TMI Blog2018 (1) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... the External Commercial Borrowings(ECB) - Held that:- It is a fact that loan was granted by the AE. s and all the gains and risks of the transaction was with them only. The assessee was compensated by the AE. s for the job done by it. As far as interest income is concerned, it is clear that there was no contract /agreement between the assessee and the AE. s to share the interest amount. The assessee is objecting to the adjustment made under the head interest income. It has no objection with regard to the other portion of the adjustment. So, we direct the TPO/AO that only 20% of the agency fee should be attributed to the assessee and the interest attributed to its income should be deleted. See M/s Credit Lyonnais Versus ADIT(International Taxation) [2014 (7) TMI 1 - ITAT MUMBAI]. - Decided partly in favour of assessee Derivative transactions and their ALP - TPA - Held that:- The assessee had adopted the GTPP to determine ALP of the IT's thus no defect in its approach. Method applied by the TPO and the details of controlled transactions, relied upon by him, were not available in the public domain. The assessee did not have any opportunity to examine the comparability of FAR of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... structuring of asset liability, risk management services, underwriting for domestic rupees/debt instruments in India through the investment banking. . Details of filing of returns of income returned incomes, assessed incomes, etc, can be summmarised as under :- A.Y. ROI filed on Returned Income Asstt. dt. Assessed Income 2006-07 30/11/2006 ₹ 222. 52crores 19/02/2010 ₹ 282. 42 crores 2007-08 31/10/2007 ₹ 162. 56crores 02/02/2011 ₹ 304. 04 crores 2. During the assessment proceedings, the AO found that the assessee had entered into international transactions(IT. s)with its Associate Enterprise(AE). To determine the arm s length (ALP)of the transactions, he made a reference to the Transfer Pricing Officer(TPO). Vide his order, dt. 28/03/2008, the TPO proposed total adjustment of ₹ 52. 51 crores. ITA/178/Mum/2011, AY. 2006-07: First ground of appeal, raised by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its principal branch office was in India, that in the course of its banking activities, the branch office in India remitted substantial funds to its head office as interest. On appeal, two questions were raised (i) whether interest payment made by the branch office in India to its head office abroad was to be allowed as a deduction in computing the profits of the assessee s branch in India, and (ii) whether in making such payments to the head office, the branch office in India was required to deduct tax at source under section 195 of the Act. Deciding the issue of non deduction of tax at source, the Hon ble Court held as under: 23. According to the Revenue, under section 195(1), the appellant's head office is to be treated as a foreign company. When the appellant remitted interest to such head office, it ought to have deducted tax under section 195(1). Having not so deducted the appellant is not entitled to claim the benefit, of such deduction, under section 40(a)(i). 24. Under article 7 read with definition of article 5, the permanent establishment is to be taken as an assessee for the purpose of computation of business profits. Further, under sub-article (3)(b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l not come in the way of the appellant claiming such deduction as from its income. Therefore, in the circumstances the appellant would be entitled to deduct such interest paid, as permitted by the convention or agreement, in the computation of its income. 28. In view of our above findings there is no conflict at all between the agreement and the Act. It is only the tax authorities, the Tribunal and to some extent the parties who have put a very complicated meaning to the provisions in the Convention read with the Act. Respectfully following the above judgment, we decide second ground of appeal in favour of the assessee. 4. GOA-3 is about applying an ad hoc rate of 20% for agency fee and interest income of the overseas branches for the External Commercial Borrowings(ECB). It is one of the issues dealt with by the TPO. 4.1. During the TP proceedings, the TPO found that the assessee was engaged in the business of structuring of asset liability, risk management services, underwriting for domestic rupees/debt instruments in India through the investment banking businesses stream of its India branches, that it had coordinated activities for ECB s raised by Indian comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parable transactions vis- -vis the assessee s functions, assets and risks, that the use of secret comparable made the TP process infructuous. The AR further stated that the assessee was not required to deduct tax at source, that the FAA was not justified in considering interest portion for calculating the disallowance. He relied upon the case of M/s. Credit Lyonnais (ITA/1935/Mum/2007) and M/s. Credit Lyonnais(IT Appeal 1781 of 2014 of the Hon ble Bombay High Court)The Departmental Representative (DR)supported the order of the FAA. 4.4. We have heard the rival submissions and perused the material before us. We find that the assessee was playing a very limited role in the sequence of activities of sanctioning of loan by the AE. s to the Indian customers. The contribution on part of the assessee was limited to establish -ing initial contact with Indian entities and acting as a liaison between the AE and the customer. It is a fact that loan was granted by the AE. s and all the gains and risks of the transaction was with them only. The assessee was compensated by the AE. s for the job done by it. As far as interest income is concerned, it is clear that there was no contract /agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings, the TPO observed that Barclays Capital, a division of Barclays bank, would manage the global derivatives operations, that it included foreign exchange, interest rate, equity and commodity and credit derivatives, that the three principal locations of its operations were London, New York, Tokyo with approximately 50 other operations of different business profiles all around the world, including India, that each of the principal trading locations together from the global derivative business of Barclays, that the business was divided by currencies and further subdivided by products, that in view of variety of factors the deal was entered directly by overseas entity with the customers, that employees of Barclays India branch had a primary relationship with the Indian customers, that they would assist the overseas Barclays entity in getting derivative business, that Barclays India branch would get compensated for its market effort. He found that in accordance with the Global TP Policy(GTPP) of Barclays the Indian entity was being compensated at around 24. 40% of the Initial Net Present Value (INPV) in respect of the marketing support it provided to its overseas AE. s, that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n country specific efforts. He rejected the TNMM adopted by the assessee and applied Profit Split Method(PSM) for benchmarking the ALP of the IT. s. Finally, he adopted arm s length compensation at the rate of 60% on INPV for the purpose of benchmarking the IT. s of the assessee. He proposed an upward adjustment of ₹ 51, 23, 17, 545/-. 5.1. Before FAA, during the appellate proceedings, the assessee made elaborate submissions. After considering the available material, he held that the assessee was coordinating with the foreign branches that offer the desired derivatives to Indian customers, that for the services rendered, the Indian branch of the assessee was compensated by the overseas branches at 24. 40 percent (approximately) of the INPV, that the Indian branch had charged the foreign branches on the basis of the GTPP, that the average cost plus margin considered by the assessee was far better than the average of cost plus margin of comparables, that the TPO had not accepted the TP study made by the assessee, that he fixed the ALP on the basis of a foreign bank in India which charged @ 60 percent of the INPV for the derivative product, that he was not justified in comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the functional role of the assessee was limited to rendering the marketing services to overseas branches, that rest of the activities were handled by the AE. s. The derivative transaction does not end with marketing. It is a complex process. So, the AE would compensate the assessee for the services rendered to it. There would always be a relation between the compensation paid and availed services. The assessee had adopted the GTPP to determine ALP of the IT. s. In our opinion, there was no defect in its approach. On the other hand, method applied by the TPO and the details of controlled transactions, relied upon by him, were not available in the public domain. The assessee did not have any opportunity to examine the comparability of FAR of the transactions selected by the TPO. In our opinion, use of untested comparables to determine the ALP is against the basic spirit of the TP provisions and the Rule 10 of the Rules The TPO had also violated the principles of natural Justice by not confronting the assessee with the comparables used against it. He proposed an addition of ₹ 51. 12 crores to the income of the assessee without affording an opportunity to it, so that it coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod, a comparison of the assessee's net profit margin from international transactions with its AEs has necessarily to be made with that of the net pro fit margin realized by the same enterprise or an unrelated enterprise from a comparable but definitely uncontrolled transaction i. e. , a transaction between non-associated enterprises. There is no statutory sanction for roping in a comparable controlled transaction for the purposes of benchmarking. When it has been clearly mandated in all the relevant methods for determining ALP that the comparison has to be made by the enterprise's international transaction with comparable uncontrolled transaction, by no sheer logic a comparable controlled transaction can be employed for the purposes of making comparison. There is no warrant for diluting the prescription given by the statute or rules when such prescription itself serves the ends of justice properly and is infallible. If the view of the Revenue that a controlled transaction should not be shunted out for the purposes of benchmarking is accepted, then all the relevant provisions contained in Chapter X in this regard, will become otiose. If such a contention oj making compariso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the case of Kodak India(P)Ltd. (155TTJ697)wherein the Tribunal has held as under: 69. We also cannot agree with the DR that the issue be restored to the TPO because the methods, as prescribed by the legislature are mandatory, not directory. When mandatory provision is either superseded or ignored, it straightway affects the jurisdiction. In the instant case, we have to mention that it was a case of suo moto reference to the TPO and it is the case of the revenue authorities, to import the provisions of Chapter X. In this circumstance, since the ATPO ddid not adhere to the prescribed methods consciously, another innings to rectify the mistake cannot be allowed, as the TPO infringed the relevant provision of the Income tax act and Rules. In the case of Havells India Ltd. (140 TTJ283)the Tribunal has dealt with the issue of restoring the matter to the file of the TPO and has held as under: 29. Apropos the ld. DR s contention asking for remitting the matter to the Assessing Officer, it must be noted here that such a course is neiher required, nor appropriate to be adopted. As an appellate authority, the Tribunal has to see whether the assessment framed has been fra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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