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TMI Blog2018 (9) TMI 1544X X X X Extracts X X X X X X X X Extracts X X X X ..... rectly transferred money to US Branch and UK branch in addition to the amount transferred to its subsidiaries. According to the lower authorities, the amount transferred to the branches clearly came under the purview of Transfer Pricing Regulations. Hence, the TPO determined the ALP for the amount so transferred to the branches directly. As no interest was seen charged on the amount transferred to the branches also, the rate which was adopted for advances to subsidiaries (including balances) was being applied for the branches also. 3.2 On appeal, the DRP observed that the assessee was treating the advances given to each of the AE's differently and was charging interest from only one AE, i.e., Suntec Germany whereas the services rendered by all these AE's were similar. In the case of the AE's the assessee had adjusted advances paid against the reimbursement of expenses which the assessee owed to its AE for the services rendered on its behalf. So, the DRP noticed that the treatment of advances and its setting off against the reimbursements payable were similar for all AE's but interest was charged only from Suntech, Germany. According to the DRP if the respective branches have raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered by the previous Bench in assessee's own case. There is no occasion for us to comment upon the correctness or otherwise of the judgments relied upon by the assessee as the case of the assessee is covered against the assessee by the Tribunal order dated 29/11/2013. It is pertinent to refer to the recent judgment rendered by the Hon'ble Supreme Court in the case of P. Suseela & Ors. Vs. Univ. Grants Commn. & Ors. 8 SCC 129, wherein the effect of the previous judgment rendered by the same Bench was discussed by the Hon'ble Supreme Court and it was held as under: "A judgment of the same High Court dated 6th January, 2014 again by a Division Bench arrived at the opposite conclusion. This is also a matter which causes us some distress. A Division Bench of the same High Court is binding on a subsequent Division Bench. The subsequent Division Bench can either follow it or refer such judgment to the Chief Justice to constitute a Full Bench if it differs with it. We do not appreciate the manner in which this subsequent judgment, (even though it has reached the right result) has dealt with an earlier binding Division Bench judgment of the same High Court. In fact, as was pointed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Suntec US and Suntec UK and upheld the charge of interest at the rate of 5% on the advances made to its AEs in USA and UK. 10. The question raised in the present appeal is identical to the question that came up for consideration for the assessment year 2008-09 in IT(TP)A No. 01/Coch/2013 in the case of Suntec Business Solutions Pvt. Ltd. dated 29/11/2013 (supra). We are bound by the previous decision of the ITAT, Cochin Bench rendered in the case of the assessee which is covered against the assessee vide its order dated 29/11/2013. We see no reason to interfere with the same in the present appeal. The interest rate of 5% chosen as an internal comparable is correctly applied. Ground No. 2 is therefore dismissed." 3.9.1 In view of the above order of the Tribunal, we are inclined to decide the issue against the assessee and in favour of the department. Hence, this ground of appeal of the assessee for both the assessment years is dismissed. 4. The next ground in ITA No.113/Coch/2016 is with regard to computation of segmental margin. 4.1 The facts of the case are that the assessee is an entrepreneur and bears the major risk relating to business and operations and all significa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hmarking analysis using no contemporaneous data and substituting the assessee's analysis with fresh benchmarking analysis conducted by the learned TPO is liable to be quashed. 3. The TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the assessee, without establishing functional comparability. The Ld. AR erred in upholding the actions of the TPO. 4. The TPO has rejected companies having related party transactions greater than 25% and applied this filter inconsistently. 5. The TPO grossly erred on facts in arbitrarily rejecting companies having software development revenue less than 75% of total operating revenue and applying inconsistently such filter, without considering the specific segmental results. The Ld. AO erred in upholding the actions of the TPO. 6. The TPO erred on facts and arbitrarily rejecting companies having export revenues less than 75% of total sales and applying inconsistently such filter. The Ld. Assessing Officer erred in upholding the actions of the TPO. 7. The TPO erred in rejecting companies having employee cost less than 25% of total sales and apply inconsistently such filter. The Ld. Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions with DRP, then, under sub-section (5) the DRP, upon receipt of objection is under obligation to issue directions as it thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment and under subsection (6) such directions which are put up under sub-section (5) would be further considering the following documents: (a) Draft order; (b) The objection filed by the assessee; (c) The evidence furnished by the assessee; (d) Report, if any, of the Assessing Officer, valuation officer, or TPO or any other authority; (e) Records relating to the draft order; (f) Evidence collected by, or caused to be collected by, it; and (g) Result of any inquiry made by, or caused to be made by it. 4.8 Under sub-section (7), DRP is also authorized before issuing of direction under sub-section (5) to make such further inquiry, as it think fit or cause any further inquiry to be made by any income-tax authority and report the result of the same to it. Under sub-section (8), the DRP has power to confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng capital adjustments. 5.1 The facts of the case are that TPO allowed nil working capital adjustment on the reason that it was minus 0.17%. The DRP rejected the claim of the assessee by observing that negative working capital adjustment is not being made in the case of the assessee by following the principles laid down by the ITAT, Bangalore Bench in the case of Lam Research India Private Ltd in ITA No. 1437/Bang/2014 dated 30/04/2015. Therefore, no risk adjustment is required to be made in the case of the assessee. The assessee claimed that there were some arithmetical errors in calculation of working capital adjustments by the TPO. The DRP directed the TPO to verify if there are any inaccuracies in any figures, correction be made in computation of working capital adjustment and case working capital adjustment is positive same alongwith 1% risk adjustment may be provided. 5.2 Against this, the assessee is in appeal before us. The Ld. AR submitted that the level of working capital required for the assessee and comparables is different. As such, the working capital adjustment is to be given. It was submitted that the contention of the assessee was rejected without giving proper o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l transactions of the assessee with its AEs in this case also. Hence this ground of appeal of the assessee is partly allowed. 6. The next ground, Ground No. 8 in ITA No. 113/Coch/2016 with regard to disallowance of appropriate adjustments to the comparable companies which was not pressed before us and hence the same is dismissed as not pressed. 7. The next common ground in both the appeals regarding variation of 5 percent from the arithmetic mean u/s. 92C(2) of the Act is consequential in nature which is to be considered after deciding the issue. Hence, this ground of appeal of the assessee is dismissed for both the assessment years. 8. The next ground in ITA No. 509/Coch/2016 is with regard to disallowance made u/s. 14A of the Act. 8.1 The facts of the case are that the TPO denied the claim of the assessee u/s. 14A for the reason that certain expenses were incurred by the assessee while managing the investments and earning the tax free income . On appeal, the DRP confirmed the findings of the TPO. 8.2 Against this, the assessee is in appeal before us. The Ld. AR submitted that while making the disallowance under section14A, the lower authorities have considered the interest p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated the disallowance at Rs. Nil, Rs. L,04,38,000/- and Rs. 26,87,000/- under (i). (ii) & (iii) of rule 8D (2) respectively. There is no dispute regarding the first component, because it is Nil. With regard to the second component being the expenditure by way of interest which is not directly attributable to any particular income or receipt, the AO has determined the amount at Rs. 1,04,38,000/-. The AO has taken into account the entire interest expenditure of Rs. 5,79,46,000/- for computing the above disallowance. The Ld. AR in his submission, has given the break-Up of interest which includes (1) interest on bank loans: Rs. 67,92,000/- (2) interest on term loans Rs. 3,82,11,000/- and (3) interest on other accounts: Rs. 1,29,43,000/-. If loans have been sanctioned for specific projects/expansion and have been utilized towards the same, then obviously they could not have been utilized for making any investments having tax-free incomes. From the copy of the sanction letters from State Bank of Bikaner & Jaipur it can be seen that the loan was granted with a specific requirement that the loan shall be utilized for purchase of imported machinery while in the case of loan from Federal Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded. While holding so, it has held as under:- "11. There is no dispute about working of this method so far as rule 8D(2)(i) and (ii) is concerned. It is only with regard to the computation under rule 8D(2)(ii) that the Assessing Officer and the CIT(A) have different approaches. This provision admittedly deals with a situation in which "the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt". Clearly, therefore, this sub clause seeks to allocate 'common interest expenses' to taxable income and tax exempt income. In other words, going by the plain wordings of rule 8D(2)(ii) what is sought to be allocated is "expenditure by way of interest...........which is not directly attributable to any particular income or receipt" and the only categories of income and receipt, so far as scheme of rule 8D is concerned, are mutually exclusive categories of 'tax exempt income and receipt' and 'taxable income and receipt'. No other classification is germane to the context in which rule 8D is set out nor does the scheme of Section 14A leave any ambiguity about it. 12. Ironi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other manner other than what is supported by plain words of the rule 8 D (2)(ii). 15. We find that notwithstanding the rigid words of Rule 8D(2)(ii), the stand taken by the revenue authorities about its application, as was before Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg Co Ltd Vs DCIT (328 ITR 81) when constitutional validity of rule 8D was in challenge, is that "It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.)". Therefore, it is not only the interest directly attributable to tax exempt income, i.e. under rule 6D(2)(i), but also interest directly relatable to taxable income, which is to be excluded from the definition of variable 'A' in formula as per rule 6D(2)(ii), and rightly so, because it is only then that common interest expenses, which are to be allocated as indirectly relatable to taxable income and tax exempt income, can be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from computation of common interest expenses to be allocated under rule 8D(2)(ii). 17. To the above extent, therefore, we have to proceed on the basis that rigour of rule 8D (2)(ii) is relaxed in actual implementation, and revenue authorities, having taken that stand when constitutional validity of rule 8D was in challenge before Hon'ble High Court, cannot now decline the same. Ideally, it is for the Central Board of Direct Taxes to make the position clear one way or the other either by initiating suitable amendment to rule 8D(2)(ii) or by adopting an interpretation as per plain words of the said rule, but even on the face of things as they are at present, in our humble understanding, revenue authorities cannot take one stand when demonstrating lack of 'perversity, caprice or irrationality' in rule 8D before Hon'ble High Court, and take another stand when it comes to actual implementation of the rule in real life situations. Therefore, even as we are alive to the fact that the stand of the learned Departmental Representative is in accordance with the strict wording of rule 8D(2)(ii), we have to hold that, for the reasons set out above, this rigid stand cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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