AI Drafter 
TaxTMI 
TaxTMI 
2023 (3) TMI 1298
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (ii) making transfer pricing adjustments totally amounting to Rs. 5,57,22,444; (iii) passing the orders without demonstrating that the appellant had motive of tax evasion; (iv) not appreciating that no addition can be made under Chapter X as Transfer pricing adjustment under Chapter X is not included in the definition of 'income' u/s 2(24) or under Chapter IV of the IT Act, 1961; Grounds on Transfer Pricing adjustment in respect of Interest received from Sasken, Inc, USA 3.1 The learned TPO, AO and DRP erred in (i) determining and making adjustment under section 92CA amounting to Rs. 1,96,54,734 in respect of interest earned on loan given to Sasken Inc; (ii) obtaining information from M/s CRISIL Ltd under section 133(6) and using the same against the assessee in making the TP adjustment in the order passed under section 92CA without allowing the Assessee to cross examine the entity / authorized signatory providing the said information; (iii) adopting flawed methodology in the process of computing arm's length price of interest received, determining ALP without considering any comparables; (iv) determini....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the service industry depends of the competency and not on brand alone. 5.6 Inappropriately concluding that the AE's have no identity or competitive value without the support of brand 'SASKEN'. 5.7 Not quantifying the financial benefit, if any, derived by the AE's by use of trademark 'SASKEN'; 5.8 Determining, without basis, ALP of royalty 2% of the external turnover of the AEs without appreciating the facts and circumstances of the case; and 5.9 computing the ALP without adopting any method or uncontrolled comparable data. 5.10 Making the rate of adjustment which is arbitrary, without any basis and computing the royalty rate excessively. 5.2 On facts and circumstances of the case and law applicable, the impugned TP adjustment of Rs. 1,90,75,332 should be deleted fully. Grounds on Transfer Pricing adjustment in respect of Software Development Services 6.1 The lower income tax authorities have erred in: a. Rejecting Comparable Uncontrolled Price Method adopted by the Appellant as the most appropriate method; b. Rejecting the transfer pricing analysis undertaken by the Appellant under the CUP....
X X X X Extracts X X X X
X X X X Extracts X X X X
....king capital adjustment while computing the ALP. 6.4 On facts and circumstances of the case and law applicable, the impugned TP adjustment should be deleted fully. Grounds on reduction of communication expenses, travelling, conveyance and insurance expenses from export turnover while calculating deduction under section 10AA 7.1 The learned AO has erred in: i. Calculating deduction section 10AA on combined basis for all the eligible units rather than each undertaking wise. ii. Excluding Rs. 13,08,04,000 being communication expenses, travelling & conveyance and insurance from export turnover of the eligible units without appreciating that the Assessee had already reduced the communication expense related to the eligible unit attributable to delivery of software outside India and expenses incurred in foreign currency from export turnover. iii. Not appreciating that his action of reducing the above has resulted double reduction. iv. Excluding insurance charges of Rs. 1,23,10,000/- and communication charges of Rs. 2,72,97,000/- from export turnover of SEZ units without appreciating the fact that the aforesaid expenditure wer....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the aforesaid grounds including relief as prayed for in these grounds be allowed. The Appellant prays accordingly." 2. Brief facts of the case are as under: 2.1 The assessee is engaged in the business of providing software development services and network engineering services. For the AY 2012-13, original return of income was filed by the assessee on 28.11.2012 declaring a total income of Rs. 47,99,96,320/- and long term capital loss of Rs. 87,49,969/-. Notice u/s 143(2) dated 08.08.2013 was issued. A revised return of income was filed on 26.3.2014 declaring total income of Rs. 43,57,97,090/- and long term capital loss of Rs. 87,49,969/-. Various details called for during the assessment were filed by the assessee from time to time. 2.2 A reference under section 92CA of the Act was made to the TPO after getting the approval of the Commissioner of Incometax, Bangalore - III. This was made for examining the reported Arm's Length Price (ALP) in respect of the international transactions entered into by the assessee. The Ld.TPO called for various details and the same were filed from time to time. The TPO passed the order under section 92CA(3) on 24.1.2016. Since there ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nterest was charged at LIBOR plus 300 points. It is submitted that the assessee adopted the CUP Method to justify the interest charged. 4.1 It is submitted that in the TP report, the assessee adopted the Emerging Market v3.1 RiskCalc model for analyzing the credit quality of the assessee and the AE. The Ld.AO noted that, a comparable loan search was done by the assessee using comparables within the same geography of the borrower, i.e., USA, and adjustments in relation to the tenure of the loan were done. The spread obtained from the set of comparable loans was within the interquartile range of 3.02% to 3.80% with a median for 3.16% for the facility arrangement. The assessee thus concluded that the interest rate of 3.24% charged by the assessee was at arm's length. 4.2 The Ld.TPO rejected the analysis carried by assessee. In the TPO order, the annual average yield for BB rated bond for 5 year or more terms was taken at 14.47% by increasing the rate of BBB rated bond at 12.06% by 20% (120% of 12.06% = 14.47%). The above rates were taken from CRISIL rating for the FY 2011-12. The rate of 14.47% was applied by the Ld.TPO on the loan receivable amounting to Rs. 16,92,15,000/- and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... transaction. The Hon'ble Delhi High Court, in the case of Cotton Naturals (I) (P.) Ltd. (supra) has held in para.14 that in order to ascertain ALP in respect of international transactions of advancing money to its foreign subsidiary. The Hon'ble Delhi High Court, in the case of Cotton Naturals (I) (P.) Ltd. (supra) held that in order to ascertain ALP return of income international transaction of advancing loan to its subsidiary, interest rate what would have been earned by the assessee by advancing loan to unrelated party in India with a similar financial health as tested party subsidiary cannot be applied. The Hon'ble High Court further held that financial position and credit rating of subsidiary will be broadly same as that of holding company. It further ruled that domestic prime rate lending or yield rate on corporate bonds in India have no applicability and LABOR rate should be taken as bench mark for international transactions. The Hon'ble Bombay High Court in the case of CIT vs. Tata Auto Comp. System Ltd. (374 ITR 316) rules that ALP in case of loans advanced to AE would be determined on the basis of rate of interest being charged in the country where loan i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....proviso to section 92C(2). Hence, the interest received from loan given to Sasken Inc, USA amounting to Rs. 48,30,677 should be considered at arm's length price. The TP addition of Rs. 1,96,54,734 should therefore be deleted. We direct the Ld.AO/TPO to consider the claim of the assessee based on the observation hereinabove. Accordingly this ground raised by the assessee stands allowed. 6. Ground Nos. 4.1 and 4.2 6.1 The assessee in its notes to Form No 3CEB stated that corporate guarantee given by it in respect of loan from banks availed by Sasken OY came to an end in September 2011. The learned TPO issued letter dated 5.11.2015 asking the assessee to submit its analysis of arms length margin of corporate guarantee given on behalf of its AE - Sasken OY. The assessee filed the written submissions on 23.12.2015 and submitted that it had given a Corporate Guarantee (CG) to Nordea Bank on behalf of Sasken Communication Technologies Oy ("Sasken Finland" or 'AE'), its wholly owned subsidiary in Finland amounting to Euro 17 Million, equivalent to INR 98.43Cr during the financial year (FY) 2006-07 as a part of the shareholder activity. During the FY 2011-12, Sasken Finland r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....light of records placed before us. 6.5 We refer to the observations of this Tribunal vide order dated 11/11/2022 for A.Y. 2011-12 in IT(TP)A No. 788/Bang/2022 which is reproduced as under: "16. We heard the rival submissions and perused the material on record. We notice that this issue is covered by the orders of the Tribunal in Medrich Ltd. v. Asstt. CIT [ITA No. 1574 (Bang.) of 2019, dated 12-4-2021], in the case of Manipal Global Education Services (P.) Ltd. v. Dy. CIT [2018] 95 taxmann.com 94 (Bang - Trib.), in the case of Xchanging Solutions Ltd. v. Dy. CIT [2017] 78 taxmann.com 54 (Bang - Trib.) and in the case of ACIT v Tejas Networks Ltd. [2022] 139 Taxmann.com 430 (Bangalore Trib.), wherein it was directed to AO/TPO to make TP adjustments in respect of corporate guarantee at 0.50% for the assessment years under consideration. With respect to the balance on which the TP adjustment needs to be made, we see merit in the contention of the ld AR that the TPO himself has applied the rate on the closing balance of the outstanding guarantee in Appellant's own case for AY 2012-13 and we therefore direct the AO to apply the rate @ 0.50% on the closing balance the of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fly stated the assessee provides software development and information technology enabled services (ITES) to its AEs. During the FY 2005-06 the assessee provided a corporate guarantee to a third party bank on behalf of an AE but failed to charge a fee for the guarantee. The assessee conducted a TP study and concluded that this transaction was at arm's length however during audit proceedings the TPO rejected the analysis of the assessee and made adjustments to this transaction. The taxpayer cites the order of Four soft Ltd wherein the Hon'ble ITAT Hyderabad observed as under: "We find that the TP legislation provides for computation of income from international transaction as per section 92B of the Act. The corporate guarantee provided by the assessee company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. In our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same can....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der passed for A.Y. 2006-07 treated the commission changed by ICICI Bank at 3.75% arms length price for the corporate guarantee provided by the assessee to its AE worked out the TP adjustment of Rs.2,61,79,350/-. The DRP also rejected assessee's objection on the issue. 25. We have heard the parties and perused the material on record. The sum and substance of the submissions made by the learned AR is, the corporate guarantee provided by the assessee cannot be equated to bank guarantee and resultantly the commission rate for bank guarantee cannot be applied to the corporate guarantee. It was submitted that the corporate guarantee is nothing but an additional guarantee provided by the parent company and it does not involve any cost or risk to the shareholders. It was submitted that since the corporate guarantee was given keeping in view paramount business interest of the parent company it has to be allowed as business expenditure. It is the further submissions of the learned AR that the retrospective amendment effected to section 92B of the Act, by Finance Act, 2 012 by insertion of Explanation (i)(c) to section 92B also has not enlarged the scope of the 'international trans ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....feel that Assessing Officer will have to follow the decision of the ITAT Hyderabad or the amended provision of the Act in this regard. If the Finance Bill of 2012 is passed by the Parliament amending the provisions of section 92B, with effect from 1st April , 2002, he will have to ignore the decision of the ITAT Hyderabad. In case section 92B is not amended with retrospective effect, he should grant relief to the appellant. " 25.4 In the aforesaid view of the matter, we agree with the TPO that ALP of the corporate guarantee has to be determined as it falls within the scope and ambit of an international transaction after the retrospective amendment to section 92B. However, it appears that the TPO has applied the rate of 3.75 %, which is applicable to bank guarantee issued by the bank. As the corporate guarantee is not in the nature of bank guarantee, the rate applicable to bank guarantee provided by the bank cannot be applied to corporate guarantee which is provided by a group company. In case of Glenmark Pharmaceuticals V s. ACIT in ITA No. 5031/Mum / 2012, dated 13/11/2013, the Mumbai Bench of the Tribunal after analysing the facts in that case had held that 0.53 % corpor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....etrospectively. Even otherwise the earlier decisions of the Tribunal on this issue were not considered by the Delhi Bench of the Tribunal. In the case of M/s. Nimbus Communication Ltd. Vs. ACIT in ITA Nos.6816/Mum/2010 and 7105/Mum/2011, the Tribunal vide order dt.7.8.2013 has considered an identical issue in paras 4 & 5 as under : " 4. As regards the issue raised in ground No. 2 relating to TP adjustment made on account of guarantee commission in respect of corporate guarantee given by the assessee to its Associated Enterprises (AEs) for obtaining bank loans, the ld. representatives of both the sides have agreed that a similar issue was involved in assessee's own case for the immediately preceding year i.e. A.Y. 2005-06 and the Tribunal vide its order dated 12-06-2013 passed in ITA No. 3664 & 2359/Mum/2010 has already decided the same vide para No. 9 & 10 which read as under:- "9. We have considered the rival submissions and also perused the relevant material available on record. For the guarantee given to the bank against the financial assistance given to its AEs, no commission was charged by the assessee company on the ground that the said AEs were not bene....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing Guidelines 2010 supports this view in para 7.13 where it is explained that where higher credit rating of Associated Enterprise is due to a guarantee by another group member, such association positively enhances the profit making potential of that Associated Enterprise. We, therefore, find ourselves in agreement with the contention of the ld. D.R. that there was a clear benefit accrued to the Associated Enterprises by the guarantee provided by the assessee and when such benefit was passed on by the assessee to the said Associated Enterprises, guarantee commission should have been charged at arm's length price. The commercial relationship between the assessee and its Associated Enterprises is distinct and separate from the transactions of giving guarantee and such transactions have to be considered and examined independently in order to determine the arm's length price. 10. As regards the rate of guarantee commission, it is noted that the arm's length price of guarantee commission was determined by the TPO by applying CUP method and the arithmetic mean of 1.5% of the guarantee commission charged by the HSBC Bank in the range of 0.15 to 3% was taken as arm'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed the rate of commission attributable to the corporate guarantee in the present facts, in the light of the above. 6.11 There is a consistent approach taken by this Tribunal in adopting the rate of corporate guarantee at 0.5% in assessee's own case. We direct the Ld.AO/TPO to restrict the corporate guarantee adjustment at 0.5% based on the outstanding payables from Nordea Bank during F.Y. 2011-12. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 7. Ground no. 5 is in respect of the adjustment made on use of trademark "sasken" as royalty. 7.1 During the proceedings under section 92CA, the learned TPO enquired as to why no Royalty was charged by the assessee for the use of trademark "SASKEN" by the assessee's subsidiaries outside India. In response, the assessee made submissions on 23.12.2015, in which the Assessee explained that the AEs (subsidiaries) which are a part of Sasken group, though using the name 'SASKEN', were not financially benefitted from such use. Therefore, the Assessee contended that question of AE's paying royalty does not arise. 7.2 It is submitted by the Ld.AR that the Ld.TPO opined the computation of royalty for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essee in India as well as Russia, USA and a host of other countries. The Ld. TPO observed that assessee owns 25 websites with the names " Sasken" as the domain name. 4.17 We note that, the Ld.TPO attributed royalty towards the use of brand name, "Sasken", by the subsidiaries in the respective countries based on a decision by Hon'ble Delhi High Court in case of Sasken Communications Technologies Ltd. vs Anupam Agarwal &Ors. Hon'ble High Court therein found that Sasken brand is proprietorily owned by assessee before us, and that the respondent before Hon'ble Delhi High Court had to pay damages for using the name Sasken, in a company opened by him. 4.18 The entire attribution of royalty is based on the observations of Hon'ble Delhi High Court wherein damages for loss of reputation and goodwill on account of infringement of the assessee's rights was directed to be payable by one Mr. Anupama Agarwal. We note that the respondent before Hon'ble Delhi High Court was owning a company independently without having any connection with that of assessee based on which, Hon'ble Delhi High Court held that "Sasken" is an inalienable brand of assessee and cannot be used by Anupam A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the authorities below to establish that, use of the name 'SASKEN' provided financial benefit to the members of the group other than the member legally owning such intangible as required under BEPS action plan 8-10. 4.22 Brand licensing is when a brand owner licenses the right to their brand assets to a licensee, letting the licensee use their brand for a set period of time, in a set way, within an agreed market. The brand owner and licensee must agree on the terms and scope of the licensing agreement, which is a legal written contract between the two parties. This will outline exactly what brand assets are being licensed, how they can be used, for how long they can be used, in what market they can be used, and what remuneration is required in return. We not that there is nothing brought on record by the revenue to establish that there is transfer of asset or technology by assessee. Provisions of Section 9 reads as under: ........... 4.23 Explanation 4 and 5 inserted by the Finance Act, 2012 w.e.f. 1.6.1976 were introduced to the definition of royalty u/s.9(1)(vi) of the Act. ........... 4.24 Therefore, as per the aforesaid provisions, co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n associated enterprise should not be considered to receive an intra group service when it obtains incidental benefits attributable solely to its being part of a larger concern, and not to any specific activity being performed. For example, no service would be received where an associated enterprise by reason of its affiliation alone has a credit-rating higher than it would if it were unaffiliated, but an intra-group service would usually exist where the higher credit rating were due to a guarantee by another group member, or where the enterprise benefitted from deliberate concerted action involving global marketing and public relations campaigns. In this respect, passive association should be distinguished from active promotion of the MNE group's attributes that positively enhances the profit-making potential of particular members of the group. Each case must be determined according to its own facts and circumstances." 4.29 The Ld.TPO shall carry out necessary verification based on the which it must first be determined whether there is any Royalty that could be attributed. In the event Royalty is to be attributed, proper benchmarking needs to carried out the accordanc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bove international transactions to be at arms length. Associated Enterprise International transactions Method used/Basis of justification Sasken China Receipt of Software Development Services Cost Plus Method ("CPM") Sasken Inc Rendering of Sales and Marketing Services CPM Sasken Japan Receipt of Software Development Services and Receipt of Sales and Marketing services CPM Sasken Network Solutions Inc Rendering of Sales and Marketing Services CPM Sasken Finland Receipt of Sales and Marketing services CPM1 Sasken Finland Rendering and Receipt of Software Development Services and Receipt of Hardware Support services Comparable Uncontrolled Price Method ("CUP Method") Sasken Inc Rendering of Software Development Services Interest received on Loan CUP Sasken Japan Purchase of fixed assets Purchase price of Assessee is same as purchase price of AE, hence considered as at arm's length Sasken Mexico Purchase of fixed assets The purchase price is based on written down value of laptops and hence considered as at arm's length Sasken Finland & Sasken Inc Cross Charge of SAP License Cost Cost....
X X X X Extracts X X X X
X X X X Extracts X X X X
....84/- (i.e. 112.23% of Rs.7,43,63,079/-). Operating margin on Operating revenue is considered as PLI. Average margin of 9 comparables has been computed at 19.22%. However no working capital adjustment was given. The arm's length cost has been arrived at Rs. 6,74,17,117/-. The operating cost has been computed at 80.78% (100-19.22%) of operating revenue as determined by the TPO. The payment to AE for the services received has been considered at Rs. 7,43,63,079/-. Thereafter, the transfer pricing adjustment for services received was determined at Rs. 69,45,962/- being the difference between arm's length cost and price paid to AE for receipt of services. 8.7 On an objection raised before the DRP, the DRP directed the Ld.TPO to treat foreign exchange gain / loss as operating in nature in case of assessee as well as the comparables for computing the operating margin. The DRP also directed the exclusion of 1) Datamatics Global Services Ltd. and 2) ICRA Techno Analytics 8.8 All other objections raised by assessee were rejected. Before this Tribunal, the Ld.AR submitted that on giving effect to the directions of the DRP, the margin of assessee would be +5% range of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion 10AA as per the draft assessment order. The addition proposed on this ground amounted to Rs. 2,78,48,633. The DRP at para 10.1, page 16 of its directions directed the AO to reduce the above expenditure from both export turnover and total turnover. In the final assessment order, at page 7, para 4.9, the learned AO has reduced the above expenditure from both export turnover and total turnover and also dropped the proposed addition of Rs.2,78,48,633. Hence, the above ground has become infructuous. This ground has become infructuous as the Ld.AO has reduced the expenditure from both the export turnover and total turnover. Accordingly, this ground is dismissed as infructuous. 10. Ground nos. 8.1 to 8.4 are in respect of the disallowance computed u/s. 14A of the Act. 10.1 During the year under consideration, assessee earned dividend of Rs. 359.27 lakhs which was treated as exempt. The assessee had computed the suomoto disallowance of Rs.8,60,643/- in respect of the same u/s. 14A. The Ld.AO while passing the draft assessment order, disallowed a sum of Rs.69,64,735/- by computing 0.5% of average value of investment u/s. 14A r.w.Rule 8D(2)(iii). The Ld.AR submitted that the....