TMI Blog2015 (7) TMI 147X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not automatically meant that assessee is indulging in some nefarious activities. This is the burden of the revenue to prove in this behalf with material and cogent reasons. Rejection of audited books of account otherwise properly maintained cannot be recourse to by Assessing Officer in a casual and wishy vice manner. The ad hoc disallowance, rejection of books and taking support of this fact which we are not able to subscribe the ad hoc addition of 1% of sales is again without any basis whatsoever. Stock tally cannot lead to an ad hoc assumption that 1% of sales are liable to be added in the income of the assessee. Our findings are supported by Gotan Lime Khanji Udyog (2001 (7) TMI 19 - RAJASTHAN High Court ) and ITAT, Amritsar Bench in the case of Asha Mehra cited [2012 (10) TMI 989 - ITAT AMRITSAR]. In view thereof, we delete the ad hoc addition of 1% sales. - Decided in favour of assessee. Addition made on account of undisclosed sales of pulses - Held that:- Assessee has pleaded that it is a market practice that no debit of milling expenses are made in the profit & loss account of the person who get milled the pulses. The additional evidences are confirmations from the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowed the direction of the DRP by not allowing the deduction u/s 80HHC in respect of sale of Replacement of Export Policy Licences in the light of the judgment of Hon'ble Supreme Court in the case of Topman Export (2012 (2) TMI 100 - SUPREME COURT OF INDIA ). Thus we restore this issue to the file of the AO to give effect of the direction of DRP as per law.- Decided in favour of assessee. Disallowance of reimbursement of advertisement expenses - Held that:- M/s. Nashar Trading Company is a distributor of the assessee and has been reimbursed 50% of the advertisement of the promotional expenses incurred as per the mutual understanding of the assessee. In our considered view, the revenue has failed to bring on record anything which can show that this expenditure was not incurred wholly and exclusively for the purpose of business. The assessee is selling Basmati rice through its distributor in Saudi Arabia. The sales have been increased for the year. In such circumstances and in absence of any adverse material, we find that this expenditure was incurred for commercial expediency and it is allowable u/s 37 (1) of the Act. Further such expenditure was not liable to be taxed in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional evidences during the proceedings before the DRP. These affidavits were also containing the PAN of Shri Gopal Manchanda and other details. After hearing both the sides, we find that this issue requires a relook at the level of AO as the correct facts are needed to be brought on record to decide the issue. Therefore, we restore this issue to the file of the AO for deciding de novo. - Decided in favour of assessee for statistical purposes. Depreciation on intangible assets like trade mark registration - Held that:- While deciding ground no.15 for Assessment Year 2006-07, we hold that expenses incurred for renewal of trademark was allowable as revenue expenditure. Since we have already allowed whole of expenditure as revenue, therefore, there is no question of allowing any depreciation thereon. Rather we also draw the attention of the Assessing Officer to withdraw the depreciation allowed in Assessment Year 2006-07. Decided against assessee. Addition made on account of loss in forex derivatives - Held that:-The export invoices also establish that there are underlying contracts. The assessee has covered exchange risk against these outstanding foreign exchange convertible bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s excess stock calculated at one place and shortage at other place, a detailed factual aspect with regard to the transfer from one place to another place requires further examination. Keeping these facts in view, we find it appropriate to restore the issue to the file of the Assessing Officer to be decided de novo. - Decided in favour of assessee for statistical purposes. Transfer pricing adjustment - Held that:- During the course of these regular assessments, the TP working as submitted by the assessee was accepted by the TPO, thus the report remains accepted by the department on the issues of corporate guarantee, interest free loans and export of goods to AEs. It is not disputed by the department that no incriminating material has been found whatsoever in respect of assessee's TP working indicating that assessee's working of TP was flawed or inconsistent in any manner. In the absence of any incriminating material and any material finding that TPO's earlier acceptance of working of assessee's TP report was questionable in any way; merely because search was conducted, a new TP report cannot be substantiated with a new one by department. It will be wholly unjustified for TPO to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In our consideration, the TPO's action, in first going to SBI and then further enhancing it, is based on surmises and conjectures. His adjustment has no basis or corroboration whatsoever from any authentic source. The assessee having itself charged the guarantee fee of 1% from one AE, in our considered view, in the given facts and circumstances, the guarantee commission adjustment under TP at the rate of 1% is fair and reasonable. The Assessing Officer will work it out accordingly. Decided in favour of assessee for statistical purposes. Export Turnover Adjustments - Held that:- TPO having earlier adopted the TNMM method should not have reviewed his own report in the first place without giving cogent reasons. The business model, agreement, relationship of parties remaining the same, there is no justification in switching to CUP method. The reasons given by TPO for applying CUP method are totally vague and bereft of any cogent reasons. There is a perceptible difference in the risk between the sales made to related parties as the surety of repayments is within the control of the assessee and in case of sales to unrelated parties, the recovery of repayment of goods bears potentiall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al taken by the assessee in ITA No.3688/Del/2012 read as under :- 1. That the assessment order passed u/s 153A rws 143(3) rws 144C is illegal, bad in law, without jurisdiction and void ab-initio and also barred by time limitation. 2. That the search has been conducted without fulfilling the preconditions envisaged in Section 132 of the Income Tax Act, as such all the consequential proceedings are void ab-initio and bad in law. 3. That the assessment made u/s 153A of the Income Tax Act is beyond the scope of provisions contained therein as well as memorandum explaining the insertion of the aforesaid provision. 4. That the additions/disallowances made while completing assessment u/s 153A of the Income Tax Act, in the absence of any incriminating material found during the search are illegal, bad in law and without jurisdiction. 5. That the learned assessing officer has erred on facts and in law in invoking provisions of section 145 of the Income Tax Act by rejecting the books of account and has failed to act in accordance with the law after rejection of the same. 6. That the provisions u/s 142 (2A) of the Income Tax Act has been wrongly invoked. Further the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the AO/DRP has failed to appreciate that the shortage/milling loss in processing is within the normal limits as applicable to the line of business and the details/ evidences filed have been wrongly ignored. (c) That the AO/DRP has failed to appreciate that no job work charges are paid by the assessee company as this is the common trade practice that residuals are kept by the millers and this fact justify the claim of the assessee company. 13. Regarding addition of ₹ 7,06,99,833/- on account of alleged undervaluation of Closing Stock. (a) That the AO/DRP has in view of the facts and circumstances of case, erred on facts and in law in making /upholding the addition of ₹ 7,06,99,833/- on account of alleged undervaluation of closing stock. (b) That the AO/DRP has wrongly and illegally considered the stock of Non-Basmati rice as of Basmati rice. (c) That, without prejudice, the valuation of closing stock has also been wrongly taken and is highly excessive. 14. Regarding disallowance of ₹ 24,41,543/- on account of excess deduction claimed u/s 80HHC and not allowing said deduction on sale of licences. (a) That in view of the facts and circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment years forming part of the assessments made u/s 153A, for example in assessment year 2005-06 the Ld. TPO had held that after examination of the company's transfer pricing documents and the functions and economic analysis contained therein, no adverse inference is drawn in respect of the above international transactions for the A.Y. 2005-06. (e) That, without prejudice, the Ld. AO/TPO has erred on facts and in law in not allowing the benefit of risk factor while making the adjustment/addition in respect of the international transactions. (f) That the Ld. AO/Ld.TPO has erred on facts and in law in enhancing the income of the assessee by ₹ 1,09,19,809/-by holding that the price/value of interest receivable on loans given to associated enterprises, international transactions relating to export of goods and relating to providing of services in the shape of corporate guarantee to its associated enterprises (AEs') by the assessee during the year do not satisfy the arm's length principle envisaged under the Act. (g) That the approach adopted by the Ld. TPO in determining the arm's length price of services of the assessee company in providing Corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP has in view of the facts and circumstances of the case, erred in law and on facts in making /upholding overlapping and duplicate additions and also in not allowing set off of the different additions made in the current year and also in the earlier years. 21. That all the grounds above are independent to each other and mutually exclusive. 6. At the outset of the hearing, ld. AR did not press Grounds No.1 to 8 in all the Assessment Years, i.e 2002-03 to 2008-09 and the same are dismissed as not pressed. Ground Nos.9 10 and 19 to 21 in AY 2002-03, Ground Nos.9 10 and 18 to 20 for AY 2003-04, Ground Nos.9 10 and 17 to 19 for AY 2004-05, Ground Nos.9 10 and 15 to 17 for AY 2005-06, Ground Nos.9 to 11 and 20 to 22 for AY 2006-07, Ground Nos.9 to 11 and 21 to 23 for AY 2007-08 and Ground Nos.9 and 22 to 24 for AY 2008-09 are general in nature and did not require any adjudication, hence the same are dismissed. 7. In the ground no.11 for Assessment Year 2002-03, ground no.12 for Assessment Year 2003-04, ground no.11 in Assessment Year 2004-05, ground no.11 in Assessment Year 2005-06, ground no.12 in Assessment Year 2006-07, ground no.11 in Assessment Year 2007-08 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The same method was adopted in the earlier years and the results have been accepted by the Department. He further submitted that in the regular assessment, the issue went up to ITAT in the Assessment Years 1999-2000 to 2001-02 and the same has been decided in favour of the assessee. He draw our attention to para 15 of the ITAT order placed at pages 164 165 of the paper book filed for Assessment Year 2002-03. He further submitted that the Tribunal has also decided in the case of Shankar Rice Co. v. ITO [2000] 72 ITD 139 (Amritsar) (SB). Ld. AR submitted that the nature of the business of the assessee is such that the quality of production is keeping on change at each step in continuous process and it is not possible for the assessee to record the same in quantity as well in quality in a 24 hours working factory. He further submitted that the documents referred in assessment order do not refer to Assessment Year 2002-03 and are isolated instances where some tally was made for a particular lot. Since no discrepancy is pointed out in the documents found during the search and mentioned in the assessment order, no sale/purchase is found to be made out of books and nothing has been poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under consideration are by and large better and acceptable, hence no such ad hoc addition can be made on surmises by unduly rejecting the books of account. Reliance is placed on the decision of Hon'ble Rajasthan High Court in the case of CIT v. Gotan Lime Khanji Udhyog [2002] 256 ITR 243/120 Taxman 779 and ITAT, Amritsar Bench in the case of Asha Mehra v. ACIT in ITA No.122 (ASR)/2012, dated 9-10-2012 for this proposition. 9. We have heard the rival contentions and perused the material available on record on this issue. The assessee's books of account are regularly maintained, audited and no discrepancies whatsoever have been indicated by the Assessing Officer in any material terms. The alleged inconsistency is to the effect that assessee says that no day-to-day quantitative stock tally was maintained. However, certain papers found indicate that assessee was maintaining regular stock details and a presumption is drawn that assessee is not producing the quantitative tally with a purpose. Apropos assessee's contention is to the effect that all the books of account have been seized during the course of search proceedings. Looking at the volume of branches and places of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tally cannot lead to an ad hoc assumption that 1% of sales are liable to be added in the income of the assessee. Our findings are supported by Hon'ble Rajasthan High Court judgment in the case of Gotan Lime Khanji Udyog (supra) and ITAT, Amritsar Bench in the case of Asha Mehra cited supra. In view thereof, we delete the ad hoc addition of 1% sales. This ground of assessee is allowed. 10. In the ground no.12 in ITA No.3688/Del/2012 for Assessment Year 2002-03 and ground no.11 in ITA No.3689/Del/2012 for Assessment Year 2003-04, the issue is related to the addition made on account of undisclosed sales of pulses. 11. While pleading on behalf of the assessee ld. AR submitted that in the Assessment Year 2002-03, the Assessing Officer has made an addition of ₹ 5,77,24,556/- on account of shortage of pulses of 36442.27 qtls. and the quantitative details of pulses sent for milling and delivered back to the assessee were not available. It was also observed that the names and addresses of the millers, quantity milled for each miller and quantity delivered back after milling have not been produced. The Assessing Officer treated the loss of pulses as sales out of books. Simil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned by them in lieu of processing charges as per industry practice. Ld. AR also submitted that assessee has filed various confirmations from Dal Millers showing the quantity milled and final product delivered after processing. Such confirmations were filed as additional evidence by way of filing an application under Rule 29 of ITAT Rules. He submitted that this evidence is only for the claim of the support of the assessee and these are obtained from the millers as confirmations and these could not be submitted during the course of hearing before the DRP as the same were received after the completion of the hearing of the DRP. He further submitted that business of the pulses done by the assessee during the Assessment Years 2002-03 and 2003-04 and not in the subsequent years. The processing of the pulses was done at Indore by various parties, assessee has obtained such certificates after huge efforts. Since these confirmations go to the root of the issue, these may be accepted as additional evidence and the matter may be decided. The reliance was placed on the decision of ITAT, Patna Bench in the case of Abhay Kumar Shroff v. ITO [1997] 63 ITD 144 (Patna)(TM) and ITAT, Delhi Bench in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer considered the stock of non-basmati at 90000 qtls. and rest of the stock as Basmati. In the assessment order, the Assessing Officer has valued the closing stock at ₹ 1,66,03,82,553/- as against the closing stock appearing in the books of account at ₹ 1,58,96,82,720/- and made the addition. The Assessing Officer has dealt with this issue at para 5.5.2 to 5.5.6 at pages 34 to 39 of the paper book. The DRP's direction is at para E-1 on pages 38 39 of the paper book. The assessee has submitted detailed chart of closing stock which is placed at page 23 of the paper book. The assessee has submitted detailed chart of closing stock which is placed at page 230 of the paper book. This chart clearly shows the quantity of non-Basmati rice at 40770.20 qtls. valued at ₹ 23,53,45,264/- and the same was included in the closing stock, which is evident from pages 265 272 of the paper book of the audited accounts. Ld. AR submitted that it was not correct to say that the details of the non-Basmati rice and Basmati rice were not provided by the assessee. The ld. AR draw our attention to the chart which is reproduced as under :- As per Book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has not furnished any stock statements or stock tallies to support their claims regarding the actual quantity of the closing stock of Basmati and non-Basmati rice. He submitted that no separate statements of the two types of rice showing the opening stock, the total purchases, total production, total sale etc. have been filed. He further submitted that the assessee has not furnished any evidence in support of his claim of the value of per quintal of both types of rice. In such circumstances, the assessee has failed to controvert the finding of the Assessing Officer, therefore, the issue deserves to be sustained. 17. We have heard both the sides on the issue. We have also perused the documents submitted in the paper book and the other relevant factors reproduced in the assessment order as well as in the submissions of the assessee. The details of valuation of closing stock (rice/paddi) is placed at page 230 of the paper book which clearly states that stock of non-Basmati rice at Port was of 2,46,308.40 qtls. which is valued totalling to ₹ 14,06,83,500.03. Similarly, the description of non-Basmati rice which is stocked at factory at Muthal and Amritsar is shown at 71461.8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sides on the issue. We have also gone through the direction of the DRP which is reproduced as under :- We have considered the issue carefully. The arguments of the ld. Counsels that the process of cleaning and polishing of rice before it is exported does not amount to manufacture is to be upheld. In the case of Gem India Manufacturing, 249 ITR 307 (SC) the supreme court has held that the process of polishing of diamonds does not amount to manufacture. AO is accordingly directed to treat the profit on export of rice, even though it is exported after cleaning and polishing as profits from export of trading goods. The assessee's objection in this regard is upheld. As far as the issue of eligibility of deduction u/s 80HHC in respect of sale REP licenses is concerned, the AO is directed to compute the deduction on this account in the light of the judgment of the Hon'ble Supreme Court in the case of Topman Export (supra). Keeping in view the pleadings of both the sides and directions of DRP, we restore this issue to the file of the AO to give effect of the direction of DRP as per law and decide the issue in view of the Hon'ble Supreme Court in the case of Topman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nent Establishment in India. All the expenses have been incurred outside India, hence, no tax was deducted. Further, the AO's reliance on the provisions of section 40(a)(i) to hold that the amount of expenses incurred for advertisement is not allowable, is completely uncalled for as no TDS was required to be deducted from this payment. 23. We have heard both the sides on the issue. M/s. Nashar Trading Company is a distributor of the assessee and has been reimbursed 50% of the advertisement of the promotional expenses incurred as per the mutual understanding of the assessee. In our considered view, the revenue has failed to bring on record anything which can show that this expenditure was not incurred wholly and exclusively for the purpose of business. The assessee is selling Basmati rice through its distributor in Saudi Arabia. The sales have been increased for the year. In such circumstances and in absence of any adverse material, we find that this expenditure was incurred for commercial expediency and it is allowable u/s 37 (1) of the Act. Further such expenditure was not liable to be taxed in India as it was reimbursed to a non-resident, therefore, we direct to allow this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E-1. On this issue the DRP-I has given the following findings:- it is seen that the AO has issued summons to the parties. Since there was no response to the summons from these parties, he deputed the inspector for physical verification and the inspector reported that some of the parties did not exist at the given addresses and some other parties were not maintaining books of account. Thereafter, on perusal of the various details filed by the assessee, the AO found that the assessee has not filed confirmations from these parties. The AO accordingly asked the assessee to file the copies of the accounts of these parties, the bank statement, the confirmations, return of income and balance Sheet of these parties. The AO has further observed that since no confirmation letter were not filed from these parties, the purchases from these parties have to be held as non-genuine/bogus/unexplained. The perusal of the position as depicted in the above charts in respect of each part shows that in respect of the following parties, assessee has furnished the item mentioned against each party, which show that the assessee has furnished necessary information to establish the genuineness of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, in respect of M/s Shanti Trading, M/s Pooja Enterprises, M/s Vikas Enterprises, M/s Tirth Ram Rajesh Kumar and M/s Shivam Traders, the assessee has failed to file even before us anything like, affidavit or confirmation to establish the genuineness of the existence of these parties and genuineness of the purchases from these parties. Even though, in respect of some of these parties, assessee has filed information like, copy of the ITR, tax audit report, copy of the balance sheet of the party. But these items just by themselves do not establish the genuineness of the purchases as there is nothing in these documents to show sales made to the assessee. Unless, the assessee files affidavit or confirmation from these parties for having made sales to the assessee the genuineness of the purchases from these parties cannot be regarded to have been established. The assessee has thus, failed to establish the genuineness of the following purchases. In respect of M/s Paras Enterprises and M/s Jai Hanuman, the assessee has not filed any account even in respect of paddy received for milling charges received after deduction of TDS and details of payments received by cheques. Therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge 84 of the paper book. All the banking transactions have been made by account payee cheques only. Further, this amount of ₹ 11,78,391/- represent the job work done by the assessee for that party. This can be verified from the copy of accounts of M/s. Shanti Trading Co. which is placed at page 228 of the paper book. It is also a fact that no summons u/s 131 of the Act were issued to M/s. Shanti Trading Co. It was also submitted that it was the value of job charges received which has been wrongly treated as bogus purchases by the AO. The assessee has also shown purchases from M/s. Shanti Trading Co. in assessment years 2004-05 and 2007-08. Ld. AR relied on the decision of Hon'ble Bombay High Court in the case of CIT v. Nikunj Eximp Enterprises (P.) Ltd. [2013] 216 Taxman 171 (Mag.)/35 taxmann.com 384 (Bom.) and the decision of ITAT, Chandigarh Bench (Third Member) in the case of J.R. Solvent Industries (P.) Ltd. v. Asstt. CIT [1999] 68 ITD 65. 28.1 For the Assessment Year 2005-06, the addition was made of ₹ 2,16,13,689/- on account of purchases from Paras Enterprises and ₹ 8,98,940/- from M/s. Shivam Impex for the reason that summons u/s 131 were issued to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s submitted the confirmation and PAN of M/s. Jai Hanuman Trading Co. and the DRP has acknowledged this fact and in his order/direction, the DRP has deleted the addition of ₹ 12,48,89,867/- in the Assessment Year 2005-06. The value of transaction entry entered into with M/s. Jai Hanuman Trading Co. represents the value of paddy received for milling purposes. The details containing truck numbers, bags, weight, approximate value of paddy received, were given, therefore, no addition was called for. The rice has been sent back after milling. With regard to M/s. Paras Enterprises, the assessee has submitted that the details of truck numbers, bags, weight, approximate value of paddy received were given. The details of rice sent back after milling are also submitted. The residual in the shape of husk, bran, etc. was kept by the assessee and it cannot be said that seized documents were unexplained. Therefore, no addition is called for. The copy of the account shows that all the transactions have been done through account payee cheques and necessary TDS entries are also reflected in the account. In view of these facts, M/s. Paras Enterprises/Trading Co. is a genuine party. 28.3 For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... awn on the assessee company which was accepted and these bills were discounted from ICICI Bank Ltd. and the proceedings were credited by the bank to the party and on the due date, the assessee company has made the payment to the bank. In view of these facts, genuineness of transactions cannot be doubted. Similarly, with regard to the purchases from M/s. Vikas Enterprises, ld. AR submitted that assessee has submitted bank statement from where the payments were made by account payee cheques before the Assessing Officer/DRP. These purchase bills were also discounted from ICICI Bank Ltd. The bank certificate dated 20.04.2012 was filed before DRP as additional evidence which has not been considered. In view of these facts, the genuineness of purchases cannot be doubted. 29. On the other hand, ld. DR submitted that the DRP has considered the submissions of the assessee in respect of various concerns and the assessee has not submitted affidavits or confirmations to establish the genuineness and existence of M/s. Shanti Trading Co. for the genuineness of the purchases and also details of the other concerns. Unless the assessee files affidavits or confirmations from these parties to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-Basmati rice (i.e. 13,328.52 qtls. + 457.10 qtls. = 13,782.62 qtls.) whereas the data on the hard disk was only with regard to the Basmati rice. The assessee has submitted the quantitative details of rice in support of this, which is placed at page 120 of the paper book. Thus, there was no difference or shortage in the figures and it tallies in toto. Without prejudice to the above, the ld. AR also submitted that the stock in the books of account was more than the seized computerized stock statement, hence, there was no shortage of stock. Further without prejudice, the ld. AR submitted that shortage of non-Basmati rice stock should be valued corrected. 35. After hearing both the sides, we find that the assessee has tried to explain the discrepancy by way of showing non-Basmati rice. Besides, the facts about availability of non-Basmati rice in the stock needs verification at the level of Assessing Officer. Therefore, it will be in the interest of justice that this issue is restored back to the file of the AO. We restore the issue to the file of Assessing Officer. 36. In the ground no.15 for Assessment Year 2006-07, the issue involved is regarding addition on account of tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h as shown in seized material. The assessee is objecting to the addition on the basis that the seized material does not belong to assessee and it belongs to Mr. Gopal Manchanda, Proprietor of Gopal Builders. As per the assessee's contention, Mr. Anil Sapra, was also handling the cash of Gopal Builders and Neelu Builders on behalf of Mr. Gopal Manchanda. The assessee has submitted affidavits of Mr. Gopal Manchanda and Mr. Anil Sapra. The assessee's submissions in this regard were dismissed by holding that the affidavit/confirmation was prepared after the draft assessment order had been prepared and the affidavits are vague and do not bear the full address of the persons, viz., Mr. Gopal Manchanda and Mr. Anil Sapra. 39. After hearing both the sides on the issue, we find that the affidavits of Shri Gopal Manchanda and Shri Anil Sapra were filed as additional evidences during the proceedings before the DRP. These affidavits were also containing the PAN of Shri Gopal Manchanda and other details. After hearing both the sides, we find that this issue requires a relook at the level of AO as the correct facts are needed to be brought on record to decide the issue. Therefore, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .16 in Assessment Year 2007-08 and ground no.14 in Assessment Year 2008-09 relate to the addition of ₹ 51,47,429/- and ₹ 5,85,30,061/- respectively on account of unexplained cash receipts. 44. This addition has been made on the basis of seized material i.e. computer hard disk. The Assessing Officer/DRP has taken a view that source of receiving the cash is unexplained and transactions are unverified from the books of account of the assessee. The assessee has concealed the details of receipts and payments of cash as shown in the seized documents. The findings of the Assessing Officer is at pages 53 to 55 of the paper book and directions of the DRP are in para 25.4. 45. While pleading on behalf of the assessee ld. AR submitted that there is no specific reasons which have been put forward to substantiate and justify the addition and no specific flaws or defects have been found in the documents furnished by the assessee. This addition has been made by making a sweeping remark that documents furnished by the assessee are nothing but self serving documents which cannot be relied. The Assessing Officer has never pointed out why these documents cannot be accepted and re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and not allowable to be set off against the normal business loss. The DRP's directions are at paras 30 30.1 of his order. Ld. AR submitted that foreign exchange is not a commodity, therefore, the issue is not covered by section 43(5) of the Income-tax Act, 1961. Ld. AR submitted that the assessee company made a profit on similar transactions in the Assessment Years 2006-07 and 2007-08 of ₹ 3.72 crores and ₹ 1.34 crores respectively which has been taxed as business profit. Therefore, now revenue cannot treat the loss incurred by the assessee as speculation loss. Ld. AR submitted that assessee company engaged in the export of rice and processed goods since 32 years. The assessee company also deals in other agro commodities which are imported form abroad for domestic consumption. The activity of the assessee also involved import of machinery for rice processing and food processing units. In this process of business, the assessee is constantly exposed to forex exchange rate risk as the exchange rate keeps changing on account of international developments on daily basis. Being a going concern, the assessee company made endeavour to protect its business from non-core ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all justified in observing that assessee did not submit any specific underlying assets/liability/transactions which were hedged. All these details were before the Assessing Officer. Similarly, the Assessing Officer was also not justified in observing that assessee could not provide any evidence for establishing that any particular derivative transaction was for hedging for any particular asset/liability/expenditure/ income/transaction. For the year 2007-08, the hedging was done by using no cost option transaction . The no cost option transaction has two components whereby in one part the company was the holder of option and in the other part, it takes the obligation as seller of the option and such arrangements were allowed by RBI. The ld. AR has further given the written submissions which are reproduced as under :- '6. The insistence of Special Auditors as well as the Ld. AO to link each hedging transactions value-wise, currency-wise with invoices shows deficiency of their knowledge on the subject. It is submitted that the RBI in case of large exporters and star trading houses permits cross currency options, and maintenance of running export packing credit account to faci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be seen as such. These decisions proved right initially but subsequently the international currency market moved in an unprecedented manner resulting into huge losses. It was pure and simple case of commercial decision going wrong and should be viewed as such. The Management had taken these decisions for the betterment of the assessee company. 10. Where an assessee enters into foreign exchange contracts in the normal course of his business and suffers therein, it has been held that such loss cannot be treated as speculation loss. Reliance is being placed on the judgment of the Hon'ble Bombay High Court in the case of CIT v. Badridas Gouridu P. Ltd. (2003) 261 ITR 256 (Bom), wherein following the judgement of Hon'ble Calcutta High Court in the case of CIT v. Soorajmull Nagarmull (1981) 129 ITR 169(Cal), was relied upon. 10.1 It is evident from the aforesaid that, where an exporter of cotton, not a dealer in foreign exchange, entered into a forward contract with banks in foreign exchange to meet possible fluctuations in foreign exchange in respect of export order and suffers loss, such loss is not to be treated as speculative loss being excepted as a hedging transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Forward Contracts (Regulation) Act, 1952 (FCRA) defines 'goods' as 'every kind of movable property other than actionable claims, money and securities' . (e) The Special Bench of ITAT Kolkata in the case of Shree Capital Services Ltd. v. ACIT, (121 ITD 498) has held that derivatives with underlying as shares and securities should be also considered as commodities as the underlying shares and securities as specifically included within the term commodities. Accordingly transactions in security derivatives are subject to the provisions of S. 43(5). However, a currency cannot be termed as a commodity so as to attract the provisions of S. 43(5). (f) The Mumbai Bench of ITAT in the case of DCIT v. Intergold (I) Ltd., (124 TTJ 337) has held that profits from cancellation of forward exchange contracts are business profits and not speculative profits. (g) The Calcutta High Court in the case of CIT v. Soorajmull Nagarmull, (129 ITR 169) has held that where in the normal course of business of import and export of jute, the assessee entered into foreign exchange contract to cover up the losses and differences in exchange valuation, the transaction is not a specu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trike against such hedges, but only to counter the practice of some assesses to buy up losses so as to reduce their profit. Consequently, wherever it is found that a hedging transaction is otherwise genuine, it has to be excluded from the purview of speculation. 14. The assessee company submits that the loss from forex derivatives is a business loss and not a business expenditure and accordingly allowable u/s.28 of the Income Tax Act, 1961. It is submitted that it has already been explained that the currency is not a commodity and the loss in question is only a business loss and not a business expenditure, as such deduction is allowable for the actual crystallised loss on account of currency derivatives. 14.1 In the case of Ramachandar Shivnarayan v. CIT, (111 ITR 263), the Supreme Court observed that: there is no specific provision to be found in either of the two acts for allowing deduction of a trading loss ... but it has been uniformly laid down that a trading loss not being a capital loss has got to be taken into account while arriving at the true figures of the assessee's income in the commercial sense. The lists of permissible deductions in either acts is not e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment order.) In holding so, the ld. AO has failed to appreciate that reference to Proviso (d) below Section 43(5) of the Act, itself is misplaced and shows non application of mind of the ld. AO. It is submitted that as has been explained above, that since foreign currency or any currency is neither commodity nor shares, as such the transaction in respect of foreign currency entered by the assessee with the authorised dealer banks for hedging the risk/loss, cannot be called speculative transaction and does even come within the substantial part of section 43(5) itself. Without prejudice, it is submitted that the contracts were for hedging foreign exchange risk and for which no Recognized Exchange was operating in the market during the relevant period. And therefore, the reliance/ reference to Proviso (d) below Section 43(5) of the Act, is out of place and not applicable on the facts of the instant case (on hedged forex transaction done by the assessee company or on losses resulting from such transactions). 16. It is further submitted that before the Special Auditor as well as the ld. AO the assessee had submitted a certificate issued by eforexindia.com (P) limited (a leading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17 Taxman 267) - Thomas Cook India Ltd. v. DCIT (217 Taxman 267) - CIT v. Badridas Gauridu (P) Ltd. (134 Taxman 376)' 52. The ld. DR has also submitted a written reply which is reproduced as under :- 'The company's case does not satisfy the test of transactions that have been excluded under the extant provisions as deemed speculative transactions as: - it had not clearly demonstrated that the hedging transactions were with respect to raw materials or merchandise; - the assessee is not a member of a forward market or an exchange. - The Company failed to demonstrate that the transactions in question were hedging transactions as no details were furnished. - the details of forex forward contracts were not linked to the trade/export. - FCs on certain dates could have been of higher value than the export receivables. As such, the assessee did not demonstrate rupee-to-rupee and date-specific correlation between the FCs and the export invoices. - Apparently few Forward Contracts might have been cancelled before the maturity date, which was a characteristic of speculation activity or there were any alterations. [Assessee failed to give detai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axes ('CBDT') regarding this matter [Instruction No.3 of 2010 dated 23 March 2010 and Circular No. 23 of 1960 dated 12 September 1960]. In this case, ITAT Mumbai has drawn a distinction between hedging transaction and speculative transaction, observing that 'speculative transaction' is a contract for purchase or sale of any commodity, stocks or shares that is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrip on the other hand, a hedging transaction is a contract entered into to protect against possible price fluctuations in the commodity / goods traded by the assessee. ITAT has formulated seven tests to determine a hedging transaction as a non speculative transaction For the purpose of clause (a) of proviso to section 43(5) of the Act. The ITAT Mumbai noted that as the assessee was a dealer in diamonds, hence only forward contracts in diamonds could be treated as hedging contracts. Further, the forward contracts for foreign exchange were closed without actual delivery. Assessee was also unable to establish that booking and cancellation of forward contracts of foreign exchange were in respect of specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on March 31. (iv) A liability is said to have crystallised when a pending obligation on the balance sheet date is determinable with reasonable certainty. The considerations for accounting the income are entirely on different footing. (v) As per AS-II, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period. (vi) The forward foreign exchange contracts have all the trappings of stock-in-trade. (vii) In view of the decision of the Supreme Court in the case of Woodward Governor India (I) P. Ltd., the assessee's claim is allowable. (viii) In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit. This creates a situation where on one hand a Special Bench decision allows MTM losses, while on the other hand CBDT Instruction mandates disallowance. Apparently, the instruction from CBDT was not pointed out to the ITAT in this matter. Also, the question in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons in foreign exchange rates, the assessee incurred loss on account of cancellation and/or settlement of the Forward Contracts. 4. It is wrong to say that there is no correlation between the Forward Contracts and export orders/export invoices. The assessee is a regular star exporter for last many years and having many order/sale contracts in hand and in pipeline at any given point of time. The Bank allows to avail the facility of booking forward contracts which carry a particular ticket size of 1 million and above which may cover combination of many transactions. The Assessing officer has only visualized a case where person is a one time exporter/importer and has one export/ import order against which the forward contracts is entered. As against that, the assessee is having a running business of export and always has multiple export orders in hand on a given day. The Forward Contracts are entered by the bank on the basis of running account and past performance as permitted by the Reserve Bank of India. The export orders are always much more than the actual export sales in a particular year as on many occasions certain export orders do not translate into actual sale which can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gill and Co. Ltd. (supra), this bench of the tribunal had clearly given a finding that when the assessee is not a dealer in foreign exchange and when the transaction is purely incidental to the assessee's regular course of business the loss would be allowable. It has further been specifically held that foreign exchange cannot be claimed as a commodity in which the assessee was dealing and therefore the transaction did not come within the substantial part of section 43(5) itself At paragraph 17, the Tribunal has held that it is not a case of settlement of a contract but it is cancellation of a contract, as is evident from the cancellation charges paid for non performance of contract and therefore the transaction cannot be said to be transaction for settlement of contract and hence section 43(5) is not attracted. At page 18 it was further held that the transaction entered into by the assessee is also covered by the Board circular No. 23D(XXXIX) [F.No. 412/(4)60/TPLl dated 12.09.1960 and gave a finding that at best this is a hedging loss. This decision is applicable in all force to the facts of the case. Even otherwise the judgment of the Hon'ble Bombay High Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. v. DCIT (2013) 38 taxmann.com 338 (Mumbai - Tribunal) order dated 11/10/2013, the Tribunal while holding that foreign exchange is in the nature of commodity has relied upon the decision of CIT v. Surajmull Nagarmull 129 ITR 169 (Calcutta) and also on the decision of CIT v. Badridas Gauridu (P) Ltd (134 Taxman 376 Bombay). The Tribunal has wrongly stated that in the case of Surajmal Nagarmal (supra) it is held that Foreign Exchange is a commodity. Whereas Calcutta High Court in the said case was referring to another case of Fedrick Ville of UK court wherein the German Convertible Bonds were sent from Berlin to Copenhagen and then to USA were seized as goods or commodity of enemy origin under the Repairable Order in Council of March 11,1975. It was observed by the court that Bonds were goods within the meaning of that word of the order. The attention of the court was drawn to the following observations of the Hon'ble Calcutta High Court in the case of Surajmal Nagarmal (supra). The relevant paras are reproduced as under: Learned advocate for the revenue contended before us that foreign exchange is a commodity. He relied on the observations of the Probate Division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be entitled to have the amount of the loss set off against his income) profits or gains under any other head in that year provided that in computing the profits and gains chargeable under the head Profits and gains of business, profession or vocation , any loss sustained in speculative transactions which are in the nature of a business shall not be taken into account except to the extent of the amount of profits and gains, if any in any other business consisting of speculative transactions. Therefore if the assessee carried on speculative transactions which are in the nature of the business of the assessee then such loss resulting from such speculative loss can be set off against the speculative gains but cannot be set off against other gains. In that context, Expln. 2 defines what is a speculative transaction. The said Expln. 2 is to the following effect: Explanation 2.-A speculative transaction means a transaction in which a contract for purchase and sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by the actual or transfer of the commodity or scrips: Provided that for the purposes of this section,- (a) a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in the case of the present Assessee the value of all forward contracts relating to the relevant period executed to hedge against Foreign Exchange fluctuations are commensurate with the expected export receivables/order during the year. 12. The fact is not denied by the Revenue that entering into Forward Contracts was not the business of the assessee and it was only incidental to the main business of Rice export. 13. The assessee was not a dealer of foreign exchange as such. Even the requirement of explanation (2) of Section 28 are not fulfilled in as much as it is not the case of the revenue that the said transactions are of such nature so as to constitute a business by itself. 14. It may also be submitted that it is not the first year that assessee has entered into foreign Contracts and even in earlier years, the assessee has earned profit from similar transactions which was declared as regular business income being incidental to main business and is also assessed as regular business income by the Assessing Officer. It is not assessed as Speculative Income in the earlier years for which assessment have already concluded u/s 153A by the same Assessing Officer. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultancy firm M/s. Eforexindia.Com (P) Ltd. The hedging contracts with regard to fluctuation in foreign exchange rate were booked by the assessee on the counter based on requirements with the leading banks which were authorized dealers in foreign exchange. The export invoices also establish that there are underlying contracts. The assessee has covered exchange risk against these outstanding foreign exchange convertible bonds. The assessee has also covered the exchange fluctuation risk against outstanding foreign currency convertible bonds, import of commodities and machinery and also outstanding PCFC loans drawn in EURO and US Dollar. The Assessing Officer without examining the details filed by the assessee and without making specific enquiries simply brushed aside the evidences and mentions that no specific underlying assets/liabilities/transactions which were hedged. In our considered view, all the relevant details were filed by the assessee before the Assessing Officer and Assessing Officer was not justified in the absence of any particular derivative transaction was for hedging for any assets/liabilities/expenditure/income/transaction. It is also a fact that assessee has made pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue loss. In our considered view, such loss calculated on the restatement of the loan is a capital loss and cannot be held to be allowable expenditure u/s 37 of the Income-tax Act, 1961. Therefore, we dismiss this ground of assessee's appeal by holding that the loss calculated on the restatement of the foreign currency loss was a capital loss. 59. In the ground no.11 for Assessment Year 2008-09, the issue raised is addition of ₹ 13,03,00,160/- on account of unaccounted investment in stock. The Assessing Officer has made the addition on the basis of seized papers found during the search. The difference was pointed out by the special auditor on which the Assessing Officer has placed the reliance pertains to is reflected in the chart reproduced in Para 6.5 at page no.234 of paper book which shows that there is a difference/discrepancy of excess stock of 30332.06 qtls. in respect of Murthal Unit. Further, in respect of Alipur Godown, there is difference/discrepancy of 38332.070 qtls. in stock physically found at the time of search is less than stock as per the stock register. The Assessing Officer worked out excess stock of 30332.06 in Murthal and a shortage of 38332.70 qt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 9,44,14,603/-. The Assessing Officer himself held that the stock of 38332.70 qtls. was sold out of books at Alipur. On this only, the gross profit can be added. However, no set off in respect of excess stock found at other location was given. If the Assessing Officer admits that once the trading has been done outside the books of account then set off should be given for the excess stock as the sale out of books stands invested in the stock. When there was no cash found and seized for such out of books sales. 61. We have heard both the sides on this issue. After hearing both the sides, we find that this issue requires a further examination with regard to the methodology of stock taking at the time of search at Murthal and Alipur. Further it also requires details with regard to the assessee's claim that goods were transferred from one place to another place. Since there was excess stock calculated at one place and shortage at other place, a detailed factual aspect with regard to the transfer from one place to another place requires further examination. Keeping these facts in view, we find it appropriate to restore the issue to the file of the Assessing Officer to be decided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atnam Overseas Ltd USA 17,97,631 27,69,781 57,75,964 1,38,10,906 3,82,62,103 6,24,16,385 Granted loan to Indo European Foods Ltd. 43,56,303 1,79,06,204 2,54,00,269 3,65,00,385 4,49,82,942 12,91,46,102 2 Corporate Guarantee on behalf of AEs 48,87,500 46,32,485 41,50,575 1,64,86,182 3,22,91,570 4,00,52,712 3,09,71,963 13,34,72,987 3 Export goods to AEs 34,22,320 36,55,819 13,64,807 29,53,207 38,40,095 30,45,770 31,80,790 2,14,62,808 Total 1,09,19,809 1,36,71,192 1,72,15,436 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holly owned subsidiary in place of joint venture for Assessment Year 2005-06 onwards. The assessee's TP reports having been accepted in Assessment Years 2002-03, 2003-04 and 2005-06 no adjustment is required to be made for subsequent years also as they are in principle accepted by department. It is vehemently argued that business model, the nature of transactions, commercial expediencies, foreign market conditions remaining the same, TP adjustments cannot be willy willy made merely because a search was conducted. Ld. AO or TPO has not relied on any incriminating search material while proposing the TP adjustments or confirming the TP adjustments. The Ld. DRP, without going into the objectivity of the objections, submissions and merits, has summarily confirmed the TP adjustments as made by the TPO. (iv) Reliance in placed on the decision of the Hon'ble Delhi High Court in the case of CIT v. Cheil Communication India (P.) Ltd. [2013] 354 ITR 549/217 Taxman 275/33 taxmann.com 170, wherein it has been held that even in the case of regular assessment proceedings, the AO would have to have some material information or documents in his possession on the basis of which he could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;s length price in respect of the property transferred or services provided in the international transaction or the specified domestic transaction. 63.3 Apropos the adjustment of corporate guarantee given by the assessee to overseas affiliate for raising the loans from financial institutions and banks is assailed by the assessee on following counts :- A. Corporate Guarantee provided by assessee is in the nature of shareholder activity and hence it does not qualify for TP adjustment. (i) The corporate guarantee was necessitated by the ownership linkage and to further assessee's business interest. The assessee in one case charged corporate guarantee commission @ 1% in the case of Rice Rice Raiser Factory LLC as the personal guarantees were also given by the two Directors of the company, Shri Pawan Kumar and Shri Mukesh Kochar, in independent capacity without charging any fee. Assessee also did not charge any fee. Ld. TPO failed to take into consideration the assessee's relevant submissions that corporate guarantee provided by the assessee is in the nature of shareholder activities performed for the betterment of business. Assessing Officer called for SBI Bank gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... safeguard for their loan assets so that the primary security provided or the cash flows on the basis of which the loan is guaranteed is not subsequently diverted to other group companies. Such requirement is also prescribed under various regulatory laws governing banking. Assuming, the borrower company was held by individual promoters, then such guarantee would have been provided by them, since they would control and manage the borrowing company. Further, if a borrower company does not have any promoter and is primarily held by independent shareholders, no such guarantee would have been provided by the shareholders, since they exercise no control over the funds loaned. (iii) Reliance is placed on Para 7.9 of the OECD Guidelines provides that where an activity is performed by a group member solely because of its ownership interest in other group member, such an activity would qualify as a shareholders activity , for which no charge is required to be paid by the service recipient. C. Provision of corporate guarantee by the shareholder is in the nature of equity contribution (i) Creditworthiness of a company is determined by capital structure. The capital structure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to enhance the business interest (i) Ld. TPO has failed to appreciate the fact that Assessee has been able to explore overseas market, enhance utilized capacity and increased sales; due to availability of financial resources with AEs obtained with the help of corporate guarantee provided by the Assessee. Thus, there is a quid pro quo. (ii) The shareholder (being a commercial enterprise) also has deep interest in the well-being of its affiliates (either JVs / subsidiaries) and their business particularly when these affiliates offer business synergy for the core business of the shareholder. In such a scenario, any support to the affiliates, is therefore in the business interest of the shareholder (i.e. the Assessee) and treated as part of its own core business. The issue is no longer RES INTEGRA and is supported by a plethora of rulings, including: Reliance is placed on the following judicial pronouncements- The Hon'ble Supreme Court decision in S.A. Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 The Hon'ble Supreme Court in the case of CIT v. Amalgamation (P.) Ltd. [1997] 226 ITR 188/92 Taxman 132 held that any financial consequences arising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d are not a one-off case as is the case with the provision of corporate guarantee by the Assessee. Reliance is placed on the decision of Addl. CIT v. Asian Paints Ltd. [2014] 44 taxmann.com 422 (Mum. - Trib.) holding that rate obtained by mere relying on market data without carrying out any comparability analysis of actual transactions, can't be applied in a blanket manner. (v) Authenticity and reliability of the information obtained by TPO under section 133(6) could not be verified by the Assessee. It is submitted that that bank guarantee rate obtained from SBI (using notice issued under section 133(6)) does not clarify whether these would have been charged by the bank from its overseas branch or an external bank in the jurisdiction of the AE of Assessee. Therefore, use of such information for application of CUP (which requires strict comparability) is highly inappropriate. Even if it is assumed that SBI would have charged the guarantee fee from its overseas branch, then such a transaction would involve two banks i.e., one bank provides primary guarantee and the other bank (an AE of the former), acting as an administrative low-risk service provider. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he instant case of the assessee, appropriate guarantee commission has already been charged from the overseas affiliate. Hence, in light of the above decision of the Hon'ble Tax courts, no adjustment on this issue is warranted. (viii) In the case of Everest Kanto Cylinder Ltd. v. Dy. CIT [2013] 34 taxmann.com 19 (Mum.) observed that :- Payment of guarantee is included in the expression 'international transaction' in view of the Explanation i(c) of section 92B. Once the guarantee fee falls within the meaning of 'international transaction', than the methodology provided in the rules also becomes applicable. There is always element of benefit or cost while providing such kind of guarantee to it Associate Enterprise CAE). However, assessee, itself has charged 0.5% guarantee commission from its AE and therefore, it is not a case of not charging of any kind of commission from its AE. The charging of a guarantee commission depends upon transaction to transaction and mutual understanding between the parties. There may be a case where the bank may not charge any guarantee commission, depending upon its evaluation of relationship with a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiaries were purely on ground of commercial expediency, in order to extend them financial support in importing assessee's goods. It eventually helped the overseas subsidiaries to purchase goods / commodities from the assessee and do their business increasing assessee's potential. In order words, such loans advances by the Assessee were intended to enhance its own business operation in relation to the export markets. (v) The Ld. TPO has thus erred in making erroneous / subjective assumptions in relation to the risk assumed by the Assessee. The observations of the Ld. DRP are summary by simply rejecting the objections raised by the assessee. (vi) It is contended that the assessee has (vide board resolutions dated 30 October 2009 and 13 February 2013) converted foreign currency loans advanced to M/s Kohinoor Foods Inc., USA (formerly known as M/s Satnam Overseas Inc., USA) and M/s Indo European Foods limited into Equity shares. (vii) It is vehemently argued that the Ld. TPO has failed to comply with the basic conditions prescribed under Rule 10B(1)(a) read with Rule 10B(2) for application of CUP method, and thereby erred in using rates mentioned in inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional transaction involving export of goods to AEs. (ii) The Ld. TPO has rejected the analysis carried out by the Assessee in the transfer pricing documentation, using Comparable Uncontrolled Price ('CUP') Method, on the contention that certain transactions involving raw basmati, brown basmati and other raw basmati varieties of rice, the price charged from its AEs was lower as compared to the price charged from unrelated parties. (iii) In this regard, the analysis carried out by the Ld. TPO is asserted on the grounds that - Though it has been brought on record before the TPO [Refer para 12 of the TPO's order on page 225 of the paperbook] that transactions with related parties and unrelated parties have been spread during the year. In spite of the information on record before the Ld. TPO, the Ld. TPO has not consistently adopted an annualised average rate of each product exported, and instead adopted differential rates (sometime monthly average, sometimes annual average etc.) which suited his convenience. In this regard, reliance is placed on Para 18 of the decision of the ITAT in the case of Tilda Riceland (P.) Ltd. v. Asstt. CIT [2014] 64 SOT 61 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such comfort/ guarantees entails significant costs in open market. Further, the AEs also ride on the goodwill and market credibility of the assessee in such a scenario. Generation of this goodwill over a period of time has definitely cost the assessee, the benefits of which are now being made available to the AEs for free. Perot Systems TSI (India) Ltd. v. DCIT (2010-TIOL-51-ITAT-DEL) VVF Ltd. v. DCIT (2010-TIOL-55-ITAT-MUM) 2. In respect of Interest on loans to AEs: Oral Submissions based on TPO/DRP and strong reliance on the TPO/DRP order. The real income theory is not applicable to Chapter X of the Act, hence Perot Systems TSI (India) Ltd. v. DCIT (2010-TIOL-51-ITAT-DEL) will apply in case of the assessee. In the following cases also, it has been held that in case of interest free loans to AEs, the amount of notional interest shall be determined having regard to the arm's length price for taxability in the hands of the Indian entity. (a) Perot Systems TSI (India) Ltd. v. DCIT (2010-TIOL-51-ITAT-DEL). (b) VVF Ltd. v. DCIT (2010-TIOL-55-ITAT-MUM). (c) Also rely on Ascendas India Pvt Ltd (ITA No.1736/Md/2011 AY 2007-08 order dated 02/0112013 on pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance sheet of the debtor; (b) Credit risk which involves terms of loans for maturity and offer of guarantees; (c) Business risk - the lender's view on the industry in which the debtor operates its business; and (d) Structural risk - the qualification of external rating agencies awarded to the debtor are weighed. In this backdrop, TPO asked for information u/s 133(6) from CRISIL which on the basis of FIMMDA (Fixed Income Money Market and Derivatives Association of India) opined that in the given facts and circumstances, interest rate of 13.49% as charged by financial institutions appears to be appropriate which the lender should have charged from debtor AEs. Assessing Officer summarized assessee's contentions as under :- (i) The assessee, has written pages to suggest that transfer pricing provisions is not an exact science and should be applied with care; (ii) The assessee, has acknowledged that its subsidiaries and joint ventures outside India, were in financial turmoil and were not able to raise funds from third party lenders, due to which it had to advance funds; (iii) The amounts advanced have been purely on the ground of commercial expediency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in summarily applying the comparable of financial institutions as uncontrolled comparable transaction. We have no issue of the TPO applying the CUP method. But the problem arises when in the name of applying CUP method; a wholly inapplicable comparable model applied which leads to distorted results. In our considered view, a significant sector of multi-national corporate set up involves creation of subsidiaries and associate enterprises for advancement of their overseas business. They help them in terms of finance by offering soft loans and subsidiary loans; they are primary focused to spread the business of the principal unit. It would have been very reasonable, judicious and appropriate on the part of the TPO to have looked into such type of transactions and applying it as uncontrolled transactions. In our view, re-coursing straightaway to CRISIL, which deals in hardcore institutional finance transactions that too with clear commercial object of earning out of loans bereft on other considerations, is wholly inapplicable. There is no dispute on the issue that the real income theory has no application to a fictional working as provided by section 92 but this being part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arantee was not an issue for TP adjustment. The TPO, however, went beyond even the rate of bank guarantee provided by the SBI. The TPO took a ground that for a bank, providing guarantee is a normal business activity and the bank discounts the losses arising out of such business activities in their rates of commission. Consequently, the rates quoted by SBI were towards a lower side and not adoptable as the risk carried out by the assessee in providing the corporate guarantee was not a normal business activity and there is more risk on this consideration. TPO further applied mark up of 2% on the rate charged by SBI and applied the rate of 4.25% as a corporate guarantee. 69.1 In our considered view, there is prevalence of various types of guarantee services in the commercial parlance, which carry different type of obligations, commitments and risk. In this case, the AO applied CUP method and first held that SBI rates an uncontrolled comparable transaction. The SBI replied as 2.25% to be the rate charged by the bank as its commercial activities while providing the bank guarantee, Ld. TPO went beyond the information called upon by him from SBI. Similar information from no other insti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same has been referred by Assessing Officer and reviewed by TPO to CUP method. It has not been disputed that no incriminating material with regard to TP proceedings was found. No cogent reasons for revision of the earlier TP orders and deviation from TNMM to CUP method are given. In this revised TP order, for the same year, the TPO changed the TNMM method into CUP method and made the adjustment by giving a vague reasoning that the application of CUP method is based on OECD Commentaries without specifying the merits of Commentary or cogent reasons. The assessee has objected to this flip flop approach by TPO. It has been unfoundedly alleged that certain transactions involving non-basmati, brown basmati and other raw basmati varieties of rice, the price charged from its AEs are lower as compared to unrelated parties. All the relevant information about transactions with related parties and unrelated parties spread over during the year have been placed on record. The TPO, however, has not looked into the same and has failed to apply the annualized average rate of each exported product. Instead TPO has adopted differential rates and sometimes adopted monthly and yearly average which sui ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
