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2015 (5) TMI 970 - ITAT PUNE

2015 (5) TMI 970 - ITAT PUNE - TMI - Transfer pricing adjustment - TPO benchmarking the transaction of interest due on amounts outstanding from its AEs at LIBOR plus 300 basis points - Held that:- The assessee in the present set of facts was carrying on its business with its AEs and the majority of business receipts were receivable from the AEs. Once the transaction between the assessee and its AEs was in foreign currency, then the same part takes the nature of international transaction and the .....

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ge interest from the AEs and subsequently, charged interest from AEs at AFR i.e. America n Federal Rate @ 2.98%. The amount is in the character of loan or borrowing after the stipulated credit period and consequently, such recovery of dues in the international transaction with its AEs is to be benchmarked by applying CUP method of international bank rates.

Accordingly, we hold that LIBOR plus rates have to be applied to the amounts due from the AEs beyond the period of 25 days, which .....

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any expenditure having been incurred by the assessee on such guaranteed commission, there was no merit in including the same. The Revenue is not in appeal against the said finding of the CIT(A) and in the totality of the above said facts and circumstances, where it has not been established that the assessee has not paid any commission, there was no merit in charging plus 200 basis as guaranteed commission. However, we uphold the order of TPO in benchmarking the transaction of interest due on am .....

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Shri C.H. Naniwadekar Respondent by : Shri Narendra Kumar, CIT ORDER PER SUSHMA CHOWLA, J.M: The cross appeals filed by the assessee and Revenue are against the order of CIT(A)-IT/TP, Pune, dated 26.11.2012 relating to assessment year 2005-06 passed under section 143(3) of the Income Tax Act, 1961. 2. The cross appeals relating to the same assessee were heard together and are being disposed of by this consolidated order for the sake of convenience. 3. The assessee in ITA No. 2504/PN/2012 has rai .....

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e TPO has applied external CUP of international bank rate d) In not appreciating that there is no industry practice to charge interest on delayed recoveries from customers and the appellant also has not charged interest on delayed recoveries from Non-Associated Enterprises e) Without prejudice to above, in holding that the amount of adjustment is required to be computed @ 7% being the prevailing rate on short term deposits of 90 days 2. The appellant craves leave to add, modify or withdraw any o .....

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n u/s.10A and, therefore, all the undertakings of the assessee are eligible for claim of deduction u/s 10A of the Income tax Act, 1961. 2) The learned Commissioner of Income tax (Appeals) erred in allowing deduction u/s.10A in respect of 3 units at Chinchwad Akrudi and Millenium Business Park without appreciating that the approving authority i.e. Software Technology Park of India (STPI) had approved the above three units as expansion of the existing units on the basis of the assessee's appli .....

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w unit at Bangalore without appreciating that the unit was established by splitting up of the existing business, there is inter-lacing, inter-dependence and inter-connection with different units and assessee has deliberately diverted its business to the units which claim deduction u/s.10A. 5) The learned Commissioner of Income tax (Appeals) erred in allowing deduction u/s.10A to the assessee in respect of its new unit SPZ 47 when the unit is basically a system hub, a server unit providing suppor .....

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to the units which claim deduction u/s.10A. 7) The learned Commissioner of Income tax (Appeals) erred in allowing set off of losses of units eligible for deduction u/s. 10A of the Act against the business profit contravening the specific provision of sub section (6) of section 10A which provides for set off of such losses only after the expiry of the relevant assessment year. 8) The learned Commissioner of Income tax (Appeals) erred in allowing set off of the 10A unit losses against the busines .....

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he assessee in respect of its 13 units. The Revenue vide grounds of appeal No.2 and 3 is aggrieved by the order of CIT(A) in allowing the deduction under section 10A of the Act in respect of three units i.e. Chinchwad, Akurdi and Millennium Business Park. Further, the Revenue is in appeal against the allowance of deduction under section 10A of the Act in respect of new unit at Bangalore and SPZ 47 vide grounds of appeal Nos.4 and 5. Another issue raised by the Revenue vide ground of appeal No.6 .....

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er years. 7. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below. 8. Briefly, in the facts of the present case, the assessee was engaged in the business of software development both on-site and off-shore. During the year under consideration, the assessee had 14 units, income of which was claimed to be exempt under the provisions of section 10A of the Act. The first unit i.e. BPO undertaking at NDA-58, Noida, U.P. was found to be eligible for .....

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sessment year 2004-05 had established 12 undertakings and during the year under consideration, the assessee had established two undertakings i.e. one unit at Bangalore at Unit-II, Block 3-4, No.43, Electricity City Phase-II, Hosur Road, Bangalore, which was approved by the STPI and had commenced business from August, 2004. The assessee claimed that the conditions laid down in section 10A(2) of the Act were fulfilled and hence, was eligible for deduction under section 10A of the Act. Another unit .....

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respective units. The Assessing Officer after considering the provisions of section 10A of the Act noted that the costing and pricing of the software development / product was based on the number of persons / engineers required for a given period to complete the given project. Therefore, manpower was the main yardstick to ascertain the independence of units. So far as the deployment of capital and manpower and splitting of the business and production on such units was concerned, the Assessing Of .....

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employees of the company, working in various existing units and had been transferred / shifted from such old units, during the first year of operation and the new unit as such, was carrying on the same business of software development. As per the Assessing Officer, the unit was clearly found by splitting and reconstruction of the existing business, as provided in section 10A(2)(ii) of the Act. Since the assessee had not given any details of the work order or clients of the new unit to show that .....

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units in close proximity to the new one, and the ratio of desktop computers to the engineers to the engineers deployed is low, and there is actually no software engineer employed in this unit suggests that this units is not a separate unit for the software development, but only providing logistical support to the existing units and their business. Assessee has not given any details of the work order or the clients of the new unit to show that the unit was given any fresh work order or otherwise .....

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assessment year 2004-05, though the CIT(A) had allowed the claim of the assessee, but the department had not accepted the order of CIT(A). In view thereof, the Assessing Officer denied the exemption under section 10A of the Act on the profits of the said 11 units also. 10. The CIT(A) noted that the Assessing Officer had allowed the deduction under section 10A of the Act on pr ofits of NDA-58, Noida, UP unit and further out of remaining 13 units, the Tribunal vide order dated 30.06.2011, had give .....

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the department, then he was of the view that the assessee is entitled to the claim of deduction in respect of balance units. Further, he considered the claim of the assessee in respect of two units established during the year and after deliberating upon the issue, held that carrying on of new business was not necessary to avail the deduction under section 10A of the Act. In respect of SPZ-47 unit, the CIT(A) observed that the Assessing Officer had denied the deduction as the said unit was a syst .....

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0A of the Act in respect of Bangalore unit and SPZ-47. 11. The Revenue is in appeal against the said order of CIT(A). 12. The issue raised by the Revenue vide its grounds of appeal is against the stand of CIT(A) in holding the assessee to be eligible for the claim of deduction under section 10A of the Act in respect of 13 units, out of which two new units were established during the year under consideration. As far as grounds of appeal No.2 and 3 raised by the Revenue are in relation to the thre .....

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e existing units on the basis of approval letters received from Software Technology Park of India (STPI). The Tribunal in turn, relying on the ratio laid down by the Co-ordinate Bench in assessee s own case for assessment years 2002-03 and 2003-04, held as under:- 12. We have carefully considered the rival submissions. We find that the issue stands fully covered in favour of the assessee and against the Revenue by the decision of our co-ordinate Bench in assessee s own case for the assessment ye .....

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f setting up of such units and not from the point of time when the original unit were set up. 35. Briefly stated the facts are that during the course of assessment proceedings, the Assessing Officer held that the three section 10A eligible units at Chinchwad, Akruti and Millennium Business Park were not new units but only expansion of the existing units. As per the Assessing Officer, Chinchwad Unit was an expansion of Software and Conversion Unit; Akruti unit was considered as expansion of Sigma .....

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igible period for deduction under section 10A of the Act with respect to the said three units would also be reckoned from the first year of the eligibility of the corresponding old units. Aggrieved with the aforesaid stand of the Assessing Officer, assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals). 36. In appeal, assessee contended that the action of the Assessing Officer was bad in law and on facts. It was pointed out that all the three undertakings have been .....

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hree units as distinct from the old units. It was also submitted that there are separate permission for Custom Bonded Warehouses and also separate Shop & Establishment Licenses for the three units. The Commissioner of Income-tax (Appeals) has since considered the submissions of the assessee. As per the Commissioner of Income-tax (Appeals), the assessee fulfilled all the conditions prescribed under section 10A(2) of the Act. According to him, merely because the approval letter received from S .....

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three conditions. The conditions contained under sub-clause (i) & (ia) of section 10A(2) are positive relating to manufacturing or production of article or thing and subclause (ii) & (iii) of section 10A(2) say that such undertaking is not formed by splitting up or reconstruction of a business already in existence or it is not formed by the transfer to a new business or machinery or plant previously used for any purpose. As is clear from the details submitted by the appellant, the three .....

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d in this regard respectfully following the ratio decidendi of Hon ble Supreme Court decision in the case of Textile Machinery Corporation Ltd v CIT quoted supra, I am of the considered view that it cannot be said that the three units are formed by the splitting up or reconstruction of business already in existence. It may also be mentioned that the Hon ble Supreme Court held that benefit of section 15C shall be applicable even in case of expansion of business and the relevant portion of decisio .....

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ew industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a ne and identifiable undertaking separate and distinct from the existing business. Since the provisions of law as contained in section 15C(2)(i) and 10A(2)(ii) & (iii) are in effect and in substance in pari materia as regards the point in issue involved in this appeal, I am of the considered view that the ratio of Hon ble Supreme Court decision in case of Textile Machinery Co .....

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this regard, are held to be unjustified on facts and not in accordance with law. 37. Before us, the learned Departmental Representative has primarily reiterated the stand of the Assessing Officer in support of the case of the Revenue. As per the learned Departmental Representative, the approval for setting up of the three units clearly bring out the fact that the new units are mere expansion of the existing units and they cannot be treated as independent units. In this manner, the order of the C .....

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strued as non-fulfillment of the conditions prescribed 7 under section 10A(2) of the Act. It is pointed out that it is not a case of expansion of an existing unit, but certainly a case of expansion of the business of the company and the same cannot lead to denial of deduction under section 10A, especially when the three units otherwise fulfill the conditions prescribed under section 10A of the Act. The learned Counsel has also referred to the decision of the Mumbai Bench of the Tribunal in the c .....

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s on an increasing scale. It has expanded its business by establishing new undertakings at different locations. It is explained that the turnover of the company has substantially increased over a period of time with the increase in the number of employees, etc. as also number of locations at which it operates through different units. In this context, the Assessing Officer noted that the assessee had treated three units, namely, Chinchwad Unit, Akruti Unit and Millennium Business Park unit as sep .....

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the eligibility period for claim of deduction under section 10A was also reckoned from the first year of the eligibility of the corresponding old units. The Commissioner of Income-tax (Appeals) has, however, appreciated the plea of the assessee and has held that the three units fulfilled the conditions laid down under section 10A(2) of the Act and are accordingly eligible for the claim of benefits under section 10A independent of the old units. 40. Section 10A of the Act provides for a deduction .....

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to the assessment year commencing on or after the first day of April, 1994 in any software technology park; and that the undertaking is not formed by splitting up or reconstruction of the business already in existence; and, that the undertaking is not formed by transfer to a new business of machinery or plant previously used for any purpose. We have carefully perused the relevant conditions and find that the Commissioner of Income-tax (Appeals) has rightly concluded that all the three aspects ar .....

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mmissioner of Income-tax (Appeals). 41. The only plea of the Revenue is that in the approvals granted by the STPI, the three units have been referred to as an expansion of the corresponding old units. The moot question is as to whether such a plea of the Revenue is potent to effect the assessee s entitlement for deduction under section 10A of the Act. Similar plea of the Revenue in the context of section 10B of the Act was a subject matter of consideration by our co-ordinate Bench in the case of .....

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ereas the existing plant was in plot 3 602. The production of 12 Hydroxy Stearic Acid is authorized by the letter dt 27th January 1995 which states that the Government has taken note of assessee s wish to manufacture Hydroxy Stearic Acid also by way of forward integration and amended the letter of permission to include 12 Hydroxy Stearic Acid of 12,000 MT in the very next sentence. It is observed that Govt also approves of your 8 request for the import of additional capital goods worth ₹ 5 .....

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separate permissions, is not really relevant. What is really to be examined is whether the units are independent of unit and whether the units are covered by the permission or not. In our humble understanding it meets both the tests. We have also noted that it is not an statutory requirement that there has to be separate permission for each unit and therefore just because the permission is granted by the Government by way of amending the original permission letter does not affect the eligibility .....

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ess achieved by setting up a new independent unit would lead to denial of deduction under section 10A of the Act. In this background, in the earlier part of this order we have already noted with approval the factual findings of the Commissioner of Income-tax (Appeals) that the three units are separate and independent production units and the same cannot be treated as mere expansions of the existing undertakings. Therefore, the mere fact that the requisite permissions from STPI refer them as expa .....

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of the case, on the above parity of reasoning, we find no error in the approach of the Commissioner of Income-tax (Appeals) in having allowed the claim of assessee for the benefits under section 10A of the Act on the three units treating the same as independent units. Thus, Ground Nos 1 to 4 of the appeal of the Revenue are dismissed. 13. Further the Hon ble Bombay High Court in Income Tax Appeal (L) No.1820/2012 vide judgment dated 28.02.2013 had dismissed the appeal of the Revenue against the .....

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.e. Chinchwad, Akurdi and Millennium Business Park as the same were independent units. The grounds of appeal No.2 and 3 raised by the Revenue in this regard are dismissed. 15. The Revenue vide ground of appeal No.6 is aggrieved by the order of CIT(A) in holding the assessee eligible for deduction under section 10A of the Act in respect of 8 old undertakings. 16. The learned Authorized Representative for the assessee pointed out that the Tribunal in assessment years 2002-03 and 2003-04 and also i .....

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the grounds of appeal No.4 and 5 raised by the Revenue in respect of two new units established at Bangalore and SPZ 47 established at Mumbai. The contention of the assessee before us was that the said units have been established by the assessee as a separate undertaking where the activity carried on by the assessee is in relation to the different projects. The profits of the said units being separate, independent undertakings were claimed to be eligible for exemption under section 10A of the Ac .....

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though some of old employees were transferred to the new unit established by the assessee, but the percentage of transferred employees vis-àvis total employees was within criteria laid down by the CBDT. Section 10A(2)(iii) of the Act prohibits formation of new units by way of transfer of previously used plant & machinery to the new unit. However, the explanatory memorandum to the said section does not express additional objective of employment generation. There is no legal requirement .....

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ceed 50% of the total technical manpower actually engaged in the development of software or IT enabled projects in the new unit. As per details furnished by the assessee in the new unit at Bangalore, the new employees employed were 289 and the transferred employees were 112 i.e. total employees 401 percentage and percentage of transferred employees to the total employees was 27.93%. In respect of unit at SPZ 47, the new employees totaled to 65 along with transferred employees of 6, resulting in .....

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system hub. However, the plea of the assessee before us and the CIT(A) was that it was engaged in providing remote infrastructure management through technology software and equipment and with the said software, the assessee could directly access from India the software and systems at clients location and carried out necessary de-bugging, patch-work and also providing software support. The unit was engaged in the development and maintenance of the system software. The conclusion of the CIT(A) wa .....

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kings where both the units have complied with the conditions prescribed under section 10A of the Act and are independent and separate undertakings working from different locations with new plant & machinery, having adequate skilled staff to carry out its operations and are independently viable undertakings earning profits / losses, which are attributable to the business carried on by the assessee in the separate units. The said units are eligible for claim of deduction under section 10A of t .....

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f the Act in respect of its Bangalore unit and the unit at SPZ 47, Mumbai. The grounds of appeal No.4 and 5 raised by the Revenue are thus, dismissed. 19. Now, coming to the grounds of appeal No.7 and 8 raised by the Revenue. The issue is with regard to the set off of losses of units eligible for deduction under section 10A of the Act against business income of the undertaking. The said issue is squarely covered by the order of the Tribunal in assessee s own case relating to assessment year 2004 .....

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ssioner of Income-tax (Appeals) has been set aside with directions to the Assessing Officer to allow set-off of the losses of the section 10A eligible units against the normal business income of the assessee while 9 computing income as per normal provisions of the Act. The relevant findings of the Tribunal as contained in paras 3 to 5 of its order are reproduced hereinbelow for the sake of brevity: "3. In the first Ground, dispute relates to the action of the Assessing Officer in adding bac .....

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e that the issue has also been dealt with by the Hon ble jurisdictional High Court in the case of Hindustan Unilever Ltd v DCIT 38 DTR 91 (Bom.) affirming the stand of the assessee. 5. In the above background, we find ample merit in the Ground of appeal raised by the assessee. The Assessing Officer, while computing the income did not allow the claim for the loss suffered in the units which were otherwise eligible for benefits of section 10A of the Act. The Assessing officer proceeded on the assu .....

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quent to the amendment with effect from 1.4.2001, the provision provides for a deduction of such profits and gains as are derived by an undertaking from the export of articles or thing or computer software duly established in free trade zones, etc. Consequently, it has to be understood that the provision, as applicable for the assessment year under consideration, is not in the nature of an exemption. Therefore, the assessee was entitled to set-off of losses sustained by the 10A eligible units ag .....

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by the assessee stands allowed. The learned Counsel for the assessee also filed a copy of the judgment of the Hon ble Bombay High Court in assessee s own case (supra) for the assessment year 2001-02 wherein the claim of the assessee relating to the set off of the losses against the other business profits was approved by the Hon ble High Court. In view of this, we accordingly affirm the order of the Commissioner of Income-tax (Appeals) and thus dismiss the Ground of appeal of the Revenue. 20. We .....

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d against the Revenue and in favour of the assessee in line with the ratio laid down by it in assessee s own case in Income Tax Appeal No.2177/2012 rendered on 01.07.2011. The Hon ble Bombay High Court had also in the appeal filed by the Revenue relating to assessment year 2004-05 in Income Tax Appeal (L) No. 1820/2012 vide judgment dated 28.02.2013 had dismissed the similar issue raised by the Revenue. Following the same parity of reasoning, we find no merit in the grounds of appeal No.7 and 8 .....

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us international transactions entered into by the assessee with its AEs during the year under consideration, but the issue raised in the present appeal is in relation to the interest received on delayed payment due from AEs. The assessee claimed to have received ₹ 3.12 crores, which was held to be at arm s length price by applying TNNM method. The TPO noted that about 85.87% of the business of the assessee was executed through its associated entities and there was need to evaluate the cred .....

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realization of the sale proceeds from them as against the credit period provided under the respective contracts for different assessment years. On examination of details provided by the assessee, the TPO noted that there was substantial delay in receipt of payments from AEs as against dues from third parties. The tabulated details relating to the year under consideration are available at page 2 of the order passed by the TPO under section 92CA(3) of the Act. The weighted average number of days d .....

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s of communication vis-à-vis the rates of interest as might have been chargeable from the assessee and / or from AEs for foreign currency loans and determined the arm s length price of interest charged by the assessee from its AEs @ 7.25% i.e. 2.25% being rate of interest at LIBOR + 3% and guarantee cost thereupon @ 12%. Accordingly, the TPO determined the arm s length price of excess credit period allowed to the AEs at ₹ 4,82,95,149/- and after giving credit of the interest recover .....

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terest @ 7% i.e. the prevailing interest on short term deposits of 90 days in assessment year 2005- 06, on the amount received after the stipulated credit period, against which the assessee is in appeal. 24. The learned Authorized Representative for the assessee pointed out that the Assessing Officer had not charged interest from AEs and non -AEs and there is a delay of 14 days between the credit period allowed to AEs and non-AEs as observed by the TPO, on which interest at LIBOR rates is to be .....

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Vs ACIT (2015) 168 TTJ (Pune) 514 for application of LIBOR rates and Mumbai Bench of Tribunal in DCIT Vs. Indian Hotels Co. Ltd. (2014) 150 ITD 792 (Mumbai - Trib). 25. The learned Departmental Representative for the Revenue pointed out that the CIT(A) had applied the reverse of working capital and since the assessee has lost 7% because of the opportunity cost weightage, delays could not be applied, but interest had to be charged for each day of delay. Reliance was placed on the ratio laid down .....

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28.02.2013 has held that in view of the amendment by Finance Act, 2012 with retrospective effect from 01.04.2002, the said transaction of charging of interest from the AEs is covered under the amended provisions of section 92B(1) of the Act. The second aspect of the issue arising before us is whether interest charged by the assessee from its AEs was at arm s length price. The assessee was carrying on its business through its AEs and had settled some credit terms with its AEs vis-à-vis the .....

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No of days delays Patni Inc, USA 592,33,38,933 580,83,75,342 199,37,97,33,476 34 Pati UK 31,51,88,988 30,81,78,039 34,97,56,88,595 111 Patni GmbH 708,59,602 692,33,110 878,56,93,667 124 Total No. of Weighted Average for AE s 630,93,87,523 618,57,86,491 243,14,10,95,738 39 27. However, in respect of non-AE s, the delay of 25 days as tabulated by the TPO was as under:- Status AE s Invoice Amount Total Realized Invoice X No of days delay Weighted Average No. of days delays Other [Non-AE s] 75,09,7 .....

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price of the interest of excess credit period allowed to the AEs. The CIT(A) on the other hand, applied the Indian Prime Lending rates in order to compute whether the said transaction was at arm s length price. The learned Authorized Representative for the assessee before us has fairly considered that LIBOR rates have to be applied since the transaction between the assessee and its AEs is an international transaction and there is no merit in the order of CIT(A) in applying the Indian PLR rates. .....

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ate fixed for international transaction had to be adopted as arm s length rate. The Mumbai Bench of Tribunal further in DCIT Vs. Indian Hotels Co. Ltd. (supra) has applied the said principle in benchmarking the international transaction involving interest charged by the assessee on outstanding loan from its AEs. 30. Further, Pune Bench of Tribunal in Varroc Engineering (P) Ltd. Vs ACIT (supra) had observed as under:- 15……..while benchmarking the international transactions what has .....

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mmercial 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 explained that it had raised the loan from Citi Bank on international rates for the purpose of investment in the share application money of its associated enterprises, which in turn was partly converted from capital into loan. Where the assessee had a compa .....

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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 operating at international rates available and since the said loan raised by the assessee at international rates was advanced to its associated enterprises, we find no merit in the order of the TPO in applying the domestic loan rates i.e. BPLR rates f .....

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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 foreign currency and the transaction was an international transactions, then the transaction would have to be looked upon the applying the commercial principles in regard to international transactions. If that was so, then the domestic prime lending th .....

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he 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 Ltd. (2011) 12 taxmann.com 132 (Mum.) held that where there is a choice between the interest rate of currency other than the currency in which transaction had taken place and the interest rate in respect of the currency in which transaction has taken .....

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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 commercial principle in regard to international transactions. In the facts of present case, the assessee had borrowed the loan from Citi Bank and advanced the same on LIBOR+ rates to its associated enterprises, then the said transaction with its assoc .....

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ssessing 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 Officer / Transfer Pricing Officer. The grounds of appeal Nos.1 and 2 raised by the assessee are thus, allowed as indicated above. 31. The learned Departmental Representative for the Revenue placed reliance on the ratio laid down by the Delhi Bench of .....

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t to be applied for benchmarking the international transactions. 32. The assessee in the present set of facts was carrying on its business with its AEs and the majority of business receipts were receivable from the AEs. Once the transaction between the assessee and its AEs was in foreign currency, then the same part takes the nature of international transaction and the said transactions have to be looked upon by applying the commercial principles with regard to an international transaction. If t .....

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