TaxTMI 
TaxTMI 
2025 (4) TMI 1256
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....21 passed u/s 92CA(3) of the Act by Deputy Commissioner of Income Tax (herein after referred to as 'TPO') are bad both in the eye of law and on facts. 2. Erred in making adjustment of Arm's Length Price for Rs. 24,40,926/-towards international transaction of Interest on ECB given to AE's:- 2.1. The Ld. TPO/ AO erred in not following the procedure laid down under the provisions of Section 92C of the Act relating to the 'Computation of Arm's Length Price. 2.2. The Ld. TPO/AO ought to have appreciated the fact that the assessee has received the funds in India from outside India for the expansion and increasing the capacity of manufacturing and acquiring the machinery in the normal course of business. 2.3. The Ld. TPO/AO ought to have appreciated the facts of case that the amount of loan has been received and used in India and same should be compared with the bank interest rates in India and not with the international rate. 2.4. The Ld. TPO/AO ought to have appreciated the fact that the rate of interest paid by assessee to its AE is lesser than the rate of interest that would have been charged by the banks i.e., base rate of SBI under uncont....
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....y has paid royalty of 100 Euros for each sell of high-speed doors which are manufactured by the technical specifications and standards as per agreement. 3.5. The Ld. TPO/AO ought to have appreciated the facts of case that the assessee company has been using the trade mark, know-How, technology and man power of the Hormann KG Verkaufsgessellschaftfor making the highspeed doors and selling in local/ international market as per agreement. 3.6. The Ld.TPO/AO ought to have appreciated the fact that the assessee has provided all the necessary supporting evidence like Agreement and Invoices of payment of royalty and supporting explanation in support of the payment of Royalty paid to licensor company. 3.7. The Ld. TPO ought to have appreciated the fact the assessee company is selling the same high-speed doors in the market at the price of approx. Rs. 2 lakh per door and on the same door approx. Rs. 8,000/- has been paid as royalty to the licensor. 3.8. The Ld. TPO/AO ought to have appreciated the fact that the said issue under consideration was covered in the previous year where Ld. TPO has accepted the interest payment is at arm's length transaction and....
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.... receivables & accordingly no separate adjustment can be made for the receivables. 4.9. The AO/TPO ought to have appreciated the fact that the assessee is following a policy of not charging interest on receivables irrespective of the fact that whether the sales are made to AE or Non-AE. 4.10. The AO/TPO ought to have appreciated that the assessee did not charge any interest on advances given to its Non-AE's and AE. 4.11. The AO/TPO ought to have appreciated the fact that no ALP adjustment is required to be made in a case where after reducing the amount of notional interest charged on outstanding receivables from operating profit, the margin of comparable is less than the margin of the assessee. 4.12. The AO/TPO ought to have appreciated the fact that the assessee is not paying any interest on trade payables or advance from customers and it is not justified to charge interest on trade Receivables, where assessee itself not paying interest to other on trade payables 4.13. The AO/TPO ought to have appreciated the fact that allowing of extended credit period to the associated enterprises is closely linked to the determination of sale price, ....
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....1.07.2013 and RBI FED Master Direction No.5/2015-16, which provides all-in-cost ceilings regarding interest on ECB over 6 months LIBOR+500 basis points for the loan having maturity period of more than 5 years and LIBOR+350 basis points on the loans having maturity period of 3 to 5 years. The Ld.AR submitted that when both the transactions of ECB-I and ECB-II are the loan taken by the assessee from its AE for more than 5 years, then the ceiling of interest payment as prescribed by the RBI as LIBOR+500 basis is ALP. The assessee has paid and agreed to pay interest at the same rate of LIBOR+500 basis points and therefore, the same is at arms length and no adjustment is called for or warranted. In support of his contentions, he has relied upon the decision of this Tribunal in the case of DCIT Vs. Devgen Seeds & Crop Technology (P.) Ltd. in ITA No.399/Hyd/2016 dated 24.03.2017. He has also relied upon the judgement of Hon'ble High Court of Karnataka in the case of CIT Vs. GE India Technology Centre (P.) Ltd. Bangalore [2021] 125 Taxmann.com 168. Thus, the learned AR has submitted that even otherwise, the interest paid by the assessee on ECB is at arms length, in pursuance with Safe Harb....
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....e case of DCIT Vs. Devgen Seeds and Crop Technology Private Limited (ITA No.399/Hyd/2016) the Hon'ble ITAT observed that "in our considered view, the relevant issue is to change the interest on international transaction based on the LIBOR or any other rates which are the basis for negotiation between the contracting parties and the rates of interest or spread cannot be the same for all the international loans irrespective of their terms, risk etc." In view of the above going by the RBI guidelines the rate should be below 300 bps. Therefore, the TPO is directed to adopt the Six month average LIBOR plus 250 basis points." 9. Once the tenure of the loan as per the agreement between the assessee and the AE is more than 5 years, then this view of the DRP, considering the tenure of the loan from the effective date of agreement till the assessment year under consideration is highly arbitrary and unjustified. The tenure of the loan as agreed between the parties is clearly manifested from the agreement itself and therefore, there is no reason to alter the tenure of the loan, when there is no payment or foreclosure of the loan during the year under consideration. We further note that for ....
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....red view, the DRP rightly directed the assessing officer to adopt the LIBOR plus for the purpose of TP adjustment. Our view is fortified by the decision of the Madras Bench in the case of Siva Industries [supra]. We do not find any merit in the arguments of the learned counsel for the assessee that the DRP should have adopted the EURIBOR for the purpose of the TP adjustments, as we find that the mostly used and recognised benchmark rate for international loan is LIBOR based. Hence, the DRP rightly directed the assessing officer to adopt the LIBOR rates. We confirm the directions of the DRP." 9.2 Aurobindo Pharma Ltd. Vs. ACIT, [2014] 42 Taxmann.com 556 (Hyd. In this case, the coordinate bench has held as under: 4.3 We have considered the issue and examined the facts. With reference to principle that LIBOR + specific percentage points is to be considered as ALP, there is no dispute as this issue was decided by various coordinate benches of Tribunal in various cases. Few of them are as under: 4.4 In the case of Siva Industries & Holdings Ltd. 46 SOT 112 (Chennai) held that "A perusal of the order of the TPO clearly shows that the assessee had raised the fun....
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....ions", and accordingly proceeded to take into account interest rate in terms of LIBOR basis. We have adopted the same approach by taking into account the commercial principles and practices with regard to a US Dollar denominated extended credit for arriving at the benchmark rate, and take LIB OR as the base. Accordingly, the LIBOR (US Dollar) has to be as benchmark for US Dollar transactions - rather than the rate of interest on domestic borrowings, even which is lower than the interest rate of 10 per cent taken as ALP by the TPO, or, for that purpose, rate of interest on any other currency loans." 4.6 In the case of M/s Four Soft Ltd Vs DCIT Circlel( 3), Hyderabad, ITA No. 1495/Hyd/2010 tribunal held that "We have considered the rival submissions and perused the materials available on record. We do not find any merit in the arguments of the learned departmental representative as we find that the ALP is to be determined for the international transaction, that is, on international loan and not for the domestic loan. Hence, the comparable, in respect of foreign currency loan in the international market, is to be LIBOR based which is internationally recognized and adopted. In....
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....er cent interest rate approved would be about LIBOR + 257 base points. The co-ordinate Benches are approving on different factual situation, LIBOR + I per cent to 3 per cent and considering that, we also feel that 7 per cent rate is reasonable which is equivalent to LIBOR + 2 per cent. Be that as it may, since the assessee has accepted 7 per cent in the earlier year and that is the basis for directing to adopt 7 per cent by the Tribunal, we do not see any reason to modify the directions of the Tribunal in this regard. Accordingly, this contention of the assessee is rejected." 9.4. From the above judicial pronouncements, the coordinate bench has adjudicated that in respect of foreign currency loan in the international market, the LIBOR based interest has to be adopted. In the case of Four Soft and Aurobindo (supra), the coordinate bench has only adjudicated that LIBOR based interest alone are to be considered for "ALP adjustment not the domestic PLR. In the case of Dr. Reddy Labs (supra), the coordinate bench has only confirmed the interest rate already accepted by the assessee at 7%, which was considered to be reasonable. Nowhere, it was adjudicated that the bench marking ....
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.... spread of 500 bps. In our considered view, the relevant issue is to charge the interest on international transaction based on the LIBOR or any other rates which are the basis for negotiation between the contracting parties and the rates of interest or spread cannot be the same for all the international loans irrespective of their terms, risk etc. 10. In view of the above discussion, we find no infirmity in the order of the DRP in deleting the adjustment made on interest on ECB/FRD and accordingly, we uphold the order of the DRP and dismiss the grounds raised by the revenue. 11. Thus, it is apparent from various decisions relied upon by the coordinate bench of this Tribunal that this Tribunal has taken a consistent view on this issue. Accordingly, in the facts and circumstances of the case and by following the earlier decisions of this Tribunal in the case of DCIT Vs. Devgen Seeds & Crop Technology (P) Ltd. (supra), we hold that the interest payment of ECB @ LIBOR+500 basis is at arms length and consequently no adjustment is warranted. Hence, the TP adjustment made and confirmed by the DRP on this account is deleted. 12. Ground No.3 is regarding TP adjustment on acco....
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....see from the payment of royalty. He has also referred to para 2.3.4 of the order of the DRP and submitted that the DR has also called for remand report, wherein, the assessee has again failed to substantiate his claim with any documentary evidence for the need of such service. 15. We have considered the rival submissions as well as material on record. The TPO has proposed adjustment on account of royalty payment in para 5 of the order as under : "5. Payment of Royalty The taxpayer vide its TP study report stated that an amount of Rs. 14,34,364/- was paid towards royalty for Technology & know-how and Trademark for the manufacturing to M/s Hormann KG Venkaufsgesellschaft. The taxpayer furnished a copy of Technology & Know-how and Trademark & Name License Agreement basis which it was stated that the amount was calculated at EUR 100 for each high-speed door sold. It was further stated that the licensor company provides all the technical know-how and expertise for manufacturing and marketing of these high-speed doors, therefore, the payment made is within arms' length. However, the taxpayer failed to show any tangible and direct benefit derived by it for su....
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....ly deducted and deposited in the Govt. Bank as seen from Form 16A placed on paper book at page 204. When the Department has given "No Objection Certificate" for remittance made to Indian Offshore Inc for earlier years which is placed on record at page Nos.211-212 of the paper book. Further, it is brought on record that there was no addition in earlier assessment years as evident from the copies filed before us for the assessment years 2005-06 to 2008- 09 which is kept on record at pages 1 to 146 of the paper book. Therefore, it is not possible to hold that the payment is not genuine. 6.1 Further, the Tribunal in the case of Cadbury India Ltd. V.ADCIT in ITA No.7408/Mum/2010 dated 13.11.2013 held in paragraph 39 that if the assessee has paid the payments in relation to royalty to its parent AE for use of technical know-how and trademark after getting due approval from RBI and SIA, the disallowance cannot be made. Further, if the amount paid by assessee was lesser than similar payments made by other group entities to parent AE, then, TPO should not make the TP adjustment in respect of the royalty payment to its parent AE. 6.2. It is pertinent to note that the Tribun....
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....e hold that applying the benefit test by the TPO and determining the ALP of royalty at Nil is highly arbitrary and unjustified. Consequently, addition / adjustment made on this account is deleted. 18. Ground No.4 is regarding transfer pricing adjustment towards interest on receivables. The assessee has reported receivables of Rs. 1,42,64,000/- from its AE. The TPO proposed adjustment on account of interest on outstanding receivables from the AE amounting to Rs. 12,63,972/-. The DRP has confirmed the adjustment proposed by the TPO. Therefore, the Ld.AR of the assessee has submitted that the assessee has outstanding receivables from AE at Rs. 1,42,64,000/- and outstanding payables to the AE at Rs. 4,72,66,000/-. The assessee has neither paid any interest on the payables nor received any interest on the outstanding receivables. The Ld.AR thus contended that when the payables are almost 4 times more than the receivables and the assessee is not paying any interest on the payables to the AE, then adjustment made by the TPO on account of trade receivables without considering the trade payables is not justified. He has thus contended that the adjustment on this account can be considered....
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....eceivables and payables are not in dispute though the receivables and payables are from different AEs. The assessee has stated that the payables are in respect of the purchases made by the assessee from AEs, which was subsequently sold to another AE and therefore, the transactions are inter connected and when the assessee is not paying any interest on the payables to the AEs, which are more than the receivables from the AEs, then the adjustment made on this account is uncalled for. At the outset, we note that for the A.Y.2014-15, this Tribunal, in assessee's own case, vide order dated 07.05.2021 (supra) considered an identical issue in para 6 as under : "6. We have heard the rival submissions and carefully perused the materials on record, and we find merit in the arguments advanced by the Ld. AR. Since, the transactions are cross-border, it would be appropriate to adopt LIBOR rate of interest while computing the notional interest on receivables from the AEs. This Bench of the Tribunal has held so on various earlier occasions with respect to the same issue. Further, it will also be appropriate for netting off the notional interest with respect to the debit and credit transa....
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....ery in the normal course of business. 2.3. The Ld. TPO/AO ought to have appreciated the facts of case that the amount of loan has been received and used in India and same should be compare with the bank interest rates in India and not with the international rate. 2.4. The Ld. TPO/AO ought to have appreciated the facts that the rate of interest paid by assessee to its AE is lesser than the rate of interest that would have been charged by the banks i.e., base rate of SBI under uncontrolled transactions. 2.5. The Ld. TPO/AO ought to have appreciated the facts that the assessee company paid interest rate LIBOR + 5% half yearly. However as per the base rate of SBI, bank interest rate comes out to be around 15% p.a. as against the rate of interest paid by the assessee on the ECB of LIBOR+5% half yearly paid by assessee. 2.6. The Ld. TPO ought to appreciate the fact that case laws referred by the TPO are relating to amount of loan or advances given outside India on which Hon'ble court charged interest at international rates. However, in case under consideration the assessee has received and utilized the funds in India and not paid or receivables in ....
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....Ld. TPO ought to appreciate the fact the assessee company is selling the same high-speed doors in the market at the price of approx. Rs.2 lakh per door and on the same door approx. Rs. 8,000/- has been paid as royalty to the licensor. 3.8. The Ld. TPO/AO ought to appreciate the fact the said issue under consideration has covered in the previous year where Ld. TPO has accepted the interest payment is at arm's length transaction and no adjustment has been proposed. 4. Erred in upheld the addition of Rs. 13,58,312/- towards Interest on receivables: 4.1. The AO/TPO erred in not following the procedure laid down under the provisions of Section 92C of the Act relating to the 'Computation of Arm's Length Price'. 4.2. The Ld. AO/TPO ought to have appreciated the fact that the amendment in the 2012 Finance Act does not cover outstanding receivables arising out of a assessee's sale transaction as the word 'capital financing' used there is particularly refers to loans or advances during the normal course of business, whereas in Assessee's case, these are outstanding receivables arising out of services rendered but not capital financing. 4.3. The Ld....
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....ought to have appreciated the fact that the assessee is not paying any interest on trade payables or advance from customers and it is not justified to charge interest on trade Receivables, where assessee itself not paying to interest to other on trade payables. 4.13. The AO/TPO ought to have appreciated the fact that allowing of extended credit period to the associated enterprises is closely linked to the determination of sale price, which is in-turn base to arrive at the margins of the assessee. 4.14. Without appropriating the fact that the outstanding receivables are foreign currency receivable and same has to be benchmark with the LIBOR rate and not SBI rate. 5. Erred in upheld the addition of relating to disallowance of Rs. 6,10,401/- towards Income credited to Profit and Loss account which is exempt shown in ITR. 5.1. The Ld. AO has erred in not following the directions of the Disputed Resolution Panel ('DRP') while passing the final assessment order; is a clear violation of provisions of section 144C(10) and (13) of the Income Tax Act, 1961('Act'). 5.2. The Ld. AO ought to have appreciated the fact that the directions issued by the....
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....that the assessee company has itself disallowed the amount of Rs. 27,150/- in the return of income. 7.4. The Ld. A.O ought to have appreciated the fact that the amount disallowed by the assessee can be seen from point 9 of Part - A of other information of the return of Income. 8. Erred in upheld the addition of relating to variance of Rs. 34,30,323/- towards amount debited to profit and loss account of the previous year but disallowable under section 43B and the assessee company has itself disallowed the whole amount of Rs. 87,79,789/- in the return of income. 8.1. The Ld. AO has erred in not following the directions of the Disputed Resolution Panel ('(DRP') while passing the final assessment order; is a clear violation of provisions of section 144C(10) and (13) of the Income Tax Act, 1961('Act'). 8.2. The Ld. AO ought to have appreciated the fact that the directions issued by the DRP are binding on AO, irrespective of fact whether the same are acceptable or not to the Department. 8.3. The Ld. A.O erred in considering amount only to the extent of Rs. 53,49,466/- and not the whole amount of Rs. 87,79,789/- which is incorrect and bad in la....
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....ate of filing return of income. 10.4. The Ld. A.O ought to consider the fact that all the payments of Provident fund of employees and employer share are paid on or before due date of filing return of income. 11. The appellant may add, alter or modify any other point to the Grounds of appeal at any time before or at the time of hearing of the appeal. 24. Ground No.1 is general in nature and does not require specific adjudication. 25. Ground No.2 is regarding TP adjustment on account of interest on ECB. This issue is common to the issue of interest on ECB for the A.Y.2017-18, which has been considered and decided by us in the preceding para of this order. In view of our finding for A.Y.2017-18, this issue stands adjudicated on the same terms and the addition made by the TPO/AO on this account is deleted. 26. Ground No.3 is regarding TP adjustment made towards royalty payment. This issue is common to the issue of royalty payment for the A.Y.2017-18, which has been considered and decided by us in the preceding para of this order. In view of our finding on this issue for the A.Y.2017-18, this issue stands adjudicated on the same terms / reasoning and the addit....
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....y taken up by the assessing officer and all these issues were required to be verified after considering the explanations as well as the relevant records available before AO. The Ld.AR has submitted that the CPC as well as the AO has not considered the suo-moto disallowance made by the assessee in respect of these items, which were disallowed by the CPC while processing the return u/s 143(1) of the Act. He has thus, pleaded that the AO may be directed to verify the record and determine the correct amount of disallowance if any on this account. 31. On the other hand, the Ld.DR has submitted that the DRP has already directed the AO to verify the claim and suo-moto disallowance made by the assessee to avoid double addition on this account. He has further submitted that since these adjustments were made by the CPC while processing the return u/s 143(1) and the assessee has not challenged the said order of the CPC, consequently, the assessee missed the opportunity and cannot challenge the same in the assessment proceedings. 32. We have considered the rival submissions and perused the material on record. The assessment was taken up for scrutiny by issue of notice u/s 143(2) on 23.09....