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2015 (11) TMI 1573 - ITAT MUMBAI

2015 (11) TMI 1573 - ITAT MUMBAI - TMI - Applicability of EURIBOR rate - T.P. Adjustment on account of notional interest - Held that:- We find force in the contention that EURIBOR rate is that at which banks and other large financial institutions deal with each other, inter se. Retail borrower do not get finance at this rate, because lending bank/institution would add some margin/premium to cover their risks/profits, which ranges to be generally between 1 to 2%. But, keeping in view peculiar fac .....

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f corporate guarantee can be determined, keeping in view the actual cost incurred by the AE or as it would have been incurred by the AE with respect to a similar transaction between the AE and any other independent party. But, no information in this regard was available. Thus taking into account all the facts and circumstances as well as submissions made by both the parties before us, and in the interest of justice, we find that this case should be sent back to the file of the TPO. Therefore, we .....

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nt all the judgments available including the judgment of the Tribunal as confirmed by the Hon’ble High Court in the case of Everest Kanto ( 2012 (11) TMI 1099 - ITAT MUMBAI ). Thus, these grounds are allowed for statistical purposes. - Disallowance made u/s 14A r.w.s Rule 8D - Held that:- In our considered opinion there has been lot of judicial development with respect to disallowance u/s 14A, and therefore, we find that the arguments made by the ld. counsel carry weight under the law. This .....

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submissions made before us and before the lower authorities, in support of the propositions argued by him. Thus, after analysing the latest position of law, we find it proper to send this issue back to the file of the AO to re-compute the amount of disallowance after taking into account following directions:- - (i) All the investments made in joint ventures, subsidiaries and other companies as strategic investment, should be excluded for computing the average amount of investment for the pu .....

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here for earning tax free income, than interest paid on such borrowing should be excluded from the amount of interest paid to be considered for computation of disallowance u/s 14A. - ITA No. 774/M/2014 & ITA No.1508/Mum/2014 - Dated:- 18-11-2015 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND ASHWANI TANEJA ACCOUNTANT MEMBER Assessee by : Shri P.J.Pardiwala, Sr. Advocate Revenue by : Shri N.K.Chand (CIT-DR) ORDER PER ASHWANI TANEJA, AM: These cross appeals have been filed by the Assessee and Revenue aga .....

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nd does not require specific adjudication, as the same has been decided while deciding other grounds. 4. Grounds No. 2 to 9:- In all these grounds, only one issue has been raised. The assessee has raised the grievance with regard to the order of the Dispute Resolution Panel (DRP) in confirming the adjustment of ₹ 87,27,27,128/- to the International Transactions pertaining to exports/imports to/from AEs (i.e. Associated Enterprises), mainly, in holding that similar issue was there before th .....

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aining to the exports/imports to/from AEs: Ground No. 2: Erroneous directions of the Hon'ble DRP based on incorrect facts' pertaining to previous assessment years The Hon'ble DRP erred in confirming the adjustment of ₹ 87,27,27,128 to the international transactions pertaining exports/imports to/from AEs by holding that similar issue was before the predecessor DRP for the Assessment Year ('AY') 2007-08 and AY 2008-09; when in fact AY 2009-10 was the first year in which s .....

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on 92C (3) of the Act. Ground No. 4: Erroneous application of Transactional Net Margin Method ('TNMM') at entity level The Hon'ble DRP / Ld. AO / Ld. TPO erred in applying TNMM at entity level to determine the arm's length nature of the international transactions pertaining to the exports/imports to/from AEs. Ground No. 5: Erroneous rejection of transactional profitability analysis undertaken by the Appellant The Hon'ble DRP / Ld.AO / Ld. TPO erred in rejecting the transactio .....

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case and in law, it is submitted that if an adjustment is sought to be made to the price of international transactions, then the adjustment should be made only on a proportionate basis to the extent of value of international transactions. Ground No. 7: Errors in computation of Profit Level Indicator ('PLI') of the Appellant, at entity level. Without prejudice to the above, the Hon'ble DRP / Ld. AO/ Ld. TPO committed errors in computing the PLI of the Appellant at entity level. Groun .....

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. Ground No 9: Rejection of use of multiple year data for comparables The Hon'ble DRP / Ld. AO / Ld. TPO erred in considering the single year data for the comparables i.e. data for Financial Year (FY) 2008-09 only and disregarding multiple year data which was considered by the Appellant in accordance with the provisions of Rule 10B (4) of the Rules. 4.1. During the course of hearing, our attention was drawn by the ld. counsel on the relevant part of the order of the DRP, and argued that the .....

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d of any respect or regard towards the law and is manifestations of casual approach of the DRP, as is sometimes followed in adjudicating the appeals. It was further submitted that this kind of cryptic, non-speaking, casual, presumptuous and factually incorrect order has caused serious hardships to the assessee-company. Our attention was drawn upon the orders of the earlier years to show that no such issue was involved in any of the earlier years. It was also stated by the ld. counsel that a rect .....

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he courtroom, pointing out that the order of DRP is totally misplaced and factually incorrect, and leads us nowhere, then ld. CIT(DR) was not able to point out anything wrong in the submissions of the ld. counsel and therefore, no serious objections were raised by him, if this issue was sent back to the DRP for fresh adjudication. 4.3. We have gone though the order of the DRP and other lower authorities, the submissions made by both the sides as well as material placed before us for our consider .....

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n of the TPO is upheld. " It is noted by us that exhaustive documentation work has been done by the assessee and detailed submissions were made before the DRP, but it is very disappointing to note that such a big issue involving addition of the amount of more than ₹ 87 crores, has been disposed of in such a non-speaking and cryptic manner, and no reasoning, whatsoever, has been given, no facts have been discussed, no comparison with the issue claimed to be involved in the earlier year .....

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from the orders of earlier years while disposing the appeal of this year. It is further noted that the assessee has also submitted a rectification petition dated January 13, 2014 under Rule 13 of the Income Tax (Dispute Resolution Panel) Rules, 2009, requesting for rectification of inadvertent mistake apparent from record in the directions given by the DRP. Relevant portion of the rectification petition is reproduced below:- "All the above grounds were disposed off together by the Hon'b .....

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2009-10 is the first year in which an adjustment to the international transactions pertaining to the exports/imports to/from AEs was made by the Learned Transfer Pricing Officer ('Ld. TPO') and such an adjustment was never made in any of the previous AYs in the assessee's case. In view of this no objections were raised by the assessee before the Hon'ble DRP in AY 2007-08 and 2008-09. A copy of the Hon'ble DRP directions is attached as Annexure 2 and 3, respectively. In light .....

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ons/arguments filed by the assessee company before the DRP for the sake of convenience. It is noted from the facts held on record that the detailed contentions of the assessee were filed with the Hon'ble DRP vide its detailed Objections dated April 26, 2013 and these were discussed in detail during the hearing dated December 9, 2013, held before the DRP. The key contentions put forth by the assessee are encapsulated in brief below: • The Ld. TPO computed the TP adjustment of ₹ 89. .....

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tion keys adopted in respect of sale of finished goods to AEs were submitted to the Ld. TPO (Paper Book Page No. 322 to 325). Further, the copy of audited segmental profitability, certified by an independent auditor, was again submitted to the Hon'ble DRP vide our submission dated December 9, 2013 (paper Book Page No 466 to 477). • The Ld. TPO committed errors in computation of Profit Level Indicator CPU') of comparable companies and erroneously considered certain companies at entit .....

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Hon'ble ITAT in various cases including the jurisdictional Mumbai bench in the case of T. Two International Private Limited vs DCIT (ITA NO.7331/Mum/2011) [Paper Book Page No 56 to 57]. • As regards Objection No. 6, the assessee had filed a rectification application before the Ld. TPO and after considering the rectification order passed by the Ld. TPO (enclosed as Annexure 4), the TP adjustment stands reduced from ₹ 89.94 crores to ₹ 87.27 crores. In the aforesaid petition, .....

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nder these circumstances, we direct the DRP to take up this matter on priority basis and dispose of this issue after giving adequate opportunity of hearing to the assessee, in a detailed, well reasoned and speaking manner. The DRP shall give adequate opportunity of hearing to the assessee, and thereafter it shall adjudicate all the issues as have been raised in grounds no 2 to 9 above, by passing a well reasoned and speaking order, dealing with and giving its findings on all these grounds indivi .....

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hould have charged interest on the international loan extended to its AE. Ground No. 11: Erroneous application of CUP Method for computil1g the arm's length interest rate Without prejudice to the above, the Hon'ble DRP erred in the application of the CUP Method for computing the arm's length interest rate, without actually undertaking any search for comparable uncontrolled transactions and considering the State Band of India's (SBI) Prime Lending Rate (PLR) of 12.25% p. a. as the .....

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for AY 2007-08 and AY 2008-09 respectively." 5.1. These grounds deal with the common issue pertaining to action of the DRP in confirming the action of AO/TPO in making a Transfer Pricing Adjustment of ₹ 77,98,656/- to the income of the assesseecompany, by holding that the assessee should have charged interest on the international loan extended to its A.E. 5.2. During the course of hearing, it was submitted by the ld. counsel of the assessee that no interest was charged by it on the am .....

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ve to be accepted. It was further brought to our notice that this matter was carried upto High Court by the Revenue, and Hon ble High Court upheld the order of the Tribunal and dismissed the appeal of the Revenue. It was further submitted that in AY 2008-09 also, this issue came up again before the DRP, wherein the assessee submitted that the EURIBOR rate was only 5.25% during the relevant period, whereas the assessee itself has charged interest @ 6%, and therefore, no further adjustment was war .....

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h to submit that, it was not mandatory under the law to apply Indian PLR. Therefore, the bench mark of EURIBOR can be adopted. But, these EURIBOR rates are for wholesale market and not for the retail borrowers and therefore, proper rate for the retail borrowers should be EURIBOR + BPS. He has drawn our attention to paragraph 19 of the order of the Tribunal in assessee s own case for AY 2007-08, wherein, it was mentioned that the appropriate percentage ranging from 1% to 2% should be added over a .....

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well as order of the Hon ble High Court for AY 2007-08, it was submitted by him that there was no question of law before the Hon ble High Court and therefore, legal position has not attained finality in this regard, as far as assessee is concerned, since this decision was given by the Tribunal and confirmed by the Hon ble High Court on the factual matrix of that year, and even ITAT had given its decision referring to the facts and circumstances of that year only. It was submitted by him that, t .....

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(DR), it was submitted by the Ld. Counsel that the Tribunal in AY 200708 has clearly said that the notional interest rate to be charged should be EURIBOR rate, and that the order of the Tribunal has been upheld by the Hon ble High Court by accepting the same and that too by passing a detailed order, independently. The order of the Tribunal stood merged in the order of the Hon ble High Court. Once an issue has been decided by the Hon ble jurisdictional High Court, it attains finality and no cont .....

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therefore, it should not be held against the assessee, that too disregarding the judgment of the Hon ble jurisdictional High Court. 5.5. We have gone through the orders of the lower authorities, submissions made by the both the sides as well as the material placed before us for our consideration, and also orders of the earlier years of DRP, Tribunal and Hon ble High Court. In our considered view, the controversy has now been reduced to a narrow compass because of the decisions of earlier year an .....

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and circumstances of the case, order of the Tribunal and Hon ble High Court in AY 2007-08, we hold that out of the above said two rates, rate to be applied is that of EURIBOR. The assessee has submitted the EURIBOR rate was 4.37%. This rate has not been negated or controverted by any of the lower authorities or by the Revenue before us, and therefore, we hold that EURIBOR rate of 4.37% should be adopted in this year for the purpose of making T.P. Adjustment on account of notional interest to be .....

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analysed the submissions of the Ld. CIT (DR). To resolve this controversy, let us first refer to the order of the Tribunal in AY 2007-08 in ITA No. 7354/Mum/2011 order dated 30th April 2012, holding vide paragraph 19 as under:- "In the present case the AE is a German company. Euribor rates are based on the average interest rates at which a panel of more than 50 European banks borrows from one another. There are different maturities, ranging from one week to one year. These rates are conside .....

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s of interest with reference to ruling LIBOR, EURO LIBOR or EURIBOR, wherever applicable and thereto appropriate percentage ranging from 1 % to 2%. The reference to the said circular is at page - 80 of the Assessee's paper book. In our view the claim of the Assessee to adopt EURIBOR rate as stated before the TPO is reasonable and deserves to be accepted. Following the ruling of the tribunal in the aforesaid cases, we are of the view that the claim made by the Assessee in this is to be accept .....

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ut the second issue with regard to addition of BPS, has not been decided and thus, we find force in the contention of Ld CIT (DR) that the question of adding some BPS point was still left open. With respect to the rationale for adding some BPS points, it was submitted by him that AE of the assessee-company was in financial crisis and therefore it should rather increase the BPS, and further, since financial position of the AE in this year may have been further deteriorated, therefore, these facts .....

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plus 0.8% (refer Annexure A). The average EURIBOR for the period April 2008 to March 2009 was 4.37 (refer Annexure B). Accordingly, on a without prejudice basis we submit that if notional interest has to be computed, the arm s length interest rate should be 5.17% (4.37+0.8%)" 5.9. We have carefully considered this issue. We find force in the contention that EURIBOR rate is that at which banks and other large financial institutions deal with each other, inter se. Retail borrower do not get .....

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result, these grounds are partly allowed in terms of our directions as given above. 6. Ground Nos. 13 & 14:- These grounds are reproduced below for ready reference: Grounds pertaining to the international transaction of provision of corporate guarantee Ground No. 13: Disregarding the commercial and economic circumstances for providing corporate guarantee without charging guarantee fee The Hon'ble DRP / Ld. AO / Ld. TPO erred in not appreciating the commercial and economic circumstances u .....

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grounds deal with the grievance of the assessee with respect to T.P. Adjustment of ₹ 4,23,09,960/- by way of corporate guarantee extended by the assessee on behalf of its AE. During the course of proceedings before the TPO, the assessee was asked by the TPO that why should not a suitable adjustment at Arm s Length Price (ALP) on account of corporate guarantee extended by the assessee on behalf of its AE be made, the assessee submitted that there was no need to compute the ALP interest in .....

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iled submissions were made by taking various arguments. The DRP did not agree with the submissions of the assessee fully. It was held by the DRP that service was rendered by the assessee to its AE, and if the same service would have been rendered by a Bank, than Arm s Length Price would have been determined on the basis of financial considerations of the Bank, and thus the order of the AO was approved, in principle. But rate applied by the TPO @ 3% for guarantee commission was found by the DRP o .....

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d applied the rate of 3% but assessee had charged the rate of 0.5% from its AE, and Hon ble bench found the rate of 0.5% to be reasonable and at ALP. It was further submitted that aforesaid decision has been upheld by the Hon ble High Court. Our attention was drawn on page no. 169 to 171 of the Paper Book comprising of detailed objections made before the DRP, wherein it was submitted that no cost has been incurred by the assessee in this regard and that assessee has huge own funds. In response t .....

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guarantee involves costs, for example, there are some costs necessarily to be incurred for administration and risk management etc. Thus, the only controversy to be resolved by the Hon ble Bench would be that how much rate should be charged by the assessee from its AE which should be taken as ALP in the hands of the assessee. With regard to the fixation of rate, it was submitted by the ld. CIT (DR) that financial position of the AE is not good, therefore, the AE would get credit facility at rela .....

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f costs have been incurred by the AE vis-a-vis other independent parties for the similar transactions. Under these circumstances, the TPO has to suggest a suitable method, following the judicial approach, and keeping in view the facts and circumstances of the case, and for this purpose this matter can be sent back to the file of the TPO for its re-examination. 6.5. We have gone through the submissions made by both the sides as well as material placed before our consideration. There is unanimity .....

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ping in view the specific facts of the actual cost incurred by the AE of Everest Kanto, and also that 0.5% was too low a rate, and therefore, it cannot be blindly applied, universally or uniformly, in all other cases. Ld. Counsel has also fairly accepted the argument of ld. CIT (DR), to the extent that ALP rate of corporate guarantee can be determined, keeping in view the actual cost incurred by the AE or as it would have been incurred by the AE with respect to a similar transaction between the .....

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propriate by it, and shall decide this issue after taking into consideration all the facts and circumstances of this case, and by exercising his suitable powers under the law to get the required information from the concerned agencies, and thereafter he shall take a judicious view of the matter, taking into account all the judgments available including the judgment of the Tribunal as confirmed by the Hon ble High Court in the case of Everest Kanto (supra). Thus, these grounds are allowed for sta .....

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allowing amount of ₹ 13,01,27,740 as additional disallowance under section 14A read with Rule 8D of the Act. Ground 16: Erroneously applying rule 8D of the Income-tax Rules, 1962 and thereby disallowing additional expenditure under section 14A of the Act Without prejudice to the Ground 15, on the facts and circumstances of the case and in law, the Ld. AO / Hon'ble DRP has erred in erroneously applying the provisions of Rule 8D and thereby disallowing amount of ₹ 13,01,27,740 as a .....

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s revenue expenditure by Hon'ble DRP. Your Appellant submits that the Ld. AO is bound to follow the directions issued by the Hon'ble DRP as per section 144C(1O) of the Act and hence such act of the Ld. AO is not valid in accordance with provisions of the Act. Ground 18: Erroneously considering the interest expenditure incurred for investment in overseas subsidiary for computing disallowance as per Rule 8D(2)(ii) Without prejudice to the Ground 15, 16 and 17 and on the facts and circumsta .....

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along with its return. 7.2. The brief facts of the case are that during the course of assessment proceedings it was noticed by the AO that the assessee has calimed exempt income of ₹ 14,69,16,869/- and the assessee had made disallowance of ₹ 2,59,85,604/- for earning exempt income. The AO was of the view that the disallowance was neither proper nor in accordance with rule 8D. It was the claim of the assessee that reasonable has disallowance been made. The AO was not satisfied with th .....

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is noted by us that in support of each and every argument, the assessee-company had placed reliance on various judgments of Tribunal as well as High Courts, but the DRP, without distinguishing or dealing with these judgments, upheld the disallowance made by AO. 7.4. Before us, Ld. Counsel made detailed arguments against the action of the lower authorities. His arguments can be summarised as under:- (i) All investments in joint ventures and subsidiaries made as strategic investment should be excl .....

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rest paid on such borrowings should be excluded before considering the amount of interest to be disallowed u/s 14A. 7.5. It was requested that, for this purpose, this issue should be sent back to the file of the AO for examining these facts properly and requantifying the amount disallowable u/s 14A. On the other hand, ld. CIT (DR) has supported the order of the lower authorities and submitted that the disallowance has been made in accordance with the Rule 8D. He has placed reliance upon the judg .....

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In our considered opinion there has been lot of judicial development with respect to disallowance u/s 14A, and therefore, we find that the arguments made by the ld. counsel carry weight under the law. This cannot be dismissed or brushed aside without examining them on facts. Recently, Hon ble Delhi High Court has held in the case of CIT vs. Cheminvest Ltd (ITA No 749 of 2014, order dated 2-9-2014) that investment made for strategic reasons cannot be considered for making disallowance u/s 14A, an .....

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ollowing directions:- (i) All the investments made in joint ventures, subsidiaries and other companies as strategic investment, should be excluded for computing the average amount of investment for the purpose of Rule 8D. (ii) Those investments should be excluded on which no dividend income has been received during the year. (iii) All those investments should be excluded which have been made in the foreign companies whose dividend income would be taxable as per law, as and when received by the a .....

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