TMI Blog2017 (4) TMI 1193X X X X Extracts X X X X X X X X Extracts X X X X ..... specific service by the assessee. An accretion in the brand valuation of a brand owned by the AE does not result in profit, losses, income or assets of the assessee company, and it cannot, therefore, result in an international transaction qua the assessee. Unless the transaction is such that it affects profits, losses, income or assets of both the enterprises, it cannot be an international transaction between these two enterprises. If the assets of one of the enterprises are increased unilaterally, without any active contribution thereto by the other enterprise, such an impact on assets cannot, in our humble understanding, amount to an international transaction. The accretion in brand value of the AE’s brand name is not on account of costs incurred by the assessee, or even by its conscious efforts, and it does not result in impact on income, expenditure, losses or assets of the assessee company. It is not, therefore, covered by the residuary component of definition of ‘international transaction’ either. As for the emphasis placed by the learned Departmental Representative, as also by the authorities below, on the exhaustive definition of ‘intangibles’ in Explanation to Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no dispute that Mauritian entities in question were carrying out banking business in Mauritius, and there is nothing on record to show, or even indicate, that the beneficial owner of interest income were not these Mauritian entities. In addition to this undisputed position, neither a case has been made for existence of any PE nor for business having been carried out through such a PE. All that is established is the presence of some of the affiliates of the MNE group to which the recipient of interest income belongs, and some peripheral role played by such affiliates, but these facts donot establish, or even indicate, existence of the PE. The protection of article 11(1) cannot, therefore, be declined on the facts of the present case. We are, therefore, of the considered view that the income embedded in these interest payments was not taxable in India. Accordingly, the assessee did not have any tax withholding obligations, under section 195, in respect of these payments, and, as a corollary thereto, disallowance under section 40(a)(i) was not justified.- Decided in favour of assessee Accrual of income - treating the export incentives on account of Focus Market Scheme and Focus Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of the assessment year 2007-08, was remitted to the file of the DRP for fresh adjudication on the nature of the subsidy. Whatever are the findings of the DRP for the assessment year 2007-08 will be equally valid for this assessment year as well. We, therefore, remit the matter to the file of the Assessing Officer for examining the matter afresh in the light of those findings of the DRP. While so deciding the matter, the Assessing Officer will give a due opportunity of hearing to the assessee. Subsidy received from the Government of Tamilnadu in the form of refund of output VAT - revenue of capital receipt - Held that:- The assessee has raised an additional ground of appeal that “subsidy received from the Government of Tamilnadu in the form of refund of output VAT is a capital receipt not chargeable to tax” and to that extent the stand of the authorities below is incorrect and needs to be vacated. While there cannot indeed be any objection to the appellant raising any new issue before the Tribunal, in view of the decision of Hon’ble Supreme Court in the case of NTPC Ltd Vs CIT [1996 (12) TMI 7 - SUPREME Court], with the consent of the parties, this matter is required to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aghavan, K R Sekar, and S P Chidambaram For The Revenue : Sriram Sheshadhri for the assessee (appearing separately for the last year) S Bharat and P Peeraya ORDER Per Pramod Kumar AM: 1. These six appeals and one cross objection, which we will take up together, consist of three sets of cross appeal for the assessment years 2009-10, 2010-11 and 2011-12 and the solitary cross objection filed by the assessee for the assessment year 2011-12. 2. These three set of cross appeals are directed against the orders 31st January 2014, dated 30th January 2015 and 28th January 2016 passed by Deputy Commissioner of Income Tax, LTU-II, Chennai (hereinafter referred to as the Assessing Officer ), in the matter of assessments under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) for the assessment years 2009-10, 2010-11 and 2011-12 respectively. There is also a cross objection filed by the assessee for the assessment year 2011-12 but that is, for the reasons we will set out now, not maintainable. The scheme of the Act, as we understand it, does not permit filing of cross objection against the order of the Assessing Officer. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee for its nonresident parent company. So far as this issue in appeal is concerned, the relevant material facts, to the extent necessary for adjudication on these appeals, are like this. The assessee before us is a fully owned subsidiary of South Korean automobile giant Hyundai Motor Company (HMC, in short)- fourth largest automobile manufacturer in the world, and is engaged in the business of manufacturing cars in India. The assessee entered into a number of international transactions with its associated enterprises abroad. During the course of scrutiny of arm s length determination of these transactions, the Transfer Pricing Officer observed, so far as the assessment year 2009-10 is concerned, that the assessee is manufacturing cars under the brand name Hyundai - a brand which is legally owned by the HMC Korea, and that the assessee is to mandatorily, under the agreement with HMC Korea, use the badge with trademark Hyundai in every vehicle manufactured by it . The TPO was of the view that by doing so the assessee has significantly contributed to the development of Hyundai brand in Indian market and the HMC Korea is thus benefited due to brand promotion activity carrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market presence in which ensures that even in case of downfall in global market, Hyundai Korea will not suffer. He was of the view that Hyundai is a very important player in Indian car market and this is to a very large extent due to the efforts by the assessee company that the brand name Hyundai has become an intangible asset in India . The TPO was of the view that HMC Korea, has to, therefore, compensate the assessee company with arm s length amount for the benefit acquired at the cost of the assessee company which has been deprived of developing its own brand name and logo . The TPO was of the view that Indian market is not a fluctuating market , that (i)t is a decisive market which stands by quality and comfort and that (b)rand building is a difficult task in India as the brand cannot be popularized just because of its global reputation . He went on to add that had it been a reality that any foreign company can enter into the Indian market just y brand popularity, the Indian market should have been stacked with millions of foreign companies but there are many hints in history to illustrate the failure of prominent foreign companies in establishing their share in Indian m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at ₹ 198,66,80,250. 9. The plea of the assessee that it has not rendered any brand building service and there was no brand promotion activity carried out by the assessee company in the absence of which there was no requirement to compensate the assessee company, was brushed aside with the observation that the use of brand name Hyundai along with the model name and the use of logo in the front of all the vehicles manufactured by the assessee company was a definite developmental activity undertaken by the assessee and that there was no need for the assessee company to include brand name and logo alongwith the model name of the vehicle the vehicle can be easily marketed only with the model name as the customer values the vehicle based on the model . Similar was the fate of the assessee s plea that the assessee and the Hyundai Korea have not entered into any contract for brand building services and that if there is no such arrangement, the holding company cannot be said to have benefited at the expense of the assessee company and, as such, the assessee is not entitled to any compensation . The TPO rejected this argument by observing that the agreement of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nter alia, stated as follows: If the contention of the assessee company has been taken for consideration, then the following questions arise for discussion i) If the holding company is not getting benefitted by the brand development, why it has been made a mandatory requirement in the agreement? ii) If the use of brand in all the vehicles benefits only the assessee company, what is the reason behind the charitable purpose of the holding company in allowing the assessee company to use the existing popular brand? No business entity will enter into an agreement for charity with another entity. It is for certain hidden benefits, the holding company has made the assessee company use the brand name and logo in all the vehicles manufactured. Had it been for charity, the holding company would have not insisted the assessee company to pay a fee as royalty fee and to pay fees for technical knowhow and for technical services. The assessee company has compensated the holding company for the use of technology, knowhow and for the technical services rendered by the holding company. The compensation given is no way less than the compensation that has been paid by an entity t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame entered India and established their market. It was only a very few companies which were able to find a permanent place in Indian market. Had it been the fact that only brand value captured the market, all the companies with reputed brand value should have sustained in Indian market. But the Indian market was unique of its quality and expectation. The Indian market practiced to have loyalty on quality and cost efficient. The Indian market has a major portion which values cost much than anything else. The Indian market was ready to compromise luxury for the benefit of cost. Its immediate need was comfort and not luxury. So, the Indian market tried to see each and every brand not by its name but by the comfort and cost effective nature. Thus the global companies, which would have understood the temperament of the Indian market, tried to bring out their product with maximizing the comfort and minimizing the cost. Those companies survived in Indian market and the others vanished from the market. The foremost step taken by the global companies to meet the expectations of the Indian market was either to have a manufacturing unit in India itself or to nave joint venture with any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s upheld the ALP adjustment in principle, the quantum of adjustment was scaled down in the sense that as against the share in global sales, in terms of quantity of cars sold, the DRP adopted the share in global sales, in terms of value of cars sold. This variation in the mechanism of allocating contribution to global brand value resulted in the reduction of ALP adjustment to ₹ 54,15,28,903. The assessee is aggrieved and is in appeal before us. 11. The situation in the two subsequent assessment years was a sli g htly different. As regards the plea that the assessee did not incur excessive expenditure on advertising, promotion and marketing being less than 1.63% of sales as against similar expenses by comparables, i.e. Hindustan Motors (4.25%), Tata Motors (1.09%) and Mahindra and Mahindra (2.53%), averaging to 2.62%, the TPO did accept that the percentage of AMP expenses as a proportion of net sales is not an unreasonable high figure and that the arguments of the assessee that there is no excess over and above a market benchmark average in this financial year is accepted . Yet, the TPO proceeded with this stand as taken in the preceding year and observed that however, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not an international transaction, the TPO, inter alia , observed as follows: Section 92B of the Income-tax Act reads as follows: 92B (1) For the purposes of this section and sections 92 92C. 92D and 92E, international transaction means a transaction between two or more associated enterprises, either 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 benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; D. The purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; E. 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 during the course of business; F. 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; G. A transaction of business restructuring or reorganization, entered into by an enterprise with an associated en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployed need to be a figure that is representative of the year as a whole. Exchange rates vary during the year. The average rate is hence preferable over an extremity value like the yearend rate. Accepting a year end rate without reason indicates unwarranted bias towards and an undesirably iniquitous benefit being extracted by the assessee. The average monthly rates of INR per 1 US Dollar for Fin Year 2009-10 (source: http://www.x-rates. com) are as follows: Month INR/USD Month INR/USD April 49.96075 October 46.69925 May 48.49682 November 46.5612 June 48.49682 December 46.56873 July 48.3825 January 46.00664 August 48.24914 February 46.3173 Sept 48.31328 March 45.449033 The average of the Exchang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally increases from F.Y. 2009 to F.Y.2010 - USD 3976.957 millions - USD 3700.622 millions = USD 276.335 millions. Therefore, increase in the Brand value of HMIL = Proportion of Sales of HMIL over those of HMC x Change in Brand Value of HMC x USD/INR conversion rate = 4.166% x 276.335 millions x 47.64113 = INR 54,84,49,847. However, this is only an increase of the Brand value of HMC from the calendar year 2009 to the calendar year 2010 and is NOT the same as the increase in Brand value from F.Y. 2008 - 09 to F.Y. 2009 - 100. This latter value is determined using the correlation coefficient between Market Capitalization (data available for financial years) and Brand values (data available for calendar years). The slight offset between the two types of annual timeframes selected has been adjusted for and smoothed out because a large number of years have been considered and statistical regression tools have been employed and only the correlation percentage between the two values generated from the analyses over 5 years is being adopted. To recollect (all figures have been rounded off as appropriate): - Increase in Market capitalization of HMC from 2008-09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this draft proposal, assessee carried the matter in appeal before the Dispute Resolution Panel but once again without any success. The Assessing Officer thus proceeded to make the ALP adjustment as recommended by the TPO. The assessee is not satisfied and is in appeal before us, inter alia, against the same. 16. 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. 17. The first question that we need to decide is whether the benefit accruing to the HMC Korea, as a result of increased brand value due to sale of Hyundai cars in India by the assessee company, constitutes an international transaction. 18. As we deal with this question, it is necessary to appreciate the fundamental fact that the issue in LG s case (supra) before the Special Bench was materially different from the issue in the case before us inasmuch as LG s case dealt with advertisement, marketing and promotion (AMP) expenses incurred by the assessee, which were in excess of similar expenses incurred by the comparables, and an inference was thus drawn that these excessive expenses were incurred for the benefit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own words of majority view, the contention of the ld. AR that the judgment of the Hon ble jurisdictional High Court has been reversed, is jettisoned . What follows thus is that unless the expenses incurred by the assessee on its AMP are excessive vis- -vis what similarly placed comparables would have incurred, according to the special bench, then, to that extent, the foreign AE had an obligation to compensate the assessee company for the AMP expenses. 20. In sharp contrast to this position in LG s case, in the present case, it is an undisputed position that the percentage of AMP expenses as a proportion of net sales is not an unreasonable high figure and that the arguments of the assessee that there is no excess over and above a market benchmark average in this financial year is accepted . There were some reservations on the data submitted by the assessee in the assessment year 2009-10 for want of complete information, but then in the subsequent two assessment years, i.e. 2010-11 and 2011-12, the TPO has, upon examining requisite details, accepted the submission based on the same data on the same comparables. 21. Clearly, therefore, the facts in the case of LG s s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not hold good in law either. To this extent also, the stand of the Special Bench in LG s case (supra) stands reversed now. 25. The legal arguments relied upon by the learned counsel on satisfying the bright line test, as also by the authorities below on the legal validity of foundational basis of the impugned addition, have thus no bearing on the decision on correctness of the impugned addition for brand promotion fees. To this extent, the legal analysis by both the parties does not meet our approval. There are, however, other issues raised by the learned representatives which, in our humble view, have merits worth being accepted. We will turn to those issues in a little while. 26. Let us, for the time being, now come back to the question as to whether the benefit accruing to Hyundai Korea, as a result of increased brand value due to sale of Hyundai cars in India by the assessee company, is an international transaction. It has been contention of the assessee all along that it does not constitute an international transaction. 27. We must bear in mind the fact that the short case of the revenue is that simply because the cars are sold by the assessee, the brand gets mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee makes the same car and markets it in the Indian market, without any established brand name, the acceptability of the car by the Indian consumer will be little less vis- -vis the situation in which the car is marketed with the foreign brand name. Any other view of the matter would mean that the foreign brand has no valuewhich is admittedly not the case. The use of Hyundai brand name in the cars manufactured by the assessee thus does indeed amount to a benefit to the assessee. In that sense, the use of brand name owned by the foreign AE is a privilege, a marketing compulsion and of direct and substantial benefits to the assessee. 32. The obligation of the assessee to use the brand name owned by the assessee is, therefore, not solely and proximately driven by the benefits to the AE, owning the brand name. The technology owned by the AE abroad is in the field of motor vehicles, and, with a view to ensure that the AE, owning this technology- which owns the brand name too, continues to be identified with the products manufactured with the use of its technology, it is a common commercial practice, and quite understandable a commercial practice too, that the use of AE s brand name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo or more associated enterprises, either 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 benefit, service or facility provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of subsection (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. Explanation: - For the removal of doubts, it is hereby clarified that - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, proprietary documentation; (f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements; (h) human capital related intangible assets, such as, trained and organised workforce, employment agreements, union contracts; (i) location related intangible assets, such as, leasehold interest, 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 attributes.' 36. As a plain reading of Section 92B(1) would show, an international transaction can be between two or more AEs, at least one of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature but even under this, what appears to be, extended definition, the accretion to the value of intangibles is not covered. As we say, we must reiterate that so far as use of brand name under the technology agreement is concerned, the agreement has been examined by the TPO and it is not even the case of the TPO that the consideration paid for the transactions flowing from this agreement is not an arm s length consideration. The arrangement under the technology use agreement, which permits the assessee and binds the assessee to use the brand name of the AE on the products manufactured by the assessee, has been specifically held to be an arm s length transaction. An aspect covered by this agreement, therefore, cannot be subject matter of yet another benchmarking exercise. All that is to be seen is that an accretion to the value of brand name owned by the assessee, on the facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lines (2010 version) state as follows: 7.6 Under the arm s length principle, the question whether an intra-group service has been rendered when an activity is performed for one or more group members by 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 willing to pay or perform for itself, the activity ordinarily should not be considered as an intra-group service under the arm s length principle. 42. In the present case, however, since no services are performed, the discussion about benefit of the services is academic. We have referred to the above discussions in the OECD Guidelines just to highlight the fact that even in situations in which benefit test is specifically set out in the definition of international transaction, the determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent- which has been accepted to be an arrangement at an arm s length price, does not result in a separate international transaction to be benchmarked. The impugned ALP adjustments of ₹ 54,15,28,903, ₹ 62,20,34,587 and ₹ 253,44,00,000, for the assessment years 2009-10, 2010-11 and 2011-12 respectively, must, therefore, stand deleted. We hold so. Grievance of the assessee, with respect to ALP adjustments on account of accretion in brand value of the AE due to its use by the assessee, is thus upheld. 45. So far as the assessment year 2009-10 is concerned, ground no. 2 in the appeal filed by the assessee pertain to the above transfer pricing controversy. Ground no. 2 is thus allowed. 46. We may also add that ground no.1 in the assessee s appeal for the assessment year 2009-10 is general in nature and it does not call for any specific adjudication. Tax withholding obligation from interest payments to Mauritian entities 47. In ground no. 3.1, the assessee is aggrieved of the disallowance of ₹ 37,33,72,396 made by the Assessing Officer under section 40(a)(i) in respect of interest payment to HSBC (Mauritius) Ltd and Standard Chartered Bank (Mauriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e benefits of the DTAA. It is doubtful as to whether the Mauritius subsidiary of the group can be considered as bank and whether they are the beneficial owner of the interest received. In such circumstances the onus was on the assessee to establish that the transactions actually took place in Mauritius. Nothing of this sort has been established. It is apparent from the discussion in the AOs order that the entire transaction was carried out from India and the Mauritius subsidiary of these banks were like name lenders. The transactions were actually carried out in India on behalf of the parent by the local branches. We therefore agree with the AO that DTAA benefit will not be available to the interest income of HSBC and Standard Chartered. As regards the objection that the assessee was not allowed an opportunity to cross examine the bank employees etc, we find that the primary onus was on the assessee to establish that the entire transaction had taken place outside India and negotiations were directly with the foreign lenders. This has not been established by the assessee. We therefore confirm the disallowance as regards the interest paid to Standard Chartered and HSBC banks. 49. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprise. 4. Notwithstanding the provisions of paragraphs ( 1 ) and ( 2 ) of this article, a person acting in a Contracting State for or on behalf of an enterprise of the other Contracting State [other than an agent of an independent status to whom the provisions of paragraph ( 5 ) apply] shall be deemed to be a permanent establishment of that enterprise in the first-mentioned State if : ( i ) he has and habitually exercises in that first-mentioned State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise ; or ( ii ) he habitually maintains in that first-mentioned State a stock of goods or merchandise belonging to the enterprise from which he regularly fulfils orders on behalf of the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. However, when the activitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 6. Where profits include items of income which are dealt with separately in other articles of this Convention, then the provisions of those articles shall not be affected by the provisions of this article. ARTICLE 11- INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, subject to the provisions of paragraphs 3 and 4 of this Article, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State. 3. Interest arising in a Contracting State shall be exempt from tax in that State provided it is derived and beneficially owned by: (a) the Government or a local authority of the other Contracting State; (b) any agency or entity created or organised by the Government of the other Contracting State; or (c) any bank carrying on a bona fide banking business which is a resident of the other Contracting State. 4. Interest arising in a Contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipient in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention 6. The provisions of paragraphs (1), (2), (3) and (4) shall not apply if the recipient of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debtclaim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply. 7. Interest shall be deemed to arise in a Contracting State when the payer is that Contracting State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise or he habitually maintains in that first-mentioned State a stock of goods or merchandise belonging to the enterprise from which he regularly fulfils orders on behalf of the enterprise . In the present case, at best first condition comes into play and it cannot be revenue s case that the Chennai affiliate office has, and it habitually exercises, the authority to conclude contracts in the name of the Mauritian affiliates because in such a case there would not have even been need for the contacts to be signed by the Mauritian entities as is the undisputed factual position in the present case. A plain look at Article 5(4) and Article 5(5) of the applicable treaty would show, the DAPE can come into play only in a situation in which an agent acts on behalf of the principal in the other contracting state, in the ordinary course of their business, when the activities of such an agent are devoted exclusively or almost exclusively on behalf of that enterprise , and when the agent has and habitually exercises authority to conclude the contracts in the name of ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... added that it should be of such a nature that it would amount to a virtual projection of foreign enterprise of one country into the soil of another country . Incidentally, the treaty definition of PE basic clause, which came up for consideration of their Lordships, was exactly the same as in the case before us. 56. Coming back to the three tests in the definition of PE, the physical test, i.e., place of business test, requires that there should be a physical location at which the business is carried out. However, mere existence of a physical location is not enough. This location should also be at the disposal of the foreign enterprise and it must be used for the business of foreign enterprise as well. A place of business should be at the disposal of the foreign enterprise for the purpose of its own business activities. This place has to be owned, rented or otherwise at the disposal of the assessee, and a mere occasional factual use of place does not suffice. This approach is accepted by a Special Bench of this Tribunal in the case of Motorola Inc. vs. Dy. CIT (2005) 95 ITD 269 (Del)(SB) wherein, inter alia, it was observed as follows: ...........The OECD Commentary on Dou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... location in the other country. It is also important to bear in mind that when such a physical location has come into play as an end result of business having been carried out, such as a barge in territorial waters of the other country upon having given such barges on hire to a resident of the other country-in the case of a person who is engaged in the business of giving barges on hire, the business cannot be said to have been carried out on such place qua that business activity. It was so held by a Co-ordinate Bench in the case of Addl. Director of IT (International Taxation) vs. Valentine Maritime (Mauritius) Ltd. [(2010) 130 TTJ (Mumbai) 417] wherein it was held that that by no stretch of logic, when an assessee is in the business of hiring out the barges, a barge so hired out cannot be viewed as a place of carrying on its business, which, as we understand, is limited to, qua that barge, the barge having been so hired out . 59. In the light of the above legal position, with which we are in considered agreement, when we examine the facts of the present case, we donot find that the mere occasional use of the office of Indian affiliate, even if there be any, cannot result in PE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue on this point. 60. It is also important to bear in mind that the satisfaction of existence of PE under article 5 is not an end in itself. The next thing to examined is whether any part of the income is attributable to PE under article 7. It is so for the simple reason that even if PE is found to exist under article 5, only so much of profits can be brought to tax as are attributable to the assesse. Just because a foreign enterprise has a PE in India, it does not mean that all the profits accruing to the foreign enterprise are taxable in India, but the manner in which the authorities below have approached the issue in appeal, such an assumption is implicit in their approach. There are no findings in this regard at all. It is important to bear in mind the fact that even when PE is found to exist in India, in order to invoke disallowance under section 40(a)(i), it is to be further shown as to how the interest income belongs to the PE. The mere existence of the PE cannot by itself lead to the conclusion that the interest income belongs to the PE. While on this issue, we may usefully refer to the following observations made by a coordinate bench in the case of ADIT Vs Epcos AG [(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... global MNE groups and the Mauritian companies, as they apprehend, could at best be front companies or conduit companies, not the beneficial owners. 63. Nothing, however, turns on this plea of the revenue. The apprehension of the revenue authorities are once again devoid of any legally sustainable merits. It is not even pointed out by the revenue authorities as to which entity is the beneficial owner of the interest, and, as such, the SCB-M is acting as conduit for whom. The allegation are vague and unsubstantiated. There is no support whatsoever, save and except for the wild apprehensions of the revenue authorities, that the SCB-M has acted as a conduit. As is elementary in law, such vague allegations and considerations cannot meet any judicial approval. Nobody can be expected to prove a negative, as is the settled legal position in India, and, therefore, these entities cannot be even expected to establish that the beneficial owners of such interest income are not some other group entities. The doubts expressed by the DRP with regard to beneficial owner of the interest income are devoid of any legally sustainable basis. No case has been made out by the revenue for the beneficia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s nothing but an entitlement for a duty credit based on incremental exports which should be substantially higher than the general annual export target that is fixed. The incentive on focus market scheme is to offset high freight cost and other externalities to select international market with a view to enhance India s export competitiveness in those countries. It is pertinent to note that the assessee will be entitled to such benefit only after verification of the claim of the assessee by relevant governmental authorities and issuance of licence by such governmental authorities. Therefore, the facts of the assessee s case are similar to the facts decided by the Hon ble Apex Court cited supra. Therefore, respectfully following the decision of Hon ble Supreme Court, we hereby hold that the notional income computed by the assessee cannot be treated as taxable income of the assessee during the relevant previous year. However, the same shall be taxed in the previous year in which the assessee has received the licences and derived such income. Thus, this issue is also decided in favour of the assessee. 68. We see no reasons to take any other view of the matter than the view so taken b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oordinate bench, in a very well reasoned and analytical order, has, inter alia , observed as follows: 10. . The central issue involved in the present case is whether provision for loss in the hands of assessee on account of restatement of outstanding foreign currency loans necessitated by fluctuation in foreign exchange would be allowable as business loss or a loss of capital nature in the facts narrated above. While as per the revenue, the increased liability due to exchange fluctuation correspond with carrying costs of the fixed assets and thus capital in nature, the assessee seeks to submit that the loss is revenue in nature. 10.1 On consideration of facts, it is noticed that certain loans were held in Indian currency in the earlier years. The Assessee entered into an agreement with the lenders to convert the loans in foreign currency equivalents to take advantage of the lower rate of interest rate applicable to later. The assessee has factually demonstrated that the conversion into foreign currency loans have actually benefited the Assessee in terms of saving of interest costs. We also notice that there is no dispute on the fact that the acquisition of capital a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard AS 11 is an accrued and subsisting liability and not merely a contingent or a hypothetical liability. A legal liability also exists against the assessee due to fluctuation and loss arising therefrom. Actual payment of loss is an irrelevant consideration to ascertain the point of accrual of liability. As a corollary, the revenue has committed error in holding the liability as notional or contingent. 10.4 Copious reference has been made to S. 43A by Assessee as well as revenue. Thus, it would be pertinent to examine the issue on the touchstone of S. 43A of the Act. Section 43A, to the extent relevant in the context, reads as under: Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment - ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S. 43A provides for making corresponding adjustments to the costs of assets only in relation to exchange gains/ losses arising at the time of making payment. It therefore deals with realised exchange gain/ loss. The treatment of unrealised exchange gain/ loss is not covered under the scope of S. 43A of the Act. It is thus apparent that special provision of S. 43A has no application to the facts of the case. Therefore, the issue whether, the loss is on revenue account or a capital one is required to be tested in the light of generally accepted accounting principles, pronouncements and guidelines etc. 10.5 Before we delineate on the allowablity of loss based on generally accepted accountancy principles, it may be pertinent to examine whether the increased liability due to fluctuation loss can be added to the carrying costs of corresponding capital assets with reference to S. 43(1) of the Act. Section 43(1) defines the expression actual cost . As per S. 43(1), actual cost means actual cost of the assets to the assessee, reduced by that portion of the costs as has been met directly or indirectly by any other person or authority. Several Explanations have been appended to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or mode of repayment of the loan has nothing to do with the cost of an asset acquired by the assessee for the purpose of his business. We hold that the questions were rightly answered by the High Court. The appeals are dismissed. There will be no order as to costs. Thus, it is evident the variation in the loan amount has no bearing on the cost of the asset as the loan is a distinct and independent transaction as in comparison with acquisition of assets out of said loan amount borrowed. Actual cost of the corresponding fixed asset acquired earlier by utilizing the aforesaid loan will not undergo any change owing to such fluctuation. 10.7 The issue is also tested in the light of provision of S. 36(1)(iii) governing deduction of interest costs on borrowals. As stated earlier, manner of utilization of loan amount has nothing to do with allowability of any expenditure in connection with loan repayment. Both are independent and distinct transactions in nature. Similar analogy can be drawn from S. 36(1)(iii) of the Act which also reinforces that utilization of loan for capital account or revenue account purpose has nothing to do with allowablity of corresponding interest e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged to follow the accounting standards prescribed to determine business income under the head business or profession . We notice that the Hon ble Supreme Court in the case of Woodward Governor India (P) Ltd. (supra) has observed that AS-11 is mandatory in nature. In the light of observations made in Woodward Governor India (P) Ltd. (supra), we are of the view that loss arising on foreign exchange fluctuation loss has been rightly accounted for as a revenue expense in the Profit Loss account in accordance with accounting fiat of AS-11. 10.9 We find that the decision in the case of Sutlej Cotton Mills Ltd. (supra) relied upon by the Ld. Departmental Representative is of no assistance to the Revenue. The Hon ble Supreme Court therein stated the principle of law that where any profit or loss arises to an assessee on account of depreciation in foreign currency held by him on conversion from another currency, such profit and loss would ordinary be trading loss if the foreign currency held by the assessee on revenue account as trading asset or as a part of circulating capital embargo in business. However, if the foreign currency is held as a capital asset, the los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of the assessment year 2007-08, was remitted to the file of the DRP for fresh adjudication on the nature of the subsidy. Whatever are the findings of the DRP for the assessment year 2007-08 will be equally valid for this assessment year as well. We, therefore, remit the matter to the file of the Assessing Officer for examining the matter afresh in the light of those findings of the DRP. While so deciding the matter, the Assessing Officer will give a due opportunity of hearing to the assessee. 79. Ground no. 3.4 is thus allowed for statistical purposes. 80. The assessee has raised an additional ground of appeal that subsidy received from the Government of Tamilnadu in the form of refund of output VAT is a capital receipt not chargeable to tax and to that extent the stand of the authorities below is incorrect and needs to be vacated. 81. While there cannot indeed be any objection to the appellant raising any new issue before the Tribunal, in view of the decision of Hon ble Supreme Court in the case of NTPC Ltd Vs CIT [(1998) 229 ITR 383 (SC)], with the consent of the parties, this matter is required to be remitted to file of the Assessing Officer for adjudication de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment dated 29th October 2013 in assessee s own case for the assessment year 2002-03. The SLP filed by the revenue, against the said order, also stands dismissed by Hon ble Supreme Court on 28.11.2014. The matter has thus attained finality. In this view of the matter, we confirm the relief granted by the DRP and decline to interfere in the matter. 88. Ground no. 2 is thus dismissed. 89. In ground no. 3, the Assessing Officer has raised the following grievance: The DRP erred in deleting the disallowance of guarantee charges. Guarantee charges incurred on account of external commercial borrowings are capital in nature and these charges are not in the nature of interest charges. 90. This issue also, as learned representatives agree, stands covered in favour of the assessee by Hon ble Supreme Court s decision in the case of ACIT Vs Akkamamba Textiles Ltd [(1997) 227 ITR 464 (SC)] whereby Their Lordships confirmed the order of Hon ble AP High Court holding that guarantee commission paid to the bank etc for purchase of machinery is a revenue expenditure. In the present case, guarantee charges paid upto the date on which the assets are put to use are capitalized, and post ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the detailed reasons set out earlier in this order, and subject to the directions set out therein, we have deleted this adjustment. 100. Ground no. 2 is thus allowed. 101. In ground no. 3.1, the assessee is aggrieved of the disallowance of ₹ 12,33,54,430 made by the Assessing Officer under section 40(a)(i) in respect of interest payment to HSBC (Mauritius) Ltd and Standard Chartered Bank (Mauritius) Limited. 102. As for this ground of appeal, learned representatives fairly agree that whatever is the fate of similar ground of appeal for the assessment year 2009-10 will be the fate of this ground. Vide our order above, we have upheld the plea of the assessee on this point and deleted the identical disallowance. The observations so made apply mutatis mutandis for this year as well. Respectfully following the view so taken, we delete this disallowance of ₹ 12,33,54,430. 103. Ground no. 3.1 is allowed. 104. In ground no. 3.2, the assessee is aggrieved of the Assessing Officer treating the export incentives on account of Focus Market Scheme and Focus Products scheme, amounting to ₹ 26,80,00,000, as income of the year before us. 105. While dealing wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer is aggrieved of the DRP s directions to delete the disallowance of ₹ 1,25,86,642 on account of guarantee charges paid by the assessee to Hyundai Motor Co, Korea, in respect of external commercial borrowings made by the assessee. 118. Vide our findings for the assessment year 2009-10, earlier in this order, we have confirmed the stand so taken by the DRP on this point, and thus decided the issue in favour of the assessee. We see no reasons to take any other view of the matter for this assessment year. Respectfully following our view for the assessment year 2009-10, and for the detailed reasons set out therein, we approve the stand of the DRP and decline to interfere in the matter. 119. Ground no. 2 is thus dismissed. 120. In ground no. 3, the Assessing Officer is aggrieved of the DRP s directions to delete the addition of ₹ 5,87,350 in respect of additional depreciation. 121. As learned representatives fairly agree, this issue is also covered, in favour of the assesse, by a coordinate bench decision for the assessment year 2007-08. Respectfully following the same, we confirm the relief granted by the DRP and decline to interfere in the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. 134. Ground nos, 27 to 31 are thus allowed for statistical purposes. 135. In the fourth issue raised in this appeal, the assessee is aggrieved of the disallowance of ₹ 4,06,32,673 under section 43B of the Act, in respect of performance reward which is said to be distinct from bonus . 136. So far as this grievance of the assessee is concerned, only a few material facts need to be taken of. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has debited performance reward, i.e. bonus, amounting to ₹ 4,06,32,673 but, as per the tax audit report, this amount has remained outstanding as at the end of the relevant previous year. On these facts, the Assessing Officer required the assessee to show cause as to why the said deduction not be disallowed under section 43B. It was explained by the assessee that since bonus was not a statutory bonus under the Payment of Bonus Act, the disallowance under section 43 B does not come into play. The Assessing Officer, however, was of the view that the provisions of Section 43B (c) were not confined to bonus under the Payment of Bonus Act, and, as such, the disallowance under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound that there was no tax exempt income in this year. 146. Learned representatives fairly agree that this issue is also covered, in favour of the assessee, by decision of the coordinate bench in assesse s own case for the assessment year 2007-08. As there was no tax exempt in the relevant previous year, the disallowance was deleted for this short reason alone. That is the approach consistently adopted by several coordinate benches as well. We see no reasons to take any other view of the matter. Learned DRP has simply followed the order f the Tribunal on this issue, and granted the impugned relief. Respectfully following the same, we uphold the relief, of deleting the disallowance of ₹ 1,35,21,777, granted by the DRP and decline to interfere in the matter. 147. Ground no. 1 is thus dismissed. 148. In ground no. 3.2, the assessee is aggrieved of the Assessing Officer treating the export incentives on account of Focus Market Scheme and Focus Products scheme, as income of the year before us. 149. We find that this issue is covered, in favour of the assesse, by a decision of the coordinate bench in assessee s own case for the assessment year 2007-08 wherein the coordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the computers. 156. Having heard the rival contentions, and having perused the material on record, we find this issue is also covered in favour of the assessee by Hon ble Delhi High Court s judgment in the case of CIT Vs BSES Yamuna Powers Ltd [(2013) 358 ITR 45 (Del)] wherein Their Lordships have, inter alia, observed that We are in agreement with the view of the Tribunal that computer accessories and peripherals such as, printers, scanners and server, etc., form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60 per cent . In this view of the matter, we approve the conclusions arrived at by the DRP and decline to interfere in the matter. 157. Ground no. 4 is thus dismissed. 158. In ground no. 5, the Assessing Officer is aggrieved of learned DRP granting relief in respect of guarantee charges of ₹ 1,87,44,188 paid to its parent company in respect of external commercial borrowings. 159. Vide our findings for the assessment year 2009-10, earlier in this order, we have con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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