TMI Blog2013 (1) TMI 623X X X X Extracts X X X X X X X X Extracts X X X X ..... gation under the contract, then the assessee was required to produce the relevant records and material in support of its claim that such scheme of giving the benefit/incentive to the distributor was duly approved by the Board of Directors of the assessee company. As the assessee has failed to produce any material such as the scheme under which the benefit has been given to the distributors set aside this issue to the record of the AO to verify and examine the relevant record as to be filed by the assessee and then to decide this issue as per law - in favour of assessee for statistical purposes. Disallowance of depreciation claim on Foster's Brand u/s 40(a)(i) - Held that:- As decided in case of M/s Mark Auto Industries Ltd. [2013 (1) TMI 448 - PUNJAB AND HARYANA HIGH COURT] deduction u/s 32 is not in respect of the amount paid or payable which is subjected to TDS, but is a statutory deduction on an asset which is otherwise eligible for deduction of deprecation - Revenue was unable to substantiate that in the absence of any requirement of law for making deduction of tax out of the expenditure on technical know-how which was capitalized and no amount was claimed as revenue expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent context and purpose cannot be considered as relevant for determination of the ALP. See Nestle India Ltd [2011 (5) TMI 566 - DELHI HIGH COURT] - no substance or merit in the assessee's stand that when the payment of royalty is within the prescribed limit of press note no.9 of 2000 FDI policy, the same is at ALP - against assessee. Adjustment made by the TPO by determining the ALP - Held that:- It is manifest from the order of the TPO that the adjustment was made on the basis of comparing entity level result of the assessee with the entity level result of the comparables by applying TNMM method. There is no dispute that the international transaction in the case of the assessee constitutes only 3.93% of the total operating cost.Therefore, comparing the entity level result of the assessee with the entity level result of the comparables is absolutely in contravention of the provisions of the Transfer Pricing regulations as provided under the I T Act. In any case the international transaction has to be compared with the benchmarking as arrived at by taking into consideration the comparables of uncontrolled transaction. Therefore, the TPO proceeded in total disregard to the relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .4 Disallowance made by invoking section 40(a)(i) of the Act and alleging that the amount reimbursed to SABMi1Ier Africa Asia Pty Ltd (an associated company) is 'Royalty' and disregarding the fact that the expenditure was incurred for annual accounting charges for software of Rs. 17,52,862 and Rs. 23,86,119 for of up- gradation of software, paid by SAB Miller Africa Asia Pty Ltd. to M/s Pilog and MIs Syspro Pty. Ltd. - Rs. 41,39,061 2.5 Disallowance of interest under section 36(1)(iii) of the Act alleging diversion of borrowed funds and advancing at a lesser rate of interest to sister group companies during the course of business by way of business and commercial considerations Rs. 7 48 58 033 2.6. Enhancement to the total income by enhancing Arm's Length Price in respect of royalty (i.e. technology fees) payment to SABMiIIer Management (IN) By, Netherlands of Rs. 31,75,51,028 and Purchase cost of traded goods to SPA Birra Peroni of Rs. 4,34,492 - Rs. 18 06 07 3. That the Ld. AO erred on facts and in law in initiating the penalty proceedings against the appellant under section 271(1)(c) of the Act. 4. That the Ld. AO while computing the assessed income has erred in comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irmed the disallowance made by the Assessing Officer. 5. Before us, the ld Sr counsel Shri C S Aggarwal has submitted that these expenses have been incurred in the course of business and thus, enabling the assessee company to hold meetings and conferences with important clients. The ld Sr counsel has referred the details of the expenses at page 157 of the paper book and submitted that the expenses incurred by the assessee is on account of entrance fee and subscription to the various clubs. Therefore, the expenses in question do not contain any expenditure which is incurred other than the club expenses. 5.1 The ld Sr counsel has pointed out that the Assessing Officer disallowed similar expenditure for the AYs 2004-05 to 2006-07 which has been deleted by the ld CIT(A) and the revenue has accepted the order of the Commissioner of Income Tax (Appeals) wherein it has been held that the expenses incurred are not capital in nature and therefore, allowable being of revenue character. The Commissioner of Income Tax (Appeals) while allowing the claim of the assessee for the earlier AYs has followed the decision of the Hon'ble jurisdictional High Court in the case of Otis Elevator Co (I) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not filed the details showing separately for monthly subscription and some holiday resorts have been shown as club. The details of the club and the respective fee and other charges are given at page 157 of the paper as under: Name of Club Entrance fee subscriptions Cost of club service Bangalore Club 333,600 166,130 Century Club 317,214 13,891 Gymkhana Club 26,448 Kamataka Golf Association 51,178 2,414 Karnataka State Lawn Tennis Association 8,100 Karnataka Golf Club 340,800 Palms Town and Country Club, 5,290 3,967 Secunderabad Club 8,812 Wheeler Club 600,000 3,702 Total 1,691,442 1,90,104 6.3 It is clear from the details that the expenditure is only towards entrance fee, subscription and other services of the club. The Assessing Officer allowed the expenditure incurred for the services availed from the club and has not doubted the payment of the entrance fee and service charges for the club membership. Therefore, we do not find any discrepancy in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bserved that cash discount and the volume/bulk discounts were given in the bill itself whereas in the case of the so-called 'sale price discounts, the assessee issued credit notes to the beneficiaries, who are the distributors of the assessee. Thus, according to the Assessing Officer, the assessee has paid commission to its distributors under the grab of sale price discount in the form of credit notes. 7.3 After examining the distributorship agreement between the assessee and the distributors, the Assessing Officer held that the arrangements made with the clubs, hotels, distributors and retailers etc., as per the Scheme tantamount to transfer of 'commission in kind' and resultantly the payment of Rs. 57,01,01,930/- on account of sale price discounts made by the assessee company is nothing but in the nature of 'commission' only, thereby attracting the provisions of section 194H of the I T Act. Since the assessee has not deducted the TDS on the aforesaid payment, the Assessing Officer accordingly disallowed the claim u/s 40(a)(ia) of the I T Act. 7.4 The DRP has confirmed the disallowance made by the Assessing Officer by observing that the assessee is silent on the issue of the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.1.2 The distributor wishes to distribute and sell the products in the territory and the assessee company desires and offers to appoint the distributor as their distributor for handling, storing, sales and onward despatch of products to customers. 8.1.3 The distributor shall purchase the products from the assessee company and prices may be determined between parties from time to time. Further, for any delay in payment by distributor there is interest liability @ 18% p.a 8.1.4 Distributor shall bare the risk and obligation of collection of payment from the market and the same are to account of distributor. 8.1.5 Distributor shall have no claim against the assessee for any loss on account of delay due to shortage of stocks or delay in transit and which are beyond control of assessee. 8.1.6 Distributor shall have warehousing facilities with adequate storage facilities for storing products. 8.1.7 Distributor will incur its own cost and make arrangements for delivery of products. 8.1.8 Distributor shall assume full responsibility and will bear all costs to comply with local rules and regulations and will indemnify assessee company resulting from non compliance of local re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the Assessing Officer has worked out the commission paid by the assessee at 0.2% to 0.3% and observed that no distributor would work for any product or brand of a particular company at such a lower rate of commission; whereas in this type of business, the commission of at least 2 to 4% is being given to the distributors. The ld Sr counsel has submitted that the Assessing Officer has committed an error while computing the rate of commission because the Assessing Officer took the entire sale instead the sale through the agents to whom commission was paid. The sale discount is given only to the distributors; whereas commission was paid to the agent. The ld Sr counsel has submitted that the Assessing Officer calculated the rate of commission by taking into consideration the entire sales at Rs. 13,384,952,487/- whereas the sales through the DCS appointed is Rs. 17,04,409,000/- only and thus, the percentage of commission arrives at 2.41% which is very much within the rate of 2 to 4% as observed by the Assessing Officer. Thus the ld Sr counsel has submitted that the basis on which the Assessing Officer treated the discount as commission, is not sustainable, in view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incipal-agent relationship because the agreement put certain qualification to become company's distributor. Further, the agreement defines and restricting the territory of operations of the distributors and therefore, it implies and they have not given any freedom to sell the goods of the assessee in the area falling outside the defined territory. The distributors have to conduct promotional, marketing advertising and sponsorship activities according to the sales and marketing strategies of the assessee company. Therefore, the distributor functions under the direct supervision and control of the assessee. 8.8 The ld DR has further submitted that the alleged discount given to the distributor has not been passed on to the retainers/customers/or to the end users; therefore, the said payment cannot be treated as discount. She has relied upon the orders of the authorities below as well as the decision of the Hon'ble Delhi High Court in the case of Idea Cellular Ltd reported in 230 CTR 43 and submitted that the Hon'ble High has observed in the said case that the distributors are not free to sell similar products offered by the competitors of the company. The PMA has complied with all t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and the distributors is on principal to principal and the distributors under no circumstance will act as an agent of the assessee. Further, the goods once delivered to the distributors, the title of the same is transfer to the distributor and after the delivery of the goods, the assessee shall have no responsibility as regards the bearing of cost for compliance with local rules and regulations as well as any laws, risk or other obligations or further loss of the goods incurred or suffered by the distributor which is not on account of any infringement or passing off action by any third party. 9.3 So far as the relationship between the assessee and the distributor as described in the agreement, it is made clear that the sale and purchase of the product shall be on principal to principal basis. We quote clause 8 of the agreement as under: "8. Legal status of the parties: 1. It is clearly understood between the parties hereto that the sale and purchase of the products shall be on principal to principal basis. 2. This agreement shall not be construed as a partnership between the parties hereto or constitute or be deemed to constitute the Distributor as an agent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the time of the delivery then the is thereafter liable for the same and would be dealing with theii1n his own right as a principal and not as an agent of the dairy. The clauses of the agreements show that there is an actual sale, and not mere delivery of the milk and the other products to the concessionaire. The concessionaire purchases the milk from the dairy. The dairy raises a bill on the concessionaire and the amount is paid for. The dairy merely fixed the MRP at which the concessionaire can sell the milk. Under the agreement the concessionaire cannot return the milk under any circumstance, which is another clear indication that the relationship was that of principal to principal. Even if the milk gets spoiled for any reason after delivery is taken, that is to the account of the concessionaire and the dairy is not responsible for the same. These clauses have all been noticed by the Tribunal. The fact that the booth and the equipment installed therein were owned by the dairy is of no relevance in deciding the nature of relationship between the assessee and the concessionaire. Further, the fact that the dairy can inspect the booths and check the records maintained by the conces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f credit note which is not adjusted or mentioned in the invoice. It is also an undisputed fact that the assessee has shown the sale turnover as per the invoice raised by the assessee and as such this amount of benefit by way of credit note was not reduced from the sale turnover, even for the purpose of sales tax return. The assessee has claimed that the said amount has been given only as a discount to the distributor; whereas the revenue has treated the same as commission paid by the assessee to the distributor; though the action of the Assessing Officer in computing the rate of commission by taking into consideration the entire sale is not justified because the commission amount admitted by the assessee was paid against the sale through agents/distributors only. Therefore, we find substance in the contention of the ld Sr counsel that if the commission has to be taken into consideration against the sale through the agent appointed by the assessee then the percentage of the commission to the sale comes to 2.41% and which is very much within the rate of 2 to 4 % prevailing in the industry as observed by the Assessing Officer. 10. The dispute before us is whether the amount paid by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tamp papers by the licensed vendors. Therefore, it was held by the Hon'ble High Court that it is clear that although the Government has imposed a number of restrictions on the licensed stamp vendors regarding the manner of carrying on the business, the stamp vendors are required to purchase the stamp papers on payment of price less the discount on principal to principal basis and there is no contract of agency at any point of time. The discount made available to the licensed stamp vendors under the provisions of the Gujarat Stamps Supply and Sales Rules 1987 does not fall within the expression 'commission' or 'brokerage' u/s section 194H of the IT Act. 10.5 The Hon'ble Gujarat High Court while arriving at the conclusion has considered various decisions of the Supreme Court as well as High Courts and particularly the decision of the Hon'ble Supreme Court in the case of Bhopal Sugar Industries Ltd. v. STO reported in 40 STC 42. The Hon'ble High Court has quoted the observation of the Hon'ble Supreme Court in the said decision as under: "The essence of the matter is that in a contract of sale, title to the property passes on to the buyer on delivery of the goods for a price paid o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit to the principal. This was further elaborated in the decision of the Weiner v. Swales reported in 217 Md 123; as a fee paid to an agent or employee for transacting a piece of business or performing a service." 10.7 The discount; in general sense, all allowance or deduction made from a gross sum on any account whatever; in a more limited and technical sense, the taking of interest in advance. 10.8 It was further elaborated as a deduction from an original price or debt, allowed for paying promptly or in cash. 10.9 The Hon'ble Gujarat High Court has also considered the distinction between the commission and discount as explained by the Hon'ble Bombay High Court in the case of Harihar Cotton Pressing Factory v. CIT reported in 39 ITR 594 wherein it has been explained the expression; "commission" has no technical meaning but both in legal and commercial acceptation of the term it has definite signification and is understood as an allowance for service or labour in discharging certain duties such four instance of an agent, factor, broker or any other person who manages the affairs or undertakes to do some work or renders some service to another. Rebate, on the other hand, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as from the facts and circumstances of the case that the benefit/incentive given by the assessee through credit note is certainly not in the nature of discount because the discount is always given at the time of transaction of sale and purchase between the manufacturer and the distributor/dealer and the said amount is required to be reduced from the gross price and therefore, the sale price is always ex-discount. 12.1 On the other hand, the commission is given only after the completion of the task or services or the sale, if it is on sale of products by the distributor or dealer to the retailer or consumers. When the distributor records the purchase price without reducing the amount of so called discount, then the said benefit allowed by the assessee to the distributor, would not partake the character of discount. 12.2 The assessee recognizes the revenue from sale as per invoice/bills at which the goods were sold to the distributor and the amount of so called discount is separately treated as expenditure on account of sale scheme expenses and under specific head 'sale price discount' and accordingly, debited to the P L account. This clearly brings out the case of the assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly or indirectly a person acting on behalf of another person. Thus, it is clear that the provisions of sec. 194H do not require any formal contract of agency. 12.8 The relationship between the parties depends on the act performed by the parties and facts and situation in which the parties are working. 13. In the case in hand, though the assessee has claimed that the discount was given to the distributor under the sale scheme expenses; however, when this amount is not as per the obligation under the contract, then the assessee was required to produce the relevant records and material in support of its claim that such scheme of giving the benefit/incentive to the distributor was duly approved by the Board of Directors of the assessee company. 13.1 The assessee has failed to produce any material such as the scheme under which the benefit has been given to the distributors. Though the said benefit/incentive is not discount as held in the foregoing paras; however, in the absence of the scheme under which such benefit/incentive was given, it is not possible to give a conclusive finding whether it is commission or not. Accordingly, in the facts and circumstances of the case, we se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee cannot be penalised under the provisions sec. 40(a)(i) of the Act for the failure to deduct tax till the liability of tax on particular income is crystallised. He has pointed out that the Ruling of AAR, in the case of Foster's Australia Ltd., has been challenged before the Hon'ble Delhi High Court and by the interim order dated 22.9.2008, the Hon'ble High Court has stayed the application of the ruling pronounced by AAR. Since the liability to deduct tax on Foster's brand has still not crystallized as the matter is pending before the Hon'ble Delhi High Court, the assessee cannot be penalised for non-deduction of tax u/s 40(a)(i). 15.1 The ld Sr counsel has further contended that the asset is owned by the assessee and the same has been utilised by it and thus, it is eligible to claim deprecation u/s 32(1)(ii) of the IT Act. Even otherwise, as per Explanation 5 to section 32 of the Act, it is obligatory on the part of the Assessing Officer to allow the depreciation whether the assessee has claimed or not. The ld Sr counsel has further contented that even otherwise, no income accrues or is deemed to accrue or arise in India on sale of equipments/trade mark/brand name. 15.2 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tribunal in the case of Frontier Offshore Exploration (India) Ltd. v. DCIT, reported in 118 ITD 494 as well as the order of the Mumbai Benches of the Tribunal in the case of Sterling Televisions Asian Region Ltd. v. DCIT reported in 99 ITD 91 (Mum). 16. We have considered the rival submissions and carefully perused the relevant material on record. The Assessing Officer has disallowed the claim of depreciation on the ground that the assessee has not withheld the tax while remitting the amount despite the ruling of AAR in the case of Foster's Australia Ltd. reported 302 ITR 289 whereby it has been held that the said amount is taxable as income in India. The question of taxability of the said payment in the hand of Foster's Australia Ltd is sub-judice before the Hon'ble Delhi High Court in the writ petition filed by Foster's Australia Ltd challenging the order of the AAR. Since the operation of the order of the AAR has been stayed by the Hon'ble High Court till the disposal of the matter; therefore, it is not appropriate to give any finding or expression on the question of taxability of the said amount in India when the issue is sub-judice before the Hon'ble High Court. 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Explanation. For the purposes of this sub-clause, (A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; 16.2 It is manifest from the plain reading of provisions of sec. 40(a)(i) that an amount payable towards interest, royalty, fee for technical services or other sums chargeable under this Act shall not be deducted while computing the income under the head profit and gain of business or profession on which tax is deductible at source; but such tax has not been deducted. The expression 'amount payable' which is otherwise an allowable deduction refers to the expenditure incurred for the purpose of business of the assessee and therefore, the said expenditure is a deductible claim. Thus, section 40 refers to the outgoing amount chargeable under this Act and subject to TDS under Chapter XVII-B. There is a dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount as made in the return of income. Since the assessee had not claimed deduction for the amount paid, the provisions contained in section 40(a) (i) were not attracted. The learned DR could not find any fault with this direction of the CIT(A) also although she referred to page 4 of the assessment order, where it was mentioned that the tax deducted in respect of the payment was made over to the Government in the subsequent year and, therefore, depreciation could not be deducted on the capital expenditure incurred by the assessee. In reply, the learned counsel pointed out that the expenditure by way of technical know-how was capitalized and it was not claimed as revenue expenditure. Therefore, there was also no reason to disallow depreciation on such capitalized amount as the aforesaid provision does not deal with deduction of depreciation. Having considered arguments from both the sides, we are of the view that there is no error in the order of the learned CIT(A) which requires correction from us. Thus, this ground is also dismissed." 6. Learned counsel for the revenue was unable to substantiate that in the absence of any requirement of law for making deduction of tax out of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ro, customizing suspro so as to enable electronic fund transfer facility used by the assessee. 17.4 The ld Sr counsel has further submitted that even if for the sake of arguments, the said expenditure is treated as royalty, then the same does not fall under Explanation 2 to sec. 9(1)(vi) as mentioned in Clause A of explanation to section 40(a). The ld Sr counsel has referred Explanation 2 to section 9(1)(vi) and submitted that the payment in question does not fall in any of the categories provided under the Explanation 2; because the payment is for computer software. The ld Sr counsel has thus, submitted that though it is not admitted that the said payment is royalty; however, the same otherwise falls under Explanation 4 to sec. 9(1)(vi); the payment in question does not fall under clause (2) of section 9(1)(vi). Therefore, the provisions of sec 40(a)(i) does not apply to the said payment in view of Explanation to the said section wherein it has been specifically mentioned that royalty shall have the same meaning as in the Explanation 2 to sub-sec. (1) of sec. 9. In support of his contention, the ld Sr counsel referred the decision of the Tribunal in the case of Sonata Informatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the said payment is in the nature of royalty. 18. We have considered the rival submissions as well as the relevant material on record. First we will take up the alternative plea of the ld Sr counsel for the assessee that since the payment is towards reimbursement of the cost and no element of income is embedded in the same; therefore, the assessee is not liable to deduct tax as per sec. 195 of the Act. 18.1 It is pertinent to note that the expenditure is not for any payment to the group company towards the services or goods provided by the group company; but is for computer software taken from a third party and the payment made by the assessee is routed through its group company. Thus, if the contention of the assessee is accepted, then the provisions of sec. 40 can be circumvented by simply following the modus-operandi to make the payment to the third party not directly but through intermediary and giving the colour of reimbursement of the cost to the intermediary. 18.2 We have carefully perused the details of reimbursement to the group company namely SAB Miller A A)(Pty) Ltd as well as the invoice and found that the payment made by the assessee to its group conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business : Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status 19.2 It is clear from the above Explanation that the payment for transfer of any right to use or right to use of computer software does not fall within the meaning of royalty as provided under Explanation 2 to sec. 9(1)(vi) of the Act. Rather, the payment for transfer of right for use or right to use of computer software has been defined as royalty under Explanation 4 as under: [Explanation 4. - For the removal of doubts, it is hereby clarified that the expression "through" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only be restricted to the amount outstanding as payable as on 31/03/2008 as per the principles laid down by Special Bench in the case supra." 19.4 In the absence of any contrary decision brought before us, we follow the decision of the Coordinate Bench of this Tribunal and accordingly held that when the royalty for transfer of right to use of computer software does not fall under Explanation 2 to sec. 9(1)(vi); but the same falls under Explanation 4 to sec. 9(1)(vi), then in view of the Explanation to sec. 40(a)(i), the said amount cannot be disallowed under the provisions of sec. 40(a)(i) of the Act. 20. Ground no.2.5 is regarding disallowance of interest for diversion of funds to the group companies u/s 36(1)(iii) of the I T Act. 20.1 The Assessing Officer has noted from the Schedule 10 of the financial statements that there is a closing balance as on 31.3.2007 in respect of the advances given to its group companies as under: (i) MBL Investment Ltd Rs. 11,07,85,131/- (ii) SAB Miller India Ltd Rs. 71,62,470/- 20.2 The Assessing Officer further noted that during the year, the assessee has obtained fresh loans to the tune of Rs. 133,43,30,625/- from various banks. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee and consider what a prudent businessman would do. 20.5 The ld Sr counsel has submitted that there are loans taken during the AY 2003-04 and the Tribunal has set aside the issue to the record of the Assessing Officer and in the giving effect order, the AO did not disallow any interest. Therefore, when the AO has not disallowed any interest as finally accepted the claim of the assessee for the AY 2003-04, then in the similar circumstances for the AY under consideration no disallowance can be called for. 20.6 The ld Sr Counsel has further contended that when the advance has not been given from the borrowed funds as no nexus between the borrowed funds and the advances given by the assessee to the group companies, then it cannot be presumed that such advance was given out of borrowed funds. He has relied upon the decision of the Hon'ble Karnataka High Court in the case of Commissioner of Income-tax v. Sridev Enterprises reported in 192 ITR 165 and submitted that the calculation has been made by the Assessing Officer as per the Annexure C on net basis; whereas the table would show opening debit balance was at Rs. 126,96,71,420/- whereas the interest has been disallowed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that during the year, the outstanding balance as noted by the Assessing Officer on June 2006 and Sept 2006 as well as Nov 2006 was increased and therefore, only the differential amount which was advanced by the assessee during the year under consideration can be taken into consideration for disallowance of interest, if the same has been given out of the borrowed funds. 21.3 There is no dispute that during the year under consideration the assessee has borrowed a sum of Rs. 133,43,30,625/-; but it is not clear whether the said borrowed fund has been directly utilized by the assessee for advance loans to the group companies at lower rate. If the assessee is having other funds, apart from the borrowed funds, when the additional amount was advanced to the group companies during the year under consideration, then it cannot be said that the borrowed fund was used for giving advance to the group companies at lower rate of interest. 21.4 It is also manifest from the records that the closing balance of advance given to MBL Investment Ltd has reduced drastically to Rs. 11,07,85,133/-; therefore, ultimately the assessee has received back the amount from the group concerns and the closing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transactions with its Associated Enterprises (AEs) Sl No. Particulars Amount Name of the AE 1 Payment of License fee 31,75,51,028 SAB Miller Management (IN)BV 2 Purchase of traded goods 4,34,492 SAP Birra Peroni 3 Cost reimbursements payable 1,46,52,856 SAB Miller Plc, SAB Miller Asia Africa BV and SAB Miller Finance BV 4 Cost reimbursements receivable 2,09,57,497 SAB Miller Plc, SAB Miller Asia Africa BV and SAB Miller Finance BV 22.2 The Assessing Officer made a reference u/s 92CA(1) of the I T Act to the TPO on 3.7.2009 for determination of the ALP. Consequently, the TPO vide order passed u/s 9CA(3) dt 29th Oct 2010 has made an adjustment of Rs. 18,06,07,120/- to the ALP in relation to international transactions of royalty payments entered into by the assessee with the AE. In the TP study, the assessee has adopted CUP method as most appropriate method for benchmarking the international transactions relating to the payment of license fee, cost reimbursement payable and cost reimbursement receivable. The assessee has adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riate method. Further, the transaction by transaction analysis is required to be done and only international transactions are required to be tested. In support of his contention, he has relied upon the various decisions of the Tribunal and submitted that it is settled proposition that the international transaction should be decided on the basis of analysis carried on transaction by transaction separately. The aggregation of different business activity as held by the Tribunal is not appropriate and the ALP principle should be applied on transaction by transaction basis. 23.3 The ld Sr counsel has further pointed that the royalty paid by the assessee @ 2.5% on gross sale or 5% on sale as per the agreement; therefore, even the rate of royalty on gross sales is substantially less in comparison to the royalty paid by the comparables as selected by the assessee in the subsequent years. The ld Sr counsel has also submitted that the trading transaction, which is very negligible, should have been benchmarked separately by using TNMM method and after giving adjustment. The assessee has also entitled for benefit of + - 5% as provided under the law. 23.4 On the other hand, Shri Ajeet Kumar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f controlled transactions. The assessee has merely stated that since the payments are within the statutory limits by the Govt of India for the payment of royalty, such payments by the assessee meet the ALP standard which is as per the provisions of law. Such standard of the assessee is not in conformity with the provisions of law. The purpose of press note or approvals is not to create a benchmark for the purpose of Indian transfer pricing regulations. The approval is essentially concerned with the outflow of the foreign exchange and not with the benchmarking exercise which is the requisite of the transfer pricing regulations. In support of his contention, he has relied upon the decision of the Hon'ble Delhi High Court in the case of Nestle India Ltd reported in 337 ITR 103 wherein the Hon'ble High Court has observed that the Tribunal is not correct in observing that since the permission is given by the RBI, the reasonableness and genuineness of the expenditure could not have been gone into by the Assessing Officer. 23.7 The ld DR has also relied upon the decision of the Ahmedabd Benches of the Tribunal in the case of M/s Bisaza India Pvt Ltd wherein the Tribunal has held that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erent . The RBI is only concerned with the foreign exchange and, therefore, would look into the matter from that point of view. The RBI, at the time of giving such permission would not keep in mind the provisions of the I T Act and that is the function of the income tax authorities and, cannot be validly go into such an issue. 24.3 Similarly view has been taken by the Ahmedabad Benches of the Tribunal in the case of Bisaza India P Ltd (supra). When a proper mechanism is provided under the provisions of the I T Act and Rules for determination of the ALP, then the approval by other than the I T Authorities, for the purpose of remittance/outflow of the foreign exchange, does not ipso facto, partake the character of ALP, which has to be determined as per TP regulations. Hence, we do not find any substance or merit in the assesse's stand that when the payment of royalty is within the prescribed limit of press note no.9 of 2000 FDI policy, the same is at ALP. 24.4 As regards the adjustment made by the TPO by determining the ALP; since the assessee did not furnish the relevant data of comparables transactions and TPO itself has selected the comparables which are as under: 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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