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TMI Blog2015 (12) TMI 1406X X X X Extracts X X X X X X X X Extracts X X X X ..... the fixed deposit interest rate of scheduled commercial bank as a comparable to make an adjustment on account of interest on outstanding interest receivable from the AE; and - Use of an adhoc rate of 2% in determining the Arm's Length Price (ALP) of the Guarantee fee for the guarantee extended by the Appellant on behalf of its AE. 3. Learned counsel for the assessee submits that he does not wish to pursue this ground of appeal. It is submitted that the grievances raised in this ground of appeal are only arguments in support of the grounds on specific arm's length price adjustments which are challenged separately in ground no. 2, 3 and 4. 4. Ground no. 1 is, accordingly, dismissed as not pressed as such. 5. In ground no. 2, grievance raised by the assessee is as follows: 2. On the facts and in the circumstances of the case and in law, the learned DRP/AO/TPO erred in benchmarking the foreign currency loan transaction using the fixed deposit rate of scheduled commercial banks and ignoring the internal CUP analysis performed by the assessee. 6. To adjudicate on this ground of appeal, only a few undisputed material facts, as culled out from material on record, need to be taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... much higher rate, such an AE is not in a position to give the required security or when the terms of the loan available are impracticable for the AE. He justified this approach on the ground that no AE would approach entity residing in a "high interest regime for a loan". He further observed that " if a higher return was available (in the domestic market), no one would chose to lend abroad at lower rates............particularly when the Indian entity itself seeks a loan to extend it further on". The TPO stated that "the availability of required loan to the AE abroad on similar terms is not evidenced". The TPO proceeded to"the opportunity cost of the funds used for the loan to subsidiary in the instant case is conservatively taken as 10.5% which is the FD rate of scheduled banks since IPO proceeds could have been invested in a bank and could have earned interest, at the minimum, at fixed deposit rate in India". Accordingly, as against an interest of 8.25% (LIBOR plus 300 points) charged by the assessee, arm's length interest was adopted at 10.5% (FD interest rate offered by scheduled banks in India), and an arm's length price adjustment of Rs. 3,01,99,896 to the interest earned was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be earned by the taxpayer by advancing loan to an unrelated party in India, we can only point out that the interest rate on foreign currency loans being qualitatively different, even if we have to see the interest that the assessee would have earned, we have to see the interest that the assessee would have earned on foreign currency loans and not rupee denominated loans. (Emphasis by underlining supplied by us) 12. The views so expressed by the coordinate bemch in the case of Bharti Airtel (supra) have subsequently been followed by other coordinate benches, including in the case of Eversto Kanto Cylinders Ltd Vs ACIT [(2015) 167 TTJ 204 (Mum)]. 13. In the case of CIT Vs Cotton Naturals India Pvt Ltd [(2015) 276 CTR 445 (Del)], Hon'ble Delhi High Court has approved this school of thought and observed that, "The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained ........... The interest rates vary and are thus dependent on the foreign curre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade and the impact of exchange rate variation inter se the currencies. Interest rate cannot be considered in isolation with the currency of transaction. In the contemporary globalized business environment, the increase in terms of money held in a currency is as important as the worth of the currency in which it is held. Therefore, when arm's length price of an international loan transaction, which is designated in a hard currency, is to be ascertained, the interest rate on rupee transactions in India has no relevance at all. 16. The comparable adopted by the assessee, in his transfer pricing analysis, is the rate at which the Exim Bank of India had extended similar foreign currency loan to the assessee, and the TPO has rejected the same on the basis that such a rate constitutes costs of funds to the assessee which is irrelevant, in the considered view of the TPO, for the purpose of benchmarking the loan to its AE. What, however, the TPO overlooks is the fact that the credit rating of the AE, which is a newly formed and one hundred percent subsidiary of the assessee, is, in the normal course, expected to be the same as that of the subsidiary and if a credit institution like Exim Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; 44,874,238 Interest on unpaid interest (out of opening balance of 1 Apr 2007) for an average period of 6 months 2,900,007 Total interest on interest 10.298,982 On the interest due on arm's length price (Rs.14,09,32,847 (Table 1)), which is still unpaid as on FY 08 end, interest on interest (@ 10.5%), based on same opportunity cost logic as above, amounts to Rs. 73,98,974 (see Table 2 above) for the period between Oct 07-Mar 08, assuming conversion is effective from 1 Oct 2007. It is also seen from the accounts that the taxpayer had interest outstanding balance of Rs. 55 million as on 1 Apr 2007. It is assumed that the payments received (in Oct and Feb) of Rs. 44.8 million in the year goes towards clearing this interest dues. Taking only the first 6 months for the year as due period (the payment are made in the 2nd half), the interest on this interest due of Rs. 55 million amount to Rs. 29 lacs (see Table 2). The total interest due is Rs. 10298982. This is the arm's length price of the interest receivable from the AE whereas the taxpayer has not charged any interest on the amounts due. 20. The assessee did raise an objection before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest receivable. Compounding of interest, in the world of trade of commerce, is more of a rule rather than an exception, while charging of interest on overdue sales invoices is more of an exception rather than a rule. Therefore, the decision in the case of Nimbus Communications (supra), which was in the context of the continuing debit balance as a result of international transactions, may not have any relevance in this case. In the present case, however, ALP adjustment by way of charging interest is in respect to delay in payment of interest itself, and APL determination of interest is also before us. While dealing with the preceding ground of appeal, we have already held that the loan arrangement with Exim Bank is a valid internal CUP for this international transaction as well, and, therefore, even the question as to whether the delayed payment of interest will invite compounding of interest can be addressed in the light of the terms of the internal CUP. For this limited purpose, the matter is restored to the file of the Assessing Officer. Whatever be the rate of interest and terms applicable in a materially similar situation of delay in payment of interest to Exim Bank will ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee had incurred a cost of Rs. 4,39,005, towards issuance of guarantee, being payment made to the ICICI Bank and the assessee had offered these charges as ALP of the corporate guarantee charges. However, holding that this ALP adjustment was not sufficient, the TPO held the ALP of the corporate guarantee at Rs. 16,00,000. The assessee did raise an objection before the DRP but without any success. The DRP confirmed the stand of the TPO by observing that "after considering all the issues, the TPO has computed arm's length price of the corporate guarantee at 2% which is minimum", that "the AE of the assessee is a loss making entity and it has got huge accumulated losses" and that "normally the banks will charge bank guarantee of 14% whereas the TPO has charged 2% arm's length price, which, according to us, in is order". It was in this backdrop that the Assessing Officer proceeded with ALP adjustment of Rs. 16,00,000 in respect of the corporate guarantee commission. The assessee is not satisfied and is in appeal before us. 27. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 28. Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is hereby clarified that - (i) the expression "international transaction" shall include - (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know -how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any type of long -term or short -term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing: 1. An international transaction can be between two or more AEs, at least one of which should be a non -resident. 2. An international transaction can be a transaction of the following types: a. in the nature of purchase, sale or lease of tangible or intangible property, b. in the nature of provision of services, c. in the nature of lending or borrowing money, or d. in the nature of any other transaction having a bearing on the profits, income, losses or assets of such enterprises 3. An international transaction shall include shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. 4. Section 92B (2), covering a deeming fiction, provides that even a transaction with non AE in a situation in which such a transaction is de facto controlled by prior agreement with AE or by the terms agreed with the AE. 26. Let us now deal with the Explanation, inserted with retrospective effect from 1st April 2002 i.e. righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. These items can only be covered in the residual clause of definition in international transactions, as in Section 92B(1), which covers "any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises". 30. It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92 B, the transactions should be such as to have beating on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression 'international transaction'. This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words "irrespective of the fact that it (i.e. restructuring or reorganization) has bearing on the profit, income, losses or assets of such enterprise at the time of transaction or on a future date". What is implicit in this statutory provision is that while impact on " profit, income, losses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not constitute an international transaction as the condition precedent with regard to the 'bearing on profit, income, losses or assets' set out in Section 92B(1) may not be fulfilled. For example, an enterprise may extend guarantees for performance of financial obligations by its associated enterprises. These guarantees donot cost anything to the enterprise issuing the guarantees and yet they provide certain comfort levels to the parties doing dealings with the associated enterprise. These guarantees thus donot have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. One may have also have a situation in which there is a receivable or any other debt during the course of business and yet these receivables may not have any bearing on its profits, income, losses or assets, for example, when these receivables are out of cost free funds and these debit balances donot cost anything to the person allowing such use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not derive any advantage from Bharti Airtel decision (supra). 31. As for his reliance on Redignton decision (supra), that decision simply follows the Bharti Airtel decision and does not have any independent reasoning of its own. Nothing, therefore, turns on this precedent either. 32. We have also noted that there is no scientific basis for coming to the conclusion that 2% guarantee commission is an arm's length price of the corporate guarantee commission, but then there was no information furnished by the assessee to assist in ascertainment of the ALP. The assessee has not even given complete details about the guarantees issued by the assessee, nor has he offered any assistance whatsoever in ascertaining the arm's length price of the corporate guarantee issued by the assessee. In view of these discussions, as also bearing in mind entirety of the case, we deem it fit and proper to remit the matter to the file of the TPO for the limited purposes of ascertaining the arm's length price of the corporate guarantee issued by the assessee. The assessee is directed to fully cooperate by furnishing necessary information and inputs to the TPO and assist in expeditious disposal of the rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for consideration before Hon'ble Supreme Court, in case the Assessing Officer has the benefit of this adjudication before finalizing his take, he shall be obviously be guided by the same as well. However, merely because the matter has not reached finality, it is not open to us to disregard the binding views of Hon'ble jurisdictional High Court. With these discussions, this issue is restored to the file of the AO. 37. Ground nos. 5, 6 and 7 in this appeal, which are termed as ground nos. 1, 2 and 3 corporate tax grounds, are thus allowed for statistical purposes. 38. In ground no. 8, termed as ground no. 4 of the corporate tax grounds, the assessee has raised the following grievance: On the facts and in the circumstances of the case and in law, the learned DRP/AO erred in disallowing an amount of Rs. 5,20,47,822/- under section 40(a)(ia) of the Act on account of non-deduction of tax at source on procurement and processing charges. 39. The relevant material facts are like this. During the course of the assessment proceedings, the Assessing Officer noted that the assessee had paid amounts in excess of Rs. 50,000 per person per year, without deduction of any tax at source, in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer to delete this disallowance of Rs. 35,28,142 as well. 45. Ground no. 9, i.e. corporate tax ground no. 5, is thus allowed. 46. In ground no. 10, i.e. corporate tax ground no. 6, the assessee has raised the following grievance: On the facts and in the circumstances of the case and in law, it is submitted that depreciation under section 32 of the Act amounting to Rs. 38,75,000/- ought to be allowed on goodwill arising on acquisition of Unicorn Seeds Pvt. Ltd. 47. So far as this grievance of the assessee is concerned, the relevant material facts are as follows. During the course of the assessment proceedings, the Assessing Officer noted that the assessee had acquired the business of Golden Seeds Pvt Ltd for a consideration of Rs. 1.55 crores, and, it was in this respect that the assessee had claimed depreciation of Rs. 38,75,000. The claim of the depreciation, however, was not pressed during the assessment proceedings. However, the assessee wishes to pursue this claim now. He has filed a petition dated 16th April 2015 seeking admission of additional evidence in support of this grievance, and contended that "on becoming aware of the decision of Hon'ble Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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