TMI Blog2014 (5) TMI 880X X X X Extracts X X X X X X X X Extracts X X X X ..... data from the market without carrying out any comparability analysis of the actual transactions undertaken, such an application of guarantee commission rate cannot be applied in a blanket manner in all the cases - when there was an internal CUP in the form of bank guarantee charges, charged by the bank from the assessee, the same ought to have been first analysed and examined wherein the guarantee commission charged ranged between 0.25% to 0.35% - in the earlier years, the Tribunal has deleted the similar addition and no question of law on this score has been raised by the Department - no upward adjustment in the ALP in relation to charging of guarantee commission over and above 0.20% can be made and, accordingly, the adjustment so made by the TPO / A.O. is hereby set aside – Decided in favour of Assessee. Disallowance of notional interest free loans – Held that:- The AO and the as well as the material available on record - it cannot be held that the assessee has given advance / loan to the subsidiary company directly out of interest bearing funds - The disallowance so made by the AO cannot be sustained - the advance / loan given to subsidiary was solely for the purpose of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that:- Provisions of rule 8D cannot be held to be applicable for the AY 2006-07 – Relying Godrej & Boyce Mfg. Co. Ltd. v/s DCIT [2010 (8) TMI 77 - BOMBAY HIGH COURT] – the matter is remitted back to the AO for fresh adjudication – Decided in favour of Assessee. - ITA No. 7801/Mum./2010 - - - Dated:- 29-10-2013 - Shri P. M. Jagtap And Shri Amit Shukla,JJ. For the Petitioner : Dr. K. Shivram For the Respondent : Mr. Ajit Kumar Jain a/w Mr. Jitendra yadav ORDER Per Amit Shukla, J. M. The present appeal has been preferred by the assessee, challenging the impugned final assessment order dated 7th October 2004, passed by the Assessing Officer under section 143(3) r/w 144C of the Income Tax Act, 1961 (for short "the Act") in pursuance of the directions given by the Dispute Resolution Panel-I, for the assessment year 2006-07, interalia on the following grounds have been raised by the assessee:- (1)"The learned Additional Commissioner of Income Tax (LTU) Mumbai erred in making an addition of Rs. 242.06 lacs with respect to Transfer Pricing adjustments on account of guarantee charges for guarantee given to Associated Enterprise. 2) The learned Additional Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n loans from overseas banks for which guarantee had been given by the assessee to its constituent branch in India for which the assessee has charged 0.20% of the guarantee amount as commission to the Associated Enterprise (A.E). In the case of some of the subsidiaries where the assessee had not charged guarantee commission from the A.E., it had suo-motu offered the same to tax @ 0.20% of the guarantee amount in the return of income. The assessee has given following corporate guarantee on behalf of the following A.Es which was outstanding as on 31 st March 2006:- Sr. no. Name of Unit In U.S. $ In Rs. Singapore / Australian Dollars 1. Berger International Ltd., Singapore 1,05,00,000 46,83,90,000 1,70,00,000 SGD 2. Berger International Ltd., Singapore 80,30,000 35,82,10,000 1,30,00,000 SGD 3. Asian Paints (Queensland) Pty Ltd., Australia 8,50,000 3,79,20,000 12,00,000 AID TOTAL 1,93,80,000 86,45,20,000 3. The TPO made an observation that the assessee (Asian Paints Ltd.) on account of its financial streng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urity for covering the risk involved in t e guarantee. In the present case the assessee as not 0 tamed any Security from its AE. It has just provided a blanket guarantee. Therefore the 's Length Compensation should be much more than the rate charged by the banks for their commission. 5.7 A valuation of the element of risk can be made by comparing the Company Fixed Deposits with a Bank Fixed Deposit. Everybody knows that by its very nature deposit made in a Private Listed Companies u/s 58A of the companies Act 1956, are totally unsecured. They do not even have a collate or secondary charge on the assets of the Company. In the event of liquid on of the company they rank in payment just prior to the shareholders. The average rate of interest offered by 86 companies on such deposits for a period of 1 to 3 years were ranging from 9.0% to 9.8% (http://www.personalfn.com/fixedincome/productarena/co-dep1-r.asp). On the other hand a fixed deposit in a Scheduled Bank is considered to be reasonably secure. It is backed by the insurance (up to deposit of Rs.11ac) and also the backing of Reserve Bank of India and Government of India., The average rate of interest offered by 44 banks on te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suo- motu has offered 0.20% on the guarantee given to it‟s A.E. Singapore and similar offer of 0.20% for the Australian A.E., even though the assessee has not charged any amount from this A.E. Thus, looking to the background and the facts of the assessee‟s case where the banks in case of assessee itself charging on guarantee amount at the rate of 0.25% to 0.35% or nil then 0.20% charged from its A.E. are at arm‟s length. He also submitted that in the assessment year 2005-06, the Tribunal in assessee‟s own case (in ITA no.408/Mum./2010 and 1937/Mum./2010), has deleted the earlier addition made by the A.O. / TPO on account of similar adjustment made in guarantee commission. The Revenue has accepted this order of the Tribunal as no question of law on this score was raised. A copy of the order of the Tribunal and the judgment of the High Court have been referred to us which has been placed in the paper book. He also submitted that in the assessment year 2004-05, on similar corporate guarantee given, no addition was made by the TPO / A.O. Thus, looking to the fact that there was internal CUP available in case of the assessee itself, there was no requirement for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd conditions. While enquiring from HSBC Bank and getting a gurantee from the website of Allahabad Bank, he noted that guarantee commission is being charged in the case of HSBC @ 0.15% to 3% and by Allahabad Bank @ 3% per annum. He also observed that even this rate does not reflect the cost of the risk undertaken, because the banks secure themselves fully, while taking the guarantee. He has also tried to analyse the element of risk by comparing the company fixed deposits and the bank Fixed deposits and worked out the cost of risk embedded in such kind of two deposits at nearly 3 to 4%. Accordingly, he bench marked the ALP for the guarantee @ 3% p.a. of the amount of the guarantee. 8. First of all, if we analyze the external comparable of HSBC Bank, it is noticed that the bank has given the information that it has been charging 0.15% to 3% of the guarantee commission whereas, in case of Allahabad Bank, the TPO has noted the blanket quote from the website, which gives the guarantee commission rate of 3%. However, the TPO has not brought any data on record, Firstly for which financial year these data belong to; and secondly, under which terms conditions and circumstances, the bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears, the assessee submitted that out of the above loans, loans aggregating Rs. 7.70 crores loans were given in the earlier years and the said loans were given out of internal generation of funds which were interest free and were not out of any specific borrowings. The loans which were given in this year were purely for the business purpose and for commercial expediency. The details of interest free funds in the respective year of grant of interest free loans were given as under:- Rs. In Lakhs Particulars F.Y. 2000-01 F.Y. 2001-02 F.Y. 2005-06 Share Capital 6419 6419 9592 Reserve Surplus 34701 34637 52636 Total Interest free funds 41120 41056 62228 Interest free loans to subsi-diaries 670 1777 1432 In support of this contention reliance was also placed on the decision of the Hon'ble Jurisdictional High Court in CIT v/s Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom.) and also the decision of the Hon'ble Supreme Court in S.A. Builders v/s CIT, [2007] 288 ITR 001 (SC). 11. It was further submitted that the additional am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, the Assessing Officer has accepted this contention and no disallowance of interest was made. A copy of various orders giving effect to the Tribunal orders right from the assessment years 2000-01 to 2005-06 were furnished in the paper book. He also pointed out that in the assessment year 2007-08, the learned Commissioner (Appeals) has deleted the similar disallowance of interest on which the Department has not raised this issue in the grounds filed before the Tribunal and similarly this issue has also been allowed by the learned Commissioner (Appeals) in the assessment year 2008 -09. Coming to the merits of the issue, he submitted that the assessee is a cash rich company and does not have any borrowed funds at all, which is evident from the Schedule-C of the Balance Sheet which gives the details of secured and unsecured loans, which was at nil‟. The total interest which has been debited in the Profit Loss account during the year is only Rs. Rs.8,79,000 which is on account of cash credit account. He also drew our attention to the bank statement of HDFC and pointed out that even after the payment, there was sufficient balance amount in the cash credit account and at the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s year, the additional amount was advanced for the purchase of land, wherein, R D lab was to be established for the purpose of the assessee. In fact, as per the subsequent records placed before us as well as before the authorities below, the R D lab has been established and such a building is also appearing in the block of asset of the assessee. Thus, the money advanced can be said to have direct nexus for the purpose of assessee‟s business and this aspect further gets strengthen by the fact that in the subsequent years, the learned Commissioner (Appeals) has accepted the assessee‟s contention and disallowance of interest has been deleted. From the perusal of the Balance Sheet, it is evident that the assessee has huge reserves and surplus‟ and also huge profit (as stated above) and, therefore, the assessee has more than sufficient interest free funds available with it. It is also a fact that the assessee does not have any long term secured and unsecured loans and there is not much expenditure on account of interest payment also. The only sum of interest aggregating to Rs.8,79,000, is on account of cash credit account. Thus, once the claim of interest in profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion was to be given by the said consultant to the assessee. The relevant extract of the said agreement has been incorporated by the Assessing Officer from Page-7 to 13 of the assessment order. It was submitted by the assessee that such a technical advise was obtained for existing line of business and for the betterment of product and, therefore, it is an allowable reserve expenditure. Reliance was placed on several decisions which has also been incorporated by the Assessing Officer at pages-13 and 14 of the assessment order. The Assessing Officer, however rejected the assessee‟s contention on the ground that all the case laws cited by the assessee are prior to the introduction of the term "technical knowhow" as an asset, in Explanation 4 to section 32(1). Now the technical knowhow has been defined and this, inter-alia, means that it is in the nature of capital expenditure. He further held that the technical knowledge provided by Mr. Jayram Nadkarni consists of entire package comprising of technical data, knowhow, formulation of paints, manufacturing process which have been handed over by the said consultant to the assessee company and this has become proprietary knowledge of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich are processed, using consultancy/ technical advise during the term of the agreement. Thus, the entire agreement goes to show that it is for providing intellectual property / proprietary information in the form of technical knowhow to the assessee which is permanent and has huge enduring value and benefit to the assessee in creating an asset. It is not merely a technical consultancy for day-to-day running of the manufacturing process or business but the whole package of technical knowhow which will have enduring benefit to the assessee company and will go to create an intangible asset and, therefore, it is definitely in the nature of capital expenditure. Thus, the findings of the Assessing Officer as well as the DRP to this extent, are factually and legally correct. Accordingly, we uphold the directions of the DRP that, to the extent of Rs. 1.20 crores, which was a lump-sum payment, is in the nature of capital expenditure, whereas, the balance sum of Rs.36 lakhs which was on account of monthly remuneration and which has been deleted by the DRP, is affirmed. Thus, the addition made by the AO would be restricted to Rs.1.20 lakhs. Thus, ground is treated as partly allowed. 23. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. CIT v/s Adidas India Marketing P. Ltd., [2010] 105 Taxman 256 (Del.) 6. DCIT v/s Warner Lambert (I) Pvt. Ltd. [2012] 143 TTJ 571 (Mum.)(Trib.) He further submitted that the learned Commissioner (Appeals) has allowed these expenses in the assessment years 2007-08 and 2008-09. 27. The learned Departmental Representative, on the other hand, relied heavily upon the order of the Assessing Officer as well as the DRP. 28. We have heard the rival contentions, perused the relevant findings of the Assessing Officer as well as the material available on record. It is not disputed that the said expenditure on the advertisement has been incurred in the relevant assessment year only and it is for the business purpose only, except for that the A.O. has treated part of it as capital expenditure. The Assessing Officer has allowed various expenditures incurred for TV advertisement expenses relating to products and has disallowed the advertisement expenses on corporate brand, the details of such expenditure were as under:- Brand Caption Expenses (net) Total Expenses Chote Sarkar 7,01,20,716 Exteriors Ottam Thullal 38,09,870 Time Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in nature. Accordingly, we hold that, such an expenditure incurred on advertisement on TV has to be allowed as revenue expenditure. 29. Insofar as ground no.5, 7 and 8, as incorporated above, it has been admitted by both the parties that before us that these grounds have not been adjudicated by the DRP and therefore, same should be remanded back to the DRP. Consequently, we restore these grounds to the file of the DRP for adjudicating these grounds afresh on merits, after giving due and effective opportunity of hearing to the assessee. Thus, these grounds are treated as allowed for statistical purposes. 30. In ground no.6, the assessee has challenged the addition of Rs.69.11 lakhs on account of disallowance made under section 14A r/w rule 8D.The Assessing Officer as well as the DRP has applied rule 8D even for the assessment year 2006-07 for the purpose of making disallowance. 31. Before us, it has been admitted by the learned Counsel and the learned Departmental Representative that provisions of rule 8D cannot be held to be applicable for the assessment year 2006-07, in view of the decision of the Hon'ble Jurisdictional High Court in Godrej Boyce Mfg. Co. Ltd. v/s DCIT, (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
