TMI Blog2017 (9) TMI 1649X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP by the TPO/AO cannot be considered as illegal and denial of the natural justice. Accordingly, the objection raised by the assessee is rejected. DRP observed that as per Rule 10B(4) financial data relating to the financial year in which international transactions were undertaken has to be used as per Rule 10B(4) of the Income Tax Rules, unless it is established that the use of data of the earlier financial years will result in more reliable results, which the assessee failed to establish. Arm’s length price adjustment towards corporate guarantee - Held that:- When there is no internal benchmark and also considering the fact that the judicial pronouncements confirmed the fee in the range of 0.25% to 3.0% year on year, we are of the view, that for the current FY, the SBI rate which is 1.8% per annum for the relevant year is reasonable and accordingly, direct the TPO/AO to adopt the same, in place of 2% Addition towards charging interest @ 14.75% on advances - Held that:- We are not in agreement with the request of the assessee that on the above said advances, the AE's had allotted Shares to the assessee company on 30.09.2012, hence no interest can be charged. The allotme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 16/01/2017 relating to AY 2012-13. 2. Brief facts of the case are, assessee company engaged in the business of software development and trading of biometric and ecoding equipments, e-filed its original return of income for the AY 2012-13 on 29/11/12 admitting a business income at Nil under normal provisions and (-) ₹ 6,98,08,245/- under the provisions of section 115JB . Assessee had also furnished a report in Form No. 3CEB in accordance with provisions of section 92E. As per the said report, assessee had international transactions with its associate enterprises which necessitated reference to the Transfer Pricing Officer (TPO) as per the provisions of section 92CA for determination of Arm s Length Price. Accordingly, the case was referred to the TPO on 25/03/2015 for determination of Arm s Length Price with the prior approval of the CIT-I, Hyderabad. 2.1 Assessee s Profile: M/s Batronics India Ltd. is formed in the year of 1990 and it has been engaged in introducing newer technologies and solutions in India based on Biometrics, RFID, POS, EAS, and smart cards etc. 2.2 International Transactions: As per 3CEB report/TP Document submitted, the internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment services: The TPO observed that the assessee had used three years data to find comparables which is not as per the provisions of section 10B. This had led to the selection of 3 comparables out of which some comparables do not have the contemporaneous data. This renders the set of comparables proposed by the assessee as invalid. Therefore, an independent search was conducted by the TPO using Prowess and Capitaline database and using contemporaneous data as provided in Rule 10B and aggregating the transactions. After applying certain filters a set of comparables have been arrived at. The TPO held that the +5% of the price received, and after allowing WCA, is within the average margin of the comparables and, therefore, no adjustment was made. 3.2. Outstanding receivables. The TPO observed that the assessee has receivables of ₹ 31,86,96,000/- which were not reported in Form 3CEB of the year. The assessee was asked to submit the details of raising the invoice and subsequent receipt. The assessee submitted the details as under: The outstanding receivable as on 31.02.2012 of ₹ 16.48 lakhs from Bartronics Asia Pte Ltd and ₹ 3170.48 lakhs from Batronics Midd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances and during the same period of time. RBI does not permit Indian entities to lend loans to any entity other than their wholly owned subsidiaries and therefore there is no uncontrolled transaction available. Further the interest rate expected by the lender is equivalent to the opportunity cost of such funds. As a hypothetical CUP would be where the Indian entity invests in bank deposits, stocks, mutual funds or real estate, the corresponding return would still be the effective Indian interest rate. Thus PLR is an appropriate CUP. TPO further observed that the assessee has not submitted the details of date of invoice and actual date of realization. The assessee submitted 18 months (i.e. 01-04-2011 to 30-09-2012) financial statements and related party transaction schedule. As per this schedule also, the entire receivables are outstanding as on 30.09.2012 Hence, the TPO proceeded with levying of interest on the outstanding receivables for 18 months @ PLR 14.75%. Working of the interest is as under: ₹ 31,86,96,000 x 14.75 x 18/12 x 100 = ₹ 7,05,11,490/- Thus, the arm s length price interest on receivables is ₹ 7,05,11,490/- and the shortfall of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e guarantee fee was computed as under: Loan outstanding as on 08/04/2011 (as the date not mentioned in the financials or TP documents) 67,92,81,000 ALP of the fee for corporate guarantee given by the assessee to the lending banks against the loan taken by the AE computed @ 2% of the outstanding amount 1,35,85,620 Actual fee charged on the corporate guarantee NIL Shortfall on account of the corporate guarantee fee 1,35,85,620 Thus the Arm s length price of corporate guarantee is ₹ 1,35,85,620/- and the shortfall of the same amount was treated as an adjustment u/s 92CA of the Act. 3.6 Advances to the AE The TPO noted that the assessee had advanced to AE as on 01/04/2011 of ₹ 3,26,11,97,000/-, however, by the end of the year the same was NIL. When the TPO was proposed to charge interest @ 14.75% as was done earlier, the assessee objected to the same stating that the TPO is not legally justified in proposing an adjustment @ 14.75% on interest at PLR as the advance was given for business development. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the contention of the assessee, the DRP observed that as per Rule 10B(4) financial data relating to the financial year in which international transactions were undertaken has to be used as per Rule 10B(4) of the Income Tax Rules, unless it is established that the use of data of the earlier financial years will result in more reliable results, which the assessee failed to establish. The view finds support from the various judicial pronouncements including the decision of the Hon'ble Delhi High Court in the case of Chrys Capital Investment Advisors (India) Pvt. Ltd Vs. DCIT (ITA N0.417/2014) in which in paragraph 35 of the decision, the Hon'ble High Court held that 'this court is of the opinion that the general rule as prescribed in Rule 10B(4) mandates the tax authorities to take into account only the relevant assessment years data'. Accordingly, the objection is not found acceptable. 7. As regard the objection relating to arm s length price adjustment of ₹ 1,35,85,620/- towards corporate guarantee, the DRP observed as under: Having considered the facts on this issue of rate of Guarantee Fee to be charged, we are of the view that this depends on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on borrowings. Thus, the advances given to the AE have a definite cost in the hands of the assessee. Further, we are not in agreement with the request of the assessee that on the above said advances, the AE's had allotted Shares to the assessee company on 30.09.2012, hence no interest can be charged. The allotment of shares was not completed in time before 31-03-2012. The shares were allotted during the subsequent FY on 30.09.2012. Hence, the same cannot come to the rescue of the assessee. 8.1 In view of the above observations, the DRP held that the TPO is justified in making the adjustment on this account and confirmed the action of the TPO in charging the interest on advances. 9. As regards the objection relating to Arm s length price adjustment of ₹ 7,05,11,490/- towards outstanding receivables of ₹ 31,86,96,000/-, the DRP was, inter-alia, observed as under: In view of the above, we are of the view that the charging of interest can be restricted to the actual due in respect of each invoice raised during the year including the balance amount due in respect of invoices raised during the earlier years, provided complete details of amount due invoice wise i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case and in law, the learned Assessing Officer (AO), learned Transfer Pricing Officer (TPO) and the Honourable Dispute Resolution Panel (DRP) respectively - Invalid Transfer Pricing Proceedings: 1. Ought to have appreciated that the reference made by the AO suffers from jurisdictional error as the AO did not record any reasons in the draft assessment order based on which he reached the conclusion that it was expedient and necessary to refer the matter to the TPO for computation of the arm's length price, as is required under section 92CA(1) of the Act. Invalid Draft Assessment Order: 2. Erred in not following the procedure laid down u/ s 144C(1) of the Act, by issuing Notice of demand u/s 156 of the Act penalty notices u/s 271BA, 271AA 271CC of the Act along with assessment order dated 22.03.2016, which tantamount to passing of Final Assessment Order. 3. Addition of ₹ 1,22,27,058/- in respect of Corporate Guarantee provided to Associate Enterprise: a. Erred in making an addition of ₹ 1,22,27,058/- u/s 92CA of the IT Act, 1961 by computing the interest @ 1.8% on Corporate Guarantee provided to AE (M/s.Veneta Holdings) without appreciating tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % without appreciating the fact that the transactions were entered into by the assessee in foreign currency in respect of which the interest rates as applicable to the loans advanced in the international finance markets are to be adopted. f. Erred in merely stating that the advances made to AE is out of borrowed funds without finding any material evidence thereof and charging interest on advances given to AE. g. Erred in considering the average cost of the borrowed funds without appreciating the fact that no cost is incurred by assessee in providing advances to Associate Enterprises. 5. Addition of ₹ 7,05,11,490/- towards Interest on Receivables: a. Erred in making addition of ₹ 7,05,11,4901 - by charging interest @ 14.75% on Outstanding Receivables from Associate Enterprise u/s 92B of the Act. b. Erred in re-characterizing the nature of transaction from 'Receivable' to 'loan' which is not permissible u/s 145 of the Act. c. Ought to have appreciating the fact that the assessee has not charged any interest on any delayed payments irrespective of whether the services rendered are made to unrelated customers or AE. d. Ought to have appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2016] 68 Taxmann.com 246 5. ACIT Vs. Getrag Hi Tech Gears Pvt. Ltd., ITA No. 823/Chd/2012. 13. Ld. DR, on the other hand, relied on the orders of revenue authorities and further submitted that the case laws relied upon by the assessee are not relevant to the present case. 14. Considered the rival submissions and perused the material facts on record. Before us, assessee raised the ground No. 2 and did not make any submission relating to ground No. 1, accordingly, the same is dismissed. With regard to invalid draft assessment order, he submitted that the draft assessment was completed with demand notice u/s 156 and penalty notices u/s 271. By issuing such notices, the assessment order becomes final. Various courts have held that such assessment orders to be null and void ab-initio. We have carefully considered the submission and case laws relied. In all the case laws relied on by the assessee, the common mistake made by the AO in those assessments were that AO passed the final assessment order instead of Draft Assessment Order, the courts have held that as per section 144C(1), the AO has no right to pass final order pursuant to the recommendations made by the TPO. Accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t assessees are adopting different methods of treatment. Some assessees charges nominal rate to the AEs, whereas other assessees are treating this as shareholder service. Here, the assessee has objected to include this transaction as international transaction for the reason that the Finance Act, 2012, which has inserted an explanation, which will be applicable prospectively from AY 2013-14 and the corporate guarantee transaction will not be applicable to the current AY. The same view was upheld by the coordinate bench in the case of Dr. Reddy Laboratories and other benches of Tribunal. The findings given by the coordinate bench in the case of Dr. Reddy Laboratories (supra) are extracted below: 29. We have carefully considered the rival submissions and perused the record. The ITAT, Delhi Bench in the case of Bharati Airtel Ltd. (supra) has considered an identical issue which was re-affirmed in the case of Siro Clinpharma Pvt. Ltd., Vs. DCIT (order dated 31st March, 2016). The bench observed that transfer pricing is a legislation seeking the tax-payers to organise their affairs in a manner compliant with the norms setout. In short, it is an anti abuse legislation which tells you a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Topsgrup Electronics Systems Ltd. Vs. ITO, 67 Taxmann.com 310 (Mum.) 6. Mylan Laboratories Ltd. Vs. ACIT, [2015] 63 Taxmann.com 179 (Hyd.) 19. Ld. DR, on the other hand, relied on the orders of revenue authorities and submitted that this transaction is recorded in the books of account as loan and not as investment. He referred to page 203 of paper book to submit that it is classified as loans advances. He further submitted that the claim of the assessee is only an after thought. 20. Considered the rival submissions and perused the material facts on record. Assessee has transferred funds to its AE as investment and the same was classified in the balance sheet as loans and advances. However, it is only a classification of accounting entry in the books, but, what is relevant and important is whether such transfer of funds were duly treated as investment and accordingly shares were allotted in the subsequent AY. Assessee has submitted share allotment certificate as evidence. Since the transfer of funds were duly accounted by the AE and there is no restriction on the part of the AE to allot shares in the same AY of receipt of funds, as long as the shares allotted, it gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nate bench of this Tribunal has held as below: 10. We have considered the rival submissions, perused the record and have gone through the orders of the authorities below as well as decisions cited. In our opinion, the amount representing 2118.84 is towards investment in share capital of the subsidiaries outside India as the transactions are not in the nature of transactions referred to section 92-B of the IT Act and the transfer pricing provisions are not applicable as there is no income. Accordingly, we set aside the order passed by the CIT u/s 263 and that of the AO is restored and the grounds raised by the assessee in this regard are allowed. As held in the above, we are inclined to treat the above transaction as not an international transaction and accordingly ground No. 1 of the assessee is allowed. Since we have adjudicated ground No. 1 as allowed, the ground Nos. 2 3 are only academic in nature and accordingly, dismissed. Respectfully following the decision of the coordinate bench in the said case, we are inclined to treat the above transaction as not an international transaction and accordingly the ground raised on this issue is allowed. 21. As regards the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. We are of the opinion that this period is reasonable and so no interest can be levied, just because amounts are shown as outstanding. Accordingly, we cancel the interest levied and allow assessee's contentions. Grounds are considered allowed. 23.1 In the case of Lanco Infratech Ltd. Vs. DCIT (supra), the coordinate bench has held as under: 9. We have considered the rival contentions. It is well accepted practice that the construction industry pay advances at a certain percentage of the contract value to mobilise various resources for the execution of contract and these advances are given in the regular course of business. As seen from the facts of assessee's case, assessee is undertaking an EPC contract and has received mobilization advances as part of that. Like-wise, assessee has given some works to other parties on subcontract basis and necessarily it has to provide mobilization advances to the parties. It is also noticed that assessee has advanced mobilization advances to both AEs and non -AEs arid no interest has been charged from either party. Not only that assessee is also not required to pay any interest on the mobilization advances received, which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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