TMI Blog2018 (6) TMI 285X X X X Extracts X X X X X X X X Extracts X X X X ..... e region which affected borrower’s capacity to borrow - this would have increased the credit worthiness and credit rating of the AE in Thailand, enabling to borrow from Siam Bank at a lesser rate - therefore, charging of premium over and above the rate of interest charged by Siam Bank to its AE in Thailand, is justified. Corporate guarantee provided to its AEs - Held that:- Following the judgement in case of BARTRONICS INDIA LTD. VERSUS DY. COMMISSIONER OF INCOME TAX, CIRCLE – 1 (2) , HYDERABAD. [2017 (9) TMI 1649 - ITAT HYDERABAD] it is held that corporate guarantee is not considered as an international transaction. Disallowance of 5% of general expenses - Held that:- CIT(A) found that that the expenses under the head “ General Expenses’ under the head Miscellaneous Expenses was booked at ₹ 4,10,64,429/- and not the amount of ₹ 6,61,00,053/- as taken by the AO - thus he disallowed 5% of the expenses booked under the head general expenses - we are in agreement with the observations made by the CIT(A) in this regard. Non-deduction of TDS for payment made u/s 40(a)(ia) - Held that:- Assessee had neither made an application before the Assessing Officer u/s.195(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar issues are involved, therefore, for the sake of convenience we consider the facts and grounds narrated in asssessee s appeal in ITA No.68/Ran/2017, wherein the assessee has raised the following grounds :- 1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has grossly erred in not accepting the returned income of the Appellant amounting to ₹ 82,84,86,466/- and in partially confirming the upward adjustment of ₹ 46,74,10,794/- computed by the learned Assessing Officer (Ld. AO) and learned Transfer Pricing Officer (Ld. TPO) in the assessment order passed under section 143(3) of the Income-tax Act, 1961 ( the Act ). 2. On the facts and circumstances of the case and in law, the Ld. CIT(A) grossly erred in upholding an adjustment of ₹ 40,32,34,839/- to the income of the Appellant on account of the alleged international transactions undertaken with its Associated Enterprises (AEs) during the year and in doing so, the Ld. CIT(A) grossly erred in: 2.1 disregarding the Transfer Pricing analysis submitted by the Appellant thereby permitting the Ld. TPO to conduct a fresh search of comparables without providing any specific and cogent fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m under Section 4o(a)(i) of the Act for alleged non-deduction of taxes at source in complete disregard of the Indo-Belgium tax treaty. 5. In doing so, the Ld. CIT(A) disregarded the Protocol to Indo- Belgium tax treaty mandating consideration of beneficial Article 12 of the Indo-US tax treaty which requires services to be made available to the recipient in order to be construed as Fee for Included Services. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming ad-hoc disallowance of 15% of foreign expenses, amounting to ₹ 32,91,583/-, without appreciating the fact that such expenses were incurred wholly and exclusively for the purpose of business in terms of Section 37 of the Act. 6. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the market value of ₹ 3.90 per unit (i.e. cost + 20% mark-up) adopted by the Assessing Officer for the purpose of computing claim u/s 80IA of the Act. 7. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in not considering market value of power at the rates applied by Jharkhand State Electricity Board (JSEB) for sale of pow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest on loan, purchase of fixed assets, sales commission and the total amount payable by the assessee has been determined. The TPO has found that in the current financial year the turnover of the assessee is at ₹ 1422,93,08,000/- and Profit Before Tax(PBT) is ₹ 138,39,60,000/- and interest on fixed assets employed at ₹ 1573,92,83,000/- and the TPO found that the assessee has considered the Most Appropriate Method for the purpose of determining Arm s Length Price (ALP), whereas the assessee has followed the Transaction Net Margin Method(TNMM) and Comparable Uncontrolled Price (CUP) method and has dealt at page 4 of the order. The TPO issued show cause notice to the assessee on 31.08.2010 referred at page 5 para 7 of the TPO s order and the assessee submitted reply in respect of the points raised in the show cause notice and the TPO dealt exclusively on the adjustments to be made in respect of ALP, the TPO considered the various aspects on transactions and corporate guarantees and the nature of transaction on the ALP of the corporate guarantees provided by the assessee against loan from DBS Bank Ltd., Singapore Branch and Siam Bank, Thailand and made adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment of international transaction with Associate Enterprise (AE) for the year under consideration as per audit report in Form No.3CEB filed. On receiving the order of Transfer Pricing Officer, Kolkata, ld. TPO passed the order u/s.92CA(3) of the Act and the AO has calculated the adjustments and assessed the total income considering the transfer pricing adjustment at ₹ 129,58,97,260/- and passed order 143(3)/144C of the Act, dated 31.12.2010. Subsequently, the draft assessment order was served on the assessee and the assessee company vide letter dated 20.01.2011 has made submission and decided to prefer an appeal before the CIT(A) as per the CBDT Clarification No.3457 dated 20.01.2010. Accordingly, the AO passed the assessment order u/s.143(3)/144C of the Act, dated 21.01.2011. 6. Aggrieved by the order passed by the AO, the assessee preferred appeal with the CIT(A). In the appellate proceedings the assessee argued the grounds and reiterated the submissions made before the TPO/AO. The TPO has passed order on 29.10.2010 and made upward adjustment. The assessee has raised the ground first of being that the TPO was erred in confirming the net margin of the comparables a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the set of expenses and has applied it across the comparables selected as well as the assessee and the CIT(A) did not find any defect in the calculation done by the TPO. Before the CIT(A) the assessee further submitted that the computation of Profit Level Indicator ( PLI ) shown by the Ld. TPO in page- 29 of his Order dated October 29, 2010 ( TP Order ) was, prima facie, not true, although, the assessee had furnished the correct computation for reference of the Ld. TPO in the course of its submissions. The assessee further relied on the Safe Harbour rules (under section 92CB r.w.s. 295 of the Act) ( Safe Harbour rules) issued by the Central Board of Direct Tax ( CBDT ) dated August, 2013. Based on the above notification, operating revenues and operating expenses have been considered as follows : - operating expense means the costs of the assessee incurred during the course of its normal operations and in connection with eligible international transactions for the previous year including depreciation and amortization expenses relating to the assets used by the assessee, but excluding the following, namely a) interest expense; b) provision for unascertained liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length prices, but in the nature of presumptive taxation, which generally enthuse taxpayers to opt for the same, as a compromise for not having to be involved in protracted litigation. Safe harbour typically include a premium payable by taxpayers for avoiding disputes and protracted litigations. Safe harbours may broadly take two forms (a) outright exclusion by setting thresholds; or (b) simplification of provisions by designating range, within which prices/profits should fall. New rules IOTA to 10TG contains the procedure for adopting safe harbour, the transfer price to be adopted, the compliance procedures upon adoption of safe harbours and circumstances in which a safe harbour adopted may be held to be invalid. Any taxpayer who has entered into an eligible international transaction and who wishes to exercise the option to be governed by the safe harbour rules is required to file a specified form (Form 3CEFA). Form 3CEFA requires the taxpayer to declare the following: Transaction entered with an AE is an eligible international transaction; Quantum of the international transaction; Whether the AEs country or territory is a no tax or low tax country or territory; and Operating prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : - CORRIGENDUM In partial modification of Circular No. 5/2010 dated 03.06.2010, (i) In para-37.5 of the said Circular, for the lines the above amendment has been made applicable with effect from Is' April, 2009 and will accordingly apply in respect of Assessment Year-2009-10 and subsequent years. The following lines shall be read; the above amendment has been made applicable with effect from 01st October, 2009 and shall accordingly apply in relation to all cases in which proceedings are pending before the Transfer Pricing Officer (TPO) on or after such date. (ii) In para-38.3, for the date 01s1 October, 2009, the following date shall be read: 01s' April, 2009 . 7.11 In terms thereof, in the instant case the benefit of the erstwhile proviso cannot be extended to the assessee. Therefore, the plea of the appellant for consideration of safe harbour rules is dismissed. Ground of appeal is dismissed. 8. None appeared on behalf of the assessee, whereas on the other hand, ld. DR relied on the orders of lower authorities and made the submission. 9. We have heard the submissions of ld. DR and perused the material available on record. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and export of Steel Wire Ropes. Hence, HCL should not have been selected by the Ld. TPO as a comparable to the assessee, as the product profile of HCL was completely different from that of the assessee. The products manufactured by the assessee and HCL fall within different Indian Tariff Codes ( ITC ). Further the difference in the general properties of steel and copper, which alters its use and application, hence viewed by the market as two separate products. Further, the total volume of copper and steel being traded globally is not comparable. The price realization per metric ton by HCL on its sales and the price realization per metric ton by the assessee on its sales, when compared, further substantiate the difference between the two products. It was also submitted that Copper and Steel follow a different manufacturing process, and hence the cost per mt for the products are significantly different. For example, the manufacturing cost of HCL s products for the Year 2006-07 is ₹ 306,410/- per mt whereas the weighted average cost of all steel products including steel wire ropes for the assessee is ₹ 35,057/- per mt. Thus the manufacturing process as well as the cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase Metals and HCL also belonged to the same category of industry. It did not matter whether it manufactured steel or copper. The appellant itself selected Base metal as a search criteria. Copper and steel both are base metal category and companies engaged in manufacturing of either product could be considered as comparable. Further, the appellant did not highlight any instance as to how such specific difference in product would result in significant divergence in profitability of the two companies. Also, the TP provisions enshrined in the Act and the Rules do not anywhere bar from taking Government Company as comparable. The submission of the appellant is dismissed. 12. Ld. DR supported the order of lower authorities. 13. We have heard the submissions of ld. DR and perused the material on record. Prima facie we find that as per the observation of CIT(A) the method chosen by the TPO was TNMM and the principle of TNMM class for functional compatibility and not product compatibility. The industrial sector in which the assessee performed the search was Non electrical Machinery' and Base Metals and HCL also belonged to the same category of industry. It did not matter w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The TPO has brought out the additional risks which need to be factored into for benchmarking the loan. The TPO has very clearly brought out that the loan by the appellant to the Thailand AE is unsecured and subordinated to the loan by Siam Bank to the AE in Thailand. Therefore, reasons exist for making adjustment to the base rate of 7.5% which represented loan by Siam Bank to the AE in Thailand after the taxpayer infused unsecured loan to the AE. It is also true that the rate of interest to be charged on the loan is dependent upon various terms and conditions which include the currency in which loan is given, security extended, the country in which the loan is given, tenure of the loan, the credit rating of the borrower. It is an admitted fact that the borrower was situated in Thailand and there was an economic turmoil in the region which affected borrower s capacity to borrow. It has been stated by the taxpayer that Siam Bank agreed to give loan only after funds were infused by the appellant. In other words, in addition to loan of Siam Bank being secured by the assets of the appellant, additional security in the form of infusion of funds was also obtained. This would have increase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tives and instead should be treated as shareholder services. The CIT(A) called for remand report and dealt on the disputed issue at para 14.20 page 59 and also considered decision of Bharti Airtel and the provisions of the Act and observed that issuance of Corporate Guarantee is an international transaction within the provisions of sec.92B r.w. Explanation (i)(c). It is held that Explanation (i)(e) does not have an application and, accordingly, TPO is not required to demonstrate bearing on profits, income, losses or assets of such enterprises. Further, the decision in the case of Bharti Airtel is distinguishable and is not applicable. Moreover, in a subsequent decision viz. Xchanging Solutions (Bang. ITAT), has held that issuance of Corporate Guarantee impacts the assets of the enterprises. Therefore, it is held that ALP is required to be computed. Without prejudice, the issuance of Corporate Guarantee can also be termed as Service as discussed above requiring determination of ALP. Further, for the detailed reasons discussed above Corporate Guarantee cannot be held to be shareholder activity as claimed and dismissed the ground of appeal of the assessee. We find that the corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has to be necessarily treated as effective from the A.Y. 2013- 2014 and in this regard, relied upon the observations of the Hon'ble Delhi High Court in the case of Skies Satellite. We have also analysed the case law relied upon by the Ld. D.R. and also the provisions of the Act. In our considered opinion, the view taken by the Delhi Bench of ITAT in the case of Bharati Airtel Ltd., (supra) is one of the possible views on the matter and so long as there is no binding decision of any other Higher Forum taking a contrary view, the one which is favourable to the assessee has to be adopted even though other Benches have taken a different view. We, therefore, hold that the Explanation to Section 92B cannot be applied retrospectively and for the years under consideration the assessee having not incurred any costs in providing corporate guarantee it would not constitute International Transaction within the meaning of Section 92B of the Act and consequently, ALP adjustment is not warranted on this aspect. Respectfully following the above decision, we reject the treatment of corporate guarantee as international transaction and consequently, ALP adjustment is not warranted on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this disputed issue is just and proper and therefore, we do not find any necessity to interfere with the order of the CIT(A) and accordingly we uphold the same and dismiss the ground of appeal of the assessee. 18. Ground Nos. 4 5 pertains to non-deduction of TDS in respect of payment made to M/s Hammonds, Belgium u/s.40(a)(ia) of the Act in complete disregard of the Indo-Belgium Tax Treaty. The assessee before the CIT(A) submitted that since the payments made to M/s Hammonds, Belgium, would not be taxable in India in view of the Protocol to India- Beligum Treaty and read with India-US Treaty, the assessee was not required to deduct any taxes from such payments as per the provisions of section 195 of the Act. The AO held that since the assessee had not deducted tax at source in terms of section 195 of the Act, the payment attracted disallowance u/s.40(a)(ia) of the Act. The CIT(A) after considering the submissions and findings of AO and after discussing elaborately on the disputed issue dismissed the ground of assessee holding that by not deducting TDS on the sum of FTS paid to M/s Hammonds, Belgium the assessee had breached the provisions of section 40(a)(ia) of the Act. The o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the AO, has dismissed the ground of assessee. Considering the facts and circumstances of the case, we restrict the disallowance on foreign travel expenses to 10% as against 15% made by the AO and confirmed by the CIT(A). Accordingly, this ground of appeal of the assessee is partly allowed. 20. Next ground relates to disallowance of claim u/s.80IA of the Act. The Ld. Assessing Officer did not agree with the method of computation of market value of power captively consumed in the manufacturing plants of the assessee. The Ld. Assessing Officer stated that JSEB published rates was not the true reflection of market value of power produced by the assessee s captive plants since those rates did not incorporate various parameters relevant for captive plants of the assessee. The Ld. Assessing Officer also took note of the rates at which Damodar Valley Corporation (DVC) sold power in Jharkhand and held that the same were not appropriate citing same reasons on which he rejected the rates of JSEB. The Ld. Assessing Officer, in order to arrive at the most appropriate market value, allowed for a margin of 20% on cost of production of power by such captive power units of the assessee which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction inter-alia provides that where any goods manufactured by the eligible undertaking is transferred to the other undertakings of the same assessee then for the purpose of computing the profits and gains of the eligible undertaking which would be allowable as deduction u/s.80IA of the Act. Accordingly, we remit the disputed issue to the file of AO, who shall examine and verify the issue afresh after providing adequate opportunity of hearing to the assessee and the assessee shall cooperate in submitting the information before the AO. Thus, this ground of appeal of the assessee is allowed for statistical purposes. 22. In the result, appeal of the assessee is partly allowed for statistical purposes. 23. Now, we shall take up appeal of the Revenue in ITA No.85/Ran/2017, wherein the Revenue has raised the following grounds :- 1. The Ld.CIT(A) s decision in deleting the adjustment of ₹ 5,89,506/- suggested by the TPO is not acceptable as the allowance of discount on early payment and charging of interest on late payments are independent transactions. 2. In respect of addition made u/s.40(a)(ia), Ld CIT(A) s decision in deleting the addition is not acceptable as sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order as well as the Remand Report. In terms of the provisions of rule 10C(1), the most appropriate method of ascertaining the arm s length price is the method which is best suited to the facts and circumstances of each particular transaction, and which provides the most reliable measure of an arm s length price in relation to the international transaction though in relatively more specific terms. Rule 10C(2) provides that while selecting the most appropriate method, following factors are to be taken into account: - (a) the nature and class of international transaction; (b) the class or classes of associated enterprises entering into transactions and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n reimbursement of expenses. In the assessment order, he has held that the assessee was required to deduct taxes from such payments and since no tax has been deducted, he disallowed the amount u/s.40(a)(ia). Before the CIT(A), the assessee submitted that in its financial accounts has under the head Operation Management Charges amongst others it had debited expenses amounting to ₹ 30,83,280/- on account of compensation paid to UM Cables for a machinery leased to the them, and subsequently discovered to be operationally defective. M/s. UM Cables incurred the expenditure on making good the defect in the said machinery. During the course of assessment, the ld. Assessing Officer had asked the assessee to furnish the details of such expenses. In response to such direction, the assessee submitted that it had given some assets on lease to UM Cables Ltd. for which UM Cables paid to the assessee 5% of the WDV of the assets equivalent to ₹ 11,06,602/- per annum. A copy of the agreement entered into between the assessee and UM Cables was filed. The assessee has booked the said income in its profit and loss account. The assets given on lease required retrofitting to bring the same t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from salaries, income from house property, profits and gains of business or profession, capital gains and income from other sources. The scheme of tax deduction at source applies not only to the amount paid which wholly bears 'income' character such as salaries, dividends, interest of securities etc., but also to gross sums, the whole of which may not be income or profits of the recipient, such as payments to contractors and sub- contractors and the payment of insurance commission. It is true that in some cases, a trading receipt may contain a fraction of sum as taxable income, but in other cases such as interest, commission, transfer of rights of patents, goodwill or drawings for plant and machinery and such other transactions, it may contain large sum as taxable income under the provisions of the Act. It cannot be said that the amount paid by the appellant to UM Cables was in the nature of income in its hands. The appellant, in its books disclosed the income as well as the expenses. Considering the facts of the case, the ground of appeal is allowed. We find that the CIT(A) dealt on the disputed issue after relying on the judicial decisions and observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been apportioned for these investments/advances and hence disallowed 10% of same on the ground that it was not incurred wholly and exclusively for the purpose of business. The CIT(A) after considering the submissions of the assessee and findings of the AO has allowed the ground of appeal of the assessee. Ld. DR submitted that the assessee had not apportioned any part of profit after taxes for the investments/advances in question and the AO rightly disallowed 10% of the same on the ground that it was not incurred wholly and exclusively for the purpose of business and prayed for allowing the appeal. 31. We find that the CIT(A) dealt on the disputed issue after relying on the judicial decisions and observed that it is now well settled law that if a question arises as to whether a particular payment made from the composite account was out of the overdraft fund or out of the accumulated profits embedded in the collection of sale proceeds and other incomes deposited therein, it cannot be said that the payment was made out of the overdraft. The observations of the CIT(A) in this regard are as under :- I have considered the submissions of the appellant and have also perused the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ^213 crores was invested out of its own funds and ₹ 147 crores was invested out of borrowed funds. Accordingly, he disallowed interest amounting to ₹ 4.40 crores, calculated at the rate of 12 per cent per annum for three months from January, 2000 to March, 2000. In this context it was held that if there are funds available both, interest-free and overdraft and/or loans are taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds are sufficient to meet the investments. 25.6 This judgment was followed by the same high court in the case of CIT V HDFC Bank 366 ITR 505 in the context of disallowance U/S.14A of the Act. It was held that In the case at hand, as recorded by the ITAT, undisputedly the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax free securities. The ITAT therefore held that there was no basis for deeming that the Assessee had used the borrowed funds for investment in tax free securities. On this factual aspect, the ITAT did not find any merit in the contention raised by the Revenue and therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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