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2015 (10) TMI 2376 - ITAT PUNE

2015 (10) TMI 2376 - ITAT PUNE - TMI - Adjustment made on account of arm's length price of interest receivable transaction from the Netherland based associate enterprise company - Held that:- Hon’ble Bombay High in Court CIT Vs. Tata Autocomp Systems Ltd. (2015 (4) TMI 681 - BOMBAY HIGH COURT ) has held that while computing arm's length price of international transaction, where the assessee had advanced loan to its associate enterprises situated in Germany, then the rate of interest was to be de .....

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ernational transaction entered into by the assessee with its associate enterprises, following the directions in our earlier year. The learned Authorized Representative for the assessee pointed out that though in the earlier, there was discrepancy in the picking up of figure interest receivable from associate enterprises, but in the year under appeal, there is no such issue. Decided in favour of assessee.

Disallowance of additional depreciation under section 32(1)(iia) of the Act on it .....

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CIT Vs. Ghatge Patil Transports Ltd. (2014 (10) TMI 402 - BOMBAY HIGH COURT ), we hold that the assessee is entitled to the claim of deduction in this regard. Accordingly, we direct the Assessing Officer to disallow the addition - Decided in favour of assessee - ITA No.573/PN/2014 - Dated:- 24-9-2015 - MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA, AM For The Appellant : Shri Kishore Phadke For The Respondent by : Shri S.K. Rastogi, CIT ORDER PER SUSHMA CHOWLA, JM: This appeal filed by the .....

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7; 9,23,36,585 (Interest rate 12.94%) instead of ₹ 3,39,01,355 (Interest rate 4.75%) thereby making an net addition of ₹ 5,84,35,230 to the returned income. 2. The learned AO and learned DRP erred in law and on facts in disallowing additional depreciation u/s 32(1)(iia) on some of the items of fixed assets (plant and machinery) amounting to Rs.3,57,606. 3. The learned AO erred in law and on facts and Hon'ble DRP erred in law and on facts in sustaining AO's view in holding tha .....

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f interest receivable transaction from the Netherland based associate enterprise company. 4. Briefly, in the facts of the present case, the assessee was engaged in the business of manufacturing of polymer engineering and electrical goods and wind power generation. During the year under consideration, the assessee had entered into international transactions with its associate enterprises i.e. Varroc European Holding BV, City Bank International PLC Euro Plaza Hoorgorrddrees 54B Amster, Netherland .....

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average rate of 12.94%. However, the assessee for the year under consideration had charged interest @ 4.75% from its associate enterprises on the loan advanced to the associate enterprises. The TPO also noted that similar transfer pricing adjustment on advancement of loan to the associate enterprises was proposed in assessment year 2008-09, which has been upheld by the Dispute Resolution Panel (DRP)-II, Mumbai, vide directions dated 21.09.2012. In view thereof, the TPO proposed an adjustment of .....

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Officer. 6. The learned Authorized Representative for the assessee at the outset pointed out that similar issue as noted by the TPO and also DRP, arose in the case of assessee in the earlier year relating to assessment year 2008-09. 7. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the order of Assessing Officer. 8. We have heard the rival contentions and perused the record. We find that the Tribunal in assessee s own case in ITA No. 2482/PN/2012, .....

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ef facts of the case are that, the assessee company was engaged in the business of manufacture of polymer engineering and electrical goods and wind power generation. During the year under consideration, the assessee had proposed to take over a running auto component business in Europe. The said business was carried on through a Italian and Poland company. The cost of acquisition of the said European business was to be around Euro 64.95 million and the loans from the overseas companies were to th .....

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d @ interest LIBOR + 1.5% p.a. which ranges between 2 - 2.5% and the balance funds were from assessee s own capital and reserves of the company. The said funds were introduced in the Netherland Company as its own share for the European business acquisition. However, the said loan was partially converted into a soft loan from the assessee company to the Netherland Company. In view of the said transactions, the assessee entered into transactions with its AE with regard to disbursement of loan to A .....

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e had entered into international transaction for over 15 crores with its AE. The Assessing Officer after going through the report in Form No.3CEB was of the view that the case needs to be referred to the Transfer Pricing Officer (in short TPO) for determining arm s length price of the services availed by the assessee company. Consequently, reference was made under section 92CA of the Act for computing arm s length price. 4. The TPO noted that the assessee had undertaken the following internation .....

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which, part of the capital had been converted into loan and the source of such capital was a loan obtained from Citi Bank. Further, the Indian banks were lending the money at the BPLR rates prevailing in India. However, the interest charged by assessee to AE on such loan was 4.75%. The assessee was show caused as to why interest amount could not be charged to AE at the Indian BPLR rates and accordingly, the TP adjustment be worked out. Since the assessee failed to furnish any reply to the said .....

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The TPO further noted that the assessee company decided that the interest was charged @ 4.75% p.a. However, the rate prevailing as per six months LIBOR + 1.5% for the year ending 31.03.2008 was 6.79%. The TPO tabulated the transactions in respect of loans granted and interest charged under para 8 at page 3 of the order under section 92CA(3) of the Act and proposed an adjustment of ₹ 4,41,74,661/-. 6. The assessee had benchmarked its international transaction taking interest rate charged @ .....

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onal Bank of that country. Accordingly benchmarking adopted by assessee is not found to be acceptable. The assessee was thus requested to show cause as to why the lending rate for the purposes of comparability following CUP method be not taken at Banking Prime Lending Rate (BPLR), for the year ended March 31st, 2008. The assessee failed to furnish any reply or furnish any TP Study report. Since the assessee had converted the share capital into loan to AE by passing resolution on 25.01.2008, the .....

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which the borrower exists and all other relevant parameters. These factors do have their bearing on the risk perception on the loans so advanced by the banks. It is the totalities of these aspects and factors which are determinative of the lending rate by the banks and the BPLR thus serves as guidance for the lending rate. The objectivity and applicability of BPLR can be taken as topnotch coupled with the factors associated with the borrower and the surrounding economic circumstances. 7. The TPO .....

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ked to determine its Arm's Length Price. As per TPO, the loan has been given to company which has no financial legs to run on and further, on its own it could not have arranged for the funds it required that the loan has been given by the principal to its subsidiary. In the given financial health of the subsidiary and for assuming the risk pertaining to loan in foreign currency, risks relating to foreign exchange fluctuation, the rate of interest charged should adequately compensate the asse .....

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ld never lend money to an unrelated entity end in any such case at the rate not less than BPLR. In normal circumstances if such advance has to be given to any unrelated entity, the rate of interest chargeable would be significantly higher than the BPLR. However, as such higher rate of interest more than BPLR is neither ascertainable nor determinable; it is considered suitable to benchmark this international transaction with benchmark rate of interest taken as BPLR. Accordingly, based or the rate .....

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oted that at LIBOR + rates of 6.79%, benchmarking of the assessee company is not at an ALP. At this rate the assessee should have charged at least ₹ 4,03,52,970, whereas it has charged only ₹ 2,86,27,089. However, in as demonstrated in both the cases the assessee is not at an ALP. 8. The TPO thus, proposed an adjustment of ₹ 4,41,74,661/- as arm's length price of the transactions. The said proposal was forwarded to the Assessing Officer and the same was confronted to the le .....

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epresentative for the assessee pointed out that investment was made by the assessee to its wholly owned company Netherland to buy stake in Italian company. The investment made by the assessee company was twofold; i.e. in the shares of the Netherland s company and also the loan advanced to the said company for the first two years, loan continued at interest rate of 4.75%. As per the TPO, the assessee should have applied BPLR rate. However, since the assessee was making international lending, char .....

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out that it had borrowed on LIBOR + interest rates i.e. the Japanese base LIBOR+ rates which was lower than US LIBOR+ rates and advanced the same by charging LIBOR + rates. The charging of the interest on loans in assessment years 2008-09 and 2009- 10 was @ 4.75%. However, in assessment year 2010-11, the whole loan was converted into share application money. Further plea of the assessee was that it applied the internal CUP method of borrowing at international rate. So, there was no merit in appl .....

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axmann.com 348 (Mumbai - Trib.) d. Wipro Ltd Vs. DCIT ITA No:624 & 1178/Bang/2007 Dated:31.10.2008 for the AY 2003-04 10. The learned Departmental Representative for the Revenue pointed out that the finding of DRP at page 4 was that the assessee had invested its own funds and borrowed funds. Further, it was pointed out by the learned Departmental Representative for the Revenue that the Transfer Pricing was to be done when compared with the international transactions. It was argued by the lea .....

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r generation. The assessee was a part of Varroc group, catered to the needs of Indian Auto Component Industry. During the financial year, the assessee had undertaken the following international transactions with its associated enterprises:- Sr No. Nature of Transactions Amount of Transactions Method Adopted 1. Disbursement of loan 7,66,740 CUP 2. Repayment of loan 2,79,10,000 CUP 3. Interest receivable 2,91,82,060 CUP 4. Part conversion of capital into loan 57,24,00,000 CUP Total 63,02,58,800 12 .....

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f the company, whereas the assessee had charged interest rate of 4.75% to its associated enterprises on such loan disbursement. 13. During the year under consideration, interest of ₹ 2,91,82,060/- had accrued as interest on loan granted to its associated enterprises. The assessee had granted loan to M/s. Varroc European Holding BV Netherlands Euro 1,00,00,000 and repayment of loan of Euro 5,00,000, hence during the year, the effective loan amounted to Euro 96,30,000 which was equivalent to .....

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e charge adopted by the assessee LIBOR [C] Base charge adopted by the assessee to benchmark the transaction However, rate charged by the assessee = 4.75% [D] Bank Prime lending rate (BPLR) of SBI as on 31.03.2008 12.25% [E] RATE CHARGED BY THE ASSESSEE 4.75% [F] Interest charged by the assessee Rs.2,86,27,089 [G] The rate prevailing as per 6 months LIBOR for the year ended 31.03.2008 was 6.79% Rs.4,03,52,970 [H] Interest @ 12.25% as per BPLR of SBI Rs.7,28,00,000 [I] Difference in BPLR and asses .....

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caused by the TPO as to why lending rate for the purpose of comparability following CUP method should not be taken. The TPO in view of the related discussion found that the arm's length price computed by the assessee in respect of the international transactions relating to provision of interest, was not acceptable. The view of the TPO was that in normal circumstances where any advance had to be given to any unrelated entity, then the rate of interest chargeable would be higher than the BPLR. .....

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ce of the international transactions. The TPO dis-regarded the LIBOR+ rate of 6.75% as not the benchmark applied by the assessee as according to that rate, the interest should have been charged at ₹ 4,03,52,970/- whereas it had only charged ₹ 2,86,27,089/-. In view thereof, an adjustment of ₹ 4,41,74,661/- was made in the hands of the assessee. The said order of TPO has been upheld by DRP. 15. In the facts of the present case, the assessee had advanced money in the form of shar .....

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have charged, if it had extended the loan to the third party in foreign country. Once there is a transaction between the assessee and its associated enterprises in foreign currency, then the transaction would have to be looked upon by applying the commercial principles with regard to the international transactions. In that case, the international rates fixed being LIBOR+ rates would have an application and the domestic prime lending rates would not be applicable. The assessee has further explain .....

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charged interest rate of 4.75% on the loan advanced to the associated enterprises. The assessee on the other hand, claims that it had borrowed the money on LIBOR+ rates i.e. international rates, which were Japanes based LIBOR+ rates which were lower than the US based LIBOR+ rates. The plea of the assessee before us was that it had advanced the loan to its associated enterprises on LIBOR+ rates i.e. 4.75%. In the totality of the facts and circumstances where the assessee has the internal CUP of o .....

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arm's length price and there is no merit in any adjustment to be made on this account. 16. The Chennai Bench of the Tribunal in M/s. Siva Industries & Holdings Limited Vs. ACIT, Chennai (2012) 26 taxmann.com 96 (Chennai) had held as under:- The assessee had given the loan to the associated enterprises in US dollars, and assessee was also receiving interest from the associated enterprises in Indian rupees. Once the transaction between the assessee and the associated enterprises was in fo .....

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nsaction between the assessee and the associated enterprises was to be upheld. As it was noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee had charged interest at 6 per cent which was higher than the LIBOR rate, no addition on this account was liable to be made in the hands of the assessee. In the circumstances, the addition made by the Assessing Officer on this count was deleted. 17. The Mumbai Bench of the Tribunal in DCIT Vs. Tech Mahindra .....

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mercial principles in regard to international transactions. 18. Similar principle has been laid down by the Mumbai Bench of the Tribunal in Hinduja Global Solutions Ltd. Vs. ACIT (2013) 35 taxmann.com 348 (Mumbai - Trib.). 19. In the entirety of the above facts and circumstances, we hold that where the assessee had entered into a transaction with its associated enterprises in foreign currency, and the transactions were international transactions, then the same had to be looked into by applying c .....

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ivable. The assessee had also raised the issue that the TPO had adopted the interest receivable from associated enterprise company at ₹ 2,86,27,089/- instead of ₹ 2,91,82,060/- which is disclosed in the audit report in Form No.3CEB. The Assessing Officer is also directed to verify the claim of the assessee in this regard and compute the arm's length price of the international transactions. Reasonable opportunity of being heard shall be afforded to the assessee by the Assessing Of .....

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e of international transaction, where the assessee had advanced loan to its associate enterprises situated in Germany, then the rate of interest was to be determined on the basis of rate prevailing in Germany, where the loan had been consumed and not to be determined on the basis of rate prevailing in India. The issue arising in the present appeal is identical to the issue before the Tribunal in assessee s own case relating to assessment year 2008-09 and before the Hon ble Bombay High Court in C .....

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under appeal, there is no such issue. Accordingly, we allow the ground of appeal No.1 raised by the assessee as indicated above. 10. The issue in ground of appeal No.2 raised before is in relation to the disallowance of additional depreciation under section 32(1)(iia) of the Act on items of fixed assets. 11. The learned Authorized Representative for the assessee at the outset pointed out that the issue in the present appeal is identical to the issue before the Tribunal in preceding year, wherein .....

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hich are tabulated under para 4 at page 2 of the assessment order passed under section 143(3) r.w.s. 144C of the Act. The assessee had claimed the additional depreciation on various assets treating the same to be plant & machinery. We find that identical list of assets were considered by the Tribunal while deciding similar issue of claim of additional depreciation under section 32(1)(iia) of the Act in the preceding year. The Tribunal after deliberating upon the issue, has restricted the all .....

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depreciation to be allowed @ 10%, which is as under:- Sr No Items Value Depreciati on Addl. Depreciati on claimed Depreciatio n allowed @ 10% (B) Differenc e (disallow ed (A-B) Depreciation disallowed More than 181 days Less than 181 days 1 Racks 2016664 359486 329460 439280 219640 109820 439280 2 Trolley 1601828 2078828 396184 528246 264123 132061 528246 3 Air Conditioner 1348845 866424 267308 356411 178205 89102 356411 Table 1895287 554356 250868 334491 167245 83622 334491 4 Dispenser 288738 0 .....

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703 114271 57135 28568 114271 14 EPBX System 267363 0 40104 53473 26736 13368 53473 15 Energy Saver 0 107767 8083 10777 5388 2694 10777 Total 1667283 2223050 1111522 555756 2223050 26. The first item was the Racks which are utilized for keeping any type of material or goods and cannot form part of the Plant & Machinery. We are of the view that the Racks cannot be considered as part of block of Plant & Machinery and no additional depreciation is allowable on the same. Further, depreciatio .....

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he same within block of Plant & Machinery and allow the depreciation and additional depreciation on the same. 28. The next items were Air-conditioner, TV Music System and Industrial Fan. The Air-conditioner is Plant & Machinery on which the depreciation at higher rate is allowable. However, no additional depreciation on the same is allowable since the same cannot part take the machinery used for manufacturing activities. Further, TV Music System is an electronic item on which higher rate .....

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However, the assessee is not entitled to claim of additional depreciation as the same were not part and parcel of manufacturing activity carried on by the assessee. 30. Another group of items were UPS, Inverter, Attendance Card Reader, EPBX System and Energy Saver, which are electronic items but are not part and parcel of Plant & Machinery utilized for manufacturing activity. The assessee was not entitled to the claim of additional depreciation on the same. Thus, ground of appeal No.3 raise .....

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