TMI Blog2014 (10) TMI 870X X X X Extracts X X X X X X X X Extracts X X X X ..... on195 r.w.s. 40(a)(ia) are not applicable - Decided in favour of assessee. Determination of arms length price for the international transaction on Libor plus - Held that:- assessee has justified the interest on the rate prevalent at that relevant point of time. Even though there may be same fraud involved in fixing the rate of international rates, as it became basis for subsequent international transactions at that point of time, We do not see any reason to differ from the LIBOR plus basis points for T.P. comparison. The Revenue cannot contend that rate of interest prevailing in India has to be adopted as the rates in India cannot be compared while loans are obtained abroad, even though funds are flown from India. What is required to be seen is whether the transaction is at arms length or not. Since, the international loan rates are based on LIBOR, we do not see any reason for differing from the Ld. CIT(A) order, which itself based on Coordinate Bench decisions that LIBOR plus basis points is at arm’s length. - Decided against revenue Expenditure incurred by assessee for implementing ERP at Haridwar Division - revenue v/s capital expenditure - CIT(A) allowed it as revenue - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y, JUDICAL MEMBER For Appellant : Mr. S. Rama Rao For Respondent : Mr. Solgy Jose T. Kottaram ORDER PER B. RAMAKOTAIAH, A.M. These are cross-appeals by Assessee and Revenue against the order of Ld. CIT(A)-IV, Hyderabad dated 17.05.2013. 2. We have heard Ld. CIT(A) and Ld. D.R. in detail and perused paper book placed on record and also sought clarifications. After considering the detailed submissions, the appeals are decided as under. 3. Briefly stated, assessee filed its return of income on 30.09.2008 declaring total income at ₹ 59,07,85,660. A.O. completed the assessment on a total income of ₹ 73,67,05,323 by making the following disallowances/ additions. (i) Addition under section 92CA(4) at ₹ 57,44,447. (ii) Disallowance of interest paid to foreign suppliers without TDS under section 40(a)(ia) at ₹ 3,85,63,183. (iii) Disallowance of ERP Software expenditure at ₹ 16,12,034. (iv) In addition to the above, A.O. also restricted the relief under section 90 to ₹ 13,55,386 as against claim of ₹ 19,58,878. 4. In appeal, Ld. CIT(A) gave relief with reference to addition under section 92CA(4) and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA.No.1462/Hyd/2010 dt.22.7.2011 (A.Y.2007-08) 4.4. The ITAT in the above decisions in the appellant s own case has held that the appellant is not liable to make TDS on usance interest and that the provisions of sec. 195 r.w.s. 40(a)(ia) were not applicable. While doing so, the ITAT also took note of the decision of the Supreme Court in the case of Vijay Ship Breaking Corporation (2009) 314 ITR 309 (SC). Respectfully following the decision of the ITAT in the appellant s own case for the preceding years, the appeal is allowed on the first issue. 7. Even though, Ld. D.R. has contended that usance interest is nothing but interest to be covered under section 195 and made submissions in detail, it is noticed that the detailed submissions of the D.R. and the assessee were considered by the Coordinate Bench of the Hyderabad Tribunal in ITA.No. 239 and 845/Hyd/2009 and ITA.No.1462/Hyd/2010 in its order dated 22nd July, 2011 vide paras 39 to 41 which is as under : 39. We have heard both the parties on this issue and perused the material on record. The issue before us is whether the assessee is liable to deduct tax at source on the usance interest u/s. 195 of the I.T. Act on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase from outside the country cannot be considered as interest u/s. 2(28A) of the I.T. Act., and it takes character of purchase price of supplies. Further jurisdictional High Court in the case of CIT vs. Visakhapatnam Port Trust (AP) (144 ITR 146) held as follows: The agreement between the German company and the Poona company did not also amount to the German company having a permanent establishment in India. The original contract between the German company and the Port Trust contemplated the employment of a sub-contractor or sub-supplier. The Poona company was so employer later. There was neither any identity of interest nor identity of character nor of personality, nor was here any unity in profit making between the Poona company and the German company so that the former may be treated as an Indian agent of the latter; and (iv) that the provisions of art. III of the Indo-German agreement indicated that while industrial or commercial income of the foreign enterprise was not taxable in India, the rents, royalties, interest, dividends, etc., derived by the foreign enterprise from sources in India were taxable. The items, rents, royalties, dividends, etc., were taxable only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Market Tools Research P. Ltd., vs. ACIT is squarely applicable to the present case. 10. Briefly stated facts are that assessee had given loan of ₹ 12.12 crores to it s A.E. Vijai Brazil and charged interest at 13% p.a. and offered an amount of ₹ 1,30,59,184 as income. Assessee compared the rate of interest charged under the CUP method with the rate of LIBOR plus 275 basis points charged on the loan taken by Vijai Brazil from local Brazil Bank, Banco De Brazil, without any guarantee. TPO did not accept this as a comparable. He held that tested party being the assessee funds flown from India to Brazil has to be considered and in an arms length situation, assessee was required to charge interest rate prevailing in India and not in Brazil. Accordingly, he determined the arms length interest rate at 17.26% based on corporate bond rated by CRYSIL. Ld. CIT(A) after considering the assessee s submissions deleted the same by stating as under : 5.3 In the course of the appellate proceedings, the AR relied on the following decisions: (i) Four Soft Ltd v DCIT [2012] 16 ITR (Trib) 73 (Hyd) (ii) Siva Industries Holdings Ltd v ACIT [2011] 59 DTR 182 (Chennai) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ason to interfere with the order of the Ld. CIT(A). Even though Revenue has raised additional grounds on the reason that LIBOR cannot be considered as a basis as it was fraudulently fixed, we are not in a position to agree with the additional grounds. Whether that was fraudulently fixed or not is not a consideration now, as it was the basis for all international transactions at that point of time as far as borrowing of funds are concerned. In fact, assessee s A.E. also obtained loan from a local branch at LIBOR plus basis only. Accordingly, assessee has justified the interest on the rate prevalent at that relevant point of time. Even though there may be same fraud involved in fixing the rate of international rates, as it became basis for subsequent international transactions at that point of time, We do not see any reason to differ from the LIBOR plus basis points for T.P. comparison. The Revenue cannot contend that rate of interest prevailing in India has to be adopted as the rates in India cannot be compared while loans are obtained abroad, even though funds are flown from India. What is required to be seen is whether the transaction is at arms length or not. Since, the internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tains to disallowance of an amount of ₹ 4,94,767 paid to Sonata Information Technology for I.T. Computer Software treating as capital expenditure. This issue was considered in Revenue appeal at ground No.4 vide paras 12 and 13 hereinabove and as stated above, the Ld. CIT(A) treated the amount of ₹ 4,94,767 as capital in nature and accordingly, partly allowed the issue in favour of assessee. 15.1. It was the contention of the assessee that this amount is also revenue in nature. Assessee has placed the relevant tax invoice and the note at pages 75 and 76 of the paper book and after considering the same, we are not in agreement with the order of the Ld. CIT(A). As seen from the invoice, assessee has purchased software at ₹ 22,050 and with tax the total cost was at ₹ 22,932. In addition to that software, assessee also purchased 10 user licenses by paying an amount of ₹ 3,95,732 and also one year maintenance totaling to ₹ 85,418, the total invoices value is to an extent of ₹ 5,04,082. How the Ld. CIT(A) has arrived at ₹ 4,94,767 could not be ascertained. Be that as it may, consistent with his stand that license and maintenance fee are r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the gross amount of the interest. Article 23: METHODS FOR THE ELIMINATION OF DOUBLE TAXATION 1. Subject to the provisions of paragraphs 3 and 4, where a resident of a Contracting State derives income which, in accordance with the provisions of this Convention, may be taxed in the other Contracting State, the first-mentioned State shall allow as a deduction from the tax on the income of that resident an amount equal to the tax paid in that other State. Such deduction shall not, however, exceed that part of the tax, as computed before the deduction is given, which is attributable to the income which may be taxed in that other State. 7.4. Article 11 and Article 23 operate in different spheres. While Article 11 deals with the manner in which interest is to be brought to tax in the two signatory countries, Article 23 provides for the manner in which tax paid in one country is to be dealt with in the other country. Article 11 provides that interest receivable by the appellant is chargeable to tax both in India and in Brazil but the tax in Brazil would not exceed 15% of the gross interest. What is of immediate relevance to the issue in appeal is Article 23 which provides th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the entire income offered by assessee, stated to have been earned from the subsidiary in Brazil, the tax liability comes to ₹ 19,58,878. It was also submitted by the Ld. Counsel before the Ld. CIT(A) that the subsidiary has deducted the entire amount of tax in the later year when the balance amount was remitted to India. Therefore, as of now the whole amount has been paid. Since, assessee has offered the entire interest income accrued to it, even though not received during the year, assessee is entitled to claim the entire tax liability at ₹ 19,58,878 as a benefit under section 90 as amount of ₹ 13,55,586 was paid during the year and the balance was remitted later as stated before us. Moreover, provisions of section 43(2) defines paid means, actually paid or incurred, according to the method of accounting upon the basis of which profits or gains are computed under the head profits and gains of business or profession. Even Article 23(1) of the DTAA is as under : 1. Subject to the provisions of paragraphs 3 and 4, where a resident of a Contracting State derives income which, in accordance with the provisions of this Convention, may be taxed in the other C ..... 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