TMI Blog2015 (11) TMI 1573X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 send this issue back to the file of the TPO for deciding the rate of commission. He will give opportunity to the assessee to submit all the details and documents as may be considered appropriate 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 ( 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J. Pardiwala, Sr. Advocate on behalf of the assessee company and Mr. N.K.Chand, CIT (DR) on behalf of the Revenue. After hearing both the sides, these appeals are adjudicated as under:- First we take up appeal of the assessee in ITA No. 774/M/2014: 3. Ground No. 1: This ground is general and 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 the predecessor DRP for the Assessment Year(AY) 2007-08 and AY 2008-09; whereas in fact impugned AY- 2009-10 was the first year in which this kind of adjustment has been made by the AO/TPO and no such adjustment was never made in any of the previous years, in the case of the assessee-company. It has also raised other numerous grounds challenging the adjustment on merits also. For the sake o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rors 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. Ground No. 8: Errors in computation of PLI of the comparable companies and erroneous consideration of companies at entity level as against comparable segment Without prejudice to the above, the Hon'ble DRP / Ld. AO/ Ld. TPO committed errors in computing the PLI of certain comparable companies. The Hon'ble DRP / Ld. AO / Ld. TPO also erred in computing the PLI of Kriti Industries (India) Ltd, Mahindra Composites Ltd. and Prima Plastics Ltd. at entity level instead of PLI for comparable segment. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar issue was before the predecessor DRP for the AY 2007-08 and 2008-09 and DRP has rejected the claim of the assessee. Respectfully following the predecessor DRP, the action 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 years, if at all any similar issue were involved in the earlier years, has been made. The order is disregardful of any minimum standards that should be followed while adjudicating an appeal by an appellate authority. 4.4. Further, on careful examination of all the facts, it is noted by us that no such issue was involved in the preceding years i.e. AYs 2007-08, 2008-09 or any other preceding year. The minimum, the DRP could have done was to at least reproduce or discuss some of the relevant findings from the orders of ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee are encapsulated in brief below: The Ld. TPO computed the TP adjustment of ₹ 89.94 crores considering assessee's entity level operating margin and ignored the fact that export sales to AEs amount to only ₹ 21.72 crores (3.29% of entity level sales) as against the entity level sales of ₹ 659.36 crores. Thus, the approach of the Ld. TPO in evaluating entity level profitability to test 3.27% of total sales was unreasonable and bereft of any rationale. The detailed break-up of the segmental profitability statement explaining the methodology and the allocation 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 entity level as against comparable segments. The Ld. TPO had also committed certain errors in computing the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that the Appellant should 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 arm's length interest rate. Ground No. 12: Disregarding the consideration of EURIBOR/LIBOR based interest rate for application of the CUP method Without prejudice to the above, the Hon'ble DRP / Ld. AO / Ld. TPO disregarded the use of EURIBOR/LIBOR based interest rate for application of the CUP method despite the presence of ruling of the Honourable Jurisdictional Mumbai Income Tax Appellate Tribunal ('ITAT') and the directions of the Hon'ble DRP in Appellant's own case 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant part of the written submissions made by the assessee-company before the TPO vide paragraph nos. 1.8.17 wherein assessee himself has suggested that some BPS points should be added to EURIBOR rate, and it was suggested by the assessee that ALP rates should be 5.17% (i.e. 4.37% EURIBOR rate + 0.8%). It was further submitted by him that all the submissions of the assessee refers to Libor + rates. With regard to the order of the ITAT as 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, thus, 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 furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied 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 charged on the amount of interest free loan granted by the assessee to TACO Kunstsofftechnik GmbH (in short referred to TKT ) by the assessee. 5.6. Ld. CIT(DR) has raised another contention i.e. the rate should be EURIBOR rate + BPS basis. The reasoning given by the ld. CIT(DR) is that decision in AY 2007-08 has been taken on the decision of factual matrix of that year and that in this year the assessee had himself suggested the rate of 4.37% + 0.8%, aggregating to 5.17%. 5.7. We have carefully 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 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee to the TPO vide letter dated 03.01.2013 vide paragraph no. 1.8.17 as under:- It is pertinent to note that during the year under consideration, TKT has paid interest to a German bank at the rate of EURIBOR plus 80 basis points i.e. EURIBOR 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 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 facts of this case, and particularly when no contrary evidence has been brought on record by the Revenue, we find it appropriate to accept the submissions of the assessee, and hold that 0.8% should be added upon EURIBOR, and thus total interest to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermined 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 on the higher side, and therefore the DRP directed to re-compute the ALP of guarantee commission by applying the rate of 2%, thereby accepting the claim of the assessee in part. 6.2. Before us, ld. counsel has submitted that no comparable analysis of the rates have been done by the TPO or the DRP. Reliance was placed before him in this regard on the judgment of the Tribunal in the case of Everest Kanto Cylinder vs. DCIT (ITA No. 542/M/2012 for AY2007-08 order dated 23.11.2012), wherein the TPO had 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 resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by both the parties. But it has been argued by the ld. CIT(DR) that rate of 0.5% has been decided in that case keeping 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 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 send this issue back to the file of the TPO for deciding the rate of commission. He will give opportunity to the assessee to submit all the details and documents as may be considered appropriate by it, and shall decide this issue after taking into consideration all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15, 16 and 17 and on the facts and circumstances of the case and in law, the Ld. AO has erred in considering the interest expenditure incurred for investment in overseas subsidiary for computing disallowance as per Rule 8D(2)(ii). 7.1. In these grounds, assessee has challenged the action of the lower authorities in making the disallowance u/s 14A for ₹ 13,01,27,740/- as additional disallowance over and above the disallowance of ₹ 2,59,85,604/- made by the assessee-company, voluntarily, in the computation of income filed by it 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 the working of the assessee. He worked our total disallowance of ₹ 14,72,27,181/- after giving deduction of ₹ 2,55,40,604/-( i.e. disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered 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, and that those investments on which no dividend income has been received, cannot be considered for making disallowance u/s 14A. There are various other judgments, as has been relied upon by the ld. counsel in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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