TaxTMI 
TaxTMI 
2025 (3) TMI 1454
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.... wheelers. It had given corporate guarantee to the tune of Rs.53,88,00,000/- on behalf of the foreign subsidiary M/s PT TVS Motor Company, Indonesia ('AE'). The assessee had also given Letters of Comfort (LOC) of Rs.10,57,00,000/- to Banks/AE for the loans borrowed by the AE. The assessee didn't charge any fee towards such corporate guarantee and LOC issued in favour of the AE. The TPO is noted to have made transfer pricing adjustment in relation thereto on the same lines as confirmed by the DRP in the earlier year viz., 2% of the value of corporate guarantee and LOC. Aggrieved, the assessee preferred objection before the DRP which confirmed the action of the TPO. Now, the assessee is in appeal before us. 3.2 Heard both the parties. The Ld. AR for the assessee has contended that since the corporate guarantee and Letter of Comfort was provided without any cost to the AE, it didn't have any bearing of profits, income, losses of the assessee and therefore could not be regarded as an international transaction and be benchmarked under the transfer pricing provisions. In this regard, the Ld. AR relied upon the decision rendered by this Tribunal in their own case for AY....
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....te Enterprise in increasing its creditworthiness in obtaining loans in the market, be from Financial institutions or from others. There may not be immediate charge on P & L account, but inherent risk cannot be ruled out in providing guarantees. Ultimately, the Tribunal upheld the adjustments made on guarantee commissions both on the guarantees provided by the Bank directly and also on the guarantee provided to the erstwhile shareholders for assuring the payment of Associate Enterprise. 76. In the light of the above decisions, we hold that the Tribunal committed an error in deleting the additions made against Corporate and Bank Guarantee and restore the order passed by the DRP. 3.3 We also note that this Tribunal in the assessee's own case for the subsequent AY 2013-14 in IT (TP) A No.66/Chny/2019 & ITA No.2404/Chny/2019, had held the transaction of corporate guarantee to be an international transaction by benchmarking the same at 0.5%. Accordingly, the first plea of the assessee is hereby rejected. 3.4 Hence, the limited issue now to be adjudicated is the ALP value of the guarantee commission. In this regard, the Ld. AR had brought to our notice that this Tribuna....
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....terprises." The transfer pricing regulations also require that it is not the 'form' but the overall arrangement/ substance of the transactions that must be kept in mind. Section 92F (v) of the Income-tax Act states as below: "transaction includes an arrangement, understanding or action in concert, whether or not such arrangement, understanding or action is formal or in writing;" Similarly, Rule 10B (2)(c) states: "the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;" It is evident from the above extracted provision that an arrangement between two AEs for allocation or apportionment of or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises is an international transaction. In this case, admittedly, the assessee has incurred the cost of AMP for the benefits of its AE accordingly AMP expenditure is an ....
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....activities in the Indonesian market. -- Identify third party vendors in the Indonesian market for availing the brand promotion services -- Negotiate the contracts and the pricing arrangements with the vendors and enter into contracts -- Discussion from time to time on the implementation strategy for brand promotion activities with the vendor, providing guidance and co-ordination -- Create marketing and promotional materials (flyers/leaflets/ brochures) through the third party vendors -- Monitor the third party vendors in the execution phase of the brand promotion activities -- Payment to third party vendors for the services received. 8.4 To arrive at the ALP of AMP expenses, it is important to understand that whether TVSM India is promoting a brand in Indonesia as a legal owner or it is assisting PT TVS Indonesia being licensed manufacturer by way of increase of sale using TVS brand in Indonesia. As per the argument of the assessee that PT TVS Indonesia had incurred higher percentage of AMP expenses it means that the economic ownership of TVS brand in Indonesia vests with AE PT TVS Indonesia. However it may be also possible tha....
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.... 2,03,31,969 (14,99,00,000 - 12,95,68,031) (total advt. exp. In Forex Advt. exp in Indonesia) 0.19% The AMP/ Sales Ratio of TVSM India for other countries (export to independent third parties) is arrived at 0.19% against the AMP sales ratio of 25.31% incurred in favour of AE PT TVS Indonesia. 8.8 To find out the mark-up of ALP of the AMP services rendered towards brand promotion/excess AMP, an independent search was conducted and 4 companies are selected as comparable companies. The margin of 4 comparable companies is annexed as Annexure and the same is 6.12% (OP/OI). 8.9 In view of the discussion made above, the amount which represents the amount that should have been compensated to the assessee company is re- computed hereunder: Particulars Amount in Rs. Advertisement and publicity 12,95,68,031 Total AMP expenses 14,99,00,000 Sales of the assessee to AE 51,17,37,520 AMP/Sales Ratio of the assessee 25.31% The ALP of the International transaction related to the incurring of AMP expense leading to the creation a marketing intangible is calculated as under: Particulars Amount in INR Total sales to AE 51,....
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....of Maruti Suzuki India Ltd (381 ITR 117), Bosch & Laumb Eye Care India Pvt Ltd vs. Addl. CIT (381 ITR 227) and Honda Siel Power Products Pvt Ltd vs. DCIT (237 taxman 304). He also relied upon several decisions of the Tribunal rendered following the foregoing judgments of Hon'ble Delhi High Court (supra). The Ld.AR further submitted that the lower authorities did not correctly appreciate the basic facts and therefore erroneously made the impugned adjustment. The Ld. AR explained to us that, in all the AMP cases, impugned by the Revenue, the position taken is that, the global foreign headquarter / AE owns the brands and the subsidiary in India was incurring marketing expenses and therefore, the Revenue took a view that the incurrence of marketing expenses by the Subsidiary created marketing tangibles which enhanced the brand values owned by the foreign company and therefore the foreign company should reimburse the Indian subsidiary for its marketing spend with a mark-up. Applying the foregoing principle, the Ld. AR submitted that, in the present case, the assessee was the owner of the brand and its subsidiary was in Indonesia and therefore, the AMP spends ought to be incurred onl....
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.... in light of the prevailing jurisprudence, we find that the facts involved in the present case are slightly different than the decision of Hon'ble Delhi High Court (supra), but at the same time, the ratio decidendi emerging from this decision is of relevance to the impugned issue at hand. In the decisions rendered by Hon'ble Delhi High Court (supra), the Hon'ble Court upheld the assessee's plea that the Indian subsidiary had rightly incurred the AMP expenses in its own right for the licensed products being marketed in India and that such AMP expenses could not be said to be recouped from the foreign holding company on the pretext that since the legal ownership of brand vested with the latter, such AMP expenses benefitted the foreign holding company by enhancing its brand value. The Hon'ble High Court held that, it was necessary for the Revenue to show existence of some arrangement or understanding between the parties regarding the AMP spends and it particularly negated the application of bright line test. 4.7 Now in the present case before us, it is the assessee which is the Indian holding company having ownership of the brand, which it has licensed to the fo....
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....then whether can it be said that the assessee had indeed incurred expenses on its behalf etc. Also, the nature of AMP expenses incurred by the assessee, reasons for such excessive AMP costs vis-à-vis sales etc. have also not been explained before the TPO. Without these facts being brought on record, one cannot objectively ascertain and decide as to whether there exists any arrangement between the parties at all or not. For the aforesaid reasons and in fitness of the matters, we set aside the order passed by the AO on AMP expenses and restore the same to the file of AO/TPO for examining it afresh. The TPO while deciding this issue shall keep in mind the ratio laid down in the decisions of the Hon'ble Delhi High Court (supra) and/or any subsequent developments on this issue, and shall pass a speaking order after allowing assessee sufficient opportunity of being heard. 4.10 For the reason set out above therefore, this ground is accordingly allowed for statistical purposes. 5. Ground Nos.8 & 9 are in relation to the transfer pricing adjustment on account of royalty of Rs.2,15,56,000/ -. 5.1 Brief facts are that, the TPO noted that the assessee did not earn any royal....
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.... continuously incurring losses and the assessee through an amendment to the agreement agreed that royalty will be waived till such time the Licensee achieves a monthly sales of 10,000 numbers of two wheelers (i.e. deferment). According to DRP, the reasons given by the assessee are not sufficient and nothing new has been submitted before the DRP. Hence, the DRP uphold the decision of the TPO. Against this, the assessee is in appeal before us. 13. We have heard both the parties and perused the material on record. In this case, assessee following the mercantile system of accounting, there is no question of deferment of receipt of income since the assessee was in a position to create the document as the transaction with AE which cannot be appreciated. It is only afterthought so as to postpone the liability of taxation. Accordingly, we are of the opinion that lower authorities were justified treating the accrued royalty as income of assessee. Thus, this ground is rejected. 5.4 Following the above decision (supra), this ground is also rejected. 6. Ground No.10 is against the disallowance of u/s.14A of the Act read with Rule 8D. 6.1 Brief facts are that, the AO noted tha....
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....com 415, has held that only the dividend yielding investments are to be considered in computation of disallowance under this Rule. In this regard, the Ld. AR for the assessee also referred to the revised computation of disallowance in terms of Rule 8D(2)(iii) with reference to dividend yielding investments, which was placed at Page 106 of the Paper Book. Respectfully following the decision of Special Bench (supra), the AO is directed to verify the computation provided by the assessee andre-compute the disallowance under section 14A read with Rule 8D(2)(iii) accordingly. This ground is therefore partly allowed. 7. Ground No.11 is against the disallowance of export agency commission paid to non-residents u/s.40(a)(i) of the Act, to the tune of Rs.26,58,53,696/ -. 7.1 The AO noted that, the assessee has made payments to non- resident Indians abroad to the tune of Rs.26,58,53,696/- towards export agency commission. According to the AO, the assessee has not deducted tax at source. When confronted, the assessee had submitted that, these are payments made to foreign agents for the purpose of promoting sale of products of the assessee abroad. Since none of the services were being pro....
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....Income tax authority, at International Taxation, who can exempt the case from liability to TDS u/s.195(1) of the Act. Since neither the assessee company nor the recipients of commissions have availed the provisions, the AO has no other option but to invoke provisions of the section 40(a)(i) of the Act for non compliance to provisions 195(1) of the act. Hence, the AO made an addition of Rs.33,23,82,167/- towards export agency commission. 15. We have heard both the parties and perused the material on record. A similar issue came for consideration before this Tribunal in assessee's own case in ITA Nos.1707 & 1782/Mds./2012 for assessment year 2008-09 vide order dated 27.04.2016 wherein held as follows :- "27. We have considered rival submissions and perused the materials on record. With regard to the issue as to whether the TDS has to be deducted or not when the commission payment made to the overseas agents, the isuse is squarely covered in favour of the assessee by the decision of the Hon'ble jurisdictional High Court in the case of CIT Vs. Faizan Shoes Pvt Ltd. [2014} 367 ITR 155, wherein by dismissing the appeal of the Revenue, the Hon'ble High Court ....
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....owings to acquire fixed assets. Apart from the foregoing, the exchange loss arising upon repayment of ECB loan was also included in the hedging cost. The AO however did not agree with the explanation put forth by the assessee and disallowed the claim by holding as under: "The contentions of the assessee have been considered and are not acceptable. The assessee itself had stated that it had capitalized the hedging cost in the books of account as the same was incurred in relation to acquisition of fixed assets. This being so, the assessee cannot change their stand when it comes to claiming of expenditure for income tax purposes and say that the expenditure was incidental to the business. The treatment of an expenditure as capital or revenue depends upon the period for which the enduring benefit was derived by the assessee. The assessee itself admitted that the benefit would be enduring for many years and had capitalized the same in the books. Hence, for income tax purposes also, the same has to be treated as capital in nature. In view of the above Rs.4,09,82,305 was treated as capital in nature, disallowed and added back to the total income. However, depreciation is allowed.....
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.... in the case of CLP Wind Farm (India) Ltd Vs DCIT (145 taxmann.137) wherein it was held that the premium paid on foreign exchange forward contracts entered into by assessee for purpose of repayment of loan was to be amortized as revenue expenditure over life of contract. The relevant findings taken note of by us is as follows :- "9. We have heard both the parties. The claim in dispute before us relates to premium paid on foreign exchange forward contracts entered into by the assessee amounting in all to Rs. 38,96,97,000/- . The claim is vis a vis the amortized portion of the forward cover premium, which fact is noted in para 3.1 of the assessment order. These foreign exchange forward contracts were entered for the purposes of repayment of foreign exchange loan/external commercial borrowing taken by the assessee for its projects in the renewal energy business, which fact is not disputed . Having outlined the facts as above we shall now proceed to adjudicate the issue. 13. A bare perusal of the above reveals that AS-11 prescribes how the effects of changes in foreign exchange rate is to be accounted for on transactions undertaken in foreign currency or in foreign co....
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....e of the Revenue that the foreign exchange loan has been taken for purchasing any asset outside the country. No other section dealing with the allowability of premium paid on forward contracts has been pointed out by the Ld.DR before us. Therefore as per the decision of the Hon'ble apex court in the case of Virtual Soft (supra), the accounting prescribed by AS-11 will apply, according to which the premium/discount on forward exchange contracts is to be amortized as expense/income. The reliance by the Ld.DR/Ld.CIT(A) on the decision of the Bangalore Bench of the ITAT in the case of Orchid Ply Industries Ltd. (supra) for the proposition that the loan having been taken for meeting capital obligations,the premium paid for forward cover also is to be treated as capital in nature, we find is of no assistance to the assessee since the Visakhapatnam Bench of the ITAT in the case of Maddi Lakshmaiah & Co. Ltd. (supra) held that for determining whether devaluation loss is Revenue or capital, the object for which the currency is obtained is not relevant and what is relevant is the utilization of the amount at the time of devaluation. The ITAT while holding so referred to....
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.... of ECB loan relating to non-imported assets as "capital" in nature and allowed only depreciation on such loss. 20. The facts of the issue is related to actual loss on exchange difference in repayment of ECB loan. Before AO Id.A.R submitted that section 43A applied to assets importer from a foreign country out of foreign currency loan and in the instant case exchange loss/gain related to importer assets has been capitalized by the assessee itself. AO invoked the provisions of the section 43A, which was upheld by DRP. Against this assessee is in appeal before us. 21. Before us, Id.A.R relied on the order of Pune Tribunal, in the case of Cooper Corporation in ITA No.866/PN/2014. According to him, foreign fluctuation exchange fluctuation in revenue's field. Hence, it is allowable expenditure. 22. We have heard both the parties and perused the material on record. Admittedly, this issue came up for consideration before Pune Tribunal, in the case of Cooper Corporation in ITA No.866/PN/2014 vide order dated 29.04.2016 for assessment year 2008-09wherein held as follows :- "10. We have carefully considered the rival submissions. Order of the authoriti....
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....s. The notification also sets out that the exchange differences arising on foreign currency transactions have to be recognized as income or business expense in the period in which they arise subject to exception as set out in Section 43A or Rule 115 of the Income Tax Rules, 1962 as the case may be. 10.3 The contention of the revenue that the loss is only contingent and notional and subsisting has been examined. As per section 209 of the Companies Act, 1956, the Assessee being a company is required to compulsorily follow mercantile system of accounting. S. 211 of the Companies Act, 1956 also, in terms, mandates that accounting standards as applicable is required to be followed while drawing statement of affairs. S. 145 of the Income Tax Act, 1961 similarly casts obligation to compute business income either by cash or mercantile system of accounting. Thus, in view of the various provisions of the Companies Act and Income Tax Act, it was mandatory to draw accounts as per AS II. Thus, in our considered view, the loss recognized on account of foreign exchange fluctuation as per notified accounting standard AS 11 is an accrued and subsisting liability and not merely a contingent....
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....e asset or the amount of expenditure of a capital nature of as the case may be, the cost of inquisition of the capital asset as aforesaid: Provided that where an addition to or deduction hem the actual cost or expenditure or cost of acquisition has been made under this section, as it stood immediately before its substitution by the Finance Act, 2002, on account of an increase or reduction in the liability as aforesaid, the amount to be added to or, as the case may he. deducted under this section from, the actual cost or expenditure or cost of acquisition at the time of making the payment shall be so adjusted that the total amount added to, or, as the case may be, deducted from, the actual cost or expenditure or cost of acquisition, is equal to the increase or reduction in the aforesaid liability taken into account at the time of making payment A bare reading of the aforesaid provision of Section 43A, which opens with a non-obstante and overriding clause, would show that it comes into play only when the assets are acquired from a country outside India and does not apply to acquisition of indigenous assets. Another notable feature is that S.43A provides for making c....
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....et. The amount may have been borrowed by the assessee but even if the assessee did not repay the loan it will not alter the cost of the asset. If the borrower defaults in repayment of a part of the loan, the cost of the asset will not change. What has to be home in mind is that the cost of an asset and the cost of raising money for purchase of the asset are two different and independent transactions. Even if an asset is purchased with non-repayable subsidy received from the Government. the cost of the asset will be the price paid by the assessee for acquiring the asset. In the instant case, the allegation is that at the time of repayment of loan, there was a fluctuation in the rate of foreign exchange as a result of which, the assessee had to repay a much lesser amount than he would have otherwise paid. In our judgment, this is not a factor which can alter the cost incurred by the assessee for purchase of the asset. The assessee may have raised the funds to purchase the asset by borrowing but what the assessee has paid for it, is the price of the asset. That price cannot change by any event subsequent to the acquisition of the asset. In our judgment, the manner or mode of repayment....
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....l asset into existence. Thus, the business exigencies are implicit as well explicit in the action of the Assessee. The argument that the act of conversion has served a hedging mechanism against revenue receipts from export also portrays commercial expediency. Thus, We are of the opinion that the plea of the assessee for claim of expenditure is attributable to revenue account has considerable merits. 10.8 Section 145 of the Income Tax Act deals with method of accounting and states that business income inter-alia has to be computed in accordance with cash or mercantile system of accounting. Sub-section (2) thereof authorizes the Central Government to notify accounting standards to be followed for determination of business income. Section 211 of the Companies Act also similarly casts a duty on a company to give a true and fair view of the profit and loss of the company for the financial year. It also requires the company to adhere, the accounting standards for preparation of profit in the Profit & Loss Account and the Balance Sheet. A conjoint reading of section 145 of the Act and section 211 of the Companies Act leaves no room for doubt that' the Assessee is obliged to f....
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....nt by the Assessee in accordance with generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification cannot be faulted. No inconsistency with any provision of Act or with any accounting practices has been brought to our notice. Otherwise also, in the light of fact that the conversion in foreign currency loans which led to impugned loss, were dictated by revenue considerations towards saving interest costs etc. we have no hesitation in coming to the conclusion that loss being on revenue account is an allowable expenditure under S. 37(1) of the Act. The order of the CIT(A) sustaining the disallowance is not called for and is thus reversed. In the result, the Ground No.1 is allowed." In view of the decision of Co-ordinate Bench of Pune Tribunal, this ground raised by the assessee is allowed." 8.8 It is noted that the lower authorities had made the impugned disallowance on the limited point that, the assessee's entries in the books of accounts capitalizing the hedging cost to the cost of assets denoted that the same was capital in nature. The Ld. AR had pointed out to us that, AS-11 ....
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....985 of 2017 8.10 For the reasons above, the reasoning given by the AO for making the impugned disallowance is found to be unjustified. 8.11 Overall therefore, we hold that the impugned disallowance of Rs.27,45,310/- was untenable and is therefore directed to be deleted. This ground is allowed. 9. Ground No.13 is regarding amortization of FCMTR to the tune of Rs.27,45,310/ -. 9.1 The Ld.AR doesn't press this ground, so dismissed. 10. Ground No.14 is against the action of the lower authorities denying the claim of balance additional depreciation amounting to Rs. 5,94,90,540/- on the assets which were put to use in the earlier FY 2011- 12. 10.1 The facts of the case are that, the AO noted that the assessee has claimed Rs. 5,94,90,540/- on account of balance additional depreciation @ 10% on the assets which were purchased and put to use on the latter half of earlier A.Y. 2011-12. The AO noted that the issue relates to the allowability of balance additional depreciation in the subsequent assessment year on the assets which were put to use for less than 180 days for the financial year relating to preceding assessment year. The AO was of the opinion that there was no....
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....Challenging the same, this further appeal has been filed by the Revenue. 7. Clause (iia) of Section 32(1) of the Act, as it now stands, was substituted by the Finance Act, 2005, applicable with effect from 01.04.2006. Prior to that, a proviso to the said Clause was there, which provided for the benefit to be given only to a new industrial undertaking, or only where a new industrial undertaking begins to manufacture or produce during any year previous to the relevant assessment year. 8. The aforesaid two conditions, i.e., the undertaking acquiring new plant and machinery should be a new industrial undertaking, or that it should be claimed in one year, have been done away by substituting clause (iia) with effect from 01.04.2006. The grant of additional depreciation, under the aforesaid provision, is for the benefit of the assessee and with the purpose of encouraging industrialization, by either setting up a new industrial unit or by expanding the existing unit by purchase of new plant and machinery, and putting it to use for the purpose of business. The proviso to Clause (ii) of the said Section makes it clear that only 50% of the 20% would be allowable, if the new ....
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.... similar issue wherein Hon'ble High Court held as under: "2. The Tribunal, by virtue of the impugned judgment, has sustained, in entirety, the order passed by the Commissioner of Income-Tax (in short 'the Commissioner') under Section 263 of the Act. To be noted, the Commissioner had issued a notice to the appellant / assessee in pursuance of powers conferred upon him under Section 263 of the Act on several issues including the issue pertaining to the right of the assessee to carry forward the balance additional depreciation in the year following the relevant previous year, in which the subject asset was purchased and put to use. 3.It is common ground before us that in so far as this issue is concerned, it is covered against the Revenue by our judgments delivered today in the following cases, as also by the judgment dated 06.03.2017 passed in T.C.A.No.157 of 2017, titled Commissioner of Income-Tax, Madurai vs. M/s.Shri.T.P.Textiles Private Limited: i.M/s. Multivista Global Ltd. vs. The Asst. Commissioner of Income Tax, TCA. No.402 of 2013 ii.M/s. Brakes India Ltd. vs. The Deputy Commissioner of Income Tax, TCA. No.551 of 2013 iii.M/s.AbiShowatech (India....