TMI Blog2014 (2) TMI 981X X X X Extracts X X X X X X X X Extracts X X X X ..... vour of Assessee. Claim of bad debts – Held that:- It is not necessary to prove that the debt has become irrecoverable and is enough if bad debt is written off in the accounts of the assessee - There is no dispute that the amount claimed is towards supplies made and the debtor company is not in the position to repay – the decision in TRF. LTD. Versus COMMISSIONER OF INCOME-TAX [2010 (2) TMI 211 - SUPREME COURT] followed - the AO is directed to allow the amount as claimed – Decided in favour of Assessee. Disallowance made u/s 40(a)(ii) of the Act – Held that:- As decided in assessee’s own case for the previous assessment year, since no services are rendered in India, sales commission cannot be disallowed under the provisions of section 40(a)(ia) – the amounts covered by sales commission are not accruing or arising to the non-residents in India – thus, provisions of section 195 does not apply and, section 40(a)(ia) cannot be invoked. Product registration and filing fee – Held that:- Without examining the nature of the amount and whether the other non-resident has any permanent establishment in India or made available anything in India or rendered any services In India, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence to transfer pricing adjustment made on interest received on loans given to Associated Enterprise (in short "AE") and claim of bad debts. 3. We have heard learned Counsel for the assessee and learned D.R. and perused the paper books placed on record along with the written submissions. 4. Briefly stated, assessee is a company which is engaged in manufacture of bulk drugs and pharmaceutical formulations. For the assessment year 2005-2006 it has filed return of income on 30.10.2005 showing loss of Rs.64,52,14,882/- but admitting book profit of Rs.51,08,78,443/-. In the course of assessment proceedings, the Assessing Officer noticed that assessee had advanced funds to its associate concerns and has earned interest. In order to examine the arms length price of such international transactions, the A.O. made a reference to Transfer Pricing Officer (in short "TPO") under section 92CA of the Act. The TPO accepted other transactions entered by the assessee with the AEs except transaction pertaining to interest receipts. It was the submission of the assessee that the funds are advanced to the sister concerns out of borrowals for the specific purpose and some out of accruals from the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest given by the learned CIT(A). 8. We have considered the issue and examined the facts. As far as the loans advanced and source of funds these are the details as furnished by the assessee :- 9. As can be seen from the above, the interest received was more than interest paid. This issue was considered by the Coordinate Bench in the Order relied above, wherein vide paras 4.3 to 4.8 the issue was decided as under : "4.3 We have considered the issue and examined the facts. With reference to principle that labor + specific percentage points is to be considered as ALP, there is no dispute as this issue was decided by various coordinate benches of Tribunal in various cases. Few of them are as under: 4.4. In the case of Siva Industries Holdings Ltd. 46 SOT 112 (Chennai) held that. "A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0 per cent optional convertible preferential shares. Thus it is noticed that the funds raised by the assessee company for giving the loan to India Telecom Holdings Ltd., Mauritius, which is its Associated Enterprises and which is the subsidiary company, is out of the funds of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the LIBOR (US Dollar) has to be as benchmark for US Dollar transactions - rather than the rate of interest on domestic borrowings, even which is lower than the interest rate of 10 per cent taken as ALP by the TPO, or, for that purpose, rate of interest on any other currency loans." 4.6. In the case of M/s Four Soft Ltd Vs DCIT Circle-l(3), Hyderabad, ITA No. 1495/Hyd/2010 tribunal held that "We have considered the rival submissions and perused the materials available on record. We do not find any merit in the arguments of the learned departmental representative as we find that the ALP is to be determined for the international transaction, that is, on international loan and not for the domestic loan. Hence, the comparable, in respect of foreign currency loan in the international market, is to be LlBOR based which is internationally recognized and adopted. In our considered view, the DRP rightly directed the assessing officer to adopt the LIB OR plus tor the purpose of TP adjustment. Our view is fortified by the decision of the Madras Bench in the case of Siva Industries". 4.7. Similar view has been taken in the case of Tata Auto comp Systems Limited vs. ACIT, ITAT Mumbai, ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... represents dues from M/s. Citadel Aurobindo Biotech Limited stated to be for the supplies made. During the assessment proceedings, the assessee explained the reasons and justified for bad debts stating that the transactions with M/s. Citadel Aurobindo Biotech Limited, a joint venture company, are multifold and include investment in equity, receivables for supplies made, non-compete fee and consideration for the brands and advance recovery. 12. During the course of assessment proceedings, it was explained that all these transactions were informed to the A.O. and the written off amount of Rs. 3 crores was only towards supplies made and not towards non-compete fee and sale of brands. Assessing Officer, however, did not allow the claim stating that assessee has transferred part of non- compete fee as loan and written off during the year as bad debt. Learned CIT(A), however, accepted that the amount of Rs. 3 crores was towards supplies made but did not allow the amount as he has considered that writing off was premature. 13. Learned Counsel reiterating the facts, submitted that assessee was justified in writing off the amount as the said company is not in the business and is not in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be benchmarked against LIBOR + certain percentage points. The dispute is only with reference to prime lending rate of the respective countries to be considered or LIBOR + 2% points are to be considered. Consistent with the view taken in earlier years in all those cases where assessee has charged more than LIBOR + 2% points, the same should be accepted as arms length unless the borrowals was at higher percentage points. Another case, where a benchmark is not done with LIBOR + 2% rate like 5 to 13% in some of the loans advanced, the same can be benchmarked at LIBOR + certain percentage as in last year and if there is any shortfall in the interest charged, the same can be considered for making adjustment in T.P. proceedings. Keeping in view the directions given in earlier years, this issue is restored to the file of the A.O. to examine the rates and benchmark with LIBOR + percentage points. Assessee's grounds are considered as allowed. 20. Grounds No. 5, 6 and 7 pertain to the issue of disallowance made under section 40(a)(ii) by the A.O. on the reason that assessee has not deducted TDS on the amounts paid to non-residents . 21. Briefly sated, facts are that the assessee has cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able for deduction of TDS under section 195 of the Act. Accordingly, the provisions of section 40(a)(ia) of the Act are not applicable. The case law relied on by the learned Departmental Representative in the case of Transmission Corporation of A.P. Limited reported in 239 ITR 587 (SC) and the decision of this Tribunal in the case of Cheminor Drugs vs. ITO is not applicable to the facts of the case under consideration, as in this case, the assessee made the payment directly to the non-resident agents for rendering services abroad. In view of the above, we do not see any infirmity in the order of the CIT(A) on this issue and the same is upheld." 26. Therefore, respectfully following the same, we hold that since no services are rendered in India, sales commission cannot be disallowed under the provisions of section 40(a)(ia. Even though there are orders favourable to the assessee, DRP however, did not consider the same. We have no hesitation in holding that amounts covered by sales commission are not accruing or arising to the non-residents in India. Accordingly, provisions of section 195 does not apply and consequently, section 40(a)(ia) cannot be invoked. The grounds to the exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.2 pertains to transfer pricing adjustment on the loans given to its subsidiaries. This issue is recurring issue and unlike in earlier year, the DRP did not restrict the disallowance to prime lending rate +2% percentage points and confirmed the T.P. order adopting the corporate bond at 14% on loans, on the reason that similar issues are pending before the ITAT. Considering various Coordinate Bench decisions on the issue, we hold that LIBOR + certain percentage points can be benchmarked. As directed in A.Y. 2006-2007, the A.O. is directed to examine the issue and arrive at the addition if any to be made over and above the rate accepted by the assessee while providing loans to the subsidiaries. The issue is restored to the file of the A.O. to examine and decide as in earlier years (as decided by is in para No. 10 and 19 hereinabove). Ground No.2 is allowed for statistical purposes. 31. Ground No.3 pertains to issue of disallowing the claim under section 35D. Assessee claimed an expenditure of Rs.4,11,71,160/- as deduction under section 35D on issue of Foreign Currency Convertible Bonds (in short "FCCB"). The said sum was disallowed by the A.O. on the reason that FCCB are not on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DRP itself allowed the FCCB expenses as deferred expenditure. Therefore, the issue is restored to the file of the A.O. to consider the issue and allow accordingly. Accordingly, ground No. 3 is allowed for statistical purposes. 34. Ground No.4 pertains to bad debt claim. Briefly stated, the facts are that the Ld Assessing officer disallowed Rs.3,66,38,477/- representing the amount due from Polaris Health Care Private Limited written off as Bad Debt. The said amount clearly represents dues from Polaris Health Care Private Limited for supplies made by the assessee which is evidenced by supporting evidence like invoices, delivery challan etc. These dues are outstanding for quite a long time and the assessee in spite of its best efforts could not recover the said dues. Considering the Financial position of the Debtor since there are no chances of recovery the assessee has charged this amount to Profit Loss account as Bad Debt. In this connection, it was submitted that the debt was created on account of sales made by the assessee which were duly accounted for in the earlier years and the debt was continuing in the Books, since not recoverable was written off as bad debt. 35. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign parties, the assessee's contentions are as under : "31.0 During the year under consideration appellant paid amount of Rs. 1,65,67,307/- towards professional fee to foreign parties who do not have Permanent Establishment (PE) in India who rendered services outside the country and it is in connection with export business of the Appellant and for earning income for the sources outside India. Most of the expenses pertain to and are in connection with product registration and filing which are required for marketing Company's products in various countries. 32.0 The Learned AO and DRP disallowed above professional and legal fees u/s 40(a)(i) stating that appellant should have deducted tax u/s 195 of the IT Act. The Learned AO/DRP ought to have appreciated that the payments made to non-residents were covered by the exception to Sec.9 (I) (vii) (b) and therefore did not require deduction of tax at source. 33.0 We draw your attention to the ruling of the Supreme Court ('SC')in GE India Technology Centre (P) Ltd v CIT(2010) 7 Taxmann.com 18 relating to Special Leave Petition filed by a few companies against the judgement of Karnataka High Court ('HC') in the leading case of CIT vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DS obligation arises on every payment to a non-resident, as this would imply that on simply making a payment to a non-resident, income would be said to accrue or arise in India. 37.0 The SC held that the Act has to be read as an integrated code and that the charging section and machinery sections of TDS have to be read together. The SC observed that if the revenue's contention were to be accepted, it would amount to the payer deducting tax on a payment that is not chargeable to tax under the provisions of the Act, for which the Act also does not have a mechanism for providing refund of tax to the payer, as only the recipient non-resident is entitled to the refund. 38.0 The revenue's argument that it would not be in a position to determine the taxability or otherwise of the payments was rejected by the se by again referring to the provisions of section 195 (1), which required TDS only on those sums that are chargeable to tax. The se also observed that the revenue can have access to the desired information when the payers are subjected to tax scrutiny in the audit of their taxable income. It was noted by the se that payments to non- residents, on which the requisite TDS has not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalties and Fees for Technical Services as per the concept of make available clause hence there is no requirement of deduction of taxes before making the payment. However the Ld AO disallowed the amount on the ground that no withholding taxes was done and disallowed the same u/s 40(a)(i) (A) of the IT Act.. (a) In Dy Dl'I'(International Taxation) vs Preroy AG(2010) 39 SOT 187 (Mum lTAT) it was held that "if make available clause exists in the tax treaty strategic consultancy services cannot be treated as fees for technical services" (b) Mere provision of technical services is not enough to attract Article 12(4) (b) .It additionally requires that the service provider should also make available his technical knowledge, experience, skill know how etc known to the recipient of the service so as to equip him to independently perform the technical function himself in future without the help of the service provider. In other words, payment of consideration would be regarded as fees for technical/included services only if the twin test of rendering services and making technology available at the same is satisfied- Anapharm Inc ruling [2008] 305 ITR 394 405 AAR. (c) Reliance is also ..... X X X X Extracts X X X X X X X X Extracts X X X X
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