TMI Blog2016 (9) TMI 146X X X X Extracts X X X X X X X X Extracts X X X X ..... IB/80IC - Held that:- Gain on account of fluctuation in foreign exchange rate is entitled for deduction u/s.80IB of the Act. So, confirming the order of the FAA, issue is decided against the AO. Order of the FAA does not suffer from any legal infirmity as far as claim with regard to insurance receipt is concerned FAA was not justified in denying the 80IB/80IC deduction to the assessee on sale of scrap. Lease rent income of blow moulding machine - Held that:- It is a fact that the machine was not used by the assessee, that it was given to a contractor, that the contractor was performing certain activities that were related to the manufactured goods of the assessee. In our opinion for claiming deduction u/s.80IB/80IC there should be close nexus of the income and the business carried out by an industrial undertaking. Anything and everything indirectly linked to the business of the assessee cannot be held to an eligible activity for claiming deduction. Confirming the order of the FAA, we decide the issue before us, against the assessee. Disallowance made under section 14 A - Held that:- We find that the AO had made a disallowance of ₹ 4.45 lakhs, that the FAA had rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AEs: SN. Nature of transactions FY 2006-07 Method 1. Sale of Bulk coconut oil 185,424,918 CUP 2. Royalty Income 17,359,290 TNMM 3. Interest on loan (received/receivable) 60,068,080 CUP 4. Guarantee fees (received/receivable) 4,726,602 CUP 5. Sale of Finished Goods 97,650,737 TNMM 6. Purchase of Intellectual Property Rights 2,629,000,000 CUP 7. Advances received from M/s. MME 678,561 NA 8. Reimbursement of expenses (received/ receivable) 4,547,145 At Cost 9. Reimbursement of expenses (paid/payable) 560,100 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee 11.93 In view of the above the assessee claimed that the royalty transaction was at ALP. The TPO found that the assessee had entered into agreement with two of its AEs. He tabulated the royalty charge from MBL and MME as under :- MBL MME Rate of royalty on sales made by AEs for Parachute brand @0.5% from 01.4.2006 to 30.9.2006 @1% from 01.10.2006 to 31.3.2007 2.5% for FY 2006-07 Royalty amount charged Rs.48,87,000/- Rs.45,86,000/- He asked the assessee to show cause as to why rate charged to MME and MBL were different for the similar brand and why royalty rate of 2.5% was not used to charge MBL as well. Vide its letter dtd.25.10.10, the assessee filed detailed submission in that regard. After considering the explanation of the assessee, the TPO held that as per the provisions of section 92(1)income arising from IT.s had to be computed having regard to ALP, that no enterprise would charge lower rate of royalty under A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Working Capital LIBOR + 150 bps/6% 1.65 2. M/s. MME, UAE Working Capital 9.5% 4.36 TOTAL 6.01 He called for an explanation in that regard. It was argued that the assessee had obtained a working capital loan in AY.2004-05 of US$2.15million from HSBC @LIBOR + 150 basis points(BPS), that during AY 2005-06 the rate was reduced to LIBOR + 100 bps, that it had charged the same rate, i.e. LIBOR + 150bps on the loans advanced to its AE prior to AY 2006-07, that it had charged interest @ 6% on loans made available to its AE from AY.2006-07 onwards-except the loan given in AY.2006-07 on which interest @ LIBOR + 150 bps was charged to M/s. Sundari LLC, USA, that both the transactions took place at the same period of time and in the same currency i.e. USD, that the loan to AE was secured by all the assets of the AE, that it had not given any security to HSBC banks while obtaining loan from it, that loan taken from HSBC was repaid on 2.2.2006, that as per the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,544 06.10.2006 2,00,000 177 9,214 16.11.2006 1,00,000 136 3,540 06.12.2006 1,00,000 116 3,019 17.01.2007 1,00,000 74 1,926 12.02.2007 1,00,000 48 1,249 Total 524,260/- Arm's length interest to be charged in Rs. @ 45.08 (A) 2,36,32,987/- Amount charged by the assessee (B) 1,65,45,240/- Transfer pricing Adjustment (A-B) 70,87,747/- 2.3. T he TPO found that the assessee had provided Corporate Guarantee(CG) to Citibank (India)so that MBL Industries Ltd.(MBLIL) could avail the credit facility in Bangladesh, that it had also provided CG to ICICI Bank Behrain so that MME could avail the credit facility from ICICI Bank UAE. He found that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MME 87,00,00,000 4.80% 111 1,26,99,616 21,16,603 1,05,83,014 TOTAL 2,83,59,616 47,26,603 2,36,33,014 Accordingly, an adjustment of ₹ 2.36 crores was proposed by the TPO under the head guarantee fees. After receiving order of the TPO, the AO passed the order making addition of all the three proposed additions. 3. A ggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA). It made elaborate submissions before him with regard to royalty. With regard to interest on loans, the assessee submitted, before the FAA, that it had made strategic investment by acquiring 63%equity stake in Sundari LLC, vide purchase agreement dt.26.2.2003, that it increased stake to 75.5% during FY.2004-05, that pursuant to the said agreement it extended revolving credit loan, that the rate of interest charged for loans given, prior to 9.6.2005, wasLIBOR+150bps, that vide amendment dated 9.6.2005 and 29.08. 2005 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t formula adopted for benchmarking suffered from the fact of the rate being charged to one of the AEs of the assessee by it, that, thus, it was a controlled transaction, that for the foreign currency loan the rate applicable should be LIBOR based, that the rate adopted by TPO and consequent bench - marking was not as per law, that there was no independent CUP rate available to benchmark the IT. Accordingly, he considered it reasonable to look into the RBI guidelines that were prevailing in respect of External Commercial Borrowings (ECB). He directed the assessee to provide certain details about ECB. Referring to the Master Circular No.07/2006-07 dated 1.7.2006, of the RBI, he held that rate of interest had to be fixed at 7.4012%. Partly allowing the appeal of the assessee, he restricted the disallowance to ₹ 18.66 lakhs. 4.2. D eciding the issue of guarantee commission, the FAA held that CG was an IT, that the assessee itself had shown the transaction as IT in form 3 CEB, that it had charged GC@0.8% from its AEs, that in the earlie year GC @ 0.8% was accepted by his predecessors. Reversing the order of the TPO/AO, he held that rate of GC adopted by the assessee was justif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e material before us. We find that the assessee had received payments towards brand royalty from two of its AEs, that one was located in Bangladesh and the other was in UAE, that the agreement with the Bangladesh AE was in respect of Parachute, that with the UAE the assessee had entered into agreement in respect to TMs of Parachute as well as of GGN, that MBL would sell pure edible coconut oil as per the agree - ment, that the UAE-AE was allowed to sell hair creams, hair gels hair oil etc., that as per the agreement it would use brand GGN, that there was issue relating to use of controlled transaction for the purpose of comparability, that there was geographical difference, that there was also difference in respect of brands as well as products, that on the same terms and conditions the brand royalty charged by it to MBL had been accepted by the TPO till the AY.2006-07, that during the year there had been increase in the rate of royalty charged to MBL, that it had been increased from 0.5% to 1% w.e.f. 1.10.2006, that the TPO had not specifically rejected assessee s benchmarking, that overall profitability of the assessee was much higher than the arithmetic mean of the comparables. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sure of interest was on the basis leading rate charged by the banks in India. The Assessing Officer passed a draft assessment order in line with the order of the TPO. 4. Being aggrieved, the respondent-assessee carried the draft assessment order to Dispute Resolution Panel (DRP). The DRP enhanced ALP i.e. the interest on loan given by the respondent-assessee to its German Associate Enterprise to 12%. Consequent to the direction of DRP, the Assessing Officer by an assessment order dated 19.9.2011 charged interest of ₹ 1.76 crores on the above account as a part of the respondent assessee s income. 5. Being aggrieved, the respondent-assessee preferred an appeal to the Tribunal. The Tribunal by the impugned order held: (a) that the interests the loan extended by a company or its Associated Enterprise comes within the ambit of International Transaction and the issue to be examined in such a case would be the ALP of such an International Transaction; and (b) with regard to quantum of addition on account of interest by ALP the impugned order held that as the amounts were advanced Associate Enterprises in Germany, the rate of interest is to be determined on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k or a corporate entity as far as GC is concerned. Both have to consider the functions performed, assets employed and risks assumed. In case of default by the borrow - er, the corporate guarantor is exposed to the same risk of a bank. In case of an AE the risk would not be as high as in case of an outsider. We find that the assessee argued that GC was not an IT. In the cases of Siro Clinpharm Private Limited(ITA No.2618 and 2876/2014);Bharti Airtel Limited (43 taxmann.com 150);Micro ink Limited (63 taxmann. com 353), Redington India Ltd. (513/ Mds/2014)it has been held that GC is not an IT. We are reproducing the relevant part of the order of the Bharati Airtel(supra) and same reads as under: 25. An analysis of this definition of ' international transaction' under Section 92 B, as it stood at the relevant point of time, and its break up in plain words, shows the following: 1. An international transaction can be between two or more AEs, at least one of which should be a non-resident. 2. An international transaction can be a transaction of the following types: a. in the nature of purchase, sale or lease of tangible or intangible property, b. in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service which are anyway covered by 2 (b) and 3 above 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 Section 92 B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92 B, namely borrowing or lending money. 29. The remaining two items in the Explanation to Section 92 B are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization, These items can only be covered in the residual clause of definition in international transactions, as in Section 92 B (1), which covers any other transaction having a bearing on profits, incomes, losse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions, as could be covered under Explanation to Section 92 B 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 pre-condition about impact on profits, income, losses or assets of such enterprises is a pre-condition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. The contents of the Explanation fortifies, rather than mitigates, the significance of expression' having a bearing on profits, income, losses or assets' appearing in Section 92 B(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 92 B, 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 Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to proceed on the basis that the provisions of Explanation to Section 92 B enlarge the scope of Section 92 B itself, even as it is modestly described as ' clarificatory' in nature, it is an issue to be examined whether an enhancement of scope of this anti avoidance provision can be implemented with retrospective effect. Undoubtedly, the scope of a charging provision can be enlarged with retrospective effect, but an anti-avoidance measure, that the transfer pricing legislation inherently is, is not primarily a source of revenue as it mainly seeks compliant behaviour from the assessee vis-a-vis certain norms, and these 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 . 35. When it was put to the learned Departmental Representative that there could be a view that issuance of guarantees could be outside the ambit of scope of ' international transaction' itself, he submitted that there are large numbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act only gives an inclusive definition which does not even really attempt to define the expression ' transaction'. It is nobody's case that the relevant legal provisions are in pari materia. We need not, therefore, deal with those foreign judicial precedents. Suffice to say that we have reached our conclusions on the basis of the legal provisions under section 92 B and no judicial precedent, contrary to our understanding of these legal provisions, has been cited before us. There is a decision of the co-ordinate bench in the case of Mahindra Mahindra (supra), referred to in the DRP order, but that decision does not deal with the scope of amended section 92 B and leaves the issue open by stating that post insertion of Explanation to Section 92 B, the matter will have to be examined in the light of the amended law. We have held that even after the amendment in Section 92 B, by amending Explanation to Section 92 B, a corporate guarantee issued for the benefit of the AEs, which does not involve any costs to the assessee, does not have any bearing on profits, income, losses or assets of the enterprise and, therefore, it is outside the ambit of' international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t given any plausible reasoning for making the ad hoc addition. The assessee had filed audited accounts and the auditors had not qualified any item for disallowance out of the Miscellaneous Expenses. The AO had also not rejected the books of accounts of the assessee. It is also not clear from the order that as what was the basis for adopting 10% of the expenditure as not allowable. There is finding to show that the expenditure in question was not incurred wholly and exclusively for the business purposes. We find that the FAA had simply followed the order of his predecessor and had not met any of the arguments advanced by the assessee before him. Therefore, reversing his order, we decide ground no.2 in favour of the assessee. 10. N ext two grounds(GOA3 4)pertain to claims that were made by way of filing revised computation and not by filing revised returns. These claims were about i)reduction of book profit, being depreciation on intangible assets, not charged to profit and loss account, ii)depreciation on non-compete fee treated as capital expenditure in earlier years and reduction of book profit being depreciation on intangible assets not charged to profit and loss account. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f exercise of discretion whether or not to allow an assessee to raise a claim which was not raised when the return was filed or the assessment order was made. As held by the Supreme Court there may be several factors justifying the raising of a new plea in appeal and each case must be considered on its own facts. However, such cases include those, where the ground though available when the return was filed or the assessment order was made, was not taken or raised for reasons which the appellate authorities may consider valid. In other words, the jurisdiction of the appellate authorities to consider a fresh or new ground or claim is not restricted to cases where such a ground did not exist when the return was filed and the assessment order was made. Even assuming that the Assessing Officer is not entitled to grant a deduction on the basis of a letter requesting an amendment to the return filed, the appellate authorities are entitled to consider the claim and to adjudicate the same. It is not necessary that the deduction be allowed only if a revised return of income would have been filed. . From the above, it is clear that the FAA is empowered to entertain the claim made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of rent and storage cost directly identifying product wise and undertaking wise, that rent and storage charges in respect sales division in ratio of turnover of the undertaking to the total turnover of the company were computed. The AO held that such expenses could not be allocated on the basis of ratio of turnover of the undertaking. He further found that the assessee had considered income from by products, sale of scrap and other items, sale of assets, insurance claim and lease rent, while claiming deduction under section 80 IB/80 IC. But, the AO did not agree with the assessee and excluded such income from the profit of the respective undertaking while computing the deduction on the ground that above income could not be said to be arising out of business of the assessee, that though the income was attributable to the business of the assessee it was not derived from the business carried out by it. 12.1. A ggrieved by the order of the AO, the assessee preferred an appeal before the FAA. Before him, it was argued that the assessee had allocated rent and storage expenses on the basis of cost directly identifiable, that common rent and storage expenses were allocated in the ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that his predecessor had accepted the contention of the assessee with regard to rent and storage charges in the earlier years, that the facts for the year under consideration were similar. He directed the AO to follow the orders of his predecessor for the earlier years and allowed the appeal filed by the assessee. With regard to income from sale of by-products and scrap, the FAA held that in the case of Pandian Chemicals Ltd.(270 ITR 448)certain principles were laid down. Relying upon the said judgement, he upheld the order of the AO. Relying upon the judgements of Pfizer Ltd (supra) and Pandian Chemicals Ltd. (supra), the FAA allowed the claim made by the assessee with regard to insurance claim. He further held that lease rent income of blow moulding machine, provided to the sub-contractor, could not be considered to be the income derived from the eligible undertaking, that it was not the case of the assessee that it used the machine directly for purpose of business of eligible undertaking. He also held that receipts arising on account of exchange gain and money received from material return to the vendor were eligible for deduction, that such receipts had arisen ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is aggrieved in respect of income shown under the heads (i)sale of by-products and scrap, (ii) lease rent income of blow moulding machine. 12.3.a. W e find that the AO had allowed the claim of the assessee with regard to rent and storages in earlier years, that he had not brought on record any fact/(s)that could distinguish such facts from the facts of the current year, that the orders of the FAA for the earlier years were not challenged before the Tribunal is also a fact. Considering this if the FAA has allowed the appeal of the assessee, then his order had to be endorsed. Issue regarding rent and storage charges is decided against the AO. 12.3.b. I n the matter of Raghunath Exports Pvt. Ltd.(330 ITR 57)it has been held that surplus realisation due to fluctuation in foreign exchange rates is part and parcel of the export turnover for the purposes of s. 80HHC. Paragraph 12 of the judgment reads as follow: We have considered the contentions of the learned advocates for the parties and checked the records. It is not disputed that tea was exported and payment was received in foreign currency and it is also admitted that when realisation of the export was made ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which has been taken care of by the legislature in the application of the formula which is referred to in subs. (3) of s. 80HHC. The insurance claim for loss of stock-in-trade must stand on the same footing as the income that would have been realized by the assessee on the sale of the stock-intrade. Insurance claim on account of the stock-in-trade does not constitute an independent income or a receipt of a nature similar to brokerage, commission, interest, rent or charges; hence, such a receipt would not be subject to a deduction of ninety per cent under cl. (1) of Expln. (baa) . Considering the above,we are of the opinion that the order of the FAA does not suffer from any legal infirmity as far as claim with regard to insurance receipt is concerned. We are aware that the judgment is about section 80HHC of the Act. But,it is applicable to the provisions of section 80IB/80IC too. Confirming the order of the FAA,we decide this issue also against the AO. 12.3.d. W ith regard to the eligibility of sale proceeds of by products and scrape for the 80IB/80IC deduction,we would like to refer to the case of Sadhu Forging (336 ITR444). In that matter the Hon ble Delhi High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds. Before him, the assessee argued that it had not incurred an expenditure in relation to the dividend income. However, he did not accept the contention of the assessee and disallowed 50% of the dividend income i.e. ₹ 4.45 lakhs under section 14 A of the act. 13.1. D uring the appellate proceedings, before the FAA, the assessee argued that no specific or material expenses were incurred to earn dividend income, that the AO had not brought anything on record to prove that expenses of ₹ 4.45 lakhs were incurred by the assessee. The assessee relied upon the case of Minda Investments Ltd.(52 DTR 1) and Hero Cycles Ltd.(233CTR74). After considering the submission of the assessee and the assessment order, the FAA held that assessee had made some investment against which it had earned an income which was not forming part of the total income, that the provisions of section 14A were clearly applicable in respect of disallowance of corresponding expenditure debited by the assessee in its P L account, that apart from the direct cost that might have been incurred in respect of employee s salary and in the work in the company there would be costs associated with infrastru ..... X X X X Extracts X X X X X X X X Extracts X X X X
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