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Manugraph India Limited Versus Dy. Commissioner of Income Tax, Circle 3 (2) , Mumbai

2016 (6) TMI 636 - ITAT MUMBAI

Transfer pricing Adjustment - Adjustment on account of interest on loans advanced to Associated Enterprise (AE) - Held that:- It cannot be open to the transfer pricing authorities to contend that this loan should be treated as a high risk loan on which high interest rate should be charged even within the range of interest rates charged by the Indian banks generally. In view of these discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assessee and direct the .....

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bank in favor of its AE - Held that:- Being a signatory to the tripartite support agreement, on the facts of this case, does not constitute a corporate guarantee akin to bank guarantee and, even if it could be treated as a corporate guarantee for benchmarking purposes, the corporate guarantee does not constitute an international transaction under section 92 B of the Act. In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that the arm’s lengt .....

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has earned the dividend income from the investment in shares and mutual funds and also given the working of disallowance u/s 14A on account of interest expenditure, therefore, so far as the disallowance u/s 14A is concerned, it is not the case of the assessee that no expenditure on account of interest expenditure has been incurred. Further the activity of the investment is stated to have been looked after by the Finance Department of the assessee along with the accounts and finance, therefore, t .....

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ause the dividend from the foreign companies is taxable. However, the growth mutual fund does not yield any dividend/exempt income, therefore, the provisions of section 14A would not apply on the investment in growth mutual funds.

As regards the disallowance of administrative expenses in respect of the investment yielding exempt income the computation made under Rule 8D cannot exceed the total allocable expenditure for earning the exempt income debited the P&L Account. Accordingly, th .....

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andis to this assessment year as well.

Disallowance of expenses incurred on DRUPA exhibition - Held that:- Here is a case in which expenditure is incurred in the revenue field, though the occasion for incurring such an expenditure comes only once in four years, and the period of its benefit cannot be ascertained with any reasonable degree of certainty. Unless even the precise period of benefit ca be reasonably ascertained, there cannot be any occasion for spreading over the expenditur .....

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unt being reimbursement of expenses incurred by subsidiary of the Appellant - non deduction of tds - Held that:- The law in this regard is now well settled in the case of G E Technology Centre Ltd Vs CT [2010 (9) TMI 7 - SUPREME COURT OF INDIA ], and unless the payment is shown to have an embedded income, no tax deduction requirements under section 195 come into play. There is nothing on record to show taxability of these payments. The subsidiary does not have a PE in India, and, therefore, the .....

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er, is also thus legally unsustainable. Thus the disallowance is devoid of legally sustainable basis - Decided in favour of assessee

Disallowance of foreign currency transaction loss under section 43A - Held that:- As pointed out by the CIT(A), similar disallowance was confirmed by the DRP for the assessment year 2010-11 which has already come up for scrutiny before a coordinate bench of this Tribunal. On our perusal of the order dated 16th September 2015, however, we did not find any .....

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s in the other assessment years and such arguments as the assesse may take before him. All issues, including the issue of consistency, the issue of additional depreciation and the impact of ASS 11, are left open. The CIT(A), while so deciding the matter afresh, will give yet another opportunity of hearing to the assessee and shall decide the matter by way of a speaking order, in accordance with the law, on all the points raised by the assessee.

Interest under section 234C - Held that: .....

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sed by the learned CIT(A) in the matter of assessment under section 143(3) r.w.s. 144C(4) r.w.s. 92 CA of the Income Tax Act, 1961 ( the Act hereinafter) for the assessment year 2009-10. 2. In the first ground of appeal, the assessee has raised the following grievance: 1. Adjustment of ₹ 1,35.05,896 on account of interest on loans advanced to Associated Enterprise (AE) The learned CIT (A) has erred in upholding the action of the Deputy Commissioner of Income-tax - Circle 3(2) (hereinafter .....

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the addition on account of interest on loan given by Appellant to its AE, without appreciating the fact that the Appellant has charged interest at 5% p.a. [6 months LIBOR + 200 bps] on the advances given to the AE based on the internal comparable available; 1.3 in considering the yield method while determining the ALP of the interest to be charged on loan advanced to AE by assigning different ratings to the Appellant and its AE (basis of the CRISIL ratings) without considering the fact that the .....

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ppellant itself and hence, is a shareholder activity; 1.6 Without prejudice to above, in not providing the benefit of the variation of 5 percent from the arithmetic mean as provided in the proviso to Section 92C(2) of the Act, while making the adjustment to the value of international transactions of the Appellant. 3. The assessee before us is a domestic company engaged in the business of manufacturing of web offset printing machineries, which are generally used for printing of newspapers, and th .....

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much as these loans were finally converted into equity in the financial year 2011-12. These loans were granted on interest computed at the rate of six months LIBOR plus 200 bps, and it was benchmarked, under internal CUP, on the basis of assessee s borrowing from State Bank of India which were used in making such advances to the subsidiary. During the course of proceedings before the Transfer Pricing Officer, however, this benchmarking was rejected and the TPO proceeded to adopt the rate of 17.2 .....

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d the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 5. Learned representatives fairly agree that this issue is covered, in assessee s own case for the assessment years 2008-09 and 2010-11, in favour of the assessee. Vide order dated 16th September 2015 and following another decision in assessee s on case for the assessment year 2008-09, a coordinate bench of this Tribunal, has decided the issue in favour of .....

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r, the TPO has arrived at ALP 14.736% by taking the interest rate based on average yield rate of DB rated points based on data collected from CRISIL. The DRP has reduced the said interest rate by holding that domestic cost of borrowing + mark-up of 3% should be applied which works out 9.90%. The applicability of interest rate based on LIBOR had come-up for consideration before the Tribunal in the case of the assessee in AY 2008-09 wherein, the Tribunal relying upon the decision of the Co-co-ordi .....

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+2% as Arm s Length and, therefore, no adjustment is called for. Thus, ground no. 1 as raised by the assessee is treated as allowed. 6. We see no reasons to take any other view of the matter than the view so taken by the coordinate benches. In any case, another coordinate bench of this Tribunal, in the case of UFO Movies India Ltd Vs ACIT [(2016) 66 taxman.com 120 (Delhi Tribunal)] has observed as follows: 5. We have noted that there is no dispute that the LIBOR rate, so far as the relevant prev .....

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lending is less than 247 points (i.e.700-453) above the LIBOR rate, the transaction entered into by the assessee with its subsidiary cannot be said to be at less than arms length price. The Transfer Pricing Study filed by the assessee, however, does not throw much light on this aspect of the matter beyond stating, in rather vague terms, that "a study revealed that around 100 basis points increase in the LIBOR rate is considered appropriate for lending to corporates", and that "th .....

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arm's length price, and it is an old matter. It is, therefore, worth exploring whether, even within the limitations of somewhat sketchy information available on the facts of this case, the matter can be decided one way or the other rather than sending it back to the TPO for fresh adjudication. 7. While exploring such possibilities, it will be useful to take note of the fact that in the case of Bharti Airtel Ltd. v. Addl. CIT [2014] 64 SOT 50 (URO)/43 taxmann.com 50 (Delhi), and a coordinate .....

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rmation gathered from websites of financial institutions which, according to him, states that, "for the foreign currency denominated term loans, the maximum rate of interest is 4% over 6 months LIBOR", and then proceeded to adopt this maximum interest rate as a fair basis for his computing the arm's length price. On the other hand, the assessee has taken two specific comparables of USD borrowings, i.e. L&T and Seri Infrastructure, on the interest rate of LIBOR + 150 bps and 1.4 .....

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of the Assessing Officer cannot be accepted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65. That leaves us with third point of difference between the assessee and the TPO and that is with regard to adjustment of 177.60 points, as balancing figure, towards lack of security and lender not being in the business of borrowing and lending money. This adjustment is justified by the TPO on the following ground: 7.10 Adjustment between a banker and non-banker .....

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. Keeping in view the financial health of the subsidiary, it may not be in a position to offer security. Thus an adjustment is required to be made for not offering a security. This may be computed as the difference between the interest rates prevailing for the bonds of equivalent credit rating of the AE and sovereign government bonds in the country in which the AE is located. This can also be considered as the guarantee cost payable to the taxpayer for giving guarantee for equivalent amount of l .....

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of security and increased risk of single party dealing. This approach overlooks the fact that the assessee has advanced monies to its subsidiaries which are under its management and control- a factor which substantially reduces the risk rather than increasing it. On these facts, it is difficult to understand, much less approve, any rationale for adjustment on account of higher risks. On this point also, we see no merits in the stand of the TPO. (Emphasis, by Underlining, Supplied by us now)' .....

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est rate of Libor had been taken into consideration. There is no material whatsoever, save and except for vague observations about weak financials of the subsidiaries - which are not supported by any specific facts and proceed on sweeping generalizations and assumptions, to reject the comparables taken by the assessee. When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent and legally sustainable reasons for doing so. On this point, therefor .....

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,11,786/- is reasonable and justified and does not call for any interference. (Emphasis, by underlining, supplied by us)" 9. That was also a case in which the lender parent company was taken as the tested party, the loan was advanced to a subsidiary company without much to the credit of its financial credentials and the loan was treated as a high risk loan resulting in adopting the maximum LIBOR rate on which dollar loans were advanced. Yet, Hon'ble High Court specifically approved the .....

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order, investments with serious risks of inadequate safety, investments of high risk, investments of substantial risk and investments of default. The approach adopted by the DRP cannot, therefore, meet our approval. 10. Similarly, the DRPs observation to the effect that "Generally, Indian banks are charging interest rate of 2.5% to 5% above the LIBOR/EURIBOR for foreign currency loans" is not only devoid of any basis but, as our day to day experience on the bench shows, ex facie incorr .....

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In contrast to this comparable case, the interest charged in the present case is 247 points above the LIBOR rate. In the case of Siva Industries & Holdings Ltd. v. Asstt. CIT [2012] 26 taxmann.com 96/54 SOT 49 (Chennai), dealing with the assessment year 2006-07 and while referring to LIBOR at 4.42, interest rate on advances to subsidiary at 6%, which was thus 158 points above the LIBOR rate, was held to be an arms length price. In view of these discussions, it cannot be said that the advanc .....

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h Court, observes that the "assessee advanced monies to the subsidiaries which were under its management and control, which in fact substantially reduced the risk and in these circumstances there was no rationale of adjusting any amount of higher basis", it cannot be open to the transfer pricing authorities to contend that this loan should be treated as a high risk loan on which high interest rate should be charged even within the range of interest rates charged by the Indian banks gen .....

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cted by the coordinate benches/ Respectfully following the views of the coordinate benches, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned arm s length price adjustment of ₹ 1,35,05,896 in respect of interest on loan advanced to the AE. The assessee gets the relief accordingly. 8. Ground no. 1 is allowed. 9. In ground no. 2, the assessee has raised the following grievance: 2. Adjustment of ₹ 2,31,71,100 on account of Corporate Guarante .....

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by its AE from the said bank disregarding the fact that no benefit is accrued to AE; 2.2 in not appreciating the fact that the transaction of bank guarantee is not an International Transaction within the meaning of section 92B and the explanation to Section 92B inserted by Finance Act, 2012 cannot extend scope of transaction retrospectively and accordingly, transfer pricing provisions cannot apply to the said transaction; 2.3 in making adjustment in respect of CG given by the Appellant without a .....

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dice to above, in applying the rate of guarantee commission of 6% on entire amount of guarantee of ₹ 38.165 crores, instead of restricting the adjustment to the extent of amount of loan availed by the AE from the overseas bank during the year; 2.7 Without further prejudice to above, in not providing the benefit of the variation of 5 percent from the arithmetic mean as provided in the proviso to Section 92C(2) of the Act, white making the adjustment to the value of international transaction .....

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DM USA, has availed from ONC Bank National Association, USA. The stand of the assessee was that no income is generated by the issuance of the corporate guarantee, that the issuance of letter of comfort does not have any effect on bearing on the profits, income, losses or assets of the assessee, that no costs have been incurred in providing this letter of comfort and that it does not, therefore, constitute an international transaction under section 92B of the Act. The TPO was, however, of the vie .....

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en [(2009) TCC 563], in support of his stand that the issuance of a corporate guarantee needs to be benchmarked. He was of the view that the credit rating of the MGDM USA was at best BB+, that difference in yields of BB+ and A+ bond is 5.79%, and, therefore, he is adopting 6% as arm s length price of the issuance of this guarantee to the AE s banker in the USA. It was in this backdrop that an arm s length price adjustment of ₹ 2,31,71,100 was made towards guarantee commission. Aggrieved, a .....

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) 34 taxmann.com 19 (Mumbai)] held that the arm s length price for guarantee commission is .5%. Interestingly, that was a case in which, as the coordinate bench itself observed in so many words, …..in this case, the assessee has itself charged 0.5% guarantee commission from its AE, therefore, it is not a case of not charging of any kind of commission from its AE. The only point which has to be seen in this case is whether the same is at ALP or not. . That is quite different a situation so .....

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by Hon ble jurisdictional High Court upon challenge by the revenue on the question of quantum. There was no adjudication by Their Lordships on the question as to whether issuance of corporate guarantee is an international transaction or not. Vide order dated 25th March 2015, the coordinate bench decided the matter in favour of the assessee, on the issue of quantum of commission, by observing that having considered the rival submission as well as relevant material on record, we agree with the alt .....

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ngly, that was the alternate plea raised by the assessee and the Division Bench proceeded to accept the alternate plea without dealing with the main plea at all. The question of dealing with alternate plea arises only when the main plea is rejected. Neither we approve such an approach of the Division Bench in principle, nor…. [Emphasis, by underlining, supplied by us now] . In the light of the guidance of the Special Bench, as above, we would proceed to deal with the main plea first. As f .....

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the Parent ) WITNESSETH: WHEREAS, concurrently herewith the Borrower and the Lender are entering into a Letter Agreement, certain promissory notes and certain other financing documents and security agreements, each dated as of the date hereof (collectively, the Loan Documents ) pursuant to which the Lender has agreed to make certain Loans (as defined in the Loan Documents) to the Borrower in the aggregate principal amount not to exceed $ 14,850,000 at any one time outstanding. WHEREAS, it is a c .....

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for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows : 1. Defined Terms. As used in this Agreement terms defined in the Loan Documents and not otherwise defined herein shall have their defined meanings when used herein. As used herein Deficiency Payment shall mean any payment made pursuant to subsection 2(b). 2. Payments. (a) So long as any of the Loans remains unpaid, the Parent agrees to make Deficiency Payments as provide .....

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mount (ii) at any time a ratio of Funded Debt to EBITDA of less than 2.25 to 1 Funded Debt Ratio Deficiency ) or (iii) a Fixed Charge Coverage Ratio determined at the end of any fiscal quarter (the Test Period ) on a rolling four quarters basis of less than 1.1 to 1 (a Fixed Charge Ratio Deficiency ). Such Deficiency Payments shall be made on the dates, and in the amounts, determined in accordance with subsection 2(b) (b) If there shall be a Funded Debt Ratio Deficiency, a Fixed Charge Coverage .....

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n the event of a Fixed Charge Ratio Deficiency shall be the minimum amount which if added to the numerator in determining the Fixed Charge Coverage Ratio for the Test Period as if it were part of the Borrower s net income for such Test Period would eliminate the Fixed Charge Ratio Deficiency for such Test Period and (C) in the event of any Shortfall shall be an amount equal to the Shortfall Amount) and (ii) the date on which such Deficiency Payment is required to be made (which date shall not be .....

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) The proceeds of all Deficiency Payments shall be paid directly to the Lender. The Lender shall apply all proceeds of Deficiency Payments received by it to the prepayment of principal of the Loans in such order as it may in its sole discretion determine, provided that such prepayment will be without penalty under the Loan Documents. (d) The Parent s obligation hereunder shall not exceed the lesser of (i) $ 14,850,000 or (ii) the amount outstanding under the Loan Documents and shall be a continu .....

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the payment directly to the Lender of the amount of such capital contributions or subordinated loans and agrees that it will accept capital contributions or subordinated loans on any date in n amount equal to the amount of the Deficiency Payment required to be made by the Parent on such date. The Parent expressly agree that its obligations hereunder are not subject to compliance by the Borrower with this Section 3 or any other term of this Agreement and expressly agrees that even if the Borrowe .....

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important to look at what are the obligation of the assessee under this agreement. These obligations include ensuring a minimum tangible net worth at a particular level (US $ 4 million in this case), ensuring a certain level of funded debt to EBITDA, (at 2.25 in the present case) and ensuring a fixed charges coverage ratio at a certain level (at 1:1.1 in this case). The AE of the assessee is a wholly owned subsidiary of the assessee, and as an owner of the AE, it is obligation of the assessee to .....

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2016) 176 TTJ 8 (Ahd)] wherein it is, inter alia, observed as follows: 21. It is only elementary that the determination of arm's length price, under the scheme of the international transfer pricing set out in the Income-tax Act, 1961, can only be done in respect of an 'international transaction'. Section 92(1) provides that, "(a)ny income arising from an international transaction shall be computed having regard to the arm's length price". In order to attract the arm' .....

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or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and 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 .....

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ed in substance between such other person and the associated enterprise. Explanation : - For the removal of doubts, it is hereby clarified that - (inserted by the Finance Act 2012, though with retrospective effect from 1st April 2002) (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, pr .....

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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 research, legal or accounting service; (e) a transaction of business restructuring or reorganisation, .....

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as laboratory notebooks, technical knowhow; (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps , engravings; (d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters; (e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schematics, blueprints, .....

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mineral exploitation rights, easements, air rights, water rights; (j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value; (k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; (l) any other similar item that derives its value from its intellectual content rather than its physical .....

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t. An international transaction can be a transaction of the following types: in the nature of purchase, sale or lease of tangible or intangible property, in the nature of provision of services, in the nature of lending or borrowing money, or in the nature of any other transaction having a bearing on the profits, income, losses or assets of such enterprises An international transaction shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or .....

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t from 1st April 2002 i.e. right from the time of the inception of transfer pricing legislation in India, which was brought on the statute vide Finance Act, 2012. 27. This Explanation states that it is merely clarificatory in nature inasmuch as it is 'for the removal of doubts', and, therefore, one has to proceed on the basis that it does not alter the basic character of definition of 'international transaction' under Section 92B. Clearly, therefore, this Explanation is to be rea .....

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regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by 2 (a) above which covered transactions 'in the nature of purchase, sale or lease of tangible or intangible property'. The only additional expression in the clarification is 'use' as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the " provision of services, including provision of ma .....

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ce or facility provided or to be provided to anyone or more of such enterprises". That leaves us with two clauses in the Explanation to Section 92B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92B, namely borrowing or lending money. 29. The remaining two items in the Explanation to Section 92B are set out in clauses (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization .....

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n 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 reorganizatio .....

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ovision, this exclusion clause is not for "contingent" impact on profit, income, losses or assets but on "future" impact on profit, income, losses or assets of the enterprise. The important distinction between these two categories is that while latter is a certainty, and only its crystallization may take place on a future date, there is no such certainty in the former case. In the case before us, it is an undisputed position that corporate guarantees issued by the assessee to .....

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erred payment or receivable or any other debt arising during the course of business". In view of the discussions above, the scope of these transactions, as could be covered under Explanation to Section 92B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have "a bearing on the profits, income, losses or assets or such enterprise" .....

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39; appearing in Section 92B(1). 32. There can be number of situations in which an item may fall within the description set out in clause (c) of Explanation to Section 92B, and yet it may 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. .....

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tuation, which are, as discussed above, excluded. One may 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 do not cost anything to the person allowing such use of funds. The situations can be endless, but the common thread is that when an assessee extends an assistan .....

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at the transaction is of such a nature as to have "bearing on profits, income, losses or assets" of the enterprise, and there was not even an effort to discharge this onus. Such an impact on profits, income, losses or assets has to be on real basis, even if in present or in future, and not on contingent or hypothetical basis, and there has to be some material on record to indicate, even if not to establish it to hilt, that an intraAE international transaction has some impact on profits .....

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s charging a .5% commission on issuance of corporate guarantees, on behalf of the AEs, and it could not, therefore, be said that the transaction will have no impact on "profits, incomes, losses or assets of such enterprise". This aspect of the matter is clear from an observations in the related Tribunal order, which is reported as Everest Kanto Cylinders Ltd (supra), to the effect that "However, in this case, the assessee has itself charged 0.5% guarantee commission from its AE an .....

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given by the Tribunal, the matter was carried in further appeal, by the Commissioner, before the Hon'ble Bombay High Court which eventually upheld the relief granted by the Tribunal. The appeal before the Hon'ble High Court was by the Commissioner, and not by the assessee, and, therefore, the grievance against the issuance of corporate guarantee being held to be an international transaction could not have come up for consideration. Of course, the assessee had no occasion to challenge th .....

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charged nor any costs are incurred, is an international transaction. In any case, there is nothing in the operative portion which even remotely suggests that Their Lordships had any occasion to address themselves to the question as to whether the issuance of corporate guarantee amounts to international transaction. The operative portion of the judgment is reproduced below for ready reference: "…………In the matter of guarantee commission, the adjustment made by the .....

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ompany that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like .....

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in the ambit of definition of 'international transaction' under section 92B irrespective of whether or not such transactions have any "bearing on profits, incomes, losses, or assets of such enterprises". Revenue, therefore, does not derive any help from the said decision. 26. Coming to Hon'ble Bombay High Court in the case of Vodafone India Services (P.) Ltd. (supra), which has been relied upon by the learned Departmental Representative, we find that the operative portion o .....

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fect of the amendment would have to be considered. It cannot be brushed aside. 214. Section 2(47), as amended, even on a cursory glance raises various issues. It is necessary to note four preliminary aspects of Explanation 2 to section 2(47). Firstly, as the opening words, For the removal of doubts it is hereby clarified that …...", indicate it is a clarificatory amendment. Secondly, it is an inclusive definition as is evident from the words "transfer" includes ". Thir .....

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irect. (b) Absolute or conditional. (c) Voluntary or involuntary. (d) By amendment or otherwise. (iv) A non-obstante provision regarding the nature of a transfer. If an act, arrangement, transaction etc. constitutes a transfer as defined in the section it would be so notwithstanding the transfer of rights having been categorised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. 216. Two aspects of a transf .....

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e or conditional, voluntary or involuntary. It may be by way of an agreement or otherwise. Further, the concluding words constitute a non-obstante provision. It provides that the transfer contemplated therein would be notwithstanding that it has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. It would be evident, therefore, that a lot more must now be seen and considered than before wh .....

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n of the clauses thereof without the aid of any other material for interpreting them. Vodafone's case obviously considered the ambit of the term "transfer" prior to the amendment. In the present assessment proceedings, it is the amended definition which would have to be considered. 218. We do not find it either necessary or proper to indicate the application of section 2(47) as amended to the present proceedings. The application would depend upon the facts on record or those may be .....

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t, as always intended by the Parliament. On the other hand, it may be equally open to the Revenue to contend that certain ingredients of a transfer were not considered by the Revenue itself in the proceedings relating to Vodafone's case on account of the Revenue itself not having appreciated or realized the actual ambit of the term "transfer" which are now clarified by the amendment. Even assuming that the Revenue cannot re-open the Vodafone case, it cannot be barred from relying u .....

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issues. There is no justification for withdrawing the proceedings from the channel provided by the Income-tax Act, bypassing the Tribunal and considering all these questions in exercise of the High Court's extraordinary jurisdiction under Article 226.' (Emphasis supplied) 27. Revenue's emphasis is on the last two sentences in paragraph No 213 which state that "The effect of the amendment would have to be considered. It cannot be brushed aside" but in doing so what it overlo .....

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ary jurisdiction under Article 226". When Their Lordships have made it clear that they would not like to bypass the channels under the Income-tax Act and proceed to decide these issues in writ jurisdiction under article 226, there cannot obviously be any question of Their Lordships deciding the matter one way or the other. Any observations made by Their Lordships, while declining to decide the matter in writ jurisdiction, cannot be treated as decisive of the issue on merits. While it is tru .....

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e before us, or on the scope of the international transaction, but in respect of connotations of 'transfer'. As learned counsel rightly contends, in the light of Hon'ble Bombay High Court's judgment in the case of Sudhir Jayantilal Mulji (supra) "ratio of a decision alone is binding, because a case is only an authority for what it actually decides and not what may come to follow from some observations which find place therein". In view of these discussions, the reliance .....

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Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court" Their Lordships further noted that "A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or s .....

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not even fall to be answered in that judgment." That precisely, however, has been the approach of the revenue authorities in placing reliance on Vodafone India Services (P.) Ltd. (supra) decision. We reject this approach. 28. For the reasons set out above, learned Departmental Representative's reliance on Hon'ble Bombay High Court's judgments in the cases of Everest Kanto (supra) and Vodafone India Services (supra) is wholly misplaced and devoid of any merits. As for coordinate .....

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ring on the profits of the assessee, clearly donot apply on this case. We, therefore, reject the reliance on these decisions as devoid of legally sustainable merits. 29. Let us now deal with the reliance placed by the revenue authorities on GE Capital's case by the Tax Court of Canada. In the DRP's order, a reference is made to well known Canadian decision in the case of GE Capital Canada (supra). The said case, to quote the words of the DRP, "also shows that the group company issui .....

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tion for the risk it incurs" and concluded that "following the above discussions, an arm's length guarantee fees is typically required to be determined by establishing a range of fees that the guarantor would, at least, want to receive and the fees that the guaranteed group company would be willing to pay depending on the prevailing conditions within financial markets in practice". 30. However, while dealing with this aspect of the matter, it is necessary to bear in mind the f .....

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enefit to the assessee, in obtaining the said guarantee. Aggrieved by denial of deduction, assessee carried the matter in appeal before the Canadian Tax Court, and the plea of the assessee was eventually upheld. It is also interesting to note that as a sequel to this Tax Court of Canada decision, the transfer pricing legislation was amended, to bring greater clarity on the issue and as a measure of abundant caution, and section 247 (7.1), granting specific exemption to guarantee fees, was introd .....

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the nonresident person is a controlled foreign affiliate of the parent for the purposes of section 17 throughout the period in the year during which the particular amount is owing; and (b) it is established that the particular amount would be an amount owing described in paragraph 17(8)(a) or (b) if it were owed to the parent. (http://www.fin.gc.ca/drleg-apl/ita-lrir-dec12-l-eng.pdf) 31. It is also important to bear in mind the fact that, under the Canadian law, the definition of 'internatio .....

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me into play "Where a taxpayer or a partnership and a non-resident person with whom the taxpayer or the partnership, or a member of the partnership, does not deal at arm's length" [See Section 247(2) ibid]. When one takes into account these variations in the statutory provisions, it will become very obvious that the provisions of the Indian Income-tax Act, 1961 and the Canadian Income-tax Act, 1985 are so radically different that just because a particular transaction is to be exami .....

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uch transactions as are "in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises". Our transfer pricing provisions, perhaps being in the quest of comprehensive coverage, have ended up in a limited scope of the transactions being covered by the arm's length price adjustments for transfer pricing. In any e .....

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hich make this decision wholly irrelevant in the present context but suffice to say that relevant legal provisions and context being radically different, the reliance of this decision must be rejected for this short reason alone. 32. As we take note of the above legal position in Canada, it is appropriate to take note of the concept of 'shareholder activities' in the context of corporate guarantees which provides conceptual justification for exclusion of corporate guarantees, under certa .....

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the active business operations of those affiliates". As to what could be conceptual support for such an exclusion, we find interesting references in a discussion paper issued by the Australian Tax Officer in June 2008 and titled as "Intra-group finance guarantees and loans" (http://www.transferpricing.com/pdf/Australia_Thin%20Capitalisation.pdf). The fact that this discussion paper did not travel beyond the stage of the discussion paper is not really relevant for the present purp .....

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wings it needs. Where such a guarantee is given it compensates for the inadequacies in the financial position of the borrower; specifically, the fact that the subsidiary does not have enough shareholders' funds. ..... 103. It would not be expected that a company pay for the acquisition of the equity it needs for its formation and continued viability. Equity is generally supplied by the shareholders at their own cost and risk. 104. Accordingly to the extent that a guarantee substitutes for th .....

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the financial position of the borrower; specifically, the fact that the subsidiary does not have enough shareholders' funds". There can be number of reasons, including regulatory issues and market conditions in the related jurisdictions, in which such a contribution, by way of a guarantee, would justify to be a more appropriate and preferred mode of contribution vis-a-vis equity contribution. It is significant, in this context, that the case of the assessee has all along been, as noted .....

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vity is not alien to the transfer pricing literature in general. On the contrary, it is recognized in international transfer pricing literature as also in the official documentation and legislation of several transfer pricing jurisdictions. The 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' itself recognizes the distinction between a shareholder activity and a provision for services, when, contrasting the shareholder activity with broader term &q .....

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ing services for particular operations, management or technical advice (trouble shooting) or in some cases assistance in day-to-day management". The shareholder activities are thus seen as conceptually distinct from the provision of services. The issuance of corporate guarantee, as long as it is in the nature of shareholder activity, can not, therefore, amount to a "provision for services". 34. Undoubtedly, pioneering work done by the OECD, in the field of international taxation, .....

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OECD in the field of transfer pricing is no less significant. No matter which part of the world we live in, and irrespective of whether or not that tax jurisdiction is an OECD member jurisdiction, the immense contribution of the OECD, in the field of the transfer pricing as well, is admired and respected. However, the relevance of this work, so far as interpretation to transfer pricing legislation is concerned, must remain confined to the areas which have remained intact from legislative or jud .....

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ernational best practices, we do not quite agree with it inasmuch as, in our considered view, Revenue cannot seek to widen the net of transfer pricing legislation by taking refuge of the best practices recognized by the OECD work. 35. While dealing with "special consideration for intra-group services", the 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' has noted that there are two fundamental issues with respect to the intra-group servi .....

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another group member should depend on whether the activity provides a respective group member with economic or commercial value to enhance its commercial position. This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. If the activity is not one for which the independent enterprise would have been w .....

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activities undertaken in MNE groups. 7.8 Some intra-group services are performed by one member of an MNE group to meet an identified need of one or more specific members of the group. In such a case, it is relatively straightforward to determine whether a service has been provided. Ordinarily an independent enterprise in comparable circumstances would have satisfied the identified need either by performing the activity in-house or by having the activity performed by a third party. Thus, in such .....

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bers even though those group members do not need the activity (and would not be willing to pay for it were they independent enterprises). Such an activity would be one that a group member (usually the parent company or a regional holding company) performs solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder. This type of activity would not justify a charge to the recipient companies. It may be referred to as a "shareholder activity .....

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cases assistance in day-to-day management. 7.10 The following examples (which were described in the 1984 Report) will constitute shareholder activities, under the standard set forth in paragraph 7.6: (a) Costs of activities relating to the juridical structure of the parent company itself, such as meetings of shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board; (b) Costs relating to reporting requirements of the parent company including the conso .....

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Whether these activities fall within the definition of shareholder activities as defined in these Guidelines would be determined according to whether under comparable facts and circumstances the activity is one that an independent enterprise would have been willing to pay for or to perform for itself.' (Emphasis supplied) 36. We have noticed that the 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' specifically recognizes that an activity in t .....

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, it is outside the ambit of transfer pricing adjustment in respect of arm's length price. It is essential to appreciate, at this stage, the distinction in a service and a benefit. One may be benefited even when no services are rendered, and, therefore, in many a situation it's a 'benefit test' which is crucial for transfer pricing legislation, such as in US Regulations 1.482-9(1)(3)(i) which defines 'benefit', form a US Transfer Pricing perspective, as "an activity .....

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e (including knowledge of and ability to take advantage of a particularly advantageous situation or circumstances); and making available to the recipient any property or other resources of the rendered" [Regulation 1.482-9(1)(2)]. The issuance of guarantees is not within the ambit of transfer pricing in United States because it is a service but because it is covered by the specific definition discussed above. As a matter of fact, David S Miller, in a paper titled 'Federal Income Tax Con .....

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instruments constitute payment for services39. A guarantor does not arrange financing for the debtor, but merely executes a financial instrument in its favour. 38See. e.g., Centel Communications Co. v. Commissioner, 92 T.C. 612, 632 (1989), aff d, 920 F2d 1335 (7th Cir. 1990); Bank of Am. v. United States, 680 F.2d 142, 150 (Cl. Ct. 1982). The Service's current position on the characterization of guarantee fees as payment for services under section 482 is inconsistent with its treatment of g .....

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f the activities. While the group entity is thus indeed benefited by the shareholder activities, these activities do not necessarily constitute services. There is no such express reference to the benefit test, or to the concept of benefit attached to the activity, in relevant definition clause of 'international transaction' under the domestic transfer pricing legislation. As we take note of these things, it is also essential to take note of the legal position, in India, in this regard. N .....

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certainly soften the rigour of this extremely drastic provision and bring it more in conformity with logic and equity". However, Their Lordships declined to do so on the ground that "There is no scope for importing into the statute the words which are not there. Such importation would be not to construe but to amend the statute". Their Lordships noted that "Even if there be casus omissus, the defect can be remedied only by legislation and not by judicial interpretation" .....

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One more thing which is clearly discernable from the above discussions is that the tests recognized by these guidelines are interwoven twin tests of benefit and arm's length. Benefit test implies the recipient group member should get "economic or commercial value to enhance its commercial position". The benefit test is interlinked with the an arm's length test in the sense that it seeks an answer to the question whether under a similar situation an independent enterprise would .....

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nding of its own and is inadequately capitalized, none will guarantee financial obligations of such a subsidiary. 39. The issuance of financial guarantee in favour of an entity, which does not have adequate strength of its own to meet such obligations, will rarely be done. The very comparison, between the consideration for which banks issue financial guarantees on behalf of its clients with the consideration for which the corporates issue guarantees for their subsidiaries, is ill-conceived becau .....

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ce of a transaction which cannot take place in arm's length situation. The motivation or trigger for issuance of such guarantees is not the kind for consideration for which a banker, for example, issue the guarantees, but it is maximization of gains for the recipient entity and thus the MNE group as a whole. In general, thus, the consideration for issuance of corporate guarantees are of a different character altogether. 40. At this stage, it would appropriate to analyze the business model of .....

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that bank has to be very sure of the business or individual to whom the bank guarantee is being issued. So, banks run risk assessments to ensure that the guaranteed sum can be retrieved back from the business. This may require the business to furnish a security in the shape of cash or capital assets. Any entity that can pass the risk assessment and provide security may obtain a bank guarantee. The consideration for the issuance of bank guarantee, so far as a banker is concerned, is this. When t .....

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situation in which there is no underlying assets which can be realized by the bank or there are no deposits with the bank which can be appropriated for payment of guarantee obligations, the banks will rarely, if at all, issue the guarantees. Of course, when a client is so well placed in his credit rating that banks can issue him clean and unsecured guarantees, he gets no further economic value by a corporate guarantee either. Let us now compare this kind of a guarantee with a corporate guarantee .....

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ry of guarantee has no financial means to reimburse it for the defaulted guarantee amounts, when invoked, the group entity will issue the guarantee nevertheless because these are compulsions of his group synergy rather than the assurance that his future obligations will be met. We see no meeting ground in these two types of guarantees, so far their economic triggers and business considerations are concerned, and just because these instruments share a common surname, i.e. 'guarantee', the .....

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new company, the parent company would generally be regarded as providing a service to the group member", it is also to be clear that when the corporate guarantees are issued for the purpose of subsidiaries raising funds for acquisitions by such subsidiaries, these guarantees will be deemed to be services to the subsidiaries, and, as a corollary thereto, when corporate guarantees are issued for the subsidiaries to raise funds for their own needs, the corporate guarantees are to be treated a .....

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bsidiaries from these banks. The guarantees were prima facie in the nature of shareholder activity as it was to provide, or compensate for lack of, core strength for raising the finances from banks. No material, indicating to the contrary, is brought on record in this case. Going by the OECD Guidance also, it is not really possible to hold that the corporate guarantees issued by the assessee were in the nature of 'provision for service' and not a shareholder activity which are mutually e .....

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241/209 Taxman 200/24 taxmann.com 199 (Delhi), a recharacterization of a transaction is indeed permissible, inter alia, in a situation "(i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner". The case of .....

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al Enterprises and Tax Administrations. These guidelines give an introduction to the arm's length price principle and explains article 9 of the OECD Model Tax Convention. This article provides that when conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises then any profit which would, but for those conditions, have accrued to one of the enterprises, but, by reaso .....

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s provide for "recognition of the actual transactions undertaken" in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important and are relevant to our purpose. These paragraphs are reproduced below:- "1.36 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent wi .....

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circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and recharacterise it in accordance with its substance. An example of this circumstan .....

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e, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlem .....

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subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement. 1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been structured by t .....

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s lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation .....

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transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner.' 43. It is thus clear that even if we accept the contention of the learned Departmental Representative that issuance of a corporate guarantee amounts to a 'provision for service', such a service needs to be re-characterized to bring it in tune with commercial reality as "arrangements made in relation to the transaction, vi .....

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OECD Guidance on the issue, an explicit support, such as corporate guarantee, is to be benchmarked and, for that purpose, it is in the service category but that occasion comes only when it is covered by the scope of 'international transaction' under the transfer pricing legislation of respective jurisdiction. The expression 'provision for services' in its normal or legal connotations, as we have seen earlier, does not cover issuance of corporate guarantees, even though once a co .....

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ransactions' under section 92B. Of course, once a transaction is held to be covered by the definition of international transaction, whether in the nature of the shareholder activity or quasi-capital or not, ALP determination must depend on what an independent enterprise would have charged for such a transaction. In this light of these discussions, we hold that the issuance of corporate guarantees in question was not in the nature of 'provision for services' and these corporate guaran .....

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rket research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, and scientific research, legal or accounting service or coordination services. As a matter of fact, even in the Explanation to Section 92B- which we will deal with a little later, guarantees have been grouped in item 'c' dealing with capital financing, rather than in item 'd' which specifically deals with 'provision for services'. When the leg .....

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al transaction' in most of the tax jurisdictions. Such a wide definition of services, which can be subject to arm's length price adjustment, apart, "Transfer Pricing and Intra-Group Financing - by Bakker & Levvy" (ibid) notes that "the IRS has issued a non-binding Field Service Advice (FSA 1995 WL 1918236, 1 May 1995) stating that, in certain circumstances (emphasis supplied), a guarantee may be treated as a service". If the natural connotations of a 'service& .....

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ional transactions. That is, in our considered view, purely fallacious logic. In our considered view, under Section 92B, corporate guarantees can be covered only under the residuary head i.e. "any other transaction having a bearing on the profits, income, losses or assets of such enterprise". It is for this reason that Section 92B, in a way, expands the scope of international transaction in the sense that even when guarantees are issued as a shareholder activity but costs are incurred .....

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in the process, he overlooks is that Section 92B(1) specifically covers sale or lease of tangible or intangible property". The expression "bearing on the profits, income, losses or assets of such enterprises" is relevant only for residuary clause i.e. any other services not specifically covered by Section 92B. It was also contended that, while rendering Bharti Airtel decision, the Delhi Tribunal did go overboard in deciding something which was not even raised before us. In the wri .....

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e up the issue with respect to specific mention of the words in Explanation to Section 92B which states that "For the removal of doubts, it is hereby clarified that (i) the expression "international transaction" shall include…….. (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 du .....

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der this Explanation, five categories of transactions have been clarified to have been included in the definition of 'international transactions'. The first two categories of transactions, which are stated to be included in the scope of expression 'international transactions' by virtue of clause (a) and (b) of Explanation to Section 92B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway cov .....

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ch, legal or accounting service" which are anyway covered in "provision for services" and "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 anyone or more of such enterprises ". That leaves us with two clauses in the Explanation to Sect ion 92B which are not .....

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g a bearing on profits, incomes, losses, or assets of such enterprises". It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92B, the transactions should be such as to have bearing 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 tr .....

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that while impact on " profit, income, losses or assets" is sine qua non, the mere fact that impact is not immediate, but on a future date, would not take the transaction outside the ambit of 'international transaction'. It is also important to bear in mind that, as it appears on a plain reading of the provision, this exclusion clause is not for "contingent" impact on profit, income, losses or assets but on "future" impact on profit, income, losses or asset .....

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l financing transactions, as could be covered under Explanation to Section 92B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have "a bearing on the profits, income, losses or assets or such enterprise". This precondition about impact on profits, income, losses or assets of such enterprises is a precondition embedded in Section 92B .....

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ly a hypothetical situation, which are, as discussed above, excluded. When an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction un .....

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y the assessee company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. In our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the Bank or .....

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al position and we are bound by the esteemed views of the coordinate bench. We are, therefore, of the opinion that the Explanation to Section 92B did indeed enlarge the scope of definition of 'international transaction' under section 92B, and it did so with retrospective effect. If, for argument sake, it is assumed that the insertion of Explanation to Section 92B did not enlarge the scope of definition, there cannot obviously be any occasion to deviate from the decision that the coordina .....

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drawn into that controversy either. On the issue of implementing the amendment in transfer pricing law with retrospective effect, in the case of Bharti Airtel Ltd. (supra), a coordinate bench had observed as follows: "34. There is one more aspect of the matter. The Explanation to Section 92B has been brought on the statute by the Finance Act 2012. If one is to proceed on the basis that the provisions of Explanation to Section 92B enlarges the scope of Section 92B itself, even as it is modes .....

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se norms cannot be given effect from a date earlier than the date norms are being introduced. However, as we have decided the issue in favour of the assessee on merits and even after taking into account the amendments brought about by Finance Act 2012, we need not deal with this aspect of the matter in greater detail." 48. In the present case, we have held that the issuance of corporate guarantees were in the nature of shareholder activities- as was the uncontroverted claim of the assessee, .....

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s, income, losses or assets", it did not constitute an international transaction, under section 92B, in respect of which an arm's length price adjustment can be made. In this view of the matter, and for both these independent reasons, we have to delete the impugned ALP adjustment. The question, which was raised in Bharti Airtel's case (supra) but left unanswered as the assessee had succeeded on merits, reamins unanswered here as well. However, we may add that in the case of Krishnas .....

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his Tribunal, in the case of Channel Guide India Ltd. v. Asstt. CIT [2012] 139 ITB 49/25 taxmann.com 25 (Mum.), held that even though the assessee had not deducted the applicable tax at source under section 195, the disallowance could not be made under section 40(a)(i) since the taxability was under the provisions which were amended, post the payment having been made by the assessee, with retrospective effect. All this only shows that even when law is specifically stated to have effect from a pa .....

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herein Hon'ble Delhi High Court confirmed the action of the Tribunal in holding that the provision, though stated to be effective from 1st April 2013 must be held to be effective from 1st April 2005. Whether such an exercise can be done in the present case is, of course, something to be examined and our observations should not be construed as an expression on merits of that aspect of matter. Given the fact that the assessee has succeeded on merits in this case, it would not really be necessa .....

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which had come up for consideration for the first time. In effect, therefore, there was no conflict on this issue of and the other issues, given decision on the said issue, were wholly academic. It cannot be open to refer the academic questions to the special bench. No doubt, some decisions of the coordinate benches which have reached the different conclusions. There is, however, no conflict in the reasoning. Four Soft Ltd. decision (supra) had decided the issue in favour of the assessee but tha .....

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on, such cases are completely distinguishable as discussed above. In Prolific' Corp Ltd. case (supra), as indeed in any other case so far, it was not the case of the assessee that corporate guarantees are quasi-capital, or shareholder activity, in nature, and, for that reason, excludible from chargeable services, even if these are held to be services in nature. That plea has been specifically accepted in the present case. Therefore, the question whether issuance of corporate guarantee per se .....

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CIT [2005] 4 SOT 84 (Mum.) and following the Full bench decision of Hon'ble AP High Court in the case of CIT v. BR Constructions [1993] 202 ITR 222/[1994] 73 Taxman 473 (AP), a decision disregarding an earlier binding precedent on the issue is per incurium. Such decisions cannot be basis for sending the matters to special bench since occasion for reference to special bench arises when binding and conflicting judicial precedents from coordinate benches come up for consideration. That was not .....

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50. In the light of the detailed discussions above, and for the detailed reasons set out above, we uphold the grievance raised by the assessee. The impugned ALP adjustment of ₹ 2,23,62,603, thus stands deleted. As we do so, however, we must add that, in our considered view, the way forward, to avoid such issues being litigated and to ensure satisfactorily resolution of these disputes, must include a clear and unambiguous legislative guidance on the transfer pricing implications of the cor .....

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to a reasonable cause. When judicial calls on the complex transfer pricing issues are to be taken, utmost clarity in the legislative framework and a comprehensive analysis of relevant facts, in the transfer pricing documentation, are basic inputs. Unfortunately, both of these things leave a lot to be desired. We can only hope, and we do hope, that things will change for better. 14. We are in considered agreement with the views so expressed by the coordinate bench. Learned Departmental Represent .....

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cisions of this Tribunal, in the case of Everest Kanto Cylinders Ltd Vs DCIT [(2012) 34 taxmann.com 9 (Mum)] and Mahindra & Mahindra Ltd Vs DCIT [2012- TII-70-ITAT-Mum], which were not considered by the Bharti Airtel decision. Our attention is also invited to the rectification petition filed by the Assessing Officer, which is said to be pending for disposal before the Tribunal. We donot find merits in any of these pleas. Mahindra & Mahindra decision (supra) was passed on 6th June 2012, t .....

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n in existence. As for the Everest Kanto decision (supra), the issue was decided against the assessee as, to borrow the words of the coordinate bench, Here in this case, it is undisputed that the assessee in its T.P. Study Report and also the TPO, have accepted that it is an international transaction and CUP is the most appropriate method for benchmarking the charging of guarantee fee , and, it was for this short reason that the matter was decided against the assessee. The co-ordinate bench had .....

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artmental Representative is indeed right, that is a case in which the assessee did infact recover charges, which included more than the cost incurred, from the beneficiary, and, as such, it clearly had an impact on the profits of the assessee. That is a case distinct from the present situation in which there is no impact on the profits or losses or assets or income of the assessee. In Advanta decision (supra), this aspect of the matter and the distinguishing feature has been discussed at conside .....

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of Bharti Airtel being on its own peculiar facts, there can be no denial of this position but that does not mean that the so far as issues of general application are concerned, the stand of the Tribunal cannot hold good. Learned Departmental Representative then takes us through the Explanation to Section 92 B to explain its true scope and through Bharti Airtel decision as to how fallacious is its logic. Its emphasized that the impact of issuance of bank guarantees, on the profits, income, losses .....

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ncome, losses or assets of the entity, which is beneficiary of the guarantee, is also important. It is pointed out that Bharti Airtel decision has examined this aspect only from the point of view of the entity issuing the guarantee and that has also been decided wrongly. As for these issues being raised by the learned Departmental Representative, suffice to say that even if reasoning adopted by Bharti Airtel decision is incorrect, it is not for us to examine that aspect of the matter. Now that t .....

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, in our humble understanding, no impact on the same as long as it is issued without a consideration and as long as the guarantee is not invoked by the beneficiary. To treat this phrase as implying a benefit test, will, in our considered view, stretching the things too far. The benefit test, as we see it, does not find place in the statute as yet. We are, therefore, not swayed by the arguments, though extremely well researched and thought provoking, of the learned Departmental Representative- pa .....

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the corporate guarantee does not constitute an international transaction under section 92 B of the Act. In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that the arm s length price adjustment of ₹ 2,31,71,100 is unsustainable in law. We, therefore, direct the Assessing Officer to delete the same.As the basic plea of the assessee has been upheld, we see no need to deal with the alternate pleawhich, given the fact that the assessee ha .....

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er section 14A of the Act by directing the learned AO to dispose of rectification application, instead of deciding the issue himself; 3.2 Without prejudice to above, in not excluding investments in Growth scheme mutual funds, income from which is chargeable to tax while computing disallowance under section 14A of the Act r.w Rule 8D(2)(ii),(iii) of the Income tax Rules, 1962 19. Learned representatives fairly agree that this issue is also covered, in favour of the assessee, inasmuch as investmen .....

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idend income from the investment in shares and mutual funds and also given the working of disallowance u/s 14A on account of interest expenditure, therefore, so far as the disallowance u/s 14A is concerned, it is not the case of the assessee that no expenditure on account of interest expenditure has been incurred. Further the activity of the investment is stated to have been looked after by the Finance Department of the assessee along with the accounts and finance, therefore, there may not be a .....

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from the foreign companies is taxable. However, the growth mutual fund does not yield any dividend/exempt income, therefore, the provisions of section 14A would not apply on the investment in growth mutual funds. A similar view was taken by the Co-ordinate Bench of this Tribunal in the case of Everest Kanto Cylinders Ltd. (supra) in para 4 as under:- 4. Before us, the Ld. Authorised Representative of the assessee has submitted that up to the A.Y. 2007-08, the Tribunal has held that the assessee .....

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Officer on the total investment which included investment mode in the mutual funds with growth scheme does not yield any dividend income. Therefore, the id. Authorized Representative has submitted that no fresh investment was made for the A.Y. 2009-10 and accordingly no disallowance can be made on account of interest expenditure u/s 14A of the income Tax Act. As far as the disallowance of administrative expenses is concerned, he has submitted that out of ₹ 92.74 crores, investment of ͅ .....

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quot; 7. As regards the disallowance of administrative expenses in respect of the investment yielding exempt income the computation made under Rule 8D cannot exceed the total allocable expenditure for earning the exempt income debited the P&L Account. Accordingly, the Assessing Officer is directed to reconsider the disallowance u/s 14A by excluding the investment in the Growth mutual funds scheme and further to earmark and identify the item of expenditure debited by the assessee in the P& .....

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above. 23. In ground no. 4, the assessee has raised the following grievance: 4. Disallowance of expenses of ₹ 2,99,79,357/- incurred on DRUPA exhibition The learned CIT (A) has erred in upholding the action of the Deputy Commissioner of Income-tax - Circle 3(2) (hereinafter referred to as the 'AO')/ Deputy Commissioner of Income-tax (Transfer Pricing) - 1 (9) (hereinafter referred to as TPO ): 4.1 in disallowing expenses incurred for DRUPA Exhibition - Germany (2008) amounting to .....

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ng and participating in an Drupa 2008- a trade exhibition which takes place every four years in Germany. The Assessing Officer was of the view that the expenditure so incurred is not a purely revenue expenditure inasmuch as the benefit from participation in this exhibition is availed for several years. The assessee s explanation was that it is a revenue expenditure in nature, incurred wholly and exclusively for the purposes of business, not being in the nature of a capital expenditure, and, as s .....

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Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is not satisfied and is in further appeal before us. 26. 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. 27. We have noted that there is no dispute about bonafides of the expenditure or even the admissibility as deduction in respect of this expenditure. The only reason for disallowance is .....

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mplicity, or, to put it bluntly, naivety, of the approach. A participation in the trade exhibition or trade fair is in the nature of sale promotion or marketing expenses, which is a routine activity for smooth running of a business and integral part of any business. There is no, and there cannot be any, dispute on the fundamental position that the expenditure in participation in a trade exhibition is in the nature of sale promotion expenses and should be admissible as such under section 37(1). T .....

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at it is a capital expenditure; all that is claimed is that since benefit of expense spreads over four years, the expense should be amortized over a period of four years. That is not a legally sustainable proposition as the very concept of deferred revenue expenditure is somewhat alien to the income tax law and as is clearly evident from the following observations made by Hon ble Gujarat High Court in the case of DCIT vs Core Healthcare Ltd [(2009) 308 ITR 263 (Guj)]: 14. In relation to the firs .....

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he IT Act is concerned, there is no such category of deferred revenue expenditure. Similarly, making of an entry or absence of an entry does not determine the allowability or otherwise of the item of expenditure and the same cannot be considered to be a factor adverse, if the expenditure is otherwise of allowable nature. Every expenditure incurred by a business concern, if incurred for the purposes of business, is bound to result in some benefit, direct or indirect, immediate or after some time, .....

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and inaugurated. It has been held by Allahabad High Court that there is no proposition that the amount spent in a special campaign of advertisement must necessarily be capital expenditure. [Emphasis, by underlining, supplied by us] 28. No judicial precedent to the contrary has been brought to our notice. 29. The legal position is thus well settled that ordinarily, and as a rule, revenue expenditure which is incurred wholly and exclusively for the purpose of business, must be allowed in its entir .....

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benefit is known right at the stage of incurring the expenditure, and the nexus between the period of benefit and the expenditure is so direct that any other view of the matter will result in distorted picture in the books of accounts. We are not dealing with such a situation right now. Here is a case in which expenditure is incurred in the revenue field, though the occasion for incurring such an expenditure comes only once in four years, and the period of its benefit cannot be ascertained with .....

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school of thought. 32. In the light of the above discussions, as also bearing in mind entirety of the case, we are of the considered view that entire expenditure on participation in Drupa 2008 should be allowed as revenue expenditure. Accordingly, the disallowance of Rs ₹ 2,99,79,357 stands deleted. However, in the event of the Assessing Officer having allowed the deduction for this amount spread over three subsequent assessment years, the deduction, to that extent, shall also withdrawn. .....

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as TPO ): 5.1 in upholding disallowance of reimbursement of expenses of Rs.,1,21,27,829 to the foreign subsidiary MDGM which was incurred wholly and exclusively for the purpose of business and hence allowable under section 37(1) of the Act; 35. So far as this disallowance is concerned, the relevant material facts are like this. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has reimbursed its US subsidiary, DGM US, for certain marketing exp .....

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f the view that the fact that expenditure was claimed to be in the nature of reimbursement would not affect the tax deduction at source liability. Aggrieved by the disallowance of ₹ 1,21,27,829 so made by the Assessing Officer, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is not satisfied and is in appeal before us. 36. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of t .....

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out of tune with the ground realities of group synergy and commerce but also amateurish. It is important to bear in mind the fact that there is specific marketing agreement that the assessee has entered into with the subsidiary, a copy of which is placed before us in the paperbook at pages 272 to 285, and the reimbursements are made in terms of the said agreement. The reimbursement is for salary of one person i.e. Ron Ehrhardt (US $ 1,54,171), who is exclusively engaged in marketing of assessee .....

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n for disallowing the expenses by question commercial expediency, nor can the Assessing Officer raise such issues anyway. As for the tax deduction at source obligations, the requirements of deducting tax at source come into play only when there is an income, taxable in India, embedded in the payments in question. Once the payments are found to be in the nature of reimbursement, without any mark up or income embedded in the same, there cannot any question of treating the same as subject to tax de .....

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tax in India. The payment is not for any services involving a transfer of technology, and, therefore, it cannot be brought to tax as fees for included services. There is no question of the payment being in the nature of royalty . The Assessing Officer has not even made out any case of taxability of the income in question. The disallowance under section 40(a)(i), as made out by the Assessing Officer, is also thus legally unsustainable. 38. In view of these discussions, we are of the considered v .....

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he 'AO')/ Deputy Commissioner of Income-tax (Transfer Pricing) - 1 (9) (hereinafter referred to as TPO ): 6.1 in confirming the adjustment under section 43A of the Act by considering the foreign currency translation loss of ₹ 6,57,75,845/- as capital loss on acquisition of asset instead of considering the same as revenue loss on account of mere restatement of loan liability. 41. The assessee has availed certain foreign currency loans, from Export Import Bank of India (Exim Bank) un .....

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ot be disallowed under section 43A. It was explained by the assessee that the loss on valuation is due to restatement of loan in INRs and not on account of acquisition of assets, and, therefore, Section 43 A does not come into play. The Assessing Officer, however, did not agree. He was of the considered view that even when the payment is made by the other party any loss on foreign exchange related to acquisition of fixed assets would increase the cost of fixed assets, which ultimately lead to in .....

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ntentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 43. We have noticed that, as pointed out by the CIT(A), similar disallowance was confirmed by the DRP for the assessment year 2010-11 which has already come up for scrutiny before a coordinate bench of this Tribunal. On our perusal of the order dated 16th September 2015, however, we did not find any reference to this disallowance. Since it is a factual matter which perme .....

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e before him. All issues, including the issue of consistency, the issue of additional depreciation and the impact of ASS 11, are left open. The CIT(A), while so deciding the matter afresh, will give yet another opportunity of hearing to the assessee and shall decide the matter by way of a speaking order, in accordance with the law, on all the points raised by the assessee. With these directions, the matter stands restored to the file of the CIT(A). 44. Ground no. 6 is thus allowed for statistica .....

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