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2015 (5) TMI 639 - ITAT MUMBAI

2015 (5) TMI 639 - ITAT MUMBAI - TMI - Transfer pricing adjustment in respect of corporate guarantee - Held that:- Following the earlier decisions of this Tribunal in assessee’s own case, we direct the AO/TPO to adopt 0.5% as arm’s length guarantee commission charges in respect of the guarantee provided by the assessee for obtaining the loan by the AE.

TP adjustment in respect of interest on loan given to AE - Held that:- The rate to be used for undertaking an adjustment should be LlB .....

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of interest on re-characterization of share application money as loan advanced to AE - Held that:- Subject to verification of the share certificate by the AO, the share application money cannot be treated as loan amount merely because there is a delay in issuance of shares by the subsidiary in the name of the assesse, which was duly explained by the assesse. Accordingly, this ground of the assesse’s appeal is allowed in above terms.

Expenditure on loan taken for Investment of USD 15. .....

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ingly, we reject the additional ground raised by the assesse being not arisen from the impugned orders of authorities below for the A.Y. under consideration - Decided against assessee.

Allowance of deduction u/s 10A - whether the deduction u/s 10Aof the Act, should be restricted to the profit of the unit eligible for deduction? - CIT(A) has allowed the claim of loss of the assesse - Held that:- As decided in Commissioner of Income-tax Vs. Black & Veatch Consulting (P.) Ltd [2012 (4) T .....

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012, ITA No. 7142/Mum/2012 - Dated:- 25-3-2015 - SHRI VIJAY PAL RAO AND SHRI D. KARUNAKARA RAO, JJ. For The Revenue : Shri R.R. Vora For The Assessee : Shri. S. D. Srivastava ORDER Per Vijay Pal Rao, JM These cross appeals are directed against the order dated 24.09.2012 of CIT(A) for A.Y. 2007-08. The assessee has raised following grounds in this appeal:- 1. The Deputy Commissioner of Income-tax -8(1) (hereinafter referred to as the DClT) / Additional Commissioner of Income-tax, Transfer Pricing .....

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etermining the arm's length Price of the corporate guarantee at ₹ 1,08,54,4OO/-. Your appellant prays that the DCIT be directed to delete the said addition made on account of adjustment of Rs. l,08,54,4OO/-. 2. The DCIT / TPO erred the adjustment of ₹ 143,38,197/- by erroneously determining the interest chargeable @ LlBOR plus 4.45% on loan given by the appellant to its AE AVTL Canada at ₹ 3,63,84,625/- in stead of ₹ 2,20,46,428/- charged by the appellant @ 6 month Ll .....

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9;ble CIT (A) erred in confirming the adjustment of ₹ 6,15,669/- by erroneously considering share application money of ₹ 4,48,01,190/- given to the appellant's AE Transworks BPO Philippines Ltd [TBPO Philippines] to be in the nature of loan and calculating the arm's length interest chargeable on the same at ₹ 6,15,669/- @10.09% being 6 month USD LlBOR + 4.45% . Your appellant submits that on the facts and the circumstances of the case, the DCIT/ TPO and Hon'ble CIT( .....

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in respect of corporate guarantee. 2.1 During the year under consideration, the assessee had acquired Minacs Canada, a Canadian company engaged in BPO operations, through its wholly owned subsidiary AVTL Canada. The subsidiary/AE of the assessee AVTL had availed a loan from DBS bank Singapore, for which, the assessee had given a corporate guarantee of ₹ 106.560 crores to the bank vide deed of guarantee dated 22.11.2006. In the TP study the assesses has not classified this transaction as in .....

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O/TPO in this respect. 2.3 Before us, the Ld. AR of the assesse has submitted that the transaction of giving corporate guarantee to the bank is not an international transaction . In support of his contention he has relied upon the decision of Delhi Benches of this Tribunal in the case of Bharti Airtel Ltd (ITA No 5816/Del/201Z) dated 11 March 2014. Alternatively, the Ld. AR has submitted that the arm s length guaranteed charges may be taken at 0.5% as held by this Tribunal in number of other dec .....

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3) (6) Reliance Industries Limited ( dated 13 September 2013) (Mumbai Tribunal) (7) Prolific Corporation Limited (ITA No. 237/Hyd/2014 dated 31 December 2014 (Mumbai Tribunal). 2.4 On the other hand, the ld. DR has relied upon the orders of authorities below and submitted that the assessee has undertaken the risk by providing the guarantee for the loan obtained by the AE from the bank, therefore, the differential rate adopted by the TPO is justified. 2.5 Having considered the rival submissions a .....

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iately preceding year in assessee s own case, wherein charging of 0.5% guarantee commission from AE was held to be quite near to 0.6%, where assessee has paid independently to the ICICI bank and charging of guarantee commission @0.5% from its AE was held to be at arm s length. The precise observation of the bench for the assessment year 2007-08 are as under :- "The universal application of rate of 3 percent for guarantee commission cannot be upheld in every case as it is largely dependent u .....

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havealready come to a conclusion in the foregoing paras that the rate of 3% by taking external comparable by the TPO, cannot be sustained in facts of the present case. We also find that in an independenttransaction, the assessee has paid 0.6% guarantee commission to IGIGI Bank India for its credit arrangement. This could be a very good parameter and a comparable for taking it as internal GUP and comparing the same with the transaction with the AE. The charging of 0.5% guarantee commission from t .....

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t of differential rate of interest. Thus, on these facts, we do not find any reason to uphold any kind of upward adjustment in ALP in relation to charging of guarantee commission. As the facts and circumstances of the case during the year under consideration are pari materia, respectfully following the decision of the Tribunal in assessee s own case, we direct the AO to compute arm s length price of transaction as per the direction given by the Tribunal in the above order for A.Y. 2007-08. 2.6 S .....

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AVTL Canada in order to accomplish the acquisition of Minacs Canada. In the TP documentation, the assesse bench marked the said transaction of providing loan to AE by using internal CUP of LIBOR+0.65%. The internal CUP was stated to have been determined by the assesse based on the loan availed from the DBS Bank at the rate of LIBOR+0.45% plus 0.20% each year for a period of 5 years. The assesse charged the interest from the AE at the rate of CAD LIBOR+1% which is more than LIBOR+0.65% ALP adopt .....

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tification order u/s 154 of the ACT and reduced the interest adjustment to ₹ 1,43,38,197/-. 3.2 On appeal, the CIT(A) has determined the ALP rate of interest as 6 months LIBOR+200 basis point, thereby, reduced the adjustment from 1,43,38,197/- to ₹ 41,50,502/-. 3.3 Before us, the Ld. AR of the assesse has submitted that the assesse adopted the internal CUP being cost of the loan availed by the assesse and, therefore, no further adjustment is required. 3.4 On the other hand, the Ld. D .....

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ssue in para 11 and 12 as under:- 11 . We had considered rival contentions and gone through the orders of lower authorities. As per our considered opinion, appropriate international rates should be used for the purpose of the comparability analysis. For this purpose, the London Inter Bank Offer Rate (LIBOR) is an internationally recognized rate for benchmarking loans denominated in foreign currency. For this purpose, reliance may be placed on the following decision of the coordinate bench :- i) .....

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IT Appeal No. 2148 (Mds.) of 2010; viii) Bharti Airtel Ltd (ITA No 581 6/0el/201Z) dated 11 March 2014 ix) Infotech Enterprises Limited (ITA No 115/Hyd/2011) dated 16 January 2014; x) Kohinoor Foods Ltd (ITA Nos 3688-3691/0el/2012 and ITA Nos 3868- 3869/0el/2012) dated 21 July 2014; and xi) Four Soft Ltd vs. OCIT, IT Appeal No. 1495 of 2011 (Hyderabad Tribunal) 12. In light of the above decisions, the rate to be used for undertaking an adjustment should be LlBOR and not the average yield rates .....

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f CIT(A) qua this issue. 4. Ground no. 3 is regarding the TP adjustment on account of interest on re-characterization of share application money as loan advanced to AE. 4.1 During the year, the assesse has advanced a sum of ₹ 4,48,01,190/- to its subsidiary, Transworks BPO Phillipines Ltd.. in the form of share application money. The TPO was of the view that although the said amount given by the assesse in the garb of share application money, however, this amount was actually in the nature .....

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es was required to obtain approval regarding issue of shares from Securities and Exchange Commission, Phillipines. TBPO Phillipines received the approval from Securities and Exchange Commission Phillipines on 22.10.2007. Subsequent to the receipt of approval, the equity shares were issued on 28th May 2008. The Ld. AR has referred the share certificate issued by TBPO Phillipines and submitted that the same has been produced before the Tribunal as additional evidence vide letter dated 13.06.2014 w .....

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s Ltd. (ITA No. 4909and 4910/M/2012) dated 11 June 2014 (Mumbai Tribunal) • PMP Auto Components P. Ltd. (ITA No. 1484/Mum/2014) dated 22 August 2014 4.4 On the other hand, the Ld. DR has relied upon the orders of authorities below and submitted that the TPO has specifically pointed out that the money given by the assesse was enjoyed and used by the subsidiary without issuing the share for about more than two years, therefore, so long the money was lying with the AE without issuing the share .....

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to obtaining necessary approval from the Securities and Exchange Commission, Phillipines. Finally, the shares were issued as per the share certificate dated 25.05.2008 which has been produced by the assesse as additional evidence. Since the document of issuance of equity shares in the name of the assesse by the subsidiary/AE vide share certificate were not before the authorities below, therefore, to the extent of limited purpose of considering the said document, we set aside this issue to the re .....

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interest of ₹ 5.73 crores paid to Joint Venture Partners. The Commissioner of Income Tax (Appeals) held that Article 7(3)(b) of the Double Taxation Avoidance Agreement forbids allowance of any interest paid to the head office by permanent establishment in India as a deduction. Further, the payment of interest also directly violates the conditions imposed by RBI in its letter dated 3/11/1998. Therefore, the order of the Assessing Officer was upheld. 7. However, the Tribunal allowed the resp .....

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s with regard to thin capitalization so as to consider debt as an equity. It is only in the proposed Direct Tax Code Bill of 2010 that as a part of the General Anti Avoidance Rules it is proposed to introduce a provision by which a arrangement may be declared as an impermissible avoidance arrangement and may be determined by recharacterzing any equity into debt or vice versa. 8. We find no fault with the above observations of the Tribunal. There were at the relevant time and even today no thin c .....

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y in issuance of shares by the subsidiary in the name of the assesse, which was duly explained by the assesse. Accordingly, this ground of the assesse s appeal is allowed in above terms. 5. Ground no. 4 is regarding depreciation on software expenditure. 5.1 At the time of hearing the Ld. AR of the assesse has submitted that the assesse does not wish to press this ground as the CIT(A) has given the relief in the A.Y. 2006-07, and accordingly the same may be dismissed as not pressed. 5.2 Ld. DR ra .....

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of Minacs Canada is capital in nature hence not allowable, the Income in relation to the same of ₹ 52,927,844/- must also be treated as capital receipt and not be taxable in the year under consideration. 6.1 We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. This additional ground is only with respect to the treatment of the investment made by the assesse in its foreign subsidiary AVTL Canada which was treated as capital in nature and accordingly th .....

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tains to subsequent assessment years when the assesse earned some foreign exchange gain, therefore, for the year under consideration, no such gain has arisen to the assesse on account of the said investment and, therefore, no adjudication of this ground is required for the year under consideration. Accordingly, we reject the additional ground raised by the assesse being not arisen from the impugned orders of authorities below for the A.Y. under consideration. In any case, it is a consequential p .....

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t;On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not upholding the deduction u/s.10A computed by the AO after setting off the losses of the non STPI unit against the profit of the STPI unit, ignoring the fact that deduction u/s lOA is allowable out of the assessee's total income and not out of the profits of the eligible undertaking." 3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to .....

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vt. Ltd.(Kar) 341 ITR 385 ignoring the fact that the department has not accepted the ratio laid down in the said case and preferred a SLP against the said decision." 7.1 Ground No. 1 is regarding the arm s length interest rate adopted by the CIT(A) at LIBOR+ 2% instead of LIBOR+4.45% adopted by the TPO. 7.2 This ground is common to the ground no. 2 of the assesse s appeal, in view of our finding on this issue in ground no. 2 of assesse s appeal, this ground of revenue s appeal is dismissed. .....

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igible for deduction u/s 10A of the Act and the total income have been shown at nil instead of claiming of loss. 8.2 The assesse challenged the action of AO before the CIT(A). The CIT(A) has allowed the claim of loss of the assesse. 8.3 We have heard the Ld. DR as well as Ld. AR and considered the relevant material on record. At the outset, we note that this issue is covered by the Judgment of Hon ble Jurisdictional High Court in the case of Commissioner of Income-tax Vs. Black & Veatch Cons .....

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tion of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive Assessment Years is to be allowed from the total income of the assessee. The deduction under Section 10A, in our view, has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of Section 72 which deals with the carry forward and set off of business losses. A di .....

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