appeal in favour of the assessee. 16. The ld.DR supported the decision of the lower authorities. 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 define....
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....which is in complete contradiction to the principles on the issue. The following judicial precedents supports that the rate interest has to be considered in the currency in which loan has originated. i. India Debt Management Pvt. Ltd., IT(TP)A No. 7518/Mum12014; ii, CIT Vs. Cotton Naturals (I) Ltd., 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, o....
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.... party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were 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 ....
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.... 18. Grounds 16 to 21 in respect of Compulsory Convertible Debenture (CCD), reads as follow:- "16. The Hon'ble DRP / learned TPO has erred in rejecting the transfer pricing analysis undertaken by the Appellant in the transfer pricing documentation to determine the arm's length nature of the international transaction pertaining to payment of interest on CCD and thereby erred in making an addition ofRs.67,08,42,381/- to the total `of the Appellant. 17. The Hon'ble DRP has erred in upholding the contentions of the learned TPO of re-characterizing the CCD to External Commercial Borrowings ("ECB") by not appreciating 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-incelling 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 exc....
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....MA India (P.) Ltd. v. DCIT ([2017] 78 taxmann.com 7 (Hyderabad- Trib.). It is submitted that the CCDs having been denominated in INR the interest having been paid in INR, and the CCDs having been repaid in INR the same cannot be benchmarked against LlBOR. Reliance in this regard is placed on the following decisions: (i) CIT v. Cotton Naturals (I) (P.) Ltd. ([2015] 55 taxmann.com 523 (Delhi) (ii) Assessee's own case for the assessment year 2012-13 (Order date 25.02.2022 passed in IT(TP)A No.2209/ Bang /2016). Therefore, it is submitted that the transaction of payment of interest of CCDs ought to be treated as being at arm's length. 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 20122013 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 T....
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....indicate that issuance of CCD is part of FDI being quasi-equity in nature and considering the same as a loan would be completely, against regulations laid by DIPB, RBI and FEMA. It is to be reiterated that issuance of CCDs was denominated in Indian Rupees and not foreign currency. Therefore, TPO has erred in considering LIBOR as benchmark rate which is in complete contradiction to the principles on the issue. The following judicial precedents supports that the rate interest has to be considered in the currency in which loan has originated. i. India Debt Management Pvt. Ltd., IT(TP)A No. 7518/Mum12014; ii, CIT Vs. Cotton Naturals (I) Ltd., 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....
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....terest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were 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 autho....
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....m in this ground is allowed." In view of the above order of the Tribunal, in assessee's own case, the issue raised in grounds 16 to 21 with regard to payment of interest on CCDs is decided in favour of the assessee. It is ordered accordingly." 5.5 In view of the above order, taking a consistent view, we remit this issue to the file of AO/TPO in both the years for a decision as per law as discussed in earlier years as above and pass fresh order. This issue is partly allowed for statistical purposes in both the appeals. 6. Ground No.6 in assessment year 2014-15 and ground No.4 in assessment year 2015-16 are infructuous in view of our findings in the immediate earlier ground. Hence, these grounds are dismissed as infructuous. 7. Ground Nos.7(a) to (i) in AY 2014-15 and Ground No.5(a) to (g) are 2015-16 are common in nature. After hearing both the parties, we are of the opinion that this issue came for consideration before this Tribunal in assessee's own case in ITA No.2839/Bang/2017 dated 25.8.2022 for the assessment year 2013-14. The Tribunal vide order dated 25.8.2022 held as under:- 10. "We have heard rival submissions and perused the material on record. ....
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....irection of the ITAT, the assessee was asked to submit the details 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 lengt....
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....nd the Tribunal rulings have approved of aggregation of closely linked transactions by applying TNMM. f. Erred in determining the arm's length price of payment towards technical service fee to AE at INR 13,23,18,570/- at 1% of net sales on ad-hoc basis using CUP method despite not following the provisions prescribed in clause (a) of the sub-rule (1) of Rule 10B of the Rules for determining of ALP in relation to an international transaction under CUP. 9. Without prejudice, the learned AO/ learned TPO/ Hon'ble DRP failed to take cognizance of the fact that the payment towards technical service fee amounting to INR 26,59,60,326/-formed part of the 'capital work in progress' as on March 31, 2013 and was not claimed as a business expenditure during AY. 2014-15 and therefore the same cannot be added to the total income of the Appellant." 9.1 After hearing both the parties, we are of the opinion that this issue is squarely covered in assessee's own case in assessment year 2013-14 in ITA No.2839/2017 dated 25.8.2022, wherein held as under:- "17. We have heard rival submissions and perused the material on record. During the relevant financial ye....
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.... from the AEs are as under:- Process Design: - This comprises of:- * Support in selection of plant; * Process flow diagram; * Heat and mass balance; * Engineering design memorandum; * Utility consumption list; * Catalyst and chemical specification; * 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 ....
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....s, the AE granted a non exclusive license (a) to use technical information to make, use, offer to sell, sell and import licensed products, (b) under the patent rights to conduct licensed processes within the field of Industrial gas business, (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 th....
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....hnical service is not a declaration of royalty payment. Accordingly, these grounds of the assessee's appeal in AY 2014-15 are allowed. 10. Next ground for our consideration in assessment year 2014-15 in ground No.10 is with regard to foreign exchange loss on Kelvin Loan amounting to Rs.17,15,12,176/-, which is reproduced as under:- AY 2014-15: 10. Disallowance of foreign exchange loss amounting to INR 17,15,12,176 under section 37 of the Act 10.1. The learned AO/ Hon'ble DRP erred in disallowing the foreign exchange loss amounting to INR 17,15,12,176 under section 37 of the Act as not being revenue in nature. 10.2. The learned AO/ Hon'ble DRP erred in not appreciating the fact that the Kelvin loan has been utilized for general corporate purposes which is revenue in nature. 10.3. The learned AO/ Hon'ble DRP erred in concluding that the short term borrowings which, are repaid by Kelvin loan are not utilized for working capital. 10.4. The learned, AO/ Hon'ble DRP failed to appreciate the fact that the foreign exchange gain on the same loan have been offered to tax in earlier year. 10.5. The Hon'ble D....
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....ld that 9. We have given careful consideration to the rival submissions. We find that the foreign exchange loss claimed by the assessee was on account of reinstatement of the liability of the assessee as on the last date of the previous year. It is no doubt true that there has been no actual payment and at the time of ultimate settlement, there may not be a loss also. Nevertheless, AS - 11 of ICAI requires such liability also to be reflected in the financial statements. The Hon'ble Supreme Court considered all these aspects in 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....
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....decided in favour of the assessee. It is ordered accordingly." 10.2 In view of the above order of the Tribunal, taking a consistent view, we allow the ground of the assessee in assessment year 2014- 15. 11. Next ground in ground No.11 in assessment year 2014-15 and ground No.8 in AY 2015-16 are with regard to disallowance u/s 14A of the Act, which are reproduced as under: AY 2014-15: 11. Disallowance of expenditure under section 14A of the Act* by applying the provisions of Rule 8D of the Income-tax Rules, 1962 ("the Rules") 11.1. The learned AO erred in disallowing expenditure amounting to INR 98,98,250 under section 14A of the Act read with Rule 8D of the 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. 11.2. The learned AO erred in not appreciating that the investments made in Praxair Carbon Dioxide Private Limited (`PCPU) (currently merged with the Appellant) and Jindal Praxair Oxygen Company Limited ("JPOCP....
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.... computing average value of investments which yielded exempt income during the year. AY 2015-16: 8. Disallowance of expenditure under section 14A of the Act by applying the provisions of Rule 8D of the Income-tax Rules, 1962 ("the Rules") 8.1. The learned AO/ Honourable DRP erred in disallowing expenditure amounting to INR 89,27 *0 under section 14A of the Act read with Rule 8D of the 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. 8.2. The learned AO/ Honourable DRP erred in not appreciating that the investments made in JSW Steel Limited of an amount of INR 100,000 and in Jindal Praxair Oxygen Company Private Limited ("JPOCPL") (now known as JSW Industrial Gases Private Limited) of an amount of1NR 1,78,31,00,000 are historical in nature and as such no expenditure has been incurred towards the same. 8.3. The learned AO/ Honourable DRP erred in not appreciating the fact that investment in JPOCPL was acquired ....
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....cer is mandatorily required to record his dissatisfaction as to the claim of the assessee, having regard to the accounts of the assessee, not only where some disallowance is made by the assessee but also where it is the assessee claims that no expenditure is incurred. Rule 8D reads as under: "(1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2)." 11.4 The Ld. A.R. submitted that in the present case, no such satisfaction is recorded, and the Officer merely proceeded on the basis of conjectures and surmises. Therefore, in the absence of compliance with mandatory precondition, the disallowance made is liable to be set aside. Reliance in this regard is placed by him on the following decisions: * Decision of this ....
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....orded by the AO. 13. We have heard the rival submissions and perused the materials available on record. In our opinion, the issue is squarely covered by the earlier decision of the Tribunal in assessee's own case in ITA No.2839/Bang/2017 dated 25.8.2022 for the AY 2013-14 wherein held as under: "28. We have heard rival submissions and perused 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 su....
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...., in the absence of any flew fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (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....
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....with Rule 8D cannot be applied to the book profit computation and only the amount of actual expenditure incurred (being an amount debited to the profit and loss account) which is relatable to the exempt income should be added to the book profits. ii. Section 115JB is a complete code by itself and no adjustments other than those which are prescribed in section 115JB of the Act itself can be made to the book profits. 12.2. The learned AO/ Hon'ble DRP erred in not placing reliance on the decision of Special Bench of the Delhi Tribunal in the case of ACIT Vs. Vireet Investment Pvt. Ltd. [2017] 82 taxmariil.com 415. 12.3. The learned AO erred in applying the provisions of section 14A to Chapter XII-B of the. Act without having regard to the restriction that the provisions of section 14A of the Act is restricted to computing the total income under Chapter IV of the Act. 12.4. The learned AO erred in not giving reasons as to why the disallowance as mentioned above has been added back in computing book profits under section 115JB of the Act. 12.5. The learned AO erred in disallowing the amount of INR 56,98,912 without issuing any show cause ....
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....isallowances into the scope of adjustment of book profit is not permissible. 14.1 After hearing both the parties, we are of the opinion that these grounds in AYs 2014-15 & 2015-16 are infructuous in view of our findings with regard to disallowance of expenditure u/s 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 i.e. ground No.11 in AY 2014-15 & ground No.8 in AY 2015-16. Accordingly, these grounds are dismissed as infructuous. 15. Next ground is with regard to disallowance of other expenses in assessment year 2014-15 in ground No.13, which reads as follows: AY 2014-15: "13. Disallowance of other expenses 13.1. The learned AO erred in disallowing 25% of the expenses under the subhead miscellaneous expenses which is under the broad head miscellaneous expense in the statement of profit and loss amounting to INR 10,02,063 (being 25% of INR 40,08,250) on the basis that Appellant has not provided any ledger extract or proper evidences in this regard. The learned AO erred in not appreciating the fact that the Appellant had provided ledger extract of miscellaneous expenses vide e-mail dated 27 December 2017. 13.2. The learned AO er....