TMI Blog2023 (3) TMI 1298X X X X Extracts X X X X X X X X Extracts X X X X ..... me to an end in September 2011 - There is a consistent approach taken by this Tribunal in adopting the rate of corporate guarantee at 0.5% in assessee s own case. We direct the Ld.AO/TPO to restrict the corporate guarantee adjustment at 0.5% based on the outstanding payables from Nordea Bank during F.Y. 2011-12. Adjustment made on use of trademark sasken as royalty - Assessee contended that question of AE s paying royalty does not arise - HELD THAT:- As decided in assessee own case [ 2021 (8) TMI 1359 - ITAT BANGALORE ] passive association should be distinguished from active promotion of the MNE group's attributes that positively enhances the profit-making potential of particular members of the group. Each case must be determined according to its own facts and circumstances. Ld.TPO shall carry out necessary verification based on the which it must first be determined whether there is any Royalty that could be attributed. In the event Royalty is to be attributed, proper benchmarking needs to carried out the accordance with section 92CA of the Act, by selecting an authorised method and comparables. Adjustment proposed on software development segment - TPO rejected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m. The orders passed being bad in law is liable to be quashed. 2. Grounds relating to Transfer Pricing Legal issues :- The learned AO erred in (i) making a reference to TPO for determining arm's length price without demonstrating as to why it was necessary and expedient to do so; (ii) making transfer pricing adjustments totally amounting to Rs. 5,57,22,444; (iii) passing the orders without demonstrating that the appellant had motive of tax evasion; (iv) not appreciating that no addition can be made under Chapter X as Transfer pricing adjustment under Chapter X is not included in the definition of income u/s 2(24) or under Chapter IV of the IT Act, 1961; Grounds on Transfer Pricing adjustment in respect of Interest received from Sasken, Inc, USA 3.1 The learned TPO, AO and DRP erred in (i) determining and making adjustment under section 92CA amounting to Rs. 1,96,54,734 in respect of interest earned on loan given to Sasken Inc; (ii) obtaining information from M/s CRISIL Ltd under section 133(6) and using the same against the assessee in making the TP adjustment in the order passed under section 92CA without allowing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot appreciating that the AEs have not received any financial benefit from use of trademark SASKEN , owned by the Assessee. 5.4 Not performing any Functional Analysis of brand usage by AE. 5.5 Not appreciating that work in the service industry depends of the competency and not on brand alone. 5.6 Inappropriately concluding that the AE s have no identity or competitive value without the support of brand SASKEN . 5.7 Not quantifying the financial benefit, if any, derived by the AE s by use of trademark SASKEN ; 5.8 Determining, without basis, ALP of royalty 2% of the external turnover of the AEs without appreciating the facts and circumstances of the case; and 5.9 computing the ALP without adopting any method or uncontrolled comparable data. 5.10 Making the rate of adjustment which is arbitrary, without any basis and computing the royalty rate excessively. 5.2 On facts and circumstances of the case and law applicable, the impugned TP adjustment of Rs. 1,90,75,332 should be deleted fully. Grounds on Transfer Pricing adjustment in respect of Software Development Services 6.1 The lower income tax authorities have erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, which assume these risks and therefore have to be credited with a risk premium on this account; and Hon'ble Not appropriately computing the working capital adjustment while computing the ALP. 6.4 On facts and circumstances of the case and law applicable, the impugned TP adjustment should be deleted fully. Grounds on reduction of communication expenses, travelling, conveyance and insurance expenses from export turnover while calculating deduction under section 10AA 7.1 The learned AO has erred in: i. Calculating deduction section 10AA on combined basis for all the eligible units rather than each undertaking wise. ii. Excluding Rs. 13,08,04,000 being communication expenses, travelling conveyance and insurance from export turnover of the eligible units without appreciating that the Assessee had already reduced the communication expense related to the eligible unit attributable to delivery of software outside India and expenses incurred in foreign currency from export turnover. iii. Not appreciating that his action of reducing the above has resulted double reduction. iv. Excluding insurance charges of Rs. 1,23,10,000/- and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the orders / directions passed by the Income tax authorities and the DRP be quashed or in the alternative, the aforesaid grounds including relief as prayed for in these grounds be allowed. The Appellant prays accordingly. 2. Brief facts of the case are as under: 2.1 The assessee is engaged in the business of providing software development services and network engineering services. For the AY 2012-13, original return of income was filed by the assessee on 28.11.2012 declaring a total income of Rs. 47,99,96,320/- and long term capital loss of Rs. 87,49,969/-. Notice u/s 143(2) dated 08.08.2013 was issued. A revised return of income was filed on 26.3.2014 declaring total income of Rs. 43,57,97,090/- and long term capital loss of Rs. 87,49,969/-. Various details called for during the assessment were filed by the assessee from time to time. 2.2 A reference under section 92CA of the Act was made to the TPO after getting the approval of the Commissioner of Incometax, Bangalore - III. This was made for examining the reported Arm s Length Price (ALP) in respect of the international transactions entered into by the assessee. The Ld.TPO called for various details and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A 69,64,735 Total 6,26,87,179 2.6 It is submitted that the proposed disallowance of deduction under section 10AA was dropped and the deduction as claimed by the assessee under section 10AA was granted. 2.7 Aggrieved by the final assessment order, the assessee filed present appeal before this Tribunal. 3. Ground Nos. 1 and 2 are general in nature and therefore do not require adjudication. 4. Ground Nos. 3.1 and 3.2 : - Ld.AR submitted that the assessee had advanced loan to its overseas subsidiary viz., Sasken Inc. The assessee charged interest of Rs. 48,30,677 at the rate of 3.24% per annum from Sasken Inc on the loan outstanding. The interest was charged at LIBOR plus 300 points. It is submitted that the assessee adopted the CUP Method to justify the interest charged. 4.1 It is submitted that in the TP report, the assessee adopted the Emerging Market v3.1 RiskCalc model for analyzing the credit quality of the assessee and the AE. The Ld.AO noted that, a comparable loan search was done by the assessee using comparables within the same geography of the borrower, i.e., USA, and adjustments in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove, it was submitted that rating of subsidiary company adopted by the TPO is incorrect. The TPO should have adopted LIBOR rate, for the purpose of bench marking, instead of adopting domestic lending rates. He also placed reliance on the decision of the Hon'ble Delhi High Court in the case of CIT vs. Cotton Naturals (I) (P.) Ltd. (55 taxman.com 523), in support of his contention. We heard rival submissions and perused material on record. We also perused TP study report placed at pages 179 to 182 of the paper book. It is undisputed that transactions of advancing loan are international transactions. The dispute is only with regard to rate of interest to be applied for the purpose of bench marking the transaction. The Hon'ble Delhi High Court, in the case of Cotton Naturals (I) (P.) Ltd. (supra) has held in para.14 that in order to ascertain ALP in respect of international transactions of advancing money to its foreign subsidiary. The Hon'ble Delhi High Court, in the case of Cotton Naturals (I) (P.) Ltd. (supra) held that in order to ascertain ALP return of income international transaction of advancing loan to its subsidiary, interest rate what would have been earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed under section 92CA dated 28.10.2016 [Page 1306 to 1313 of the compilation filed on 9.7.2020] accepted the ALP of interest on loan given at LIBOR + 300 bps. The relevant observation is at pages 1306 to 1313 of the paper book filed on 09/07/2020. 5.2 For the year under consideration, it is submitted that the assessee charged interest on loan at 3.24% p.a. This fact is also evident from para 13 of page 155 of paper book 1 filed on 4.6.2018 which is the notes to Audit report in Form No 3CEB. During the year under consideration, average USD LIBOR was 0.58%. Interest rate considering LIBOR + 300 bps would be 3.58%. This rate is within +/- 5% range applicable for the year under consideration as per second proviso to section 92C(2). Hence, the interest received from loan given to Sasken Inc, USA amounting to Rs. 48,30,677 should be considered at arm s length price. The TP addition of Rs. 1,96,54,734 should therefore be deleted. We direct the Ld.AO/TPO to consider the claim of the assessee based on the observation hereinabove. Accordingly this ground raised by the assessee stands allowed. 6. Ground Nos. 4.1 and 4.2 6.1 The assessee in its notes to Form No 3CEB s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he OGE to the order of this Tribunal for A.Y. 2011-12, determined the adjustment at 2%. The DRP in the second round, reduced the adjustment on corporate guarantee at 0.92% vide directions dated 20/06/2022 and on further appeal before this Tribunal, this Tribunal directed the Ld.AO/TPO apply the rate of 0.5% on the closing balance of the corporate guarantee as on 31/03/2011 for the purposes of TP adjustment. 6.4 The Ld.AR thus submitted that, the corporate guarantee adjustment should be restricted to 0.5% based on the outstanding payables to Nordea Bank during F.Y. 2011-12. On the contrary, the Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 6.5 We refer to the observations of this Tribunal vide order dated 11/11/2022 for A.Y. 2011-12 in IT(TP)A No. 788/Bang/2022 which is reproduced as under: 16. We heard the rival submissions and perused the material on record. We notice that this issue is covered by the orders of the Tribunal in Medrich Ltd. v. Asstt. CIT [ITA No. 1574 (Bang.) of 2019, dated 12-4-2021], in the case of Manipal Global Education Services (P.) Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, we see no reason to entertain the proposed questions of law. 6.8 Similar is the ratio laid down Hon ble Delhi High Court in case of CIT vs. Cotton Naturals (I)(P) Ltd., reported in (2015) 55 taxman.com 523. 6.9 Further in case of Xchanging Solutions Ltd. vs. DCIT reported in [2017] 78 taxmann.com 54 (Bangalore-Trib.), Coordinate Bench of this Tribunal on identical issue observed and held as under: 15. We have considered the rival submissions as well as the relevant material on record. At the outset we note that the assessee has raised the objection before the DRP as recorded in paras 6.1 and 6.2 as under : '6.1 Grounds 1, 2 and 3 are considered together for convenience. Briefly stated the assessee provides software development and information technology enabled services (ITES) to its AEs. During the FY 2005-06 the assessee provided a corporate guarantee to a third party bank on behalf of an AE but failed to charge a fee for the guarantee. The assessee conducted a TP study and concluded that this transaction was at arm's length however during audit proceedings the TPO rejected the analysis of the assessee and made adjustments to this transaction. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP of such transaction was to be computed having regard to the financial consideration as the nature of transaction between the related parties. The Tribunal has taken a view that the guarantee fees for providing corporate guarantee should not be more than 0.5%. The Hyderabad Benches of this Tribunal in the case of Four Soft Pvt. Ltd. Vs.DCIT (supra) has considered an identical issue in paras 24 to 26 as under : 24. It is noted by the TPO, during the F.Y. 2005-06 the assessee has provided bank guarantees on behalf of its Overseas subsidiary, Foursoft BV, Netherlands for an amount of Rs.69,81,16,000/- which is continuing for the year under consideration also. The TPO following the order passed for A.Y. 2006-07 treated the commission changed by ICICI Bank at 3.75% arms length price for the corporate guarantee provided by the assessee to its AE worked out the TP adjustment of Rs.2,61,79,350/-. The DRP also rejected assessee s objection on the issue. 25. We have heard the parties and perused the material on record. The sum and substance of the submissions made by the learned AR is, the corporate guarantee provided by the assessee cannot be equated to bank guarantee and re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue is covered in favour of the assessee by virtue of the order passed in assessee s own case for A Y 2006-07 no longer holds good since the order passed by the coordinate bench is prior to the amendment made to provision of sect ion 9 2B of the Act. It will be pertinent to mention here that this issue was also considered by the ITAT Mumbai Bench in case of Mahindra Mahindra Vs. DCIT in ITA No. 8597/Mum/2010, 54 SOT (UR) 146. The coordinate bench of this Tribunal while considering similar argument advanced on behalf of the assessee by placing reliance on the decision of the Four Soft Ltd.(supra), held as under: 15. 2 After hearing the rival submissions we feel that Assessing Officer will have to follow the decision of the ITAT Hyderabad or the amended provision of the Act in this regard. If the Finance Bill of 2012 is passed by the Parliament amending the provisions of section 92B, with effect from 1st April , 2002, he will have to ignore the decision of the ITAT Hyderabad. In case section 92B is not amended with retrospective effect, he should grant relief to the appellant. 25.4 In the aforesaid view of the matter, we agree with the TPO that ALP of the cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition of international transactions as per Section 92B(1) without considering the Explanation to the said Section. As we have discussed in the foregoing part of this order that the Tribunal has been taken a consistent view that corporate guarantee provided to the AE falls in the ambit of international transactions as per Section 92B(1) even without considering the Explanation inserted vide Finance Act, 2012. The Mumbai Bench of this Tribunal in the case of Siro Clinpharm Pvt. Ltd. Vs. DCIT (supra) has restricted its finding only to the applicability of Explanation in the cases where the assessment was completed prior to the insertion of the said Explanation retrospectively. Even otherwise the earlier decisions of the Tribunal on this issue were not considered by the Delhi Bench of the Tribunal. In the case of M/s. Nimbus Communication Ltd. Vs. ACIT in ITA Nos.6816/Mum/2010 and 7105/Mum/2011, the Tribunal vide order dt.7.8.2013 has considered an identical issue in paras 4 5 as under : 4. As regards the issue raised in ground No. 2 relating to TP adjustment made on account of guarantee commission in respect of corporate guarantee given by the assessee to its Associated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee was benefited as a result of giving the guarantees in the form of commercial benefits secured for future. In our opinion, such commercial expediency cannot be equated with business strategy, which is specific and well laid out. As rightly held by the ld. CIT(A), a financial loan guarantee is a commitment entered into by the assessee company with a third party lender of its Associated Enterprises which obliges the assessee company to cover the risk of default by its Associated Enterprise and this act thus involves performance or carrying out of service to cover the risk of default for which price has to be charged. Even the OECD Transfer Pricing Guidelines 2010 supports this view in para 7.13 where it is explained that where higher credit rating of Associated Enterprise is due to a guarantee by another group member, such association positively enhances the profit making potential of that Associated Enterprise. We, therefore, find ourselves in agreement with the contention of the ld. D.R. that there was a clear benefit accrued to the Associated Enterprises by the guarantee provided by the assessee and when such benefit was passed on by the assessee to the said Associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for guarantee given by the assessee to its AEs at 0.5% being the arm's length price. Ground No. 2 of the assessee's appeal for A.Y. 2006-07 is partly allowed. As it is clear that the Tribunal has followed the decision of the Tribunal for the earlier assessment year and while taking a consistent view held that guarantee provided by the assessee gives the benefit to the AE and such benefit was passed on by the assessee to the said AE and therefore should have been charged at ALP. 6.10 In the above decision, this Tribunal has considered the commission on guarantee fee at 0.5%. In view of the above, we direct the Ld.AO/TPO to recomputed the rate of commission attributable to the corporate guarantee in the present facts, in the light of the above. 6.11 There is a consistent approach taken by this Tribunal in adopting the rate of corporate guarantee at 0.5% in assessee s own case. We direct the Ld.AO/TPO to restrict the corporate guarantee adjustment at 0.5% based on the outstanding payables from Nordea Bank during F.Y. 2011-12. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 7. Ground no. 5 is in respect of the adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th sides in the light of records placed before us. 4.16 The AE s considered in the present facts are admittedly 100% subsidiaries of assessee. These subsidiaries have further acquired other companies to expand the client base and to acquire niche technologies owned by such companies in the respective geographical locations. With specific reference to Sasken Finland OY. Sasken Inc, USA, was set up to make strategic investments in USA and other overseas markets. Admittedly, the Ld. AO recorded that subsidiaries of assessee is working as full-fledged entrepreneurs in USA, Finland and other countries and that Sasken brand is registered by the assessee in India as well as Russia, USA and a host of other countries. The Ld. TPO observed that assessee owns 25 websites with the names Sasken as the domain name. 4.17 We note that, the Ld.TPO attributed royalty towards the use of brand name, Sasken , by the subsidiaries in the respective countries based on a decision by Hon ble Delhi High Court in case of Sasken Communications Technologies Ltd. vs Anupam Agarwal Ors. Hon ble High Court therein found that Sasken brand is proprietorily owned by assessee before us, and that the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it rating higher than it would if it were unaffiliated, but and intragroup services would usually exist is where the higher credit rating were due to a guaranteed by another group member or where the enterprise benefited from deliberate concerted action involving global marketing and public relations campaigns. In this respect passive Association should be distinguished from active promotion of the many groups attributes that positively enhance the profit-making potential of particular member of the group. Each case must be determined according to its own facts and circumstances. 4.21. There is nothing on record brought by the authorities below to establish that, use of the name SASKEN provided financial benefit to the members of the group other than the member legally owning such intangible as required under BEPS action plan 8-10. 4.22 Brand licensing is when a brand owner licenses the right to their brand assets to a licensee, letting the licensee use their brand for a set period of time, in a set way, within an agreed market. The brand owner and licensee must agree on the terms and scope of the licensing agreement, which is a legal written contract between the two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Ld.TPO is to verify if the AE s acquired any right in the brand SASKEN , for the purpose of selling their products, and that whether at any point of time the AE s were entitled to become the exclusive owner of the technical know how and the trade mark. Whether there is an active promotion of group s attributes that positively enhances the profit making potential of a particular member of the group. 4.28 The Ld.TPO while carrying out necessary verification keep in mind the following extract from OECD BEPS Action Plan 8-10: 7.13 Similarly, an associated enterprise should not be considered to receive an intra group 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 credit rating were due to a guarantee by another group member, or where the enterprise benefitted from deliberate concerted action involving global marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing international transactions during the year under consideration. Description Amount(Rs.) Rendering of Software Development Services 15,01,20,788 Rendering of Sales and Marketing Services 1,50,38,267 Receipt of Software Development Services 8,16,60,440 Receipt of Sales and Marketing Services 3,03,57,507 Receipt of Hardware Support services 3,47,12,700 Cross Charge of SAP License Cost 55,27,988 Interest received on Loan 48,30,677 Purchase of fixed assets 3,16,202 Reimbursement of expenses (Net) Receivable/Received 68,01,427 Reimbursement of expenses (Net) Payable/Paid 14,60,531 8.4 It was further submitted that the Assessee adopted the following methods to justify the above international transactions to be at arms length. Associated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Uncontrolled rate was taken as the starting point in the comparability study. Similarly for services received, the Assessee adopted the rate charged by AE to third parties as basis of comparison. 8.6 The Ld.TPO rejected the TP analysis of the assessee in respect of the software services rendered and received by assessee which was done based on internal comparables. The Ld.TPO instead carried out new TP analysis based on external comparables by adopting TNMM as the most appropriate method. The Ld.TPO considered 9 companies and proposed the TP adjustment. The Ld.TPO considered the entity level margin of the assessee and computed operating cost at Rs.13,37,61,729/- wherein the Ld.TPO considered the revenue received by AE for rendering software development services. The average net profit operating margin to operating cost of the comparable was computed at 23.80% and downward adjustment of 3% was made towards the working capital adjustment. The Ld.AR submitted that the Ld.TPO determined the ALP of international transaction under software development service segment rendered by assessee at Rs.16,11,82,883/-. He also submitted that the operating cost determined on the proportionate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee s margin at 17.7% and the comparables margin was computed at 20.5%. Admittedly this is within +5% as per proviso to section 92CA(2). 8.10 Further we note that the Ld.TPO has not considered the entity level margins even though the segmental details were provided to him. The said details are filed vide letter dated 04/06/2018 which is placed at page 852 of the paper book as per which the computation, OP/OC % for AE segment provision of services and receipt of services is 31.72% and 37.67% respectively. The margins of comparables as per the TPO for provision of services and receipt of services is 20.5% and 19.22% respectively and the above details have been not considered by the Ld.TPO/AO. In the interest of justice, we remand this issue to the Ld.AO/TPO to verify the above details. In the event, the margins computed at segmental levels are found to be within +5%, no adjustment is warranted. The Ld.AO/TPO is directed to consider the claim of assessee based on the above observations in accordance with law. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 8.11 As we have directed the Ld.AO/TPO to verify the margins, the comparables so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.3 The Ld.AR without prejudice submitted that if at all any disallowance is to be made over and above the voluntary disallowance made by assessee, only such investment which have yielded exempt income should be considered for computing the average value of investment under Rule 8D(2)(iii). On the contrary, the Ld.DR submitted that the moment assessing officer goes into the accounts of the assessee, there is a verification that has been made based on which a further disallowance has been computed. This act of the Ld.AO amounts to a satisfaction though not expressly mentioned in the assessment order that warrants further disallowance. He thus submitted that merely because an express satisfaction has not been mentioned in the draft assessment order, the disallowance made cannot be nullified. We have perused the submissions advanced by both sides in the light of records placed before us. 10.4 We note that admittedly there is an exempt income earned by assessee. While computing the voluntary disallowance, assessee has not considered the provisions of Rule 8D(2) as the disallowance has to be made as per Rule 8D(2). The Ld.AO has not made any disallowance under Rule 8D(2)(ii) w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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