TMI Blog2018 (11) TMI 990X X X X Extracts X X X X X X X X Extracts X X X X ..... 005-06 and 2006-07, the foreign AE can be considered as a tested party. TPO in the event assessee is able to provide complete financials of foreign AE along with complete financials of relevant comparables required to benchmark the international transaction. We further direct the TPO to consider the foreign AE to be tested party and then verify whether the Foreign AE could be considered as least complex with minimum adjustments and for which comparables are available easily on public domain. Thus, we are remanding back this issue to the file of A.O/TPO. Transfer Pricing addition in respect of interest on loan given to foreign A.E - Held that:- The contention of the Ld. AR are accepted that where the transaction was of lending money in foreign currency to its foreign subsidiaries the comparable transactions, therefore, was of foreign currency lent by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In such a situation, domestic prime lending rate would have no applicability and the international rate fixed being EURIBOR + 200 points was properly taken by the assessee. Therefore, the TPO’s treatment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, revenue in nature and were deductible. This position remains identical to that of earlier Assessment years wherein the Tribunal decided this issue in favour of the assessee Disallowance u/s. 14A - Held that:- In fact, the assessee in its return of income has not determined any administrative expenditure incurred in relation to those investments, which would earn tax-free income. The assessee has also not determined or allocated any expenditure on account of interest in relation to the average investment of ₹ 157,63,33,630/-. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for re-computation of disallowance under Section 14A of the Act as per the law. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Disallowance of FCCB issue expenses - Held that:- The bond-holders also had an option of converting their FCCB’s into equity shares anytime on or after 31.07.2007 until 11.06.2012. The assessee incurred expenses of ₹ 10,33,76,854 on issue of FCCB’s and claimed the same as deduction in the return of income. These facts were not disputed by the Revenue at any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n favour of the assessee and the DRP rightly directed the AO that no interests need to be charged on share application money pending with its foreign subsidiaries. - decided against revenue. - ITA No. 6042/DEL/2012, ITA No. 2395/DEL/2014, ITA No. 1200/DEL/2014 And ITA No. 1617/DEL/2015 - - - Dated:- 3-10-2018 - SHRI N. K. SAINI, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER For The Appellant : Sh. Upvan Gupta, Adv For The Respondent : Sh. Sanjay I. Bara, CIT DR ORDER PER SUCHITRA KAMBLE, JM These appeals are filed by the assessee as well as by the Revenue against the Assessment Orders dated 30/10/2012 for A. Y. 2008-09, 28.02.2014 for A.Y. 2009-10 and 30.01.2014 for A.Y. 2010-11 passed by the Assessing Officer u/s 143 (3) read with Section 144C of the Income Tax Act, 1961. 2. The revised grounds are as under: ITA No. 6042/DEL/2012(A.Y 2008-09) GENERAL 1. That assessing officer erred on facts and in law in computing taxable income of the appellant at ₹ 62,39,09,420 as against returned loss of ₹ 79,08,80,137. TRANSFER PRICING ISSUES 2. That the assessing officer erred on facts and in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,87,091, being amount pertaining to amortisation of premium payable at the time of redemption of FCCB, holding the same to be unascertained and contingent in nature. ITA No. 2395/DEL/2014 ( A.Y 2009-10) GENERAL 1. That Assessing Officer erred on facts and in law in computing taxable income of the assessee appellant at ₹ 54,71,49,400/- as against returned loss of ₹ 1,93,73,70,310/- 2. That the assessing officer erred on facts and in law in making an addition of ₹ 1,78,26,66,433 to the appellant s income on account of the alleged difference in arm s length price of exports made by the appellant to its associated enterprises. 3. That the assessing officer erred on facts and in law in making an addition of ₹ 9,12,25,805 to the appellant s income on account of the alleged difference in arm s length price of interest charged by appellant from its associated enterprises. CORPORATE TAX ISSUES 4. That the assessing officer erred on facts and in law in reducing the deduction claimed by appellant under the provisions of section 10B of the Income-tax Act, 1961 ( the Act ) in respect of eligible unit at A-164, Noida by s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut appreciating the fact that shares have not been allotted within time as per norms of the company law and also the fact that assessee has parked its money with its foreign AE? 4. That the order of the DRP is erroneous and is not tenable on facts and in law. 5. That the grounds of appeal are without prejudice to each other. 6. That the appellant craves leave to add, alter, amend or forgo any ground(s) of appeal either before or at the time of hearing of the appeal. ITA No. 1617/DEL/2015 ( A.Y 2010-11) GENERAL 1. That assessing officer erred on facts and in law in computing taxable income of the appellant at ₹ 1,43,95,15,290 as against returned loss of ₹ 6,63,65,973. 2. That the assessing officer erred on facts and in law in making an addition of ₹ 41,53,41,460 to the appellant s income on account of the alleged difference in arm s length price of exports made by the appellant to its associated enterprises. 3. That the assessing officer erred on facts and in law in making an addition of ₹ 5,20,26,523 to the appellant s income on account of the alleged difference in arm s length price of interest charged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct disks (CD-R) rewritable compact disks (CD-RW), pre-recorded CD/DVD, digital versatile disks in optical media and compact cassettes, microfloppy disks and digital audio tapes in magnetic media segment and home entertainment business. The case was referred to the Transfer Pricing Officer, New Delhi with the approval of CIT-II, New Delhi u/s 92CA of the I.T Act, 1961. The order of the Transfer Pricing Officer-1(3) was passed u/s 92CA (3) of the I.T Act, 1961 on 31/10/2011 where by the TPO has proposed following enhancements in the total income of the assessee for the international transactions undertaken by the assessee. Sl. Particulars Amount in INR 1 On A/c of exports made to the A.E 73,95,75,860/- 2 On A/c of interest on loan to Subsidiary co 1,58,81,963/- TOTAL 75,54,57,823/- A draft Assessment Order under the provisions of Section 144C(1) read with Section 143(3) was served upon the assessee company on 26/12/2011. The assessee filed its objecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO also used internal TNMM as MAM and compared assessee s profit of AE segment with the profit of non- AE segment. The Ld. AR submitted that transfer pricing adjustment cannot exceed profit of foreign AE. The Ld. AR relied upon the decision of this Tribunal in assessee s own case for the A.Ys 2003- 04, 2005-06 2006-07. (Moser Baer India Ltd. Vs. DCIT 93 Taxmann. Com 79). The aforesaid decision was pronounced by this Tribunal on the basis of another decision of this Tribunal in assessee s own case for the A.Y 2002-03 and the decision of Delhi High Court in the case of CIT Vs Global Ventedge (P) Ltd.: ITA 1828/ 2010 (SLP against this decision has been dismissed by the Supreme Court in CC No.21808/ 2013). The Ld. AR submitted that in the present case, all the 3 AEs had incurred losses in their audited financial statements for the relevant period . The Ld. AR submitted that following the decision of this Tribunal in assessee s own case for the preceding assessment years and the decision of Delhi High Court in the case of Global Vantedge (P) Ltd. (supra), the transfer pricing adjustment in the present case calls for being deleted in totality. Without prejudice, the Ld. AR submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see in 2nd limb of his argument, which has attained finality as SLP has been dismissed by Hon ble Supreme Court in the case of CIT v. Global Vantage (P.) Ltd. cc No. 21808/2013 vide, order dated 2/01/2014, wherein Hon ble Supreme Court upheld decision of Hon ble High Court in the case of CIT v. Global Vantage Pvt. Ltd. TA No. 1828/2010 order dated 14/03/13. To succeed in this argument assessee shall provide all the details to ascertain the correct value of transaction received by A.E. 7.11 Accordingly this ground raised by assessee stands allowed for statistical purposes. From the perusal of Tribunal s order dated 1/5/2018, the Tribunal has remanded back the issue to the file of the TPO, directing to accept assessee s contention of foreign AE to be a tested party in the event assessee is able to provide complete financials of GDM Dubai along with complete financials of relevant comparables required to benchmark the international transaction. The Tribunal further directed that the TPO shall then consider the foreign AE to be tested party and then verify whether the Foreign AE could be considered as least complex with minimum adjustments and for which comparables are avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of loan advanced to foreign A.E., LIBOR/EURIBOR should be taken as benchmark. The Ld. AR relied upon the following decisions, wherein, it has been held that, arm s interest rate in respect of loan advanced to foreign AE should be computed based on interest rate applicable to currency in which loan has to be repaid (PLR is not relevant for foreign currency loans and LIBOR/ EURIBOR only can be considered for benchmarking the same): i. CIT vs Cotton Naturals (1) (P) Ltd.: 231 Taxman 401 (Delhi High Court) ii. CIT vs Tata Autocomp Systems Ltd.: 374 ITR 516 (Mumbai High Court). The Ld. AR further submitted that the Hon ble Rajasthan High Court in case of CIT vs. Vaibhav Gems Ltd. 88 taxmann.com 12 held that where assessee extended loan to its AE, adjustment should be made at average LIBOR rate existing at that time, i.e., at 0.79%, instead of LIBOR + 2%. The Ld. AR also relied upon the following case laws:- Cotton Naturals (1) (P) Ltd. Vs DCIT: 169 TTJ 685 (Delhi ITAT) Motherson Sumi Systems Ltd. Vs Addl. CIT: 58 taxmann.com 38 (Delhi ITAT) UFO Movies (I) Ltd. Vs ACIT: 175 TTJ 633 (Delhi ITAT) Siva Industries Holdings Ltd. Vs ACIT: 46 SOT 112 (Chennai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in Indian Rupee. It is not a comparable transaction. The finding of the TPO that for this reason the interest rate should be computed at 14% per annum i.e. the average yield on unrated bonds for Financial Years (FY, for short) 2006-07, has to be rejected. Thus, the contention of the Ld. AR are accepted that where the transaction was of lending money in foreign currency to its foreign subsidiaries the comparable transactions, therefore, was of foreign currency lent by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In such a situation, domestic prime lending rate would have no applicability and the international rate fixed being EURIBOR + 200 points was properly taken by the assessee. Therefore, the TPO s treatment of benchmarking the aforesaid transaction @ 17.26% by applying the yield rate on corporate bonds as well as the DRP directing the TPO to apply the Prime Lending Rate ( PLR ) prescribed by RBI @ 13.25% to benchmark the transaction, both were not correct. Ground No. 3 is allowed. 13. As regards Ground No. 4 relating to deduction under Section 10B to be allowed without setting off the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r: 5.3. We have perused the submissions advanced by both the sides in the light of the records placed before us and the judicial decisions relied upon by Ld. AR. 5.4. It is observed that only activity carried on by assessee is to sell manufactured products through its foreign AE. Therefore it is not correct to say that assessee traded in foreign exchange derivatives. Further authorities below do not dispute that foreign exchange received by assessee was in respect of exports made. Assessing Officer has not brought anything on record to prove that foreign exchange gain was due to any speculative transaction entered into by assessee. 5.5. Under such circumstances we reverse the observations of Ld. CIT (A) and hold that foreign exchange gain earned by assessee was arising out of business of eligible undertaking for purposes of deduction under section 10B of the Act. 5.6. Accordingly this ground raised by assessee stands allowed. Thus, the issue is squarely covered in favour of the assessee by the decision of the Tribunal for A.Ys. 2003-04, 2005-06 and 2006-07. Ground No. 5 is allowed. 19. As regards to Ground No. 6 relating to reduction of deduction u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee from export business. Therefore, it satisfies the requirements of Section 10B and the Tribunal has rightly held that the assessee is entitled to the benefit of Section 10B even in respect of the profits earned out of sale of scraps materials within the country. In that view of the matter, we do not see any infirmity in the order passed by the Tribunal. Accordingly, the third substantial question of law is answered in favour of the assessee and against the Revenue. In the present case in fact, scrap sales are sales made by assessee s existing exports business only. There is the direct nexus between the profits and gains derived from the assessee from export business and therefore, it satisfies the requirements of Section 10B of the Act. Thus, the Assessing Officer was not correct in disallowing this claim of the assessee. Ground No. 6 is allowed. 22. As regards to Ground No. 7, relating to disallowance of royalty/technical know-how, the Ld. AR submitted that during the relevant assessment year, the assessee made payment on account of royalty/ technical know-how and claimed deduction for the same. The assessing officer relying upon the decision of Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the ground raised by revenue stands dismissed. Thus, in the present assessment year as well the assessee made payment on account of royalty/ technical know-how and claimed deduction for the same. From the perusal of the agreements, it can be seen that the assessee acquired merely right to draw upon technical knowledge of foreign companies for a limited purpose of carrying on its business, and that foreign companies did not part with any of their assets absolutely for ever or for a limited period of time, that they continued to have the right to use their knowledge and, even after agreements had run their course, their rights in this behalf was not lost, that assessee had not, therefore, acquired any asset or advantage of an enduring nature for benefit of its business and that payments were, therefore, revenue in nature and were deductible. This position remains identical to that of earlier Assessment years wherein the Tribunal decided this issue in favour of the assessee and against the Revenue. Ground No. 7 is allowed. 25. As regards to Ground No. 8 relating to disallowance u/s. 14A, the Ld. AR submitted that the Assessing Officer, in the assessment order, without recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO. In fact, the assessee in its return of income has not determined any administrative expenditure incurred in relation to those investments, which would earn tax-free income. The assessee has also not determined or allocated any expenditure on account of interest in relation to the average investment of ₹ 157,63,33,630/-. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for re-computation of disallowance under Section 14A of the Act as per the law. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 8 is partly allowed for statistical purpose. 28. As regards to Ground No. 9 relating to disallowance of FCCB issue expenses, the Ld. AR submitted that the assessee, in June 2007, i.e., during the relevant assessment year, had issued Zero Coupon Foreign Currency Convertible Bonds ( FCCB ) with a total issue size of US$ 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... despite indications to effect that debentures are to be converted in near future into equity shares. The Ld. AR relied upon the following decisions: CIT vs. Secure Meters Limited: 321 ITR 611 (Rajasthan High Court) - SLP dismissed in CC No.10548/ 2009 CIT vs. First Leasing Co. India Limited: 304 ITR 67 (Madras High Court) CIT vs. Southern Petrochemical Industries Corporation Limited: 311 ITR 202 (Madras High Court) CIT vs. ITC Hotels Limited: 334 ITR 109 (Karnataka High Court) CIT vs. Sukhjit Starch Chemicals Limited: 326 ITR 29 (Punjab Haryana High Court) Mahindra Mahindra Limited Vs JCIT: 36 SOT 348 (Mumbai ITAT) CIT vs. Reliance Natural Resources Limited: 166 ITD 385 (Mumbai ITAT) In view of the aforesaid judicial precedents, the Ld. AR submitted that the expenses incurred by assessee on issue of FCCB s calls for being allowed as deduction. 29. The Ld. DR relied upon the Assessment Order. 30. We have heard both the parties and perused all the relevant material available on record. During the present assessment year, the assessee had issued Zero Coupon Foreign Currency Convertible Bonds ( FCCB ) with a total issue size of US$ 150 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturn of income. The Assessing Officer/ DRP disallowed the aforesaid redemption premium amortization by holding that the same is unascertained and contingent in nature. The Ld. AR submitted that at the end of the relevant assessment year, the FCCB were in the nature of debt and conversion thereof into equity, was solely at the option of the bond-holder. Accordingly, as a prudent businessman, the assessee was required to ascertain the future liability and create provisions in respect thereof. The Ld. AR also submitted that, in reality, only 1 % (approx.) of bond holders exercised the option of conversion. In-fact, on the basis of circumstances prevailing at the relevant time, conversion of bonds into equity shares was not at all a viable option for bond-holders, since, the market price of equity shares was much lower than FCCB price, due to global recession and crashing of share markets in India. The Ld. AR submitted that, in respect of the conversion of 1% (approx.) of FCCB by bond-holders into equity shares in subsequent years, the premium already amortized was reversed in books of accounts and was offered to tax in the return of income. The Ld. AR further submitted that it is a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the return of income is allowable. 32. The Ld. DR relied upon the Assessment Order. 33. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee, for the purpose of payment of redemption premium to bond-holders in future, amortized the same in books of accounts over the tenure of bonds, on a prudent basis, as the same was an ascertained liability. The premium amortised every year, in accordance with the Company Law provisions, was also debited to Securities Premium account and not charged to P L account. Accordingly, the same was claimed as deduction in the return of income as a separate line item. During the relevant assessment year, the assessee charged an amount of ₹ 30,47,84,267 towards provision for redemption premium. Out of the same, an amount of ₹ 4,35,97,176 (proportionate interest expenditure qua FCCB utilization towards purchase of capital assets) was suo motu not claimed as deduction in the return of income. Only ₹ 26.11,87,091 (difference of ₹ 30,47,84,267 - ₹ 4,35,97,176) was claimed as deduction in the return of income. At the end of the relevant assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Section 92B. The Ld. AR relied upon the decision of the Delhi Tribunal in case of Bharti Airtel Ltd. Vs. Additional CIT 161 TTJ 428. The Ld. DR could not controvert the same. Thus, the issue is squarely covered in favour of the assessee. 40. We have heard both the parties and perused all the relevant material available on record. The Tribunal in case of Bharti Airtel Ltd. (supra) held as under: 35. ..Suffice to say that we have reached our conclusions on the basis of the legal provisions under section 92B and no judicial precedent, contrary to our understanding of these legal provisions, has been cited before us. There is a decision of the co-ordinate bench in the case of Mahindra Mahindra (supra), referred to in the DRP order, but that decision does not deal with the scope of amended section 92B and leaves the issue open by stating that post insertion of Explanation to Section 92B, the matter will have to be examined in the light of the amended law. We have held that even after the amendment in Section 92B, by amending Explanation to Section 92B, a corporate guarantee issued for the benefit of the AEs, which does not involve any costs to the assessee, does not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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