TMI Blog2016 (9) TMI 1302X X X X Extracts X X X X X X X X Extracts X X X X ..... o 8 are remitted to the file of the Assessing Officer/TPO for fresh analysis in accordance with Rule 10B(1)(a) of the I.T. Rules. Adoption of corporate guarantee fee at LIBOR + 0.50% accepted Disallowing the SAP implementation expenses - Held that:- We direct the Assessing Officer to allow the expenditure incurred on implementation of the application software of SAP as revenue expenditure - ITA.No.83/Hyd/2014, & ITA.No.158/Hyd/2014 - - - Dated:- 28-9-2016 - SMT. P. MADHAVI DEVI, JUDICIAL MEMBER, AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER For the Revenue : Mr. P. Chandrasekhar For the Assessee : Mr. Deepak Chopra MS. Manasvini Bajpai ORDER PER SMT. P. MADHAVI DEVI, J.M. Both are cross-appeals for the A.Y. 2009-2010. These appeals are against the assessment order dated 31.12.2013 passed under section 143(3) read with section 144C of the I.T. Act, 1961. 2. Brief facts of the case are that the assessee-company which is engaged in manufacture and trading of cement, filed its return of income for the A.Y. 2009-2010 on 13.09.2009 declaring total income of ₹ 52,40,57,941. The return was initially processed under section 143(1) of the Act and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, brought these discrepancies to the notice of the assessee and asked the assessee to explain the said discrepancies. The assessee, vide its reply dated 17.10.2012 submitted that the A.E has sold the GPC to the assessee at its purchase price and there is no mark-up on the same and hence, there is no arms length adjustment to be made. However, the Assessing Officer did not accept the assessee s explanation holding that, under the CUP method, the controlled transaction has to be compared with an uncontrolled transaction and not with any other controlled transaction. He held that in the case of the assessee, A.E s purchase of GPC from the ultimate suppliers is also a controlled transaction and therefore, it cannot be compared with the assessee s purchase of GPC from the A.E. He, therefore, did not accept the assessee s contentions that since it has purchased the GPC from the A.E. at the same price at which A.E. has purchased it, to be at arms length. He held that the assessee has failed to establish that GPC supplied by the A.E. was of better quality than that supplied by non-A.Es and further that it has also failed to show that the terms of payment in the A.E. purchase were not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO has erred in comparing the A.E. transactions with other controlled transactions and also in picking-up only some transactions. He submitted that if the transactions in entirety are considered, then the margin of the assessee is very much at arms length price with the other non- A.E. transactions. Further, according to him, the TPO has also erred in not taking into consideration the difference in the product and quality. He therefore, prayed that the issue may be remanded to the file of the TPO for fresh analysis. 6. The Ld. D.R. however, supported the orders of the authorities below and submitted that there is huge difference in the price charged between the assessee and A.E. and related parties. As regards the assessee s contention that it is a back-toback transaction i.e., A.E. of the assessee has supplied the material to the assessee at its purchase price, the D.R. submitted that the same is not relevant as there may be different criteria at which the A.E. has purchased the product as compared to the circumstances under which the assessee has purchased the material from it s A.E. As regards the difference in the products and their quality, he submitted that the same is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve paras, it is noticed that the assessee had purchased the GPC from various countries and therefore, the geographical source, influents the quality and composition of the product and proportionately the price also. Therefore, in our opinion, the T.P. analysis made by the TPO needs re-consideration. In view of the same, grounds of appeal No. 2 to 8 are remitted to the file of the Assessing Officer/TPO for fresh analysis in accordance with Rule 10B(1)(a) of the I.T. Rules. 8. As regards Grounds No. 9 to 21 against the direction of the DRP to calculate the guarantee fee at 1.25% on the guarantee amount as against the TPO s direction to compute it at 2% on the guarantee amount of ₹ 300 crores in favour of the lenders to the A.E., the Rain Commodities USA Inc., the Learned Counsel for the assessee submitted that this issue had arisen in assessee s own case in the earlier years and the Tribunal had directed the Assessing Officer to adopt the LIBOR+ 0.50% as guarantee fee. He placed reliance upon the decision of Mumbai Tribunal in the case of Glenn Mark Pharmaceuticals which has been followed by this Tribunal in assessee s own case for the A.Y. 2008-09. 9. The Ld. D.R. howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the transaction between the assessee and the AE s. Considering the above view, we are incl ined to accept the decision of the CIT(A) and accordingly we dismiss the grounds of assessee as well as ground 2 of the revenue. 11. ALP adjustment on corporate guarantee Assessee s grounds of appeal: The ld. CIT(A) has erred in 7. Making adjustment while determination of ALP on the shareholders corporate guarantee provided to bank on behalf of WOS. 8. Determining the ALP on the shareholder corporate guarantee provided by the Appellant @ 1.25% on the guarantee amount. 9. Not appreciating the fact that WOS was set up as a SPY for acquisition of business in USA. 10. Not appreciating that the shareholder corporate guarantee is not covered under the def inition of international transaction u/s 92B of the Act. 11. Not appreciating that the amendment to section 92B would not apply to the facts of the case. 12. Not undertaking an objective analysis for determining the ALP on the shareholder corporate guarantee. 13. Not making adjustments for the differences in the comparable transactions selected vis-a-vis shareholder corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering some calculation to arrive the f igure 0.53% whereas the CIT(A) in the present case had adopted 1.25% without any basis. He also submitted that the TPO had analysed the risk factor in this transaction since the guarantee was given without any security. He also submitted that even though there is no cost to the assessee but there is intrinsic benef it to the AE. He submitted that he relies on the order of AO/TPO and justif ied the action of the AO. 13. Af ter taking into consideration the above decision of the tribunal and the ratio of the four sof t pvt. Ltd. (supra), we hold that the corporate guarantee is an international transaction. For the sake of clarity and ready reference, we reproduce the relevant paras below: 25.4. In the aforesaid view of the matter, we agree with the TPO that ALP of the corporate guarantee has to be determined as it falls within the scope and ambit of an international transaction after the retrospective amendment to section 92B. However, it appears that the TPO has applied the rate of 3.75%, which is applicable to bank guarantee issued by the bank. As the corporate guarantee is not in the nature of bank guarantee, the rate applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the coordinate bench of this Tribunal in Four Sof t Pvt. Ltd. (supra), and also the decision of the Hon ble Mumbai High Court in the case of M/s Everest Kanto Cylinder Ltd. Vs. DCIT, it was held that commercial banks guarantees are easily encashable in the event of default hence higher commission is justif ied for them, whereas in case of corporate guarantee the parent company would repay loan in case its AE defaults. Further, it was held that the conditions for issuance of corporate guarantees are distinct and separate from bank guarantee. Accordingly, the Hon ble High Court upheld ITAT decision of guarantee commission @ 0.50%. The relevant portion of ITAT, Mumbai decision is reproduced for convenience: 21. So far as the learned Senior counsel s contention that guarantee commission is not an international transaction and there could not be any method for evaluating the ALP for the guarantee commission, we do not find any merit in the said contention in view of the amendment brought by the Finance Act, 2012 with retrospective effect from 1-4- 2002 by way of Explanation added in Section 92B. Payment of guarantee fee is included in the expression 'international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing the above decision of the Mumbai Bench, which has been upheld by the Hon ble High Court, we f ind that in the circumstances of the said case, it was held appropriate to charge the corporate guarantee at 0.50% from its AE and that it can be said to be at arm s length. However, in the case before us, we find that there is no corporate guarantee commission charged by the assessee. Therefore, we remit this issue to the f ile of the AO/TPO to determine the ALP of the corporate guarantee by following the judicial precedents, more particularly, the case of Glenmark Pharmaceuticals Vs. ACIT (supra). In the result both the assessee s as well as revenue s appeal are treated as allowed for statistical purposes. 14. The ground 15 of the Assessee relating to TDS TCS credit, is also remitted back to the f ile of AO. 10.1. Respectfully following the same, we direct the Assessing Officer to adopt the same for the relevant assessment year also. The Revenue is also aggrieved by the directions of the DRP to adopt LIBOR rate by raising grounds of appeal No. 2 and 3. In view of the above decision, the Revenue s grounds of appeal No.2 and 3 are rejected and Assessee s grounds of ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software is allowable as revenue expenditure, more so as the software acquired by the assessee was an application software which enables it to execute tasks in the field of accounting purchase and inventory margins. In the case of Srinivasa Resources, the Coordinate Bench of this Tribunal was also dealing with the nature of the expenditure on purchase of application software and has held it to be capital expenditure. The decision of the Tribunal is dated October 11, 2013 whereas, the decision of the Hon ble High Court is dated 04th November, 2011. Thus, it can be seen that the decision of the Hon ble Delhi High Court has not been considered by the Coordinate Bench of this Tribunal in the case of Srinivasa Resources. Further the judicial discipline requires that the decision of the Higher Court be followed over the decision of the Lower Court/Tribunal. Since the decision of the Hon ble High Court is on the very same issue, we are inclined to follow the decision of the Hon ble High Court of Delhi and accordingly, we direct the Assessing Officer to allow the expenditure incurred on implementation of the application software of SAP as revenue expenditure. Accordingly, ground of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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