TMI Blog2017 (3) TMI 1626X X X X Extracts X X X X X X X X Extracts X X X X ..... Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015 (3) TMI 580 - DELHI HIGH COURT]. Accordingly, we hold that for benchmarking international transactions, various activities undertaken by the assessee under the head 'manufacturing activities' need to be aggregated. The Assessing Officer / TPO is directed so. Difference in gross profit margins by AO as against difference in net profit margins between sales to associate enterprises and sales in domestic market - Held that:- The Tribunal in view of the detailed reasoning of CIT(A) observed that the addition made by the Assessing Officer on account of division of difference in gross profit margins by the Assessing Officer as against difference in net profit margins between sales to associate enterprises and sales in domestic market, no addition is warranted. The Tribunal decided the issue as per provisions of Rule 10A(d) of the Rules and deleted addition. Applying the said principle, we direct the Assessing Officer / TPO to re-compute the adjustment, if any, in the hands of assessee on account of international transactions. It may be pointed out herein itself that the adjustment was made in the hands of assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Disallowance of incremental provision for New Engine Performance Inspection Fee (in short NEPI Fee') - Held that:- the assessee was following a scientific basis for making the aforesaid provision which is not a contingent expenditure as the provision is made in relation to the IC Engines sold by the assessee. The assessee no doubt is making the provision and after the lapse of the period of inspection in case the expenditure has not been necessitated then the same is written back. In the totality of the above said facts and circumstances, we find merit in the plea of the assessee and allow the claim of the provision made for any NEPI fee. It may also be pointed out that the inspection and servicing is different from warranty which is to be taken care of in case of failure of the Engine or its Components during the period of warranty. Accordingly, we allow the claim of the assessee Disallowance of incremental warranty provision - Held that:- We find no merit in the stand of the authorities below in this regard wherein the assessee is following a scientific basis in claiming the said expenditure and as in the case of NEPI fee, the provision made by assessee is to be allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n circumstances of the case pursuant to the directions of the learned DRP in rejecting the aggregation approach followed by the Appellant for benchmarking of international transactions in respect of manufacturing function of the Appellant. 2.2 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in accepting the benchmarking done by the Transfer Pricing Officer [ TPO ] and stating that benchmarking done by the Appellant is not reliable. 3. Inappropriate issue of two show cause notices 3.1 The learned DCIT, pursuant to the direction of the learned DRP, erred in law and on the facts and in circumstances of the case in issuing two show cause notices. 4. Inappropriate comparison of profitability of export to Associated Enterprises (AEs) and domestic sales ignoring differences in Functions, Assets and Risks (FAR) and comparison of controlled transactions with controlled transactions. 4.1 The learned DCIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in rejecting the external comparable companies selected by the Appellant for benchma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PLI as net profit to total cost as against net profit to sales as selected by the Appellant without providing cogent reasons. 8. Benefit of the variation / reduction of 5 percent from the arithmetic mean 8.1 The learned DCIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in confirming the computation of arm's length price undertaken by the TPO without considering lower +/- 5 percent range from the price computed based on arithmetic mean as provided in proviso to Section 92C (2) of the Act. C. International Transaction relating to Payment of Royalty 9. Inappropriate approach adopted by the TPO for benchmarking payment of royalty to associated enterprises 9.1 The learned DCIT erred in law and on facts and in circumstances of the case pursuant to the directions of the learned DRP, in rejecting the aggregation approach in respect of manufacturing function followed by the Appellant for benchmarking the international transaction relating to payment of royalty. 9.2 The learned DCIT erred in law and on the facts and circumstances of the case pursuant to the directions of the learned DRP, in benchmar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Inappropriate approach adopted by TPO in benchmarking procurement support services provided to associated enterprises 11.1 The learned DCIT erred in law and on facts and in circumstances of the case pursuant to the directions of the learned DRP, in rejecting the aggregation approach in respect of manufacturing function followed by the Appellant for benchmarking the international transaction relating to provision of procurement support services. 11.2 The learned DCIT pursuant to the direction of the learned DRP erred in facts and circumstances of the case in following cherry picking approach in selection of the comparable companies. 11.3 The learned D C IT erred in facts and in circumstances of the case in treating the Appellant as a cost protected entity for rendering procurement support services. F. International Transaction relating to receipt of Commission 12. In appropriate approach followed by the TPO in benchmarking receipt of commission from associated enterprises 12.1 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in rejecting the benchmarking methodology adopted by the Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion as compared to the actual requirements of the Appellant Company. 14.4 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in not following the ratio of the following decisions: (i) The order of ITAT Pune Bench in ITA No. 510/PNI1998 in the case of the Appellant Company for Assessment Year 1994-95 (ii) Rotork Controls India P. Ltd. v. CIT (2009) 314 ITR 62 (SC) (iii) CIT v. Ericssion Communications P. Ltd. (2009) 318 ITR 340 (Delhi) 15. Proposed disallowance of expenses u/s 14A of Income Tax Act,1961 15.1 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in disallowing an amount of ₹ 15,94,740/- as incurred in relation to exempt income u/s.14A of the Income Tax Act, 1961. 15.2 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in not appreciating that there was no dominant and immediate connection between the expenditure incurred and exempted income and therefore there cannot be any adhoc disallowance out of general ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Bang.) (vii) IBM India Ltd. v. CIT (2007) 105 ITD 1 (Bang.) 17. Proposed disallowance out of Deduction u/s. 80IB by the DCIT 17.1 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in disallowing the deduction u/s. 80IB by allocating a portion of Head Office Expenses and Director's Expenses to the profits of eligible Daman Unit. 17.2 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in not appreciating that the eligible unit of the Appellant Company at Daman was an independent unit managed independently without any interference by other divisions of the Appellant Company and therefore no part of the common expenses / expenses on directors could be attributed to the said unit of the Appellant Company. 18. Proposed disallowance out of depreciation on intangible by the DCIT 18.1 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in disallowing depreciation on intangibles in respect of Global Sourcing Consideration. 18.2 The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed return of income declaring total income of ₹ 210,40,80,385/- on 23.11.2006. The case of the assessee was selected for scrutiny. In view of various international transactions detailed in the audit report in Form 3CEB, reference under section 92CA(1) of the Act was made to the Transfer Pricing Officer (TPO). The TPO noted that the assessee was 51% owned subsidiary of Cummins INC, USA and the balance equity was held by Kirloskar group, the Indian public and various financial institutions. The company was engaged in the manufacture and sale of IC Engines for power generation and industrial application in the domestic market. Further, it manufactures and sold IC Engines and components for exports. The assessee was purchasing spares by way of imports for re-sale in the domestic market. The details of international transactions entered into by the assessee are enlisted under para 5 at page 2 of the TPO's order and the activities were divided into (a) manufacturing activity, (b) activity carried on by the low horsepower division, (c) sourcing activity, (d) business services and (e) financing activity. The TPO show caused the assessee since he was of the view that each of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 8% and the total royalty paid was ₹ 22,28,27,492/-, out of which royalty amount paid @ 8% of net sales was at ₹ 17,13,10,967/-. The TPO worked out the said payment of royalty @ 4.56% on total sales of ₹ 375.95 crores. The assessee was asked to give the details in respect of the said payment of royalty, since the royalty was being charged by the associate enterprises for the assessee's export to associate enterprises itself. The TPO noted that group entities were being charged at the rates ranging from 3%-4% and the average rate of royalty worked out to 3.55%. The TPO worked out the excess royalty payment by 1.0566% and suggested an adjustment of ₹ 3,96,23,859/-. In respect of technical know-how also, where the assessee had paid sum at ₹ 51.35 crores to the associate enterprises and the transaction was benchmarked following TNNM method aggregating the transactions under the manufacturing activity, the TPO noted that this amount was merely an advance and was not debited to Profit Loss Account. Since it was not reflected in the Profit Loss Account, the TPO queried how the same is being benchmarked after having grouped under manufacturing activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o associate enterprises of the manufactured IC engines. However, the TPO was of the view that allocation of expenses wherein administrative expenses of ₹ 39.35 crores had been allocated against domestic sales, whereas ₹ 8.49 crores was allocated to exports to associate enterprises and similarly, in respect of selling and distribution expenses, ₹ 19.79 crores was against domestic sales and ₹ 8.90 crores in respect of exports to associate enterprises. After perusing the details, wherein allocation was made in respect of certain expenditure but no allocation was made in respect of depreciation, repairs maintenance, rent receipts and taxes and other expenses, the TPO observed that the expenses were not allocated in the ratio of sales. The assessee was show caused as to why allocation of expenses should not be on the basis of sales of demostic unit and sales to associate enterprises and was also show caused as to why internal comparability should not be taken following TNNM method and why the net margins over total cost be not taken as PLI for such internal comparability and accordingly, why an adjustment of ₹ 34.35 crores should not be made in benchmarki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales, the same were at arm's length price. However, the royalty paid at 8% was very higher. Another aspect noted by the TPO was that Cummins Inc had incurred expenditure of about 3% of sales during the year and if the expenditure was 3% of sales, then he was of the view that royalty @ 3.5% on gross sales as proposed in the show cause notice was more than justified. In view thereof, adjustment of ₹ 3,97,23,859/- was made to the international transactions relating to payment of royalty to associate enterprises by the TPO. The TPO also made following additions on account of arm's length price of each of the transactions:- (a) Technical Know-how Fees Rs.51.35 lakhs First installment paid towards acquisition of Know-how pertaining to KIT engines which for the year under consideration was an advance. (b) Procurement support services Rs.13.99 lakhs (c) Receipt of commission Rs.43.24 lakhs (d) Financing activity Rs.141.51 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f in comparing the two activities undertaken by the assessee i.e. manufacturing of items and sale to domestic market with the manufacturing and sale to associate enterprises. He pointed out that wherein, there was difference in the products and there was functional difference and also difference in risk in two activities undertaken by the assessee, there could not be comparison between the same. In any case, he pointed out that the comparison, if any is to be with Uncontrolled Transactions and not with the controlled transactions. The learned Authorized Representative for the assessee thereafter, referred to third show cause notice issued by the TPO, wherein he referred to allocation of administrative and selling expenses on sales ratio basis. He pointed out that the assessee has applied SAP System and ERP System for allocating expenses, on the other hand, the TP re-allocates the administrative expenses on adhoc basis. He further found fault with the order of TPO in comparing the exports made to associate enterprises by the assessee with its domestic sales and in not applying the margins of comparable companies selected by the assessee to benchmark its international transactions. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied the margins to benchmark the international transactions undertaken by the assessee, which is acceptable. Similarly, where the assessee had not maintained separate books of account and where the activity undertaken was common, then allocation of expenses was also aggregated. He further pointed out that the assessee had imported components which were used for both domestic and export sales and the TPO had not made any comparison of utilization. He relied on the reasoning of TPO in applying TNNM method with net margins as PLI. 14. We have heard the rival contentions and perused the record. The assessee is engaged in manufacture and sale of IC engines for power generation and industrial applications in the domestic market and it also manufactures and sells IC engines and components for exports. The assessee imports engine parts and components which in turn, were grouped for utilizing in the manufacturing activity undertaken by the assessee both for domestic and for exports. During the year under consideration, the assessee had entered into various international transactions which are as under:- Sr. No. International transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17 Fixed Asset and Cash Management Services 43,30,309/- TNMM E Financing Activity 18 Receipt of Interest for extended credit-period facility 4,00,97,000/- Comparable Uncontrolled Price Method 15. The assessee had applied TNNM method to benchmark its international transactions by aggregating closely and inter-linked transactions under similar activities and had found the transactions to be arm's length price. The TPO on the other hand, segregated various transactions and benchmarked the same and found it to be not at arm's length price and hence, addition in the hands of assessee. On the other hand, the claim of assessee was that the operations undertaken by it were predominantly relating to manufacture of internal combustion engines which in turn, are used for various applications and all the transactions should be aggregated as done by the assessee in its transfer pricing study report and the same be accepted to be arm's length price. The first iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions are 'closely linked'. Ostensibly the rationale of aggregating 'closely linked' transactions to facilitate determination of ALP envisaged a situation where it would be inappropriate to analyse the transactions individually. The proposition that a number of individual transactions can be aggregated and construed as a composite transaction in order to compute ALP also finds an echo in the OECD guidelines under Chapter III wherein the following extract is relevant:- Ideally, in order to arrive at the most precise approximation of arm's length conditions, the arm's length principle should be applied on a transaction-by-transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. Examples may include 1. Some long term contracts for the supply of commodities or services; 2. Rights to use intangible property; and 3. Pricing a range of closely linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know- how and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the most appropriate method shall be for each particular international transaction. The term 'transaction' itself is defined in rule 10A(d) to include a number of closely linked transactions. Therefore, though the reference is to apply the most appropriate method to each particular transaction, keeping in view, the definition of the term 'transaction', the most appropriate method may be chosen for a group of closely linked transactions Two or more transactions can be said to be linked when these transactions emanate from a common source being an order or a contract or an agreement or n arrangement and the nature, characteristics and terms of these transactions are substantially flowing from the said common source. For example, a master purchase order is issued stating the various terms and conditions and subsequently individuals orders are released for specific quantities. The various purchase transactions are closely linked transactions. 13.8 It may be noted that in order to be closely linked transactions, it is not necessary that the transactions need be identical or even similar. For example, a collaboration agreement may provide for import of raw mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t intended by the transfer pricing regulations. The learned TPO has also referred to the segmental profitability in this regard computed by the assessee during the course of transfer pricing proceedings before him. In our considered opinion, the point made out by the learned TPO is not justified, inasmuch as, separate invoicing of an activity, flowing from a singular contract/ negotiation, would not ipso facto lead to an inference that they are individual/independent transactions. In-fact, it is the nature and characteristic of the activities which would be required to be analyzed having regard to the facts and circumstances of each case as to whether they can be considered as individual/independent transactions or a single transaction for the purpose of transfer pricing regulation. In the present case, as we have noted earlier, it is only on account of the manufacturing activity that the activity of commissioning and installation of the equipment arises and pertinently all the aforesaid activities are negotiated and contracted for at one instance. With regard to the segmental profitability referred by the Assessing Officer, the position has been clarified by the assessee. Accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Needless to say, the Assessing Officer shall allow the assessee a reasonable opportunity to put forth material and submissions in support of its stand and only thereafter the Assessing Officer shall pass an order afresh on the above aspect in accordance with law. Thus, on this Ground, assessee succeeds for statistical purposes. 25. Similar principle has been laid down by the Delhi Bench of the Tribunal in M/s. Panasonic India Pvt. Ltd. Vs. ITO (supra) and M/s. Intimate Fashions (India) Pvt. Ltd. Vs. ACIT (supra). 26. In view of the ratio laid down by Pune Bench of the Tribunal in Demag Cranes Components (India) Pvt. Ltd. Vs. DCIT (supra), it is held that where number of transactions are closely linked transactions, then the same can be aggregated and construed as a single transaction for the purpose of determining the arm's length price. In case, there is close link exists between the different transactions, the same should be treated as composite transaction and appropriate method should be applied to work out the transfer pricing analysis. Where two or more transactions emanate from common source being an order or contract or an agreement or an arrangement, then suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d enterprises and the exports made to third parties. The explanation of the assessee in this regard was that the exports made to the associated enterprises were on regular basis and were being made to its associated enterprises, which in turn were supplying to the dealers and through them, to the customers. However, the exports to third parties were directly made to the consumers who could select the spares through the catalogue and order the same to the assessee, who was engaged in providing aftermarket support to the IC engines sold worldwide. Further, the claim of the assessee was that the export to third parties was made on urgent basis and hence, the premium was charged and further, the frequency of such transactions was low and consequently, higher margins of profits. The first major activity carried on by the assessee was of import of spare parts to ₹ 29.45 crores as against which, the export of spare parts was only ₹ 0.87 crores. The payment for IT support received from associated enterprises was ₹ 1.09 crores and the payment for access to customized part catalogues was ₹ 0.02 crores. Further, the assessee had received ₹ 0.76 crores against war ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s length price, provided that such transactions are closely inter-linked. Further, even under the OECD Guidelines under the Chapter III, the proposition of aggregation of individual transactions is taken note of. In such background, it emerges that in appropriate circumstances, where there is existence of closely linked transactions, the same could be considered as one composite transaction and for this, common transfer pricing analysis needs to be carried out by adopting most appropriate method. Depending on the facts and circumstances of each case, it needs to be seen as to which transactions are to be held to be closely linked. Applying the said principle to the facts of the present case, where the primary activity of assessee was to manufacture and sell IC engines and components both for domestic market and for exports, then the activity of importing engine parts and components, payment of royalty for getting know-how, provision of miscellaneous service i.e. procurement support services to the associate enterprises to help the sourcing of components, receipt of IT support services, design services and payment of technical know- how fees, etc. is closely linked to the export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nes to associate enterprises. The assessee has also stressed that comparability, if any, is to be made with uncontrolled transactions. Another aspect raised in appeal is that the net profit margins of controlled transactions has to be compared with net profit margins of uncontrolled transactions, whereas the TPO has applied gross profit margins. 18. We find that similar issue of adjustment made on account of arm's length price of international transactions relating to export of manufactured IC engines by considering difference in the gross margins earned by the assessee from sale of IC engines in the domestic market and gross margins earned by the assessee from exports of IC engines to associate enterprises arose before the Tribunal in assessee's own case relating to assessment year 2005-06 in ITA No.594/PN/2013 i.e. Revenue's appeal with CO No.53/PN/2014 and the Tribunal vide order dated 29.01.2016 held that in view of the provisions of Rue 10B(e) of the Rules as well as para 3.26 of OECD Guidelines and various other decisions, net profit margins of controlled transactions had to be compared with net profit margins of uncontrolled transactions. The Tribunal also hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te enterprises as against domestic market, assessee's arguments on this issue could not be considered and the contention of assessee on this ground was not accepted by the CIT(A). The CIT(A) thereafter, decided the issue on the margins to be applied whether on the gross or net and deleted the addition. The appeal of Revenue was dismissed. The perusal of order reflects that the grounds of appeal No.2, 3 and 5 of Cross Objections were not pressed by the assessee, wherein grounds of appeal No.2, 3 and 2.4 were against the order of CIT(A) in not considering the use of external comparable companies selected by the assessee for benchmarking the manufacturing activity of HHP division. The ground of appeal No.2.5 was against the stand of Assessing Officer in comparing the segmental profitability of assessee's export to associate enterprises segment and domestic sales segment. The ground of appeal No.2.6 is on the difference in FAR analysis of sales in export market than in domestic market. However, all these grounds of objections were not pressed by the assessee before the Tribunal and the same were dismissed while deciding the appeal relating to assessment year 2005-06 (order date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directed to adopt net profit to sales in order to benchmark the international transactions. Hence, the ground of appeal No.7 is allowed. 23. The ground of appeal No.1 is general and hence, the same is dismissed. The ground of appeal No.2 against aggregation, is allowed. The ground of appeal No.3 against issue of two show cause notices for the same transaction is dismissed. The ground of appeal No.4 against comparability of profitability of export to associate enterprises and domestic sales is dismissed as indicated above. The issue in ground of appeal No.6 of allocation of administrative and other expenses is allowed and ground of appeal No.7 is also allowed. The issue in ground of appeal No.8 of benefit of variation of +/- 5% becomes consequential. 24. Now, coming to the balance grounds of appeal raised by the assessee in benchmarking various payments made by the assessee i.e. by way of ground of appeal No.9, payment of royalty, ground of appeal No.10 of payment of technical know-how fees to associate enterprises, ground of appeal No.11 of procurement support services provided to associate enterprises. 25. In the paras hereinabove, we have already held that all these inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcentage on actual commission received on sales from CPG, Kent, vis- -vis CPG, Singapore. The TPO thus, applied internal comparable as the basis and proposed adjustment corresponding to the difference of rate of commission which worked out to ₹ 43.24 lakhs, which was made to the value of international transactions to arrive at arm's length price of international transactions relating to receipt of commission from CPG, Kent. The said order of TPO was upheld by the DRP and the assessee is in appeal against the order of Assessing Officer in this regard. 29. The learned Authorized Representative for the assessee pointed out that the approach of TPO was incorrect, wherein international transactions with associate enterprises were benchmarked by comparing the same vis- -vis another transaction with different associate enterprises. The comparison of controlled transactions with another controlled transaction was held to be not correct. The learned Authorized Representative for the assessee in this regard, placed reliance on the ratio laid down by Mumbai Bench of Tribunal in Asstt. CIT v. Fuchs Lubricants (India) (P.) Ltd. [2013] 30 taxmann.com 404/56 SOT 246. 30. The learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for export of IC engines and had charged interest at LIBOR below 290 basis points in case of billing in US Dollars and LIBOR + 280 basis points in case of billing in GB pounds. Credit period was extended by 80 days over and above the original credit period of 90 days allowed to associate enterprises. The plea of the assessee before the TPO was the benchmarking the said transaction by adopting the rate of interest payable by it by applying the rates of packing credit in foreign currency. The TPO rejected the claim of assessee and made an adjustment of differential amount of interest of ₹ 1,41,51,731/-. 34. The learned Authorized Representative for the assessee pointed out that the issue is now stands covered by the ratio laid down by the Pune Bench of Tribunal in iGATE Computer Systems Ltd. v. Addl. CIT [2016] 65 taxmann.com 44 (Pune - Trib.) and in Varroc Engg. (P) Ltd. v. Asstt. CIT [2015] 54 taxmann.com 384 (Pune - Trib.). 35. We have heard the rival contentions and perused the record. The issue arising before us is in relation to interest charged by the assessee company to its associate enterprises on the outstanding amount due to the assessee, wherein as against cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on interest to its associated enterprises. The assessee had charged interest rate of 4.75% on the loan advanced to the associated enterprises. The assessee on the other hand, claims that it had borrowed the money on LIBOR+ rates i.e. international rates, which were Japanes based LIBOR+ rates which were lower than the US based LIBOR+ rates. The plea of the assessee before us was that it had advanced the loan to its associated enterprises on LIBOR+ rates i.e. 4.75%. In the totality of the facts and circumstances where the assessee has the internal CUP of operating at international rates available and since the said loan raised by the assessee at international rates was advanced to its associated enterprises, we find no merit in the order of the TPO in applying the domestic loan rates i.e. BPLR rates for benchmarking transaction of charging of interest on the loans advanced to the associated enterprises by the assessee. Where the assessee had made the borrowings on LIBOR+ rates and advanced the same at LIBOR+ rates, then the said transaction is at arm's length price and there is no merit in any adjustment to be made on this account. 16. The Chennai Bench of the Tribunal in M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to international transactions. In the facts of present case, the assessee had borrowed the loan from Citi Bank and advanced the same on LIBOR+ rates to its associated enterprises, then the said transaction with its associated enterprises is within arm's length price. The TPO / AO thus, directed to re-compute the arm's length price of the international transactions. Another aspect to be kept in mind is the plea of the assessee with regard to the interest receivable. The assessee had also raised the issue that the TPO had adopted the interest receivable from associated enterprise company at ₹ 2,86,27,089/- instead of ₹ 2,91,82,060/- which is disclosed in the audit report in Form No.3CEB. The Assessing Officer is also directed to verify the claim of the assessee in this regard and compute the arm's length price of the international transactions. Reasonable opportunity of being heard shall be afforded to the assessee by the Assessing Officer / Transfer Pricing Officer. The grounds of appeal Nos.1 and 2 raised by the assessee are thus, allowed as indicated above. 31. The learned Departmental Representative for the Revenue placed reliance on the ratio laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture having been incurred by the assessee on such guaranteed commission, there was no merit in including the same. The Revenue is not in appeal against the said finding of the CIT(A) and in the totality of the above said facts and circumstances, where it has not been established that the assessee has not paid any commission, there was no merit in charging plus 200 basis as guaranteed commission. However, we uphold the order of TPO in benchmarking the transaction of interest due on amounts outstanding from its AEs at LIBOR plus 300 basis points. The Assessing Officer / TPO shall determine the adjustment, if any, to be made in the hands of assessee on account of interest chargeable on the amounts due from its AEs beyond the credit period of 25 days after allowing the benefit of interest recovered by the assessee from its AEs. The grounds of appeal raised by the assessee are thus, partly allowed.' 36. Following the same parity of reasoning, we hold that LIBOR + rates have to be applied to the amounts due from associate enterprises for the extended period of credit and the extended period of credit. The Assessing Officer is directed to follow our directions in iGATE Computer S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive for the Revenue placed reliance on the order of the Assessing Officer. 42. We have heard the rival contentions and perused the record. The assessee was engaged in the manufacture and sale of IC Engines which had wide applications. The assessee was offering free servicing and free inspection of the equipment for certain initial running of the equipment. The assessee was following a system under which the inspection checks were being carried out at different intervals as in the following manner : Inspection Checks Period of Interval A At putting engine into service OR at 50 hours or 1 month of engine operation whichever is earlier B At 250 hours OR 6 months of engine operation whichever is earlier C At 1500 hours OR 1 year of engine operation whichever is earlier D At 4500 hours OR 2 years of engine operation whichever is earlier 43. The inspections carried out by the assessee was to check the performance of IC Engines and such services were vital business requirements. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity being determined on a scientific basis and hence the same is to be allowed as an expenditure in the hands of the assessee. We hold so and allow Ground of appeal No.16 raised by the assessee. 47. Now coming to Ground of appeal No.15 raised by the assessee which is against disallowance of expenses u/s.14A of the Act, the assessee during the year under consideration had received interest and dividend of ₹ 36.81 crores from shares in different companies and units of mutual funds and had shown long term capital gain of ₹ 1.62 crores. All these items of income were exempt from tax and the Assessing Officer invoked the provisions of section 14A read with Rule 8D of the Income Tax Rules and worked out the disallowance in the hands of the assessee to the tune of ₹ 15,94,740/-. 48. The assessee is aggrieved by the aforesaid disallowance. The first contention raised by the assessee before us is that the year under consideration is Assessment Year 2006 -07 and in the said year, the provision of Rule 8D of the Income Tax Rules were not applicable. He further pointed out that the assessee has sufficient reserves and surplus and current income, to make the aforesaid in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s running a unit at Daman for the manufacture of LHPC Engines, against which the assessee had claimed deduction under section 80IB of the Act at ₹ 6.55 crores. The assessee was asked to submit the profit and loss account of Daman unit and also to state whether the head office expenses, i.e. Directors salary, sitting fee and commission etc., were allocated to the Daman unit. The plea of the assessee before the authorities below was that the said unit was functioning as a separate business unit and as its own employees were looking after the operations, none of the expenses of the other division including the head office could be attributed or allocated to the activities of the eligible industrial undertaking. Without prejudice to its submission, the assessee also submitted the details of directors salary, sitting fees and commission amounting to ₹ 53,79,161/- and estimated the directors travelling expenses at ₹ 17,15,000/-. The plea of the assessee before the Assessing Officer/Transfer Pricing Officer was that none of the said expenses could be attributed to the activities of the eligible industrial undertaking. The contention of the assessee was not accepted and p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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