TaxTMI 
TaxTMI 
2024 (5) TMI 1558
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....n 92CA(1) of the Act are mandatory and the learned AO is expected to record his satisfaction in that respect before making the reference to the learned TPO. 1.3 Further, the learned Transfer Pricing Officer ("TPO") has failed to prove that any of the conditions laid down in section 92CA(1) of the Act had been satisfied, which made out a case for tax evasion. 1.4 On the facts and in the circumstances of the case, a transfer pricing adjustment cannot be made without arriving at the finding that the intention of the Appellant was to evade tax and shift profits outside of India. Further, such finding of tax evasion and of shifting of profits constitutes a condition precedent for making the transfer pricing adjustment. 1.5 The transfer pricing adjustment made by the Ld AO / Hon'ble DRP is bad in law, illegal, without jurisdiction and contrary to and / or beyond and in excess of the express statutory provisions of the Act including sections 4, 5, 9, 92, 92C, 92CA, etc. The approval of the CIT under section 92CA(1) is also not in accordance with law and hence the adjustment must be quashed. Erroneous adjustment on account of non-recovery of commissi....
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....fact that: (i) if the dividend paid to the Appellant by the concerned AE was equal to or in excess of the value of any benefit(s) allegedly enjoyed by such AE consequent to the issue by the Appellant to the Bankers of such AE of any LoC(s), no such transfer pricing adjustment ought to be made; and (ii) if the dividend paid to the Appellant by the concerned AE was less than the value of any such alleged benefit(s), then it is only the excess of such alleged benefit(s) over such dividend which ought to be determined as the transfer pricing adjustment. 1.12 The Ld AO / Hon'ble DRP erred in disregarding the fact that this issue is no longer res-integra, and resolved in favour of the Appellant by Hon'ble Commissioner of Income Tax (Appeals) for AY 2005-06, AY 2006-07 and AY 2007-08. Erroneous adjustment on account of rate of interest chargeable in respect of extended period for remittance by AEs of export sales proceeds 1.13 The Ld AO / Hon'ble DRP erred on facts and in law in making an addition of Rs.2,39,940/- on account of notional interest on perceived delay in collection of receivables from the AEs. 1.14 The Ld AO / ....
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....rest could be imputed in respect of the same. 2.2. The Ld AO/ Hon'ble DRP erred in law and in fact in determining the arm's length interest rate; (i) by not conducting any benchmarking analysis and failing to identify any comparable uncontrollable transaction for determining the arm's length interest; (ii) by considering the interest rate prevailing in lender's country rather than borrower's country; (iii) by not considering the impugned interest on interest free loans by relying upon the RBI's circular in respect of External Commercial Borrowings (ECB); and (iv) by applying the weighted average cost of borrowing ("WACB") instead of LIBOR for the purpose of computing the adjustment towards non-recovery of interest on shareholder loan. 2.3. The Ld. AO-DRP erred on facts and in law in disregarding the fact that, there was no nexus between the funds borrowed and the funds lent by way of advances to subsidiary, as the advances have been made out of own funds of the assesse. Hence, no interest in respect of the borrowings by the appellant could be attributed to such advances and no disallowance should be made ....
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....ness and (c) that, accordingly, the Interest of Rs. 1,73,87,000 was allowable under Section 36(1)(iii). 3.4 Without prejudice to the foregoing grounds, the Appellant submits that, in making their determinations in respect of the disallowance under Section 14-A, the learned AO-DRP erred in the following respects : 3.4.1 The learned AO-DRP erred in holding that the amount disallowed under Section 14-A was not allowable under Section 36(l)(iii). 3.4.2 The learned AO-DRP erred in holding that a part of the Appellant's borrowed funds had been used for the purpose of making investments in shares, particularly in view of the fact thattheAppellant's Own Funds 419.67crores) were far in excess of the Appellant's Total Investments (* 120.17crores). 3.4.3 The learned AO-DRP erred in holding that a part of the Appellant's borrowed funds had been used forthe purpose of making investments in shares, for the reason also that the learned AO-DRP has not brought on record any material establishing any nexus between any part of the Appellant's borrowed funds and the funds utilized by the Appellant to make such investments. ....
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....erred in rejecting the Appellant's further alternative claim to the effect that the learned AO-DRP ought to have excluded the average cost of such of the Appellant's investments as had not yielded any dividends during the year under consideration ("Non Dividend-Yielding Investments"). Erroneous adjustment on account of disallowance of professional fees paid to Deloitte Touche Tohmatsu 4.1 On the Facts & circumstances of the case, the Ld AO-DRP has erred in law and in fact in upholding AO's action in disallowing expenditure amounting to Rs.16,66,520/- by way of professional charges paid toDeloitte Touche Tohmatsu for the purpose of market research and survey incurred wholly andexclusively for the purpose of the present business. 4.2 Without prejudice to the above, the Ld AO-DRP erred in Jaw and in fact in holding that the expenditure has no direct nexus to the income earned and not incurred for the purpose of the business. 4.3 Without prejudice to the above, the Ld AO-DRP erred in making disallowance in respect of out of pocket expenses of Rs.1,22,320 and expenditure on Transfer Pricing study Report of rs.2,20,600 which are in the natu....
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....ly.We follow the grounds mentioned in chart as per the request of the ld. AR. The ground-wise argument and adjudication are as follows: - Ground nos. 1.1 to 1.12 5. During the impugned assessment year the assessee has issued 9 letter of comfort (in short LOC) aggregating to an amount of Rs. 735,94,50,000/-. Considering the direction of DRP for earlier years, @1.5 is directed to adopt on ALP of the transaction. The Ld.AR invited our attention in order of the TPO page 7, para 5.4. The relevant paragraph is reproduced as below:- "5.4. The submissions of the assessee on the issue of letter of comfort have been examined and considered. The facts are similar to AY 2009-10. Thus, for the purpose of continuity the issue is being dealt in line with AY 2009-10. The assessee in its submissions has mentioned that the letter of Comfort is not a contract, banks cannot proceed against assessee in case of default of repayment by the AE and the letter of comfort has been given in the business interest. It has also mentioned that the banks to whom the letters of comfort have been given are not the AEs of the assessee" 5.1 The Ld.AR further argued that the issue is squarely co....
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.... by Id. CIT (A). In the result, Ground No. 6 to 9 (additional ground) of assessee's appeals are allowed and consequently the grounds of appeal raised by revenue are dismissed." 14. Similar view has been taken by the coordinate bench again in the Appellant's own case for the A.Y. 2007- 08 vide Order dated 30 November 2023 (bearing ITA No. 6753/Mum/2012). A copy of the said decision was also handed over to the Bench during the course of hearing on 24 January 2024 (refer para Nos. 11 to 13 on page nos. 07 to 11 of the order) reproduced herein below as under: "11. The brief facts are that the Assessing Officer has made addition of Rs.5,75,38,800/- on account of transfer pricing adjustment in respect of non-recovery by the assessee from its AE and the issue of letter of credit holding that assessee has not charged any commission from the AE. The ld. CIT (A) has deleted the said adjustment after observing and holding as under:- 9.4 I have considered the facts of the case and written submissions and oral arguments of the appellant advanced during the course of the appeal as against the observations/findings of the TPO/AO in their orders. The contentio....
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....nsured that the AE's liability to the bank is discharged in full no legal recourse is available to the banker against such dilution or disposal; and d) as the very title of the LOC suggests, the LOC merely provides comfort to the Bank as to the AE's ability / willingness to perform its obligations and neither creates nor is intended to create any kind of binding recourse which the Banker may have on the appellant. v. Moreover, it is an incidental benefit arising merely from passive association with the group and are therefore not regarded as giving rise to arrangements subject to remuneration. Para 7.13 of OECD Guidelines, July 2011 deal with the issue which is reproduced hereunder: "Similarly, an associated enterprise should not be considered to receive an intragroup 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 credi....
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....-cause, the assessee submitted that no adjustment is ought to be made as Letter of Comfort would not represent international transaction within the meaning of section 92B (1). It was further stated that merely an unequivocal statement of intention expressed by assessee not being bilateral, is not a transaction and letter is a private affair between the assessee and the lender/banker (non associate and is not a transaction between two associate). The contention of assessee was not accepted by TPO by taking view that transaction relating to provision for Letter of Comfort and payment of commission for the services by AE to the assessee would fall within the definition in term of international transaction 92B of the Act. The TPO made adjustment of Rs. 8.70 crore on account of issuance of Letter of Comfort. The Id. CIT (A) after appreciating the contention of assessee concluded that issuance of Letter of Comfort does not constitute an international transaction. The Id. CIT (A) appreciated the difference between corporate guarantee and Letter of Comfort. The Ld. AR further submits that there is a basic difference between corporate guarantee and Letter of Comfort. In a Letter of Comfort,....
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....ival submissions and considered the documents available on the record. In our considered view, the issue is squarely covered by the order of co-ordinate bench in assessee‟s own case for A.Y. 2008-09. Further, the LOC is continuing from earlier years. The coordinate benches of earlier years are decided in favour of assessee. In earlier years the same addition are fully deleted. We cannot circumvent the orders of coordinate bench. The DRP directed @1.5% adopt on ALP.During the hearing the Ld.DR was unable to submit any contrary judgement against the order of ITAT. We relied on the order of the co-ordinate bench of ITAT Mumbai. The addition is directed to be deleted. Accordingly, the ground of the assessee succeeds. In the result, ground nos. 1.1 to 1.12 are allowed. Ground nos.1.13 and 1.18 8. On this issue, the ld.AR placed that the interest is charged on outstanding receivable from AEs. The assessee itself charged the interest on outstanding @6% to 10% without allowing any credit period. The TPO determined interest @13.10%. But the DRP held prime lending rate to be charged. The ld.AR invited our attention in order of DRP pages 2-3. The relevant paragraph is reproduce....
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.... TPO if assessee had received these proceeds in time, it would not have had to borrow such funds from banks and its interest liability would have been that much less or it could have deployed funds in the domestic market and earned return. Therefore, assessee has to be compensated appropriately by the AEs. Bank PLR is deemed appropriate. The TPO is directed to restrict the adjustment accordingly." 8.1 The Ld.AR placed that the issue is squarely covered by the order of ITAT, Mumbai Bench in assessee‟s own case in ITA No.537/Mum/2013 date of pronouncement 06/02/2024, for A.Y. 2008-09. The relevant paragraphs 16-17 are reproduced as below:- ―16. Ground No. 4, Transfer Pricing adjustments in respect of interest of Rs. 20, 70,633/- on delayed realisation of sales proceeds from its AEs. This ground relates to the transfer pricing adjustment vis-à-vis imputing interest on delayed realisation of sale proceeds from its AEs. The Appellant charged interest at the rate of 6% on the realisation of sale proceeds from its AEs for the entire credit period extended to the AEs of 150/180 days. The TPO held that interest chargeable by the Appellant on the outstanding ba....
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.... Total Rs. 33,581 lakhs The ld. AR claimed that the own funds were utilized for interest free loans to the subsidiary. The Ld.AR also placed the submission which was submitted before the DRP contending that the loan was given for the purpose of business. The relevant paragraphs are reproduced as below: - ―Facts of the case The assessee had, in the. course of its business, advanced interest free loan to its wholly owned foreign subsidiary TWA located at Jebel Ali Free Zone - Debai of USD 5,50,000 (Rs.280.49lacs). During the year, TWA could not recover a debt of USD 4,84.000 from a Usha Ispat Limited - a debtor, since Usha Ispat Limited became a sick company and no assets were available for recovery of loan of TWA. This resulted in net assets of TWA falling below 75% of share capital. As per Jebel All Free Zone Rules (Implementing Regulations No. 1/92 of November 1992) JAFZA rules (copy enclosed at Annexure 1) the net assets need to be maintained at 75% of share capital and if there is a shortfall funds need to be infused to remedy the same. The relevant extract of rules is reproduced as under: "if the net assets of a Free Zone Establi....
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.... and circumstances of respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure commercial expediency. However, money can be said to be advanced to a sister concern for cornmercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advanced borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. 36. In view of the above, we allow these appeals and set aside the impugned judgments of the High Court, /, Tribunals and other authorities and remand the matter to the Tribunal for a fresh decision, in accordance with law and in the light of the observations made above. 37. We also make it clear that we are not setting aside the order of the Tribunal or other income-authorities in relation to the other points dealt with by these a....
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....ssesses has not offered any amount for disallowance u/s. 14A, in spite of the fact that it has claimed domestic dividends aggregating Rs. 2,71,70,877/- to be wholly exempt u/s. 10(34) (Rs.2,00,55,466) and 10(35) (Rs.71,15,411). Therefore, the A.R. of the assessee was required to explain as to why disallowance u/s 14 should not be made in your case. In this regard, the assessee made detailed submissions through Annexure No. 1 submitted vide their letter dated 26.09.2013, which is reproduced as under-(.1) (i) The provisions of sec. 14A have no application to the assessee's case, for the following reasons: The assessee has not, during or for the year under consideration, incurred any expenditure in relation to exempt income, whether by way of interest or otherwise. (ii) The entire effective Borrowed Funds of the assessee, constituted of Export Packing Credit of Rs. 172.27 crores and term loan of Rs 20.17 Crs, was utilised for the purposes of the assessee'sexport business and capacity expansion project for the purchase of plant & machinery no part of such funds could have been utilised by the assessee for any other purpose, much less for making any in....
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....interest aggregating to Rs.1003.71 lakhs which is in relation to EPC export credit and true shipment credit in foreign currency incurred for the purpose of export / import business of the assessee. Hence, such interest has to be excluded. Accordingly, the disallowance under rule 8D(2)(iii) restricted to 0.5% of only those investments which have yielding income amount to Rs. 2255.02 lakhs which works out to Rs. 11.28 lakhs. The Ld.AR respectfully relied on the following order. 15.2.South Indian Bank Ltd vs CIT 438 ITR 1 (SC) "28. The above conclusion is reached because nexus has not been established between expenditure disallowed and earning of exempt income. The respondents as earlier noted, have failed to substantiate their argument that assessee was required to maintain separate accounts. Their reliance on Honda Siel (supra) to project such an obligation on the assessee, is already negated. The learned counsel for the revenue has failed to refer to any statutory provision which obligate the assessee to maintain separate accounts which might justify proportionate disallowance. 29. In the above context, the following saying of Adam Smith in his seminal work ....
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....v. C [(1980) 1 SCC 139].) An Explanation to a statutory provision may fulfil the purpose of clearing up ; ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 SCC 585]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24; Brij Mohan Das Laxman Das v. CIT(1997) 1 SCC 352; CITv. Podar Cement (P.) Ltd., (1997) 5 SCC 482]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are "it is declared" or "for the removal of doubts". 18. There was and is no ambiguity in the main provision of section 9(1)(//). It includes salaries in tl total income of an assessee if the assessee has earned it in India. The word "earned" had been judicial! defined in SG. Pgnatale[(1980) 124 ITR 391 (Guj.)] by the High Court of Gujarat, in our vie\ correctly, to mean as income "arising or accruing in India". The amendment to the section by way of a Explanation in 1983 effected a change in the scope ....
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....rder of South Indian Bank Ltd(supra). We respectfully follow the orders of Hon'ble Apex Court and Hon'ble Delhi High Court. In our considered view, the addition should be restricted to @.5%, only those investments which have yielding income amount to Rs.2255.02 lakhs. The Ld.DR has not circumvented the offer made by the assessee. Accordingly, the entire addition U/s 14Ais directed to restrict amount to Rs. 11.28 lakhs. In the result, the ground no. 3 is allowed. Ground no. 4: 18. 18.In this issue, the assessee incurred expenditure by way of professional charges paid to Deloitte Touche Tohmatsu amount of Rs.16,66,520/-. The Ld.AR in argument placed that one of the business segments of the appellant is manufacturing of leather and leather products for export. The assessee has tried to explore the sales of leather goods in the domestic market. Accordingly, the consultant was appointed and paid to work in opportunities in the market related to leather goods. So, the consultancy fees was paid after deducting. But entire consultancy fees was added back with the total income. 19. Ld.DR vehemently argued and relied on the assessment order. The pages 21 & 22 of final assessme....
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.... any capital assets created from the same and should be a/towed to assessee as revenue expenditure. Without prejudice to above assessee submitted that even if your goodself would like to treat the amount paid to DHS related to market study/survey as capital only the amount to the extent of Rs.13,23,600 out of total amount of Rs. 16,66,520 relates to market opportunity study for footwear business in India and balance relates to the out of pocket expenses and TP study report which is an yearly activity and related to the business as a whole and required to be submitted annually to TP officer for TP assessment." 6.2 It is apparent from the above stand of the assessee that the payment made on a/c of market opportunity are for a future business intended by the assessee and not incurred on the existing business, therefore these expenses are held to be not incurred exclusively for the purpose of the present business of the assessee. Thus these cannot be allowed as revenue expenditure. More over these expenses has no direct nexus to the incomes reported by the assessee. Hence these expenses are held to be non business and are disallowed & added to the income of the assess....
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....tive and against the revenue. The appeal is, accordingly, allowed, but with no order as to costs." 20.1. Further respectfully relied on order of ITAT Mumbai Bench-K in the case of Asian Paints vs ACIT 160 taxmann.com 356 (ITAT-Mum).The relevant part is as follows:- "19. From the summary of expenditure incurred by the assessee, we further find that the assessee also incurred expenditure on exploring the decorative paints market in Turkey and Indonesia, since the assessee wishes to expand its geographical presence worldwide and wants to develop its operational understanding of the decorative paints market in Turkey and Indonesia. From the perusal of the agreement in respect of the aforesaid market survey, forming part of the supplementary factual paper book from pages 67-87, we find that the same includes mapping and trends of the coating market and decorative paints market in Turkey and Indonesia, understanding pricing scheme of decorative paints, market and product segments, major market players and understanding the channel structure of decorative paints and commercial aspects of distribution. Thus, from the agreements, it is sufficiently evident that the scop....