AI Drafter 
TaxTMI 
TaxTMI 
2023 (5) TMI 350
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....r Pricing Officer (TPO) to determine the Arm's Length Price of the international transaction undertaken by the assessee. The TPO passed order dated 26.10.2017 u/s 92CA of the I.T.Act, determining the TP adjustment at Rs.1004,25,07,785. The Assessing Officer passed the draft assessment order on 26.12.2017 u/s 143(3) r.w.s. 144C(1) of the I.T.Act, wherein he incorporated the TP adjustment suggested by the TPO. Further, the A.O. also proposed certain additions / disallowances on the corporate tax front. 3. Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 29.09.2018, disposed off the objections of the assessee. The DRP upheld the TP adjustment proposed by the TPO. As regards the corporate tax additions / disallowances proposed in the draft assessment order, partial relief was granted by the DRP. 4. Pursuant to the DRP's directions, the impugned final assessment order was passed on 10.10.2018. In the final assessment order, the total income assessed was Rs.1609,01,40,058 (business income as per the revised computation of the assessee at Rs.407,11,79,829 disclosed during the course of....
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....firmed by the DRP. 6.1 Aggrieved, the assessee has raised this issue before the Tribunal. We find an identical issue was considered by the Tribunal in assessee's own case for assessment year 2013- 2014 in IT(TP)A No.2701/Bang/2017 (order dated 05.04.2022). The above order of the Tribunal for assessment year 2013-2014 had followed the earlier order of the Tribunal in assessee's own case for assessment year 2012-2013 in IT(TP)A No.489/Bang/2017 (order dated 29.05.2020). The Tribunal had upheld the action of the TPO by imputing notional interest on interest free advances extended by the assessee to its AE. However, as regards the computation of ALP, direction was made by the Tribunal for applying LIBOR rate and the matter was restored to the files of the A.O. The relevant finding of the Tribunal for assessment year 2013- 2014 (supra) reads as follows:- "7.7 We have heard rival submissions and perused the material on record. In the instant case the admitted facts are that the assessee provided interest free loans to AEs. These loans were given for the purposes of acquisition of business of various global suppliers of liquor. The TPO made an adjustment of Rs. 548,04,95,014 c....
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....f the expression "International Transaction", it shall include capital financing, including any type of long-term or short-term borrowing, lending or guarantee etc. Hence, TPO has examined the interest free loan given by the assessee to its AE, as the same falls under the definition of "International Transaction" and made Transfer Pricing adjustment in this year. 27. We shall now deal with various arguments advanced by the assessee. The Ld A.R submitted that Chapter X dealing with determination of Arms Length price of international transactions is a machinery provision and the same cannot acquire primacy over the charging provisions like sec.4,5, 15 etc. Accordingly, he submitted that the "income" should have accrued to the assessee and then only the provisions of Chapter X can be applied to international transactions, i.e., it was submitted that the provisions of sec.92(1) could be invoked only when there arises any "income" from the international transaction, since the provisions of sec.92(1) uses the expression "Any income arising from an international transactions shall be computed having regard to the arms length price". Accordingly, it was contended that existence of....
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.... 29. The Chapter X is titled as "Special Provisions relating to Avoidance of Tax" and same includes sec. 92 to 94A. We have earlier noticed that the expression "international transactions" has been defined to include capital financing, loan transactions etc. Hence there should not be any dispute that the impugned interest free loan given by the assessee to its AE shall fall under the definition of "International transaction". However, it is the case of the assessee that there is no requirement of determining ALP of transactions, when there is no "income" at all from the international transactions. This argument was rejected by the Ld DRP by following the decision rendered by the Special bench of ITAT in the case of Instrumentarium Corporation Ltd (supra) and the Ld DRP has extracted following observations made by the Special bench dealing with the above said contentions of the assessee:- "37. In our considered view, the commercial expediency of a loan to subsidiary is wholly irrelevant in ascertaining arm's length interest on such a loan. There is indeed no bar on anyone advancing an interest free loans to anyone but when such transactions are covered by the internat....
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....d; there has to be some material on record to demonstrate, or even indicate, the existence of these facts. The references to OECD report and BEPS report is in the context of benefit test, but then the benefit test is not really relevant in the context of Indian transfer pricing legislation. Learned counsel has not explained as to how these inputs are relevant in interpreting the scope of the statutory provision before us, nor do we see any relevance of this material in the present context and given the fact situation above. It is also important to bear in mind the uncontroverted findings of the Assessing Officer that the interest was all along charged by the assessee on its loans to Datex but, for some unexplained reasons, the assessee has stopped charging interest in the assessment year 2003-04. The commercial bonafides of the present transactions are not established. As regards the assessee's claim that the revenue authorities have re- characterized the transaction, and that they do not have the powers to do so, we find that the claim of the assessee is ill conceived inasmuch as there is no re-characterization of the transaction, inasmuch as it continues to be a loan transact....
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.... tax". Undoubtedly, learned counsel is right in interpreting this decision to the extent that what is not in the nature of income cannot be turned into income so as to make ALP adjustment therein, and then bring the ALP adjustment to tax, since the computation is of income and it is only the price at which transaction is entered into that is to be taken as an arm's length price in computation of that income. The ALP adjustments cannot be treated as income per se. However, the assessee does not derive any support from this decision since consideration for a loan, i.e interest, is inherently in the nature of income. There is no, and there cannot be any, dispute or controversy about this character of income. The point of dispute is whether zero interest, or no interest, is good enough for computing the income or whether an arm's length interest must substitute this zero interest. The answer is obvious. As long as the transaction is an international transaction between the AEs, the computation of income has to be on the basis of arm's length interest. Therefore, in our considered view, even when no income is reported in respect of an item in the nature of income, such as in....
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....ternational transaction, has not produced any income. At this stage, it is relevant to refer to the Explanation below sec.92(1), which reads as under:- "Explanation:- For the removal of doubts, it is hereby clarified that the allowance for any expenses or interest arising from an international transaction shall also be determined having regard to the arms' length price." The argument of the assessee that income should arise out of the international transaction contradicts the above said Explanation, because "allowance for any expenses" per se cannot produce any income. However, if the said claim for any expense falling under international transaction is not at arms' length, then the same shall produce "income" to the extent of payment made in excess of arms' length price. As observed by the Special bench, if the transaction falls under the definition of "international transaction, then the same is required to be tested under arms length principle even if it did not produce any real income to the assessee. Suppose the income that arose to the assessee from an international transaction is Rs.100/- and the arms length price is Rs.125/- For computing total income, the AO shall....
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....re Ltd (supra). It is a fact that the TPO/DRP did not deal with the contentions of the assessee regarding quasi-equity. However, it is stated that the assessee has intended to convert the loan into equity. When the loan transactions remained as loan transactions in the books, in our view, the contention of any such intention cannot be recognized. Under these set of facts, we are unable to appreciate this alternative contention of the assessee. 34. The Ld A.R submitted that the AO/TPO was not right in adopting yield rate applicable to bonds rated by CRISIL agency. He submitted that the impugned loan has been given to a foreign AE and hence the LIBOR rate should have been applied by the TPO. He also placed his reliance on the decision rendered by Hon'ble Rajasthan High Court in the case of Vaibhav Gems Ltd (supra). He also submitted that the LIBOR has been accepted by the co-ordinate bench of Bangalore ITAT in the case of M/s Sasken Technologies Ltd vs. DCIT (IT(TP)A 550/Bang./2016). In view of these judicial rulings, we restore this issue to the file of AO/TPO with the direction to examine this claim of the assessee by duly considering the decisions referred above and a....
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....Vaibhav Gems Ltd [2017] 88 taxmann.com 12. The SLP was dismissed by the Supreme Court. The applicability of LIBOR has also been restored by the Tribunal to the file of the AO for the AY 2012-13. Following the ITAT's order in assessee's own case for assessment year 2012-2013, we restore this issue to the file of AO/TPO. The TPO is directed to follow the direction given at para 34 of decision in assessee's own case in IT(TP)A No 489/Bang/2017 for the AY 2012-2013. The TPO shall ascertain the applicable LIBOR during the year under consideration and make the adjustment. 7.8. In the result, ground 1.1 to 1.13 are partly allowed for statistical purposes." 6.2 In view of the above order of the Tribunal, we uphold the TPO's action, which was affirmed by the DRP in imputing notional interest on interest free advances made by the assessee to its AE. However, the TPO is directed to ascertain and apply the LIBOR rate during the year under consideration and make the TP adjustment accordingly. 6.3 The learned AR, however, for the year under consideration, has advanced additional arguments as to why TP adjustment should not be made on interest free advances to its AEs. It was argue....
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....n relation to the defined pension scheme deficit, net of pensions contributions for the period commencing 1 April 2014 ("Completion Accounts")' Further, the seller has given warranties and indemnities which are customary for a transaction of this nature and these are not currently expected to have any financial implication and will be reassessed at each reporting date. (iii) The financial closu.re of the proposed transaction as contemplated by the terms of the SPA (as may be amended and modified from time to time). is subject to satisfaction of certain condition precedent. (iv) The equity shareholders of the Company have approved the proposed sale of WMG by USGBL.The Company has filed an application with Reserve Bank of India (through authorized dealer of the Company) for approval. Further to the signing of the SPA. The following provisions has been recorded as an exceptional item. (v) the net proceeds of sale will be insufficient to fully repay the intra-USL Group Loan, the balance of which stands at Rs.47,928.849 Million as of 31 March 2014. The Company, required, pursuant to mandatory applicable accounting standards, to impair its nvestment in USL ....
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....ng or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises. As per Explanation to section 92B, 'International transaction' shall include, inter alia, (c) capital financing, including any type of long term or short term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (e) a transaction of business restructuring or reorganization, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date. The term 'transaction' as per section 92F(v) includes an arrangement, understanding or action in concert (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding. 6.4.1 In the present case, there is no dispute to the fact that the loans and advances given to AEs are an ....
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....r pricing regime. Similarly, the other decisions relied on by the learned AR are not applicable to the facts of the present case as the genuineness of the loans given and the subsequent provision made for the same is under question by the `Project Spirit report'. In view of the above, we confirm the findings of the TPO in making the TP adjustment on interest free loans given to AEs. As mentioned earlier, the applicability of LIBOR, the TPO is directed to follow the direction given at para 34 of the order of the ITAT in assessee's own case in IT(TP)A No.489/Bang/2017 for the A.Y. 2012-2013. It is ordered accordingly. Fee Imputed on corporate guarantee extended to subsidiaries (Ground 2) (TP Adjustment) 7. The learned AR submitted that the above issue has been considered by the Tribunal in assessee's own case for assessment year 2013-2014 (supra) and the findings of the Tribunal by restricting the TP adjustment on corporate guarantee at 0.5% may be adopted in the relevant assessment year also. 7.1 The learned DR was duly heard. 7.2 We have heard rival submissions and perused the material on record. The Tribunal in assessee's own case for assessment year 2013-2014 (supra),....
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.... 7.3 In view of the above order of the Tribunal in assessee's own case, which is identical to the facts of the instant case, we direct the TP addition to be restricted at 0.5% of the corporate guarantee given by the assessee to its subsidiaries. It is ordered accordingly. 7.4 In the result, ground 2 is partly allowed. Purchase of raw material from Whyte & Mackay (Ground 3) (TP Adjustment) 8. It is admitted by both the learned AR and the learned DR that an identical issue was considered by the Tribunal in assessee's own case for assessment year 2013-2014 (supra), wherein the addition made was restored to the files of the AO / TPO for a proper consideration of the facts and to decide as per law after affording sufficient opportunity of hearing to the assessee. The relevant finding of the Tribunal in assessee's own case for assessment year 2013-2014, reads as follows:- "9.5 We have heard rival submissions and perused the material on record. The TPO made an addition of Rs. 68,60,16,563 for the reason that the payments made to W&M for stock purchase has been diverted for onward remittance to Ultra Dynamix and other third parties. The TPO relied on the internal report ....
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....ment year 2013-2014 with certain specific directions and similar course of action may be taken for this assessment year also. 9.2 We have heard rival submissions and perused the material on record. The Tribunal in assessee's own case for assessment year 2013-2014 (supra) by following the order of the Tribunal for assessment year 2012-2013 (supra) had restored the matter to the files of the AO to re-compute the disallowance u/s 14A of the I.T.Act. The relevant finding of the Tribunal for assessment year 2013-2014 reads as follows:- "10.6 We have heard rival submissions and perused the material on record. In the final assessment order, following the DRP directions, the AO made the disallowance under section 14A as per rule 8D at Rs. 48,04,00,000. The Tribunal in assessee's own case for the AY 2012-13 in IT(TP)A No. 489/Bang/2017 order dated 29.5.2020 considered the arguments made on similar disallowance and remanded the issue to the AO with various directions. The arguments of the learned AR are similar to the arguments considered by the Tribunal in the above order. The findings of the ITAT for the earlier year are as under:- "36. We heard the parties on this iss....
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....e this issue to the file of the AO for examining it afresh in the light of discussions made supra." 10.6.1 Following the above order of the ITAT in assessee's own case for assessment year 2012-2013, we set aside the disallowance under section 14A of the I.T.Act and restore the issue to the file of the AO. The AO shall follow the above directions of the ITAT and recompute the disallowance u/s 14A of the I.T.Act. It is ordered accordingly. 10.7 In the result, ground 4.1 to 4.12 are allowed for statistical purposes." 9.3 In view of the above order of the Tribunal in assessee's own case for assessment year 2013-2014 and 2012-2013 (supra), we restore the issue of disallowance u/s 14A of the I.T.Act to the files of the AO. The AO shall follow the directions of the ITAT given in assessment year 2012-2013 and shall re-compute the disallowance u/s 14A of the I.T.Act. It is ordered accordingly. 9.4 In the result, ground 4 is allowed for statistical purposes. Disallowance of interest u/s 36(1)(iii) of the I.T.Act (Ground 5) (Corporate Tax Issue) 10. We find an identical issue was considered by the Tribunal in assessee's own case for assessment year 2013- 2014 (su....
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....e would be rendered academic in nature. However, if any part of disallowance is liable to be made, then the AO should consider other arguments of the assessee also in the set aside proceedings." 11.5.2 Following the above order of the ITAT, we set aside the substantive and the protective addition made under section 36(1)(iii) and restore the issue to the file of the AO to follow similar directions as given above. 11.5.3 Hence grounds 5.1 to 5.14 is allowed for statistical purposes." 10.1 In view of the above order of the Tribunal, we restore the issue raised in ground 5 to the files of the AO. The learned AR has also pointed out that for the relevant assessment year the assessee has been charging interest (as per the amendment to the Companies Act, 2013) at the rate of 13% on advances made to its subsidiaries. This argument raised by the learned AR is also to be examined by the A.O. for the relevant assessment year and if the assessee is charging interest on the advances made during the relevant assessment year, no disallowance is called for u/s 36(1)(iii) of the I.T.Act in respect of the said advances. It is ordered accordingly. 10.2 In the result, ground 5....
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....ssee group was displayed permanently in the cricket stadium is also on the playing gear of the players, that in the terms of the agreement and amount of Rs.4.50 crores was paid towards sponsorship fees during the year under consideration, that the sponsorship fees for different years had been apportioned and allocated to 3 entities of the assessee group which were using the brand logo in the ratio of their respective turnovers during the year, that out of the expenditure of Rs. 2.50 crores and amount of Rs. 21.61 lakhs was allocated to the assessee, that the expenditure incurred on IPL sponsorship did not provide it any benefit of enduring nature, that the expenditure had been incurred year after year by the assessee group with a view to get visibility, that it was in nature of some kind of advertisement expenditure, that same should be allowed as revenue expenditure. Referring to the case of Delhi Cloth and General Mills Co.Ltd.(115 ITR 659) of the honorable Delhi High Court, the FAA allowed the appeal filed by the assessee. 3.1.a. With regard to management fee, the FAA observed that there was no doubt about the genuineness of expenditure, that the expenditure was incurre....
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....ubmitted that during the relevant previous year the assessee entered into an agreement dated 20.08.2008 with ICC Development (International) Limited (ICC) for obtaining sponsorship rights in respect of various ICC cricketing events around the world. The assessee paid an amount of Rs. 3,85,15,497/- for sponsoring cricketing events held during 2008 to ICC. The said amount was proposed to be disallowed by the AO in the Draft Assessment Order, for the following reasons: - (i) Similar expense has been disallowed in the earlier years as part of the Transfer Pricing Adjustment on account of AMP expenses. (ii) Assessee has been bearing substantial portion of the fees paid to ICC for acquiring sponsorship rights even though benefit of the same is derived by the other entities of the world. 88. Aggrieved by the addition proposed by the AO, the assessee had filed objections before the DRP. The DRP vide directions dated 20.12.2013 upheld the action of the AO, on the ground, that the expenditure was benefitting all the entities across the globe and hence, it could not be said to have been incurred wholly and exclusively for the business of the assessee. 89. T....
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....y of the world. The contention raised by the learned counsel that since major viewer of cricket is an Indian subcontinent looking to its mass popularity in India, the assessee company has been consistently promoting its range of products using cricket as an advertisement platform. The said payment has been made after obtaining the approval of Ministry of Health Affairs and Sports and after deducting TDS u/s.195. Once the expenditure has been incurred wholly and exclusively for the purpose of business which fact has not been disputed by the Department, then even if some incidental benefit which may arise to any other entity cannot be a bar for allowance of expenditure u/s. 37. Under the principle of commercial expediency such an expenditure has to be seen from the angle, whether the decision taken by the assessee for paying sponsorship fees was for the purpose of business or not. Here in this case, the commercial expediency has not been doubted but rather it has been held by the AO that in all the years transfer pricing adjustments has been made on this score and benefit is arising to the other AEs also. What is relevant for an expense to be allowable as revenue expense is that, whe....
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.... The applicable test as to what constitutes expenses "laid out or expended wholly and exclusively for the purposes of the business or profession" was explained in Gordon Woodroffe Leather Manufacturing Co. v. CIT [1962] Supp. (2) SCR 211. The correct approach, said the Court, which has to be taken in all such cases is to see whether: "was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business" Again, in Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/ 1 Taxman 485 (SC) the Supreme Court outlined the correct test of commercial expediency as the guiding principle to decide whether the expenditure was to facilitate profits, as follows: (iii) that the sum of money was expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee" In Smith Kline & French (India) Ltd. v. CIT [1992] 193 ITR 582/[1991] 59 Taxman 357 (Kar.), it was held that in normal commercial sense and in common parlance sales promotion and publicity are activities aimed at gaining goodwill in the market. They need no....
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....for their business of hotel, being run in the palace, more efficiently and profitably. The question is whether the expenditure of Rs.10 lakh resulted in any addition to the fixed capital of the assessee. According to the Revenue, the assessee had acquired right to use the court yard apart from the palace, and thus, had acquired an advantage of enduring benefit of a trade. In other words, the expenditure incurred by the assessee for the use of court yard is in the capital field and it cannot be said to have been incurred to facilitate trading operation of the assessee. 7. Learned Counsel appearing for both the sides placed reliance upon the judgment of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69, in support of their contentions. Mr. Aravind, learned counsel for the Revenue tried to distinguish the ratio laid down by the Supreme Court in this case on the basis of factual matrix involved therein. As against this, learned counsel appearing for the respondent/assessee placed reliance upon the principle laid down by the Supreme Court in the said judgment. 8. We have perused the judgment. We find ourselves in agreement with t....
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.... the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case'. 9. It is clear that if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. In the present case, except the right to use the court yard, no other ri....
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....tter dated 14.10.2016 for the purpose of arriving at the impugned finding that the funds of the assessee have been diverted in many ways and hence the revenue expenditure claimed as deduction amounting to Rs.48,14,00,000 is to be disallowed. The AO further held that the diversion of funds to various entities would not be returned back to the assessee. The AO therefore charged an interest of Rs. 6,35,10,000 calculated at 14.5% on Rs. 43.8 crores. The DRP confirmed the AO's additions. Referring to the DRP objections, the learned AR argued that out of disallowance of Rs. 48.14 crores, a sum of Rs. 15.23 crores pertain to other entities and hence the same cannot be disallowed in assessee's case. Similarly, it was argued that the entirety of Rs. 43.8 crores on which interest income of Rs.6,35,10,000 is imputed did not pertain to the assessee and hence the impugned addition of Rs. 6,35,10,000 is bad in law. These arguments have not been considered properly by both AO and DRP. The assessee's claims in the DRP objections [Page 128 to 134 of the appeal memo] regarding deduction under section 28 on account of fraud committed on the company has also not been considered by the AO/DRP. It appea....