TMI Blog2018 (11) TMI 1250X X X X Extracts X X X X X X X X Extracts X X X X ..... a. No such evidences were led by the assessee in case of these Chinese quotations, which are downloaded from the Internet without any Comparability analysis, cannot be accepted. Before the learned Transfer Pricing Officer the assessee also did not substantiate that how the Chinese market quotations support the rule 10 B and D of the income tax rules. Further according to the OECD Transfer Pricing Guidelines For Multinational Enterprises And Tax Administration (July 2017) in Para number 2.18 has stated that the term quoted price refers to the price of the commodity in the relevant period obtained in an international or domestic commodity exchange market. The quoted price also include prices obtained from recognized and transparent price reporting or statistical agencies or from governmental price setting agencies where such indexes are used as a reference by unrelated parties to determine prices in transactions between them. Therefore, we fully agree with the order of the learned Transfer Pricing Officer and the learned Dispute Resolution Panel in holding that the Chinese market quotations downloaded from Internet by the assessee of BAO steel and LIiSCO cannot be used for comparabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the learned Transfer Pricing Officer, before the learned Dispute Resolution Panel , or before us this data is made available. Even the composition of the each product with respect to the nickel content, steel content, chromium content et cetera has not been established. Therefore, we do not have any alternative to give such kind of adjustment to the assessee at this stage. Therefore we set aside this issue to the file of the learned assessing officer with a direction to the assessee to substantiate its claim accordingly with respect to the nickel content in the product, nickel price variations over the period, variation in other commodity prices et cetera. The AO may examine the detail and then decide the issue afresh with respect to the alternative claim of the assessee. Alternatively the assessee has also stated that if the CUP method cannot be applied in the case of the appellant due to the reasons stated above, the alternative claim of the assessee is that international transactions undertaken by the assessee to be benchmarked applying the Transaction Net Margin Method - Here the assessee has given multiple data to justify the benchmarking methodology with respect to sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice of interest of loan to subsidiaries - Held that:- The assessee has granted loan to its subsidiary company. Therefore, economic purpose and substance of the debt claim or debt for which granting of credit calls for the lending rate would be determinative. The commercial expediency and related benefits of close connections with the above transaction, of course, would have a marginal significance and effect. The lending rates shown by the bankers as adopted by the learned Transfer Pricing Officer will not have any factoring of that consideration. Furthermore, the credit rating would also be an issue when the banks are lending to a foreign party. The learned assessing officer has also stated that adjustment for securities also required to be made and the bankers extending loan in foreign currency would be insisting on sufficient security which looking at the financial health of the subsidiary is not possible and therefore interest rates are required to be imputed which will take care of this aspect also. In the present case, the borrower is the subsidiary of the lender company and therefore we do not find it necessary to include the same in the interest cost. Therefore, the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h court in case of THE COMMISSIONER OF INCOME TAX, MUMBAI Vs M/s EVEREST KENTO CYLINDERS LTD [2015 (5) TMI 395 - BOMBAY HIGH COURT]. Even otherwise the commission charged by the assessee also in conformity with the rates quoted by Indusind bank and ING vasya bank. Further, the reasons given by us with respect to Risk adjustments and margins while deciding the issue of Interest receipt relying on the decision of Bharti Airtel decision [2014 (3) TMI 496 - ITAT DELHI] are equally applicable for this transaction too. Disallowance under section 14 A r.w.r. 8D - Held that:- For assessment year 2007 08 the learned assessing officer has applied rule 8D for making disallowance under section 14 A of the Income Tax Act of ₹ 3 9214001 where the assessee has earned the exempt income of rupees 1162000/ . Now it is a settled judicial precedent that for assessment year 2007 08 the rule 8D the does not apply. The assessee has contested that in assessment year 2006 07 the assessing officer has made an addition of ₹ 50,000 under section 14 A on the ground that assessee has earned a sum of ₹ 482.26 crores as dividend on investment of ₹ 25209.08 lakhs and no disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee for assessment year 2008 09 is allowed. Disallowance of Bad Debts - Held that:- Both the parties agreed before us that this issue is covered in favor of the assessee by the decision in the assessee s own case for the assessment year 2006-07 wherein, following the decision of Hon ble Supreme Court in the case of T.R.F. Ltd. vs. CIT [2010 (2) TMI 211 - SUPREME COURT] deleted the disallowance of bad debts claimed in that year. Disallowance of depreciation on computer peripherals - Held that:- The power supply equipments and computer peripherals are held to be the part of the computers and are eligible for depreciation at the rate of 60%. The issue is squarely covered by the decision of BSES YAMUNA POWERS LLD. / BSES RAJDHANI POWERS LTD. [2010 (8) TMI 58 - DELHI HIGH COURT] in favour of the assessee. The learned departmental representative could not point out any other decision, which binds us. Therefore, respectfully following the decision of the honourable High Court s the disallowance deleted by the learned commissioner appeals of ₹ 231402/ on account of excess claim of depreciation is confirmed. Addition on account of interest capitalization to be del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises and to unrelated third parties on the same date or a nearby dates. 2.1 That the Commissioner of Income Tax (Appeals) erred on facts and in law in rejecting the benchmarking of international transaction of export of goods undertaken by the appellant in its transfer pricing study by comparing the monthly average price realized in export to related parties with similar average of price of export to the unrelated parties. 2.2 That the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that prices of goods exported to associated enterprise and unrelated third parties varies within a day itself on account of change in market price of nickel and iron and accordingly, benchmarking undertaken on the basis of day to day comparison does not provide accurate or reliable results. 2.3 That while benchmarking the transaction of export of goods applying CUP method, the Commissioner of Income Tax (Appeals) erred on facts and in law in not allowing comparability adjustment on account of bulk discount of 5% given on sales made to associated enterprise allegedly holding that: a. The invoice raised by the appellant does not speak about any discount. b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tax (Appeals) erred on facts and in law in disregarding the fact that the loan was advanced by the appellant to its associated enterprise in foreign denominated currency and accordingly, loan available in the international market with interest rate computed considering Libor rates shall be applied for benchmarking. 4. That the Commissioner of Income Tax (Appeals) erred on facts and in law in sustaining addition of ₹ 2,29,74,981 allegedly on account of the difference in the rate of the commission charged by the appellant for providing corporate guarantee to consortium of Exim Bank and SBI on behalf of its Associated Enterprise. 4.1 That the Commissioner of Income-tax (Appeals) erred on facts and in law in upholding the action of the assessing officer in determining the arm s length price of international transaction of provision of corporate guarantee at 3.5%, allegedly on the basis of assumption that the corporate guarantee, issued by the appellant on behalf of the associated enterprise at Indonesia, was beset with risk and, therefore, a mark-up of 200 basis point were to be charged as against corporate guarantee paid by the appellant @ 1.5%. 4.2 That the Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounds of appeal in ITA No. 4110/Del/2013:- 1. Whether in the facts and circumstances of the case, the Ld CIT(A) erred in deleting the addition of ₹ 4,11,57,000/- on account of bad debts written off by ignoring the findings of the A.O. that these debts were not bad in nature ? 2. Whether in the facts and circumstances of the case, the Ld. CIT (A) erred in deleting the disallowance of ₹ 2,31,402/- made on account of excess claim of depreciation on UPS @ 60% as UPS/Computer peripherals are not part of the Computer? 3. Whether in the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of ₹ 21.74 crores by ignoring the findings of the A.O. which were based on the decision of Tuticorin Alkalis Chemical Fertilizers Ltd. Vs CIT 27 ITR 172 (SC)?. 5. ITA number 6337/Del/2012 is appeal of assessee for A.Y. 2008 09. The assessee has filed appeal against the assessment order passed under section 143 (3) read with section 144C of the Income Tax Act, 1961 [ The Act] dated 18/10/2012 passed by the learned Deputy Commissioner of income tax, circle 4 (1), New Delhi,[ The Ld AO ] wherein the income of the assessee is assessed at ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purposes of benchmarking should be actual transactions and hence, market quotations cannot be used for applying CUP method. 3.4 That the assessing officer erred on facts and in law in benchmarking the international transaction of export of goods to AEs with the prices of sales in domestic market ignoring the differences in domestic market conditions, pricing policies, locational economic difference, etc. 3.5 Without prejudice, the assessing officer/TPO erred on facts and in law in not allowing adjustment on account of bulk discount of 5% given on sales made to AEs as per the accepted practice in the market and ignoring the discount actually extended by the appellant to its customers. 3.6 Without prejudice that the assessing officer/TPO erred on facts and in law in comparing sales made by the appellant to associated enterprises with unrelated enterprises (in domestic market) on the basis of date of contract/date of order acceptance instead of monthly, which evens out daily fluctuation in the prices of metals and hence, provides a better comparison. 3.7 That the assessing officer/TPO erred on facts and in law in comparing the export made by appellant to its associated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... markup of 3.43% on account of adjustment for security and single customer risk, without providing any cogent reasons and on the basis of his surmises and conjecture. 4.5 That the assessing officer/TPO erred on facts and in law in making an addition of Rs. 4,78,62,360, allegedly, on the ground that commission at a lower rate of 1.5% is charged by the appellant for providing corporate guarantee to lenders of its associated enterprise, PT Jindal Stainless. 5.1 That the assessing officer/ TPO erred on facts and in law in imputing the commission at the rate of 2.68% plus a mark-up of 200 bps, allegedly on the basis of data obtained from various banks u/s 133(6) of the Act. 5.2 That the assessing officer/ TPO erred on facts and in law in not appreciating that, the appellant has himself paid commission at the rate of 0.75% on bank guarantee to State Bank of India, which should be considered as CUP, as against the rate of 4.68%. 6. That the assessing officer erred on facts and in law in disallowing expenses amounting to ₹ 4,48,08,080 invoking section 14A of the Act read with rule 8D of the Income-tax Rules, 1962 allegedly holding the same to be attributable to earning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd assessee has exported various hot rolled coils of the value of ₹ 4765543264/ to its associated enterprise which has sold it further after processing into cold rolled coils. The assessee has benchmarked this transaction using CUP [Comparable Uncontrolled Prices] method. Assessee has supplied cold rolled stainless steel coils to its associated enterprise of three grades, namely, J4 HRAP, J4 black, and J 1 Black. It was the contention of the assessee that grades J4 HRAP and J1 black has unique cost structure, specially graded, and manufactured by the assessee company only. The contention is that there are no comparable prices available in the market. Therefore, assessee benchmark these international transactions relating to export of J4 and J1 grades using CUP of sales made of the same grades to thirdparty independent companies. The assessee to benchmark international transactions relating to export of grade J4 stainless steel has aggregated transactions for the entire month and computed the average rate of the same product sold to third parties. Similarly, the assessee has computed average rate for the entire month of the goods sold to the assessee as well as goods sold to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and stated that when the assessee has itself used the third-party sales comparable uncontrolled prices and there are variation in prices between sales made to associated enterprise and third-party of identical product sold on the same date. Therefore, he held that explanation of the assessee does not satisfy the difference in prices on the daily bases. The learned Transfer Pricing Officer also noted that assessee has not furnished any evidence to prove that the quality of steel sold to third party is different from that sold to associated enterprise. He also rejected the explanation of the assessee with respect to the nickel content and wide fluctuation in the price of the nickel. It was further stated by him that effect of 5% tolerance band is not applicable in the CUP method when the prices are compiled on the daily bases from transaction to transaction. Therefore, he held that the difference in price of same grade coils sold to third party and associated enterprises is ₹ 24783673/ and therefore he proposed an adjustment of the above sum on account of export of steel to the associated enterprise. 11. On the issue of interest on loans given to associated enterprise, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oney, 14% rate of interest would be just. Accordingly, on the total loan amount, he applied interest at the rate of 14% amounting to US$ 350,000 wherein the interest already charged is US dollar 185364.58 and computed the balance interest to be charged of 16463 US$ 5.42. He applied the conversion rate of Rs. to dollar at the rate of 43.10 and proposed an adjustment of ₹ 7095787/-. 12. During the course of proceedings, the learned Transfer Pricing Officer noted that assessee has given a bank guarantee of ₹ 10827.5 lakhs on behalf of its associated enterprise and it has charged ₹ 149.21 lakhs for providing the corporate guarantee to its associated enterprise. The assessee benchmarks the above transaction applying the CUP method. The learned TPO for verification of the applicable rate sought information under section 133 (6) from State Bank of India about the rate of commission charged for providing bank guarantee to corporate during the same financial year. The State Bank vide letter dated 1/9/2010 informed that such rates are 2.75% plus ₹ 100/-. Based on the above information, the learned TPO held that a markup of 200 basis points on the rate charged by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7884/ . 15. Assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned Commissioner of Income Tax (Appeals) XX, New Delhi who disposed off the appeal vide order dated 30/4/2013. 16. With respect to the corporate tax disallowance under section 14 A the learned CIT A held that the learned AO has correctly applied the provisions of section 14 A, however he directed the learned AO to take the average value of the total asset as defined in rule 8D of the Income Tax Rules, 1962 for the working out the disallowance of the expenditure. Regarding the disallowance of bad debts of ₹ 41 1517 00/ he directed the learned AO to delete the addition for the reason that it is the prerogative of the businessmen to decide the nature of the debt and the since the amount has already been shown as income in the earlier years, and it has been written off in the profit and loss account, there is no requirement of showing that the debt has become bad during the year. With respect to the excess depreciation claimed on uninterrupted power supply equipments he held that issue has been decided by the jurisdiction High Court in CIT vs BSES Yamuna pow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... location; it is also situated different financially. He also upheld the risk adjustment. Accordingly he upheld the interest adjustment made by the learned TPO on loan given by the assessee of US dollars 25, 00,000 to Indonesian entity and interest income thereon. The 3rd adjustment is on account of the issue of corporate guarantee given by the assessee to the associated enterprise. He upheld the addition proposed by the learned TPO. Reason being that appellant itself has charged the guarantee fee at the rate of 1.5% and the TPO has assumed that corporate guarantee on behalf of entity at Indonesia is beset with risk and therefore 200 basis point were marked upon such guarantee in addition to what the assessee has charged is justified. Therefore, he upheld the 3.5% guarantee charge proposed by the learned Transfer Pricing Officer. 18. Therefore both the parties, assessee and assessing officer aggrieved with the order of the learned Commissioner Of Income Tax Appeals has preferred appeal before us separately. Facts for AY 2008-09 19. For A.Y. 2008 09 assessee filed its return of income on 29/9/2008 at ₹ 696249090/- which was subsequently revised on 29/3/2010 at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess steel, which was also exported to third parties. These grades are J4 plate and JSL tube HRAP. Therefore, the third-party export rates were available only with respect to these two grades. For determination of the arm s-length price of the export of these two grades, assessee adopted the rates at which the sales are made to the third parties as CUP data. However, for the purpose of the comparison, assessee has aggregated the transactions for the entire month and computed average rate of the sales made to associated enterprises, similarly computed average rate for the entire month of third-party sales, and compared these average rates. With respect to the other grades of steel, for which no actual CUP data is available, the assessee adopted Chinese market quotations downloaded from the Internet and used them for benchmarking the transactions of export made to associated enterprises. Even the Chinese quotations were available only in respect of two grades i.e. J4 HRAP and 304 HRAP. For the other grades, the assessee adjusted even this quotation data on account of difference in the nickel content and the conversion cost of black oil to pick the Nickled coil HRAP. With respect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hly LIBOR + 200 basis points using the CUP method stating that assessee is paying interest on the same rate of interest to other lenders. The method adopted by the assessee was not disputed by the learned Transfer Pricing Officer however; the manner in which the CUP method was used was rejected by him. He stated that the interest received from associated enterprise cannot be benchmarked with the interest that assessee is paying to other lenders. Further, the loan given to an associated enterprise cannot be benchmarked with the rate that the assessee would have got if invested in fixed deposits, current deposits, or commercial papers when assessee has already borrowed loan from the banks. Therefore, he proceeded to determine the CUP rates. After detailed analysis and dealing with the objection raised by the assessee and quotes called for under section 133 (6) of the act, he held that that the basic interest rate for the credit rating of the associated enterprise shall be 9.88% and transaction cost thereto should be added of 395 basis points resulting into the CUP rate of 13.83%. He further made a risk adjustment for single customer to that rate as no securities offered by the subsid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld have shown a revenue of ₹ 57564000 and proposed an adjustment of ₹ 47862360/-. 24. Further on aspect of the corporate tax adjustment the learned AO disallowed ₹ 44808080/ on account of disallowance under section 14 A of the Income Tax Act read with rule 8D of the income tax rules 1962. He further disallowed depreciation on the computer peripherals holding that they are not entitled to the depreciation at the rate of 60% but that at the rate of normal depreciation rate applicable to a plant and machinery. Therefore the adjustment on account of excess depreciation claimed by the assessee was disallowed to the extent of ₹ 192197/ . The learned assessing officer further disallowed a sum of ₹ 125330/ being the depreciation on cars under section 32 of the act. Certain other adjustments were also made. Consequently the draft assessment order under section 144C (1) of the Income Tax Act 1961 was passed by the learned assessing officer and forwarded to the assessee on 28/12/2011. 25. Assessee aggrieved with the above order preferred objection before the Dispute Resolution Panel 1, New Delhi who passed the direction under section 144C (5) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing officer at the rate of 15% on the computer peripherals, which were claimed by the assessee at the rate of 60%, the learned Dispute Resolution Panel accepted the argument of the assessee and directed the learned assessing officer to allow depreciation at the rate of 60% on computer peripherals relying on the decision of the jurisdictional High Court of BSES Yamuna powers Ltd. With respect to the disallowance of depreciation of ₹ 1 25330 with respect to the purchase of 3 ready built flats purchased by the assessee where the learned assessing officer disallowed this the appreciation is holding that 5% of the total cost of ₹ 25066109/ is related to the land the learned Dispute Resolution Panel directed the learned AO to delete the disallowance of depreciation of ₹ 1 25330/ . With respect to the depreciation disallowed on cars sold to the employees, the learned Dispute Resolution Panel agreed with the opinion of the learned assessing officer and rejected the argument of the assessee. The learned Dispute Resolution Panel was of the opinion that assessee has devised a scheme to claim more depreciation than what is justifiably entitled to where purchase cost of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned Dispute Resolution Panel directed the learned assessing officer to not to make such adjustment as it is not warranted according to the provisions of section 115 JB of the Income Tax Act. 27. Consequent to the direction of the learned Dispute Resolution Panel the learned Assessing Officer passed an assessment order under section 143 (3) read with section 144C of the Income Tax Act, 1961 on 18/10/2012 and determined the total income of the assessee at ₹ 8 70418751. 28. The assessee aggrieved with the order of the learned Assessing Officer passed under section 143 (3) read with section 144C of the act has preferred an appeal before us. 29. Therefore, now it is apparent that following issues are under dispute in these two appeals filed by the assessee and one appeal filed by the revenue for two assessment years. i. Transfer pricing adjustment made by the learned assessing officer with respect to the arm s-length price of export of goods made by the assessee to its associated enterprise of stainless steel [ Ground no 3 for AY 2008-09 and Ground No 2 for AY 2007-08 in appeal of assessee] ii. Transfer pricing adjustment made by the learned TPO with respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious grades of Stainless Steel products to the associated enterprise, viz., PT Jindal Stainless, Indonesia, aggregating to ₹ 476,55,43,264. For benchmarking the aforesaid transaction, the appellant has applied CUP method as the most appropriate method. For application of CUP method the prices of international transactions of export of the various grades of stainless steel products was compared with prices of export of the same grades of stainless steel products to unrelated party on the same or the nearest possible date. Wherever such comparison was not available, market quotation published in International Weekly Stainless Steel Review was considered as the benchmark for applying CUP method, as under: Product Quantity Exported Average Rate Value INR Rate as per Arm s length Value as per Arm s length HR SS Coils Grade J4/J8 56442.295 60.840 3,433,951.939 60.094 3,391,843.276 HR SS Coils Grade 304 4228.855 129.645 548, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 331.115 74,263 2,45,89,627 HR SS Coils Grade 204CU Black 1,512.335 74,542 11,27,32,964 HR SS Coils Grade 304 HRAP 444.740 1,51,735 6,74,82,617 HR SS Coils Grade 304 Black 2,646.335 1,51,695 40,14,36,716 HR SS Coils Grade 430 Black 436.020 46,999 2,04,92,346 HR SS Coils Grade J4 HRAP 2,202.630 66,605 14,67,07,249 HR SS Plate Grade J4 382.805 68,362 2,61,69,462 HR SS Coils Grade J4 Black 45,205.790 62,446 2,82,29,29,453 HR SS Coils Grade JSL AUS HRAP 803.585 1,16,381 9,35,21,792 HR SS Coils Grade JSL AUS Black 5,581.245 1,11,765 62,37,87,101 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparing unrelated party prices in China, comparability adjustment is made on account of levy of VAT @ 17%. Comparable uncontrolled transactions of sale of stainless steel products by uncontrolled enterprises in China were available only for J4 HRAP and 304 HRAP grades of coils. Accordingly, for comparing such uncontrolled prices with other grades of stainless steel products, adjustment was made because of difference in Nickel content and conversion cost of Black Coil (HR) to Pickled Coils HRAP Annealed, as follows: Grades Adjustment for Nickel contents HRAP Adjustment for conversion from Black to HRAP 204 CU HRAP coil 0.50% 204 CU HRAP coil (second) 0.50% 204 CU Black coil 0.50% USD 60 304 Black coil - USD 60 JSL AUS HRAP coil 3% JSL AUS Black Coil 3% USD 60 JSL Tube Black coil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market quotations are not comparable to price charged by the appellant due to different in geography, product, quality etc. ii. As per rule 10B(1)(a), only actually transacted data can be used as comparable price. iii. The quality of goods manufactured by the appellant are different from goods sold by Chinese manufacturers and therefore, cannot be compared applying CUP. Accordingly, during the course of assessment proceedings, the TPO required the appellant to compare export of goods to related parties with domestic sales and any other comparable prices. In reply to the requirements of the TPO, the appellant vide reply dated 29.09.2011 submitted the comparison of prices of export of steel products to related parties with domestic sales and also with export sales made to unrelated parties after adjusting for nickel content in the exported goods. The TPO while comparing export of goods made to related parties with domestic sales, rejected the adjustment claimed by the appellant on account of bulk discount of 5% to associated enterprises for purchases made in huge quantum by them holding that the appellant has not been able to produce any analysis or documentary evidence for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces 31,818 304 Black Coil 2,850 JSL Tube Black coil 50,562 Total (INR) 34,94,445 Total 12,78,29,707 35. The ld CIT (A) and Ld DRP for respective years confirmed the adjustments proposed by the ld TPO and Therefore assessee is agitated and appealed before us. 36. The ld AR submitted a written note which also covers his oral arguments made before us as under :- The adjustment made by the TPO in the arm s length price of the international transaction of export of goods is unjustifiable and bad in law, for the following reasons as under: 1. Rejection of Chinese market quotations as CUP data: The TPO rejected the use of Chinese market quotations for the purpose of benchmarking the international transaction of export of steel products to associated enterprises, holding that as per rule 10B(1)(a) of the Income Tax Rules, 1962, the data to be used is transacted data and thus use of quotations as done by the appellant is not as per intent of law. In this regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia, price publication including stock exchange and commodity market quotation. The relevant portion of sub-rule (3) of rule 10D reads as follows: 10D. Information and documents to be kept and maintained under section 92D. (1) (2) (3) The information specified in sub-rule (1) shall be supported by authentic documents, which may include the following: (a) official publications, reports, studies, and data bases from the Government of the country of residence of the associated enterprise, or of any other country; (b) reports of market research studies carried out and technical publications brought out by institutions of national or international repute; (c) price publications including stock exchange and commodity market quotations; The appellant for the purpose of applying CUP method compared the prices of international transactions of export of the various grades of stainless steel products with prices of export of the same grades of stainless steel products to unrelated party on the same or the nearest possible date. Wherever such comparison was not available, market quotation of Chinese manufactures, i.e., BAO Steel and LISCO, was con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... typical volume discounts. Attention in this regard is invited to the relevant portion of the order of Special Bench of Tribunal in the case of Aztec Software and Technology Ltd. v. ACIT: 107 ITD 141, where the Tribunal while discussing the applicability of various methods of determining arm s length price, provided under the Act, duly considered that the public data available at exchanges, quotation media etc., on the basis of which actual transaction take place in the market, even amongst unrelated parties can be used/ relied upon, while applying CUP method. The relevant observations of the Tribunal are as under: 119. . ..XX .. XX XX However, where CUP method is to be applied on the basis of public data, it is provided in Regulation 1.482-3(b)(5) that following requirements must be met: - The data is widely and routinely used in ordinary course of business in the industry to negotiate prices for uncontrolled sales. - The data is used to set prices in the controlled transaction in the same way that it is used by uncontrolled taxpayers in the industry; and - The amount charged in the controlled transaction is adjusted to reflect product and service vari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of determination of transaction prices and all that the Transfer Pricing Officer is to see is whether the variation in such prices vis-a-vis the prices at which the appellant has entered into transactions with the AE is reasonably explained. As a matter of fact, Rule 10B(1)(a)(ii) categorically provides that price charged for the property transferred in comparable uncontrolled transaction, which London Metal Exchange price inherently is, to be 'adjusted on account of differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market . What is translates into, on the facts of the present case, is that the adjustment on account of services rendered by the AE and the insurance and freight costs are required to be made to the LME prices. An adjustment of 2% to 6%, for such factors, cannot be said to be unjustified .. xxx xxx xxx xxx xxx The test in selecting the most appropriate method of ALP determination does not have complexity of the method as one of the factors. All that is to be taken into account for the said pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... changes, the transactions of buying and selling are carried out by parties based on the prices prevailing/quoted on the respective stock or commodity exchanges. Therefore, such published data available from stock or commodity exchanges is available to set prices in the uncontrolled and controlled transactions both. At this stage, we may also refer to the judgment of Hon ble High Court of Gujarat in Tax Appeal No.240 of 2014 in the case of CIT Vs. Adani Wilmar Limited, dated 07.04.2014 which was relied upon by the appellant before us. In the case before the Hon ble High Court of Gujarat, the TPO adopted CUP method to benchmark an international transaction. The appellant presented two sets of prices claiming them to be comparable to his transactions with the associated enterprises. One set of prices relied upon by the appellant was supplied by the Malaysian Palm Oil Board and the second set of prices was the quotations published by Oil World, an independent organization. The TPO took into account the rates mentioned by Malaysian Palm Oil Board and disregarded the rates published by Oil World. According to the TPO, the Malaysia Palm Oil Board was a statutory body of Malaysia wherea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse and suffers from any legal infirmity. No substantial question of law arises for determination. Reliance in this regard is also placed on the recent decision of Mumbai Bench of Tribunal in the case of Reliance Industries Limited vs. ACIT (ITA No. 3082/Mum/2006), wherein the Hon ble Tribunal for the purpose of benchmarking international transaction applying CUP method has directed the assessing officer to consider data available in public domain in the form of publication of shipping Intelligence weekly and Drewry Monthly, as under: 12.10 Both the parties agreed before us that the CUP method should be followed. As there is no comparable transactions, in view of the fact that Reichem Isha , is a Unique Vessel, with no comparable ship available, as suggested by both the parties, we set aside the issue to the file of the Assessing Officer for the limited purpose of recomputing the arm s length price by taking the date available in the public domain in the form of publication of Shipping Intelligence Weekly and Drewry Monthly as a comparable price , and thereafter to make various adjustments towards weight, capital cost, risk, etc., and then arrive at the arm s length pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I of the Transfer Pricing Guidelines relating to commodity transactions [Extracted from OECD publication Aligning Transfer pricing Outcomes with value creation OECD 2015] as under .. XXX Therefore respectfully following the decision of Hon‟ble Gujarat High Court and drawing support from OECD BEPS Action Plan , we are of the view that even the quoted prices‟ which is authentic may be acceptable as per Rule 10D(3) of the Income Tax Rules for comparability analysis It is also submitted that the appellant is selling its steel products in global market and the Chinese manufactures, with whom the comparison has been made by the appellant sells its products globally. Since, the market for both appellant and Chinese manufacturers are same, the market quotation provided by the Chinese manufacturers provides better comparable uncontrolled transactions. Reliance in this regard is placed on the decision of M/s Clear Plus India Pvt Ltd vs. DCIT (ITA No.3944/D/2010), wherein the Hon ble Tribunal held that: 7. We have examined the ratio of these cases in the context of the facts of the case. At the cost of repetition, it may be mentioned that goods were sold by the Chin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iv) time of export and (v) size of the order, etc. In fact, in the year under consideration, the price charged by Chinese manufacturers in the open market were lower than the price charged by the appellant from its associated enterprises, due to huge production of steel in their country. Despite slowdown in the steel industry, China has produced 36% more steel than the preceding year which is much higher than the growth in production reported by entire Asia region at 6.3% (refer page 35 of the paper book). Therefore, considering the economic scenario prevalent in the international market, the price charged by the appellant in sales made to associated enterprise cannot be compared with domestic sales and the right comparable ought to be the price at which goods were available to the associated enterprise in the open market, i.e. price charged by Chinese Manufacturers. It is respectfully submitted that comparison of prices of international transactions of export of various grades of stainless steel products with the prices in domestic market would not satisfy the test of comparability, in as much as, the two transactions have been undertaken in different economic and geographi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties provided, sale or purchase volumes, credit terms, transportation terms, etc) (iii) Level of market i.e. wholesale, retail, etc. (iv) Geographical market in which the transaction takes place. (v) Date of transaction (vi) Intangible property associated with the sale (vii) Foreign currency receipt (viii) Alternatives realistically available with the buyer and the seller. 81. In OECD Transfer Pricing guidelines at II-3 paragraphs 2.8 and 2.9 it is states as follows: 2.8 It may be difficult to find a transaction between independent enterprises that is similar enough to a controlled transacting such that no differences have a material effect on price. For example, a minor difference in the property transferred in the controlled and uncontrolled transactions could materially affect the price even though the nature of the business activities undertaken may be sufficiently similar to generate the same overall profit margin. When this is the case, some adjustments will be appropriate. As discussed below in paragraph 2.9, the extent and reliability of such adjustments will affect the relative reliability of the analysis under the CUP method. 2.9 In considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch differences. The said regulations clearly provide for adjustments in margins of the enterprise entering into international transactions for any differences between such international transactions and the transaction of the comparables or between the enterprise entering into international transactions and comparable companies. Reliance is also placed on the following decisions, wherein undertaking economic adjustment for improved comparability of the entities being compared for benchmarking experience has been emphasized. - Sony Ericsson Mobile Communications India Pvt. Ltd. vs CIT III (374 ITR 118) - Transwitch India Pvt Ltd vs DCIT (ITA No 6083/Del/2010) - Hon ble Delhi High Court, in the appeal preferred by the revenue, vide order dated 17.07.2013 upheld the adjustment claimed by the appellant on account of capacity utilization. - Mentor Graphics (Noida) : Private Limited : 109 ITD 101 (Del), - Sony India (P) Limited : 106 ITD 175 (Del). - Skoda Auto India (P) Ltd. vs. ACIT : 122 TTJ 699 (Pune) - Schefenacker Motherson Ltd. vs. ITO (in ITA Nos. 4459 4469/Del/07), - Honeywell Automation India Pvt. Ltd. vs. DCIT (ITA No. 4/PN/08), - Egain Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 444.740 111 401 3,666.023 9 430 Black Coil 8 436.020 55 2 1.240 1 J4 Black Coil 296 45,205.790 153 174 2,243.400 13 J4 HRAP Coil 32 2,202.630 69 69 605.482 9 J4 Plate 14 382.805 27 104 858.935 8 JSL AUS Black Coil 46 5,581.245 121 23 330.510 14 JSL AUS HRAP Coil 18 803.585 45 53 441.518 8 JSL Tube Black Coil 68 6,612.860 97 285 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which has been reproduced in the above part of this order. The relevant portion of impugned TPO s order has also been reproduced in the above part of this order. So as it relates to chemical HOSTAPERM the turnover for this year to the related parties is 29,400 Kgs. @ 302.38 per Kg as against similar sales made to AE s in A.Y 2002-03 to the tune of 23,500 Kgs. at the average the price of ₹ 310.83 per Kg. The uncontrolled party sales for the year under consideration for the same chemical is 700 kgs. as against the similar sales to unrelated parties of 125Kgs. Therefore, it cannot be said that there is any material difference in the facts of the two years i.e. A.Y 2002-03 and 2003-04. When the facts are same the question will be that whether on the same facts Department can take a different stand for the year under consideration which is against the rule of consistency. When there is no difference in the facts of preceding year where the case of appellant has been accepted by the TPO expressly, then in our considered view TPO cannot take a different stand during the year under consideration as the appellant will be entitled to get benefit of the stand taken by the revenue in imm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined by making adjustment on account of bulk discount of 5% given the assess to its associated enterprises. It would be appreciated that prices of international transactions of export to associated enterprise, after considering adjustment on account of bulk discount of 5%, is higher/ within the range of +/-5% than the comparable uncontrolled prices in all grades of stainless steel products. In view of the aforesaid, too, the international transactions of export of stainless steel products is to be regarded as having been undertaken as at arm s length applying CUP method. 3. Comparison on the basis of date of order acceptance cannot be applied in the present case: In the present case, it is submitted that the goods exported by the appellant, namely, hot rolled and cold rolled stainless steel coils contains metal components such as nickel and iron and the prices of the goods sold by the appellant is determined considering the prices prevailing in London Metal Exchange (LME) on the respective dates of such metal components. In view of the aforesaid, the price of goods sold on one specific date cannot be compared with the prices of goods sold on any preceding or subsequent d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d equitable, as tax is payable on the total income after transfer pricing computation in respect of international transactions (See Section 92(4) of the Act). 137. The question of aggregation and disaggregation of transactions when the TNM Method or even in other methods is sought to be applied, must have reference to the strength and weaknesses of the TNM Method or the applicable method. Aggregation of transactions is desirable and not merely permissible, if the nature of transaction(s) taken as a whole is so inter-related that it will be more reliable means of determining the arm s length consideration for the controlled transactions. There are often situations where separate transactions are intertwined and linked or are continuous that they cannot be evaluated adequately on separate basis. Secondly, the controlled transaction should ordinarily be based on the transaction actually undertaken by the AEs as has been struck by them. We should not be considered as advocating a broad-brush approach but, a detailed scrutinized ascertainment and determination whether or not the aggregation or segregation of transactions would be appropriate and proper while applying the particular M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis of the entries in the books of account. The concept of set off or adjustments was/is well recognized and accepted internationally and by the tax experts/ commentators. In case the legislative intent behind sub-section (3) to Section 92 was to deny set off, the same would have been spoken about and asserted different and categorical words. Legislative intent to the contrary should not be assumed. 142. The Legislature, therefore, if it wanted to provide and stipulate that set off would not be available or should be denied, would have appropriately expressed their intention in specific and express words. The intention on the other hand of the Legislature is not what is propounded by the Revenue. Consistent, the stand of the Revenue, it is apparent is divergent from the internationally accepted practice relating to Transfer Pricing determinations. The Legislature when it wanted to deviate, has adopted such recourse as with the year data and use of inter-quartile range. We do not read any repugnancy on this aspect in Section 92(3) of the Act. Thus, where the Act, i.e. the Income Tax Act, 1961 or the Rules do not devise or enact a contrary provision, we should not discard o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessed AE which will have reference to the declared bundled/packaged international transaction. Reliance is also placed in this regard on the decision of the Hon ble Pune Bench of the Tribunal in the case of Demag Cranes Components (India) Pvt. Ltd. vs. DCIT (ITA No. 1683/Pn/2011), wherein, the Hon ble Tribunal while upholding the principal of aggregation held as under: 30. We have carefully considered the rival submissions. Section 92B of the Act provides the meaning of expression international transaction as a transaction between two or more associated enterprises. Rule 10A(d) of the Rules explains the meaning of the expression transaction for the purposes of computation of ALP as to include a number of closely linked transactions. Rule 10B of the Rules prescribes the manner in which the ALP in relation to an international transaction is to be determined by following any of the methods prescribed. Shorn of other details, it would suffice to observe that on a combined reading of Rule 10A(d) and 10B of the Rules, a number of transactions can be aggregated and construed as a single transaction for the purposes of determining the ALP, provided of course that su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm's length price. In case, there is close link exists between the different transactions, the same should be treated as composite transaction and appropriate method should be applied to work out the transfer pricing analysis. Where two or more transactions emanate from common source being an order or contract or an agreement or an arrangement, then such transactions could be said to be closely linked as the nature, characteristic and terms of such transaction substantially flow from the said common source. Reliance is also placed in this regard on the decision of the Canadian International Trade Tribunal in the case of Skechers USA Canada Inc (Appeal No AP -2012-073) wherein the Tribunal held that in cases where the Research and Development activity is necessary for creation of successful models of goods, costs relatable to such R D activity when separately allocated by the manufacture of goods to the distributor of goods, is required to be taken into consideration while determining the arm s length price of sale of goods by the manufacturer to the distributor. The relevant findings of the Tribunal are as under: 82. Not only does the Tribunal consider the R D paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of export of goods made to associated enterprise, applying CUP method, holding as under: 10. We have considered rival contentions and gone through the orders of the authorities below. A clear finding has been recorded by the CIT(A) to the effect that appellant has already considered all the 8 transactions with its AE in totality by aggregating the same whereas the TPO picked up two transactions where the price charge was less than the average market price. Rule 10(A)(a) defines a transaction to include a number of closely linked transaction. In case they are closely linked then they can be aggregated for determining the ALP. We found that appellant has exported hot rolled coils to its AE between 30-6-2005 to 10-3-2006, the price has been determined from the website whose data is not subject to challenge. The product remains the same and the source from which the average price has been taken remains the same. Accordingly, it is a fit case for aggregation. We found that if the average price is adopted for all the 8 transactions, then the average comes exactly to 420.71 which is what the price charged by the appellant to its AE. Furthermore, the detailed finding recorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less steel prices had happened primarily on account of variation in nickel prices in open market. In any case, the aforesaid comparison made by the appellant on the conservative basis, since the prices of stainless steel products were higher in earlier month and have gradually declined in the later month during the relevant financial year. The aforesaid comparison would clearly establish that the prices of international transactions of export of J-4 Black Coil grade of stainless steel product are at arm s length applying CUP method. (ii) 304 Black Coil: In respect of international transactions of export of 304 Black Coil made in the month of April, 2007 (OA date 28-02-2007) was compared with prices of export of similar grade of stainless steel products, viz., 304 HRAP Coil with the minor adjustment on account of difference in conversion of black stainless steel coil to annealed and pickled (AP) coil by USD 60 per metric ton. For international transactions undertaken in the subsequent month, comparison has been made with reference to the comparable uncontrolled prices arrived at, as aforesaid, after making adjustment on account of variation in prices of nickel on day to day varia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of nickel content. (vi) 204CU HRAP Coil: CUP method was applied in respect of international transactions of export of 204CU HRAP Coil grades of stainless steel products with reference to the unrelated party price of market quotation of the above manufacturers of stainless steel products in China. The appellant has also compared the prices of such international transactions of export of 204CU HRAP Coil grades of stainless steel products with the prices of export of highest rate of J-4 Stainless Steel coil with appropriate adjustment of difference in composition on account of nickel content. (vii) 204CU Black Coil: CUP method was applied in respect of international transactions of export of 204CU Black Coil grades of stainless steel products with reference to the unrelated party price of market quotation of the above manufacturers of stainless steel products in China. The appellant has also compared the prices of such international transactions of export of 204CU Black Coil grades of stainless steel products with the prices of export of highest rate of J-4 Stainless Steel coil with appropriate adjustment of difference in composition on account of nickel content. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod. It is submitted that since CUP cannot be applied in the case of the appellant due to reasons submitted infra, it is respectfully submitted that the international transactions undertaken by the appellant ought to be benchmarked applying TNMM. The TNMM examines the net profit margin relative to an appropriate base (e.g. cost, sales, assets) that a taxpayer realizes from a controlled transaction (or transactions that are appropriate to aggregate under the transfer pricing principles). TNMM determines an arm s length price for the transfer of tangible property by reference to an objective measure of profitability of an uncontrolled party, or comparable, that engages in similar transactions or operates under similar circumstances. The method compares the profitability of either the controlled party buyer or seller to the profitability of the comparable. Reliance is placed on the decision of the Mumbai Bench of the Tribunal in the case of ACIT vs. Tara Ultimo Pvt. Ltd. (ITA No. 5098/Mum/2010), wherein the Hon ble Tribunal held that, when ALP cannot be reasonably determined by CUP or any other direct method (i.e., cost plus method and resale price method) in respect of even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on ble Tribunal held that the benefit of range of +/-5% is available not only to a situation where more than one price is determined as ALP by the most appropriate method but also where only one price is determined as ALP, as under: 8. We have heard the rival submissions and perused the relevant material on record. Section 92C deals with computation of arm's length price (ALP). Sub-section (1) of this provision provides that the ALP in relation to an international transaction shall be determined by any of the prescribed methods, being the most appropriate method having regard to the nature of transaction or class of transaction or class of associated persons etc. Five specific methods starting with (a) comparable uncontrolled price method, are set out in this provision with the sixth residual method under clause (f) as : such other method as may be prescribed by the Board . Subsection (2) provides that the most appropriate method referred to in sub-section (1) shall be applied for determination of arm's length price in the manner as may be prescribed, which has been prescribed in rule 10B(1). Proviso to section 92C(2), which is the core of controversy, at the releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or paid may be taken as ALP, not calling for any adjustment. In order to be eligible for exercising option of having ALP as a price varying by +-5% of the price worked out as per rule 10B, it is necessary that there should be more than one price determined by the most appropriate method as per rule 10B which should be then averaged. To put it simply, if there is more than one price determined by the most appropriate method, the ALP shall be considered by taking the cushion of plus minus five percent of the arithmetical mean of such prices. If, however, there is only one price determined by the most appropriate method, then this option of plus minus 5% is not available for determination of the ALP. 11. At this juncture, we consider it expedient to note that the above quoted proviso to section 92C(2) has been substituted by the Finance (No.2) Act, 2009 w.e.f. 1.10.2009 with two provisos. The first proviso states that : 'Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices'. As per the second proviso if the variation between the arm's length price so d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprise and price of export to unrelated party. It is respectfully submitted in this regard as follows: (i) For benchmarking of international transactions of export of J-4 HR Plate SS to associated enterprise in Indonesia on 21-09-2007, the appellant has considered price of export of same grade of steel made to unrelated party in Indonesia on 05-09-2007. The TPO however, has compared the price of export of J-4 HR Plate SS to unrelated party in Bangladesh on 12-09-2007 as comparable uncontrolled price or applying CUP method instead of comparable uncontrolled price of export to the unrelated party in the same country, i.e., Indonesia on 05-09-2007. Accordingly, since the price charged by appellant on sales made to AE at USD 1525 PMT is higher than the price charged from sales made to unrelated third party in Indonesia at USD 1504 PMT, the adjustment of ₹ 83,528 made by the TPO will be deleted. (ii) With respect to the international transaction of J-4 HR Plate SS made on 07-02-2008, the appellant had considered comparable uncontrolled transactions of export of similar product undertaken on 22-02-2008 as the benchmark. The TPO, however, considered the price of export o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re to be compared between the associated property and the Non associate enterprise, the transaction date, the product, quality, and quantity needs to be same. If exact replication is not possible, then it is preferred that in almost replication is achieved. Therefore, he stated that this implies that if the same or similar products are not transacted on the same date, then, the nearest date on which the similar products are transacted should be the date for comparison. He submitted that in the transfer pricing study, the assessee has used monthly average rates. However, it is clear from the transfer pricing study that similar transactions have happened either on the same day or in the same week with similar products with both the associated enterprises and non-associated enterprises. He therefore submitted that hence the approach of the assessee is flawed since it is not judicious to utilize average monthly price while applying CUP method, as the prices through the wall month are likely to fluctuate much more (which is also evident from the case in hand). Therefore, it stated that this might call for suitable adjustments, which are not possible to be quantified accurately. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention is an acceptable document for the application of CUP method. He stated that quotation precedes an actual transaction and is not a transaction per se. According to him, quotation is merely intent to enter into transaction but it is certainly not a transaction. Those being the case, the amount quoted in a quotation can be by no stretch of imagination takes the same of price charged or actually paid under any circumstances. He further stated that for the benchmarking of the transactions were no actual CUP was present since the product developed by the assessee is of high grade and renowned, for benchmarking purposes, the assessee has used the Chinese market quotations. The approach adopted by the assessee is not correct as the product manufactured by the company is in the genius and driven by Indian market forces, plus as already pointed out, the grade of the material is very superior. Thus, to apply up method the first requirement is that the quality of the product needs to be matched. If the approach of the assessee had to be followed, then the basic requirement of CUP method fails as the quality of the product whose quotation it has used is not comparable to that of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e adjustment to nickel prices similar to the adjustment done by the assessee. He further referred to the order of the learned Dispute Resolution Panel in assessee s own case for assessment year 2008 09 where the adjustment in the price of fabricated stainless steel is not dependent on the fluctuating price of the nickel alone. It also depends on various other constituent components of stainless steel. Additionally the learned Transfer Pricing Officer has pointed out that demand and supply gap, seasonal variation; global economic situations also play a vital role. He therefore submitted that any alternate analyses using only one variable would not give the desired results. He therefore supported the order of the learned Transfer Pricing Officer on this count. f. With respect to the contention of the assessee that the learned Transfer Pricing Officer has erred in benchmarking the transaction of export of goods to associated enterprises with the price of goods sold in domestic market ignoring the difference in domestic marketing conditions, pricing policies, locational economic differences et cetera. He therefore submitted that it is important to underline the basic principles of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esses? He further stated that it is pertinent to mention here as stated by the learned CIT appeal that out of the total sales only 10 15% of the sale is towards the associated enterprises. Therefore in uncontrolled conditions the transactions involving 85 90 percentage of the transaction would include the bulk discount and not in the other way around. h. He further referred to the contention of the assessee that the learned Transfer Pricing Officer has erred in comparing the sales based on the date of contract/date of order acceptance instead of monthly, which evens out a daily fluctuation in the price of metals as per the assessee. He submitted that the contention of the assessee is entirely unsustainable as it fails to satisfy the basic requirement of CUP method as laid down in the act, rules as well as the international guidelines such as you and TP manual and OECD guidelines et cetera. He submitted that in the present scenario, as far as possible, if the comparable transactions are to be compared between the associated enterprise and the known associated enterprises, the transaction date, the products, the quality, and quantity needs to be the same. If exact replication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies have a margin of 7.71%, he submitted that in essence, what is being argued by the taxpayer is that cases where profit higher than those of the comparable is are demonstrated at net level, when international transaction is benchmarked using TNMM method, in such cases the ALP should be determined by aggregating the international transactions, where they pertain to purchase, sale, transactions of royalty, warranty charges, intragroup services and AMP expenses. He submitted that the taxpayer is argued that since the ratio of operating margin to operating revenue of the taxpayer is above that of the two comparable companies, the same should be treated to have benchmarked all other international transaction also at arm s length. He submitted that that the net margin of an entity is in operation of various factors. The task of the Transfer Pricing Officer is not so much to determine the profit of the entity but to determine the arm s-length price of international transactions. In the taxpayer s case, the higher operating profit margin that the taxpayer is demonstrating is due to a higher unit price as the product manufactured by the assessee is of a superior grade and a renowned bra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icial precedents and OECD guidelines were quoted by the assessee. The objection of the learned Transfer Pricing Officer is that that the data to be used is transacted data and the quotations are not the transacted data. The identical issue arose in case of a decision by the honourable Gujarat High Court in case of CIT versus Adani Wilmar Ltd [tax appeal number 240 2014 dated 7/4/2014] where the issue was whether the quotation of Malaysian oil price from oil word which is an independent agency of Germany engaged in providing forecasting services for the purpose of deciding the arm s-length price of valuation palm oil is right. The honourable High Court while dealing with the issue noted that firstly the learned assessing officer did not object before the lower authorities that oil word is a forecasting agency and such rates were not based on actual transactions. Thereafter the honourable High Court held that the price publications as long as they are authentic and reliable would be relevant materials. Merely the basis of organization would be of no consequence. Such quotations also would be entitled to its due and full weightage unless it lacks basis. The issue before the honourable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of different quality of steel it was not known that how the products of those of Chinese companies are comparable with the assessee. At page number 8 of the order of the learned Transfer Pricing Officer this was the one of main reason for rejecting the Chinese quotations. For the CUP method to be reliably applied to commodity transactions, the economically relevant characteristics of the controlled transactions and the uncontrolled transactions or the uncontrolled arrangements represented by the quoted price need to be comparable. For the products manufactured by the assessee the economically relevant characteristics include among others, the physical features and the quality of the steel, the contractual terms of the controlled transactions, such as volumes traded of the arrangements, the timing and terms of delivery, transportation, insurance and foreign currency terms are very important. Further relevant factor in determining the appropriateness of using the quoted price for a specific commodity is the extent to which the quoted price is widely and routinely used in the ordinary course of business in the industry to negotiate prices for uncontrolled transactions comparable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the claim assessee has relied on the decision of the coordinate bench in case of ATUL Ltd versus ACIT [ITA number 3118/HD/2010] and the decision of the Mumbai bench of tribunal in case of Clariant chemicals India Ltd versus JCIT [ITA number 2393/IBM/2011]. Therefore, it is stated that if the above discount were factored into the prices then the transactions with the associated enterprise would be in the range of +- 5%. The learned TPO has rejected the discount as has been stated by the learned the TPO that onus is on the assessee to substantiate it claim for quantity discount. The assessee has not been able to submit any analysis or produce any documentary evidences that the assessee is giving 5% discount on bulk purchases since this claim is not substantiated by any evidence, hence rejected. We have carefully considered the decision of the coordinate bench in case of ATUL limited versus ACIT wherein para number 5.19.2 the coordinate bench has held that as far as the merit of this adjustment is concerned we are of the view that it is a common market practice that the bulk purchases are generally given some discount. If the associated enterprise have been given sale price d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim of the assessee is merely an ad hoc claim without any supporting evidences. No documents was also placed before the lower authorities or before us that giving the volume discount is a market trend or commercial practice in steel business when assessee is a premium steel manufacturer of the country. In view of this we do not find any infirmity in the order of the lower authorities in rejecting 5% bulk discount to the assessee. Therefore, this contention is rejected. 42. The third contention of the assessee that prices based on the date of order acceptance cannot be applied in the present case. The claim of the assessee is that the products sold by the assessee contains metal components such as nickel , the prices of the goods sold by the appellant is determined considering the prices prevailing in London metal exchange on the respective dates. It was further stated that there were huge price variation in the price of nickel in a particular year where it has fluctuated 33 times the base price. It was therefore stated that the price of the product sold on one specific date cannot be compared with the price of goods sold on any preceding or subsequent date and therefore it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the coordinate bench. Therefore, respectfully following the decision of the coordinate bench, we also direct the AO to compute the ALP considering the transactions of export to associated enterprise on aggregate basis after assessee establishes before him that all these export transactions of the associated enterprise are interlinked. To this extent, this issue is sent back to the file of the learned AO/TPO with a direction to the assessee to substantiate the argument that the transactions of export of goods to associated enterprise are interlinked. 43. The fourth contention of the assessee before us is that it has made an analysis based upon the nickel price adjusted export data. According to this the comparison of the prices of international transactions of export of those grade of stainless steel product has been compared with the prices of export of the same grade of stainless steel products to unrelated party in the earlier months was determined. There from the adjustment on account of variation in the nickel prices on day-to-day basis as per the prices quoted in London metal exchange was made. After this analysis, the assessee stated that the variation in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned assessing officer with a direction to the assessee to substantiate its claim accordingly with respect to the nickel content in the product, nickel price variations over the period, variation in other commodity prices et cetera. The AO may examine the detail and then decide the issue afresh with respect to the alternative claim of the assessee. 44. Alternatively the assessee has also stated that if the CUP method cannot be applied in the case of the appellant due to the reasons stated above, the alternative claim of the assessee is that international transactions undertaken by the assessee to be benchmarked applying the Transaction Net Margin Method. For assessment year 2007 08 The assessee has also submitted that comparable namely Salem Steel Plant and assessee has operating profit ratio of at the rate of 9.85% which is higher than the operating profit margin of 7.71% of the comparable. Undisputedly both the assesses as well as the learned Transfer Pricing Officer are on the same page that most appropriate method applicable in this case is CUP. It is also not the case of the assessee that the appropriate data is not available, as such statement has never been made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppreciation of the facts. We therefore in the interest of justice, deem it proper to restore the ground raised by the assessee relating to TP adjustment to the file of the TPO for fresh adjudication of the issue in the light of the submission details filed by the assessee in the paper book . Therefore, respectfully following the decision of the coordinate bench in the assessee s own case, we set aside this argument of the assessee to the file of the learned assessing officer/Transfer Pricing Officer, with a direction that if there are more than one prices the learned Transfer Pricing Officer is directed to consider the 5 percent as in the case for assessment year 2006 07. Accordingly, this argument of the assessee is accepted. 46. The seventh argument of the assessee is with respect to certain errors in the comparison made by the Transfer Pricing Officer in his order. The errors pointed out by the assessee with respect to assessment year 2008 09 deserve consideration by the learned Transfer Pricing Officer. The assessee is directed to show the error to the learned TPO/assessing officer and the learned AO and TPO are directed to verify the error and if found correct it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting to USD 1,85,364.58 on loan granted to PT Jindal Stainless, Indonesia. In case of JSL, comparable transaction is available where JSL has availed loan from financial institutions, viz., State Bank of India, at the rate of 3 months LIBOR + 170 basis point and from ICICI at 3 months LIBOR + 140 basis point. JSL had provided the loan to PT Jindal Stainless, Indonesia at higher rate, i.e., 3 months LIBOR + 200 basis points. In addition, the associated enterprise, viz., PT Jindal Stainless, Indonesia has obtained external commercial borrowings from unrelated parties for meeting its working capital requirements at LIBOR + 200 basis point. Considering that, the international transaction of receipt of interest by JSL at LIBOR + 200 basis points was higher or comparable to comparable uncontrolled prices for similar uncontrolled transactions, the international transaction of interest received is considered as being at arm s length applying Comparable Uncontrolled Price method. The TPO, however, in the impugned order has disregarded the benchmarking analysis undertaken by the appellant for determining the arm s length price of interest on loan applying CUP method. He instead impute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rules ) provides for application of CUP method. In terms of the provisions of the said clause, Comparable Uncontrolled Price ( CUP ) Method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances, as under: 10(1) (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii)the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction; In practice, there are two types of comparable uncontrolled transactions. The first, known as an Internal Comparable , is a trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi High Court in the case of ACIT vs. Birlasoft Limited in ITA No. 44/2015, Wherein, while dismissing the appeal of the revenue filed against the decision of Hon ble Tribunal for application of internal TNMM, Hon ble High Court held the court sees no reason to interfere firstly because the ITAT s order has become final. Furthermore, the ITAT s reasoning is in accord with Rule 10B(1)(e)(ii) of the Income Tax Rules. Further, the Benches of the Tribunal has consistently held that while undertaking benchmarking analysis, internal comparable uncontrolled transactions is to be preferred over the external comparable uncontrolled transactions. Reference, in this regard, is made to the following decisions: (i) Inslico Ltd vs. DCIT (ITA No. 4880/Del/2013) (ii) M/s e4e Business Solutions India Pvt. Ltd. vs. DCIT (ITA No. 324/Bang/2015) (iii) M/s. Agila Specialties Pvt. Ltd. vs. DCIT (ITA No. 214/Bang/2015) (iv) Valtech India Systems P. Ltd. vs. DCIT (ITA No. 22/Bang/2014) (v) UCB India (P) Ltd. v ACIT 30 SOT 95 (vi) Easton Fluid Power Limited vs. ACIT (ITA No. 1623/PN/2011) (vii) Cybertech Systems Software Ltd. vs. ACIT (ITA No. 7307/Mum/2012) (viii) Gharda Chemic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... currency, ought to be taken into consideration for undertaking benchmarking of international transactions of loan extended to the AE in foreign currency. Reliance is also placed in this regard on the decision of the Hon ble Pune Bench of the Tribunal in the case of Varroc Engineering Pvt Ltd vs ACIT (ITA No 2482/PN/2012), wherein, the Hon ble Tribunal held as under: In the totality of the facts and circumstances where the appellant has the internal CUP of operating at international rates available and since the said loan raised by the appellant at international rates was advanced to its associated enterprises, we find no merit in the order of the TPO in applying the domestic loan rates i.e. BPLR rates for benchmarking transaction of charging of interest on the loans advanced to the associated enterprises by the appellant. In view of the aforesaid, it is respectfully submitted that since the appellant has charged interest on the loan @ monthly LIBOR plus 200 basis point from JSL Indonesia, being higher than the internal CUP where JSL has availed loan from financial institutions, viz., State Bank of India, at the rate of 3 months LIBOR + 170 basis point and from ICICI at 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k. A bank, it is submitted, cannot have control over the operations of the borrower and accordingly always carry credit risk. However, in the case of the appellant, the associated enterprise, is its wholly owned subsidiary company and accordingly, question of any margin money/security does not arise. Reference in this regard is also made to the recent decision of Delhi Bench of the Tribunal in the case of Bharti Airtel Limited vs. ACIT (ITA No. 5816/Del/2012), wherein, the Hon ble Tribunal upheld the aforesaid proposition of the appellant, as under: 66. We see no substance in this adjustment either. The TPO has taken the lender as the tested party, and yet made adjustments for higher risks on account of assumed lack of security and increased risk of single party dealing. This approach overlooks the fact that the appellant has advanced monies to its subsidiaries which are under its management and control a factor which substantially reduces the risk rather than increasing it. On these facts, it is difficult to understand, much less approve, any rationale for adjustment on account of higher risks. On this point also, we see no merits in the stand of the TPO. In view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at a cheaper rate than what enticed the associated enterprise to obtain a loan from other entities at a higher rate. The logic behind it is that the associated enterprise had exhausted its borrowing limit with the local banks and then it had to take a loan from Indian associated enterprise. He further stated that the contention of the assessee that loan was advanced by the assessee to the associated enterprise in foreign denominated currency therefore should be benchmarked accordingly using LIBOR rates prevalent in the international market is also devoid of any merit. He stated that the company that lent in foreign currency has to bad and additional transaction cost, which for the year under consideration works out to the tune of 3%. Further the learned TPO has examined in detail how he has applied LIBOR + appropriate basis points after accounting for transaction cost, adjustment between the bank and non-bank and adjustment of security. He further submitted that the argument of the assessee that the learned TPO has used information acquired under section 133 (6) without confronting the same to the assessee, he submitted that assessee has been confronted with the result of this exer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different transactions the assessee is trying to benchmark the transaction of receipt of interest with the transaction of payment of interest. Therefore, according to us this is not a proper internal comparable, hence, this argument of the assessee is rejected. 55. Second contention is that benchmarking should be done based on the borrowing rates on Thailand Company as internal CUP. Here the tested party is the assessee therefore the transaction is required to be benchmarked what an independent person in India would have charged on the interest on loan to the foreign AE. Therefore, internal CUP with respect to the borrowing made by the Thailand Company is also correctly rejected by the learned Transfer Pricing Officer. 56. For assessment year 2007 08 the learned commissioner of income tax appeal has upheld the action of the learned Transfer Pricing Officer in benchmarking the rate of interest at Libor +700 basis points and addition on account of the risk factor as a result of that the interest to be charged is determined at the rate of 14%.. Coming to the order of the learned Dispute Resolution Panel for assessment year 2008 09, wherein they have directed the learned Tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest rates charged in ECB loans. Thus the bench marking is based on LIBOR + some basis points depending on the credit rating of X. Indian companies go for External Commercial Borrowings as the interest rates on ECB loans are generally cheaper than the prevailing interest rates in the domestic market. Thus as can be seen from above, while borrowing money by X (in India) from Y (outside India), the interest rates are benchmarked with LIBOR and the interest rate above LIBOR is decided by the stand alone credit rating of X. On the contrary, no company in India would like to investment in the form of loan outside India and that also without security as the interest returns in India would be higher than those prevailing in developed markets. Thus while lending money by X (in India) to Y (outside India), the interest rates would be bench marked against those prevailing in India for investing in corporate bonds (which are without security). 16. We would first like to deal with the aforesaid table and the reasoning given in the case of Logic Micro Systems Ltd. (supra) before we advert to other facets of the issue. 17. In our opinion, the reasoning recorded ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner. 18. This judgment was referred to by us in ITA No. 16/2014, Sony Ericsson Mobile Communications India Private Limited (Now known as Sony India Limited) versus Commissioner of Income Tax-III and other connected cases decided on 16th March, 2015 = 2015-TII-06-HC-DEL-TP and it was held as under:- 147. Tax authorities examine a related and associated parties transaction as actually undertaken and structured by the parties. Normally, tax authorities cannot disregard the actual transaction or substitute the same for another transaction as per their perception. Restructuring of legitimate business transaction would be an arbitrary exercise. This legal position stands affirmed in EKL Appliances Ltd. (supra). The decision accepts two exceptions to the said rule. The first being where the economic substance of the transaction differs from its form. In such cases, the tax authorities may disregard the parties' characterisation of the transaction and recharacterise the same in accordance with its substance. The Tribunal has not invoked the said exception, but the second exception, i.e. when the form and substance of the transaction are the same, but the arrangement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 11, paragraph 6, of the OECD Model Convention, the Commentary on which reads as follows: 32. The purpose of this paragraph is to restrict the operation of the provisions concerning the taxation of interest in cases where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest paid exceeds the amount which would have been agreed upon by the payer and the beneficial owner had they stipulated at arm's length. It provides that in such a case the provisions of the Article apply only to that last-mentioned amount and that the excess part of the interest shall remain taxable according to the laws of the two Contracting States, due regard being had to the other provisions of the Convention. 33. It is clear from the text that for this clause to apply the interest held excessive must be due to a special relationship between the payer and the beneficial owner or between both of them and some other person. There may be cited as examples cases where interest is paid to an individual or legal person who directly or indirectly controls the payer, or who is directly or indirectly cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t will be necessary to resort to the mutual agreement procedure provided by the Convention in order to resolve the difficulty. 23. When this issue was last considered, some members of the former Group of Experts pointed out that there are many artificial devices entered into by persons to take advantage of the provisions of Article 11 through, inter alia, creation or assignment of debt claims in respect of which interest is charged. While substance over form rules, abuse of rights principle or any similar doctrine could be used to counter such arrangements, Contracting States which may want to specifically address the issue may include a clause on the following lines in their bilateral tax treaties during negotiations, namely: The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment. 20. Reverting to the reasoning given, we record that the respondent-assessee had incorporated a subsidiary in United States for undertaking distribution and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. Equally important is sub-rule (3) to Rule 10B, which reads:- 10B. (3) An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if- (i) none of the differences, if any, between the transactions b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders in force, costs of labour and capital in the markets, overall economic development and level of competition, are all material and relevant aspects. If we keep the aforesaid aspects in mind, it would be delusive not to accept and agree that as per the prevalent practice, subsidiary AEs are often incorporated to carry on distribution and marking function. This is not an unusual but common. Once this is accepted, then we cannot accept the reasoning given by the TPO that the transfer pricing adjustment could restructure the transaction to reflect maximum return that a party could have earned and this would be the yardstick or the benchmark for determining the interest payable by the subsidiary AE. This is not what Chapter X of the Act and Rules mandate and stipulate. The aforesaid provisions neither curtail the commercial freedom, nor do they bar or prohibit a legitimate transaction. They permit transfer pricing adjustment so as to bring to tax what would have been paid for the transaction in the same or similar comparable circumstances by an independent third party. 23. This ratio and rationale, when applied to the facts of the present case, would mean that the transfer pricin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CUP Method for computing arm's length interest payable by the subsidiary AE. To this extent, there is no lis or dispute. 26. The TPO has noticed the contractual terms and referred to the following facets: The advance given by the parent company i.e. the assessed to M/s JPC Equestrian Inc. was to meet the working capital requirements of the subsidiary AE. He noted that when independent enterprises transact with each other, their business relations are determined by the market forces operating, i.e. what is the amount of interest that would have been earned had such an advance been given to an unrelated party placed in a similar position as that of the subsidiary AE. The TPO had asked for the audited financial accounts of the subsidiary. Credit rating would be relevant. He accepted that there was a sense of commercial expediency and related benefits in the loan transaction but the assessed had not been able to demonstrate that the interest charged satisfied the arm's length standard. He observed that business prudence or necessity of advancing loan to the subsidiary was not relevant for computing arm's length price (i.e. rate of interest in this case) in unrelated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng exports with the said object and purpose. Export credit interest was available only for limited number of days and for specific purposes. The rates fixed did not reflect comparable market rates. 31. On the question of adjustment, the TPO referred to the FCNR loan advanced by the Power Finance Corporation to the Indian company i.e. Jindal Thermal Power Company Ltd. of US$ 44.50 million. Interest charged in the said case was US LIBOR plus 350 basis points for a company which had been given BB+ credit rating. However, full facts like the nature of transaction; risk factors etc. are not elucidated. He has also referred to the Bank of Baroda website that the rate of interest on FCNR loan were between 350-650 basis points over LIBOR for the FY 2006-07. TPO held that in view of the financial health of the subsidiary AE, interest rate could be taken as the average of six months LIBOR plus 400 basis points. On the question of transaction cost, it was stated that it was mandatory for the bank to insist that the borrower must book forward contracts to hedge their position. The TPO referred to the premium payable for undertaking the said hedging transactions and added a cost of 3% per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, i.e. 2003 have not been examined and are not the basis on which the TPO made the adjustment and compute the interest rate for the transaction under consideration. It claimed that the LIBOR rates in the year 2002 varied between 1.447 % to 3.006 % and in the year 2003 between 1.201% to 1.487%. Rates in the year 2004 were again marginal, with the highest at 3.100% and the lowest at 1.340%. The LIBOR rate of 5.224% quoted in the TPO's order, it is pointed out, was the rate received on the investment made during the assessment year in question by the assessed. Thus, it was argued that the present case is of a long-term loan granted to the AE and the rate of interest charged was much higher than the then prevailing LIBOR interest rate. There is no finding of the TPO, the DRP or the Assessing Officer questioning the long-term transaction as such. 36. Under sub-rule (4) to Rule 10B, the data used for comparability of the uncontrolled transaction should be the data relating to the financial year in which the international transaction has been entered into. The proviso permits consideration of data, not more than two years prior to the financial year, if such data reveals facts whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company might not have completely refrained from making investment for which it borrowed the money. 40. The aforesaid methodology recommended by Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply. 41. Counsel for the Revenue had made reference to Chapter 10 of the U.N. Transfer Pricing Manual, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banking companies are taken as the benchmark rate to arrive at the ALP. The Indian tax administration also uses the interest rate prevalent in the rupee bond markets in India for bonds of different credit ratings. The difference in the credit ratings between the parent in India and the foreign subsidiary is taken into account and the rate of interest specific to a credit rating of Indian bonds is also considered for determination of the arm's length price of such guarantees. 10.4.10.4. However, the Indian transfer pricing administration is facing a challenge due to non-availability of specialized databases and of comparable transfer prices for cases of complex inter-company loans as well as mergers and acquisitions that involve complex inter- company loan instruments as well as an implicit element of guarantee from the parent company in securing debt. 42. The first paragraph quoted above, rightly stipulates that inter- company loans would require examination of the loan agreement, comparison of the terms and conditions of loan agreements, the determination of credit rating of the lender and the borrower, identification of comparable third party loan agreements and sui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or consensus view of the Subcommittee. 43. Normally there would be a difference between the lending rate and borrowing rate in each country. Some authors and writers suggest that the average or mid-point between the two should be taken. However, others like Klaus Vogel, have suggested that economic purpose and substance of the debt-claim or debt for which granting of credit calls for the lending rate would be determinative. Thus, in case of a capital investment, the borrowing rate will apply, whereas in case of credit allowed to a customer on sale of goods, the lending rate would apply. We do not deem it necessary to enter into this controversy and express our view as regards the same. 44. We are also not expressing any view on adjustment for lack of security as this issue does not arise for consideration in terms of the observations of the DRP. 58. In the above decision, the honourable High Court has held that PLR rates are not applicable to loans to be repaid in foreign currency and the interest rates are dependent on the foreign currency in which the repayment is to be made. It is also not dependent on the residence of either party. Therefore, the interest rate shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the coordinate bench in case of Bharti Airtel Limited V ACIT [5816/Del/2012] wherein it has been held that that when the Transfer Pricing Officer has taken the lender as the tested party and yet made adjustment for higher risk on account of assumed lack of security and increased risk of single party dealing is not based on any rational for adjustment on account of higher risk. Apparently, in this case the assessee, lender is a tested party and further the loan is advanced to 100% wholly owned subsidiary in Indonesia the facts of the case are clearly covered by the decision of coordinate bench. The honourable Delhi High Court in CIT vs Cotton Naturals (supra) has already held that the transaction cost of hedging cost is borne and paid by the borrower therefore transaction cost is not applicable in case in question the loan had to be repaid in the foreign currency.Even otherwise according to us the markup towards the transaction cost is exorbitant and comparison with the bank is also untenable. In view of this, we do not see any rational in the impugned in further cost and risk premium on the rate directed by the learned Dispute Resolution Panel . Accordingly we direct the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he associated enterprise for issue of corporate guarantee is comparable / higher than the rate of guarantee charges of 0.75% charged by State Bank of India in uncontrolled transactions. The international transactions of commission received on issue of corporate guarantee is, therefore, considered as being at arm s length applying CUP method. The TPO, however, disregarded the internal CUP provided by the appellant and instead imputed a rate of commission of 2.68% plus 200 bps on the basis of information sought from various banks under section 133(6). Accordingly, the TPO has made an adjustment of ₹ 4,78,62,360 in the arm s length price of commission on corporate guarantee. 63. The ld AR submitted as under :- 1. Issue of guarantee was pursuant to an obligation of the appellant and not at behest of the associated enterprises Section 92(1) of the Act provides for computation of income arising from an international transaction having regard to the arm s length price. The essential elements that should exist for application of provisions of section 92 of the Act are income and international transactions . Sub-section (2) of section 92 of the Act, further provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnection with benefit, service or facility provided to any of such associated enterprise. A corporate guarantee, even though, pursuant to a mutual agreement or arrangement between the two associated enterprises, there is no cost or expense incurred in connection with a benefit or facility on this account, which is to be allocated or apportioned in terms of the second limb of section 92B(1) of the Act. Therefore, the issue for consideration is whether the corporate guarantee in the present case would constitute a transaction , having bearing on profits, income, losses or assets of such enterprises, so as to be regarded as an international transaction in terms of the first limb of sub-section (1) of section 92B of the Act. It is further respectfully submitted that for the purpose of determining whether any guarantee fee was liable to be charged or not in a case where the underlying guarantee is furnished by a parent entity, it needs to be seen whether the guarantee results in a benefit constituting a service to the AE or it is being provided only by the guarantor as a shareholder. Reference in this regard is made to the OECD Transfer Pricing Guidelines, wherein, the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsure client confidentiality and supervision aimed in protecting the group interest as a whole, could not be considered as services within the meaning of Article 5(2)(1) of the India-US Tax Treaty. The relevant extract in this regard is re-produced below: In such a case it cannot be said that MSCo has been rendering the services to MSAS. In our view MSCo is merely protecting its own interests in the competitive world by ensuring the quality and confidentiality of MSAS services. We do not agree with the ruling of the AAR that the stewardship activity would fall under Article 5(2)(1). It is respectfully submitted that issuance of corporate guarantee being a shareholder activity does not amount to a service to the associated enterprise and therefore has no bearing on the income of the assessee. It has also been the settled position that the commercial expediency is to be taken into consideration for determining the taxability or otherwise of a transaction.Reference in this regard is also made to the decision of Hon ble Delhi High Court in the case of CIT vs. Cotton Naturals (I) Pvt. Ltd. in ITA No. 233/2014, Where the Delhi High Court held as under: 17. In our opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E. He noted that when independent enterprises transact with each other, their business relations are determined by the market forces operating, i.e. what is the amount of interest that would have been earned had such an advance been given to an unrelated party placed in a similar position as that of the subsidiary AE. The TPO had asked for the audited financial accounts of the subsidiary. Credit rating would be relevant. He accepted that there was a sense of commercial expediency and related benefits in the loan transaction but the assessed had not been able to demonstrate that the interest charged satisfied the arm s length standard. He observed that business prudence or necessity of advancing loan to the subsidiary was not relevant for computing arm s length price (i.e. rate of interest in this case) in unrelated party transactions. This aspect, he held, would not take precedence over the arm s length nature of interest. 27. Several aspects enunciated above, reflect the correct legal position. We, however, express our inability to accept that commercial expediency and related benefits have no connection or relationship with the rate of interest. In terms of Clause (c) and ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton's case, (supra) has been approved by this Court in several decisions e.g.Eastern Investments Ltd. v. CIT [1951] 20 ITR 1, CIT v. ChandulalKeshavlal Co. [1960] 38 ITR 601 etc. 24. In our opinion, the High Court as well as the Tribunal and other income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. 25. The expression commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency. 26. No doubt as held in Madhav Prasad Jatia& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontained in Section 309 of the Companies Act. This payment is characterized as a guarantee commission and the amount is paid. It is not a lawful payment in the facts of the case and therefore, the Assessing Authority was fully justified in disallowing the said expenditure under Section 37 of the Act. The said expenditure incurred is not for the purpose of earning profits of the business. Merely because the banks insisted on such guarantee and the Managing Director agreed to stand as a guarantor on payment of such commission, the commission is actually paid. That would not constitute a lawful expenditure so as to claim deduction under Section 37 of the Act. The Chennai bench of the Tribunal in the case of Mascon Global Ltd. vs. ACIT (ITA No. 2205/Mds/2010) has appreciated the concept of shareholder services holding that no interest payment on advances extended to a subsidiary was required where the advances made were to undertake an acquisition and hence arose out of commercial expediency. The Hon ble Ahmadabad Bench of the Tribunal in the case of Micro Ink Ltd vs Addl CIT (ITA No 2873/Ahd/10), too, while relying on the OCED guidelines held that activity which is solely undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92B. Further, the Ahmedabad Bench of Tribunal in the case of Micro Inks Limited vs. ACIT (ITA No. 2873/Ahd/2010) for subsequent year, i.e. assessment year 2006-07, extensively dealt with the issue of shareholder s activity with respect to transaction of issue of corporate guarantee and held as under: 33. On a conceptual note, thus, there is a valid school of thought that the corporate guarantees can indeed be a mode of ownership contribution, particularly when, as is often the case, where such a guarantee is given it compensates for the inadequacies in the financial position of the borrower; specifically, the fact that the subsidiary does not have enough shareholders funds . There can be number of reasons, including regulatory issues and market conditions in the related jurisdictions, in which such a contribution, by way of a guarantee, would justify to be a more appropriate and preferred mode of contribution vis-a-vis equity contribution. It is significant, in this context that the case of the assessee has all along been, as noted in the assessment order itself that said guarantees were in the form of corporate guarantees / quasi capital and not in the nature of any servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch a guarantee transaction can only be, and is, motivated by the shareholder, or ownership considerations. No doubt, under the OECD Guidance on the issue, an explicit support, such as corporate guarantee, is to be benchmarked and, for that purpose, it is in the service category but that occasion comes only when it is covered by the scope of international transaction under the transfer pricing legislation of respective jurisdiction. The expression provision for services in its normal or legal connotations, as we have seen earlier, does not cover issuance of corporate guarantees, even though once a corporate guarantee is covered by the definition of international transaction , it is benchmarked in the service segment. In view of the above discussions, OECD Guidelines, as a matter of fact, strengthen the claim of the assessee that the corporate guarantees issued by the assessee were in the nature of quasi capital or shareholder activity and, for this reason alone, the issuance of these guarantees should be excluded from the scope of services and thus from the scope of international transactions under section 92B. Of course, once a transaction is held to be covered by the definit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Es, at least one of which should be a non-resident. 2. An international transaction can be a transaction of the following types: a. in the nature of purchase, sale or lease of tangible or intangible property, b. in the nature of provision of services, c. in the nature of lending or borrowing money, or d. in the nature of any other transaction having a bearing on the profits, income, losses or assets of such enterprises 3. An international transaction shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. 4. Section 92B (2), covering a deeming fiction, provides that even a transaction with non AE in a situation in which such a transaction is defacto controlled by prior agreement with AE or by the terms agreed with the AE. 26. Let us now deal with the Explanation, inserted with retrospective effect from 1st April 2002 i.e. right from the time of the inception of transfer pricing legislation in India, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in international transactions, as in Section 92 B(1), which covers any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises . 30. It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92 B, the transactions should be such as to have bearing on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression international transaction . This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words irrespective of the fact that it ( i.e. restructuring or reorganization) has bearing on the profit, income, losses or assets of such enterprise at the time of transaction or on a future date . What is implicit in this statutory provision is that while impact on profit, income, losses or assets is sine qua non, the mere fact that impact is not immediate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises. These guarantees do not cost anything to the enterprise issuing the guarantees and yet they provide certain comfort levels to the parties doing dealings with the associated enterprise. These guarantees thus do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. One may have also have a situation in which there is a receivable or any other debt during the course of business and yet these receivables may not have any bearing on its profits, income, losses or assets, for example, when these receivables are out of cost free funds and these debit balances donot cost anything to the person allowing such use of funds. The situations can be endless, but the common thread is that when an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Micro Inks (supra), reiterated their decision in the case of Bharti Airtel and after extensively dealing with the laws and precedents of other countries, vi-a-vis Indian Laws, and held as under: 44. As for the words provision for services appearing in Section 92 B, and connotations thereof, our humble understanding is that this expression, in its natural connotations, is restricted to services rendered and it does not extend to the benefits of activities per se. Whether we look at the examples given in the OECD material or even in Explanation to Section 92 B, the thrust is on the services like market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, and scientific research, legal or accounting service or coordination services. As a matter of fact, even in the Explanation to Section 92 B- which we will deal with a little later, guarantees have been grouped in item c dealing with capital financing, rather than in item d which specifically deals with provision for services . When the legislature itself does not group guarantees in the provision for services and includes it in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covers sale or lease of tangible or intangible property . The expression bearing on the profits, income, losses or assets of such enterprises is relevant only for residuary clause i.e. any other services not specifically covered by Section 92 B. It was also contended that, while rendering Bharti Airtel decision, the Delhi Tribunal did go overboard in deciding something which was not even raised before us. In the written submission, it was stated that Hon ble Delhi ITAT was not requested by the contesting parties to decide the issue as to whether the provision of guarantee was a service or not . That s not factually correct. We are unable to see any merits in learned Departmental Representative s contention, particularly as decision categorically noted that not only before the Tribunal, but this issue was also raised before the DRP- as evident from the text of DRP decision. We now take up the issue with respect to specific mention of the words in Explanation to Section 92B which states that For the removal of doubts, it is hereby clarified that (i) the expression international transaction shall include .. (c) capital financing, including any type of long -term or short -te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in Section 92B (1), which covers any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises . It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92 B, the transactions should be such as to have beating on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression international transaction . This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words irrespective of the fact that it (i.e. restructuring or reorganization) has bearing on the profit, income, losses or assets of such enterprise at the time of transaction or on a future date . What is implicit in this statutory provision is that while impact on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of international transaction under section 92B (1) of the Act. The decision of the Tribunal in the case of Bharti (supra) was followed by the Chennai Bench of Tribunal in the case of Redington (India) Limited vs. JCIT (ITA No.513/Mds/2014). The aforesaid decision in the case of Micro Inks (supra) was followed by the Hon ble Ahmedabad bench of Tribunal in the case of Suzlon Energy Limited vs. ACIT (ITA No. 1369/Ahm/2013). In the following cases too, relying on the decision of Bharti Airtel (supra), Hon ble Tribunal held that since no material has been brought by the revenue to show that the corporate guarantee issued by the assessee has bearing on profits, income, losses or assets, no transfer pricing adjustment could be made with respect to corporate guarantee: - Videocon Industries Limited vs. ACIT (ITA No. 6145/mum/2012) - Advanta India Limited vs. ACIT (ITA No. 1643/Ban/12) Reliance is also placed on the recent decision of the Hon ble Rajkot bench of the Tribunal in the case of Jyoti CNC Automation Pvt. Ltd., wherein, while dealing with the entire legal position in this regard, the Hon ble Tribunal held the corporate guarantee to be in the nature of shareholders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Fall 1994), pp. 103-165 (http://www.jstor.org/stable/20771688), has stated that a guarantee is not a service. The following observations, at pages 114, are important: The position that guarantees are services has been discredited by the courts with good reason38. Guarantee fees do not represent payments for services any more than payments with respect to other financial instruments constitute payment for services39. A guarantor does not arrange financing for the debtor, but merely executes a financial instrument in its favour. 38 See. e.g., Centel Communications Co. v. Commissioner, 92 T.C. 612, 632 (1989), aff d, 920 F2d 1335 (7th Cir. 1990); Bank of Am. v. United States, 680 F.2d 142, 150 (Cl. Ct. 1982). The Service's current position on the characterization of guarantee fees as payment for services under section 482 is inconsistent with its treatment of guarantee fees under other provisions. See P.L.R. 9410008 (Dec. 13, 1993). 39 But cf Federal Nat'l Mortgage Ass'n v. Commissioner, 100 T.C. 541, 579 (1993) (Fannie Mae provided services by buying mortgages). 37. We are in agreement with these views. There can thus be activities which benefit the group entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or own use is a reasonable presumption as it is a matter of course rather than exception. There has to be something on record to indicate or suggest that the funds raised by the subsidiary, with the help of the guarantee given by the assessee, are not for its own business purposes. As a plain look at the details of corporate guarantees would show, these guarantees were issued to various banks in respect of the credit facilities availed by the subsidiaries from these banks. The guarantees were prima facie in the nature of shareholder activity as it was to provide, or compensate for lack of, core strength for raising the finances from banks. No material, indicating to the contrary, is brought on record in this case. Going by the OECD Guidance also, it is not really possible to hold that the corporate guarantees issued by the assessee were in the nature of 'provision for service' and not a shareholder activity which are mutually exclusive in nature. In the light of these discussions, we are of the considered view, and are fully supported by the OECD Guidance in this, that the issuance of corporate guarantees, in the nature of quasi-capital or shareholder activity- as is the un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently, Mumbai Bench of Hon ble Tribunal in the case of The Bombay Dyeing Mfg. Co. Limited vs. DCIT in ITA No. 1716/Mum/2017 dated 27.10.2017, reiterating the principle of Shareholder s fu`nction and relying on the decision of Hon ble Supreme Court's in case of S.A. Builders Ltd. v. CIT (2007) 288 ITR 1 (SC). The Hon ble Tribunal while deleting the transfer pricing adjustment made by the TPO on account of issue of corporate guarantee, upheld the contention of the assessee that reiterates the proposition of the assessee that when the guarantee has been given by the assessee results in a direct or indirect benefit to the assessee itself, then there arises no need to charge any commission on the same. The relevant findings of the Tribunal read as under: 18. Further, we are in agreement with the argument of the assessee that even if providing corporate guarantee falls within the definition of international transaction , in our view, providing such corporate guarantee by a parent company to its wholly owned subsidiary without charging any commission/fees would still be regarded as being at arm's length price, if such corporate guarantee was provided by the parent company f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er taxpayers operating in the same market. The relevant facts of the present case do not indicate that there was any such business strategy adopted by the assessee in not charging commission in respect of guarantees issued for its AEs. As a matter of fact, there is nothing to suggest that any such business strategy was adopted by the assessee with specific intention or motive and the case has been sought to be made out merely on the basis of commercial expediency by claiming that the assessee was benefited as a result of giving the guarantees in the form of commercial benefits secured for future. 20. Thus, the above decision of the Mumbai Tribunal reiterates the proposition of the assessee that when the guarantee has been given by the assessee results in a direct or indirect benefit to the assessee itself, then there arises no need to charge any commission on the same. Thus, following the decisions of the co-ordinates benches of the Tribunal (supra), we, in the present case are of the view that the above transaction does not fall within the purview of international transaction as defined under section 92B of the Act and hence, the orders of the lower authorities are reversed. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the rate of 0.6%. Further, Hon ble Bombay High Court in ITA No. 1165 of 2013, dismissing the appeal filed by the revenue against the order of the Tribunal, held that: In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered the highest rate of commission charged by State Bank of India on corporate guarantee. It is common understanding that the rate of commission increases depending on the increase in level of risk involved in the providing such guarantee. Accordingly, if the highest rate of commission has been considered, the risk has already been factored in such rates. Further, no cogent basis and reason is provided in the impugned order for charging a markup of 200 bps on account of security and single customer risk. Since the TPO has considered the highest rate of commission charged by the banks without taking into account the credit worthiness and market reputation of the appellant, a markup on account of risk adjustment is unwarranted and liable to be reduced from the arm s length rate of interest so determined. 64. The ld DR vehemently relied upon the order of the learned Transfer Pricing Officer, the learned Dispute Resolution Panel , and the learned commissioner of income tax appeals. He submitted that the claim of the assessee that giving a corporate guarantee to its associated enterprise is not an international transaction is devoid of any merit as the assessee itself is consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the learned CIT appeal and approved by the learned Dispute Resolution Panel is deserves to be upheld. 65. We have carefully considered the rival contention. Briefly stated the facts of the case is that assessee has issued a corporate guarantee for a sum of US dollars 30 million to the lenders of its associated enterprise PT Jindal stainless, Indonesia. For assessment year 2007 08 the assessee received the commission of ₹ 1 4921269 computer that the rate of 1.5% on the amount of loan availed by the associated enterprise and further for assessment year 2008 09 at the same rate the assessee received the sum of ₹ 9 701640/ . The learned Transfer Pricing Officer computed the ALP @ of 3.5% for assessment year 2007 08 making an adjustment of 200 basis points on account of adjustment for risk and 4.68% for assessment year 08-09 considering the margin of 25%, proposing a markup of 200 basis point and made the respective adjustment. For AY 2007 08 the learned commissioner of income tax appeals and for assessment year 2008 09 the learned Dispute Resolution Panel upheld the adjustment made by the learned Transfer Pricing Officer. 66. The first contention of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. 68. Even otherwise the commission charged by the assessee also in conformity with the rates quoted by Indusind bank and ING vasya bank. Further, the reasons given by us with respect to Risk adjustments and margins while deciding the issue of Interest receipt relying on the decision of Bharti Airtel decision (Supra) are equally applicable for this transaction too. In view of this Ground No 5 for Ay 2008-09 and Ground No 4 for Ay 2007-08 are partly allowed. 69. The fourth issue was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in Civic Appeal No.7020 of 2011) and Hon ble Delhi High Court in the case of Maxopp Investment Ltd. : 347 ITR 272, too held that Rule 8D is not retrospective and applies from assessment year 2008-09 only. In view of the above Rule 8D has wrongly been applied by the assessing officer. Even otherwise, the disallowance made by the assessing officer is not sustainable for the following reasons submitted as under: The provisions of section 14A of the Act provide that no deduction shall be allowed in respect of expenditure incurred by the appellant in relation to income that does not form part of the total income. The said section reads as under: Expenditure incurred in relation to income not includible in total income. 14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the appellant in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, the same needs to be disallowed under section 14A of the Act. The relevant portions of the decision of Supreme Court, wherein the contentions of the Department have been dealt are as under: According to the Department, the differential amount between the purchase and sale price of the units constituted expenditure incurred by the appellant for earning taxfree income, hence, liable to be disallowed under Section 14A. As a result of the dividend pay-out, according to the Department, the NAV of the mutual fund, which was ₹ 17.23 per unit on the record date, fell to ₹ 13.23 on 27.3.2000 (the next trading date) and, thus, ₹ 4/- per unit, according to the Department, constituted expenditure incurred in terms of Section 14A of the Act. In its return, the appellant, thus, claimed the dividend received as exempt under Section 10(33) and also claimed set-off for the loss against its taxable income, thereby seeking to reduce its tax liability and gain tax advantage. The Supreme Court negated the contentions of the Department and held that there needs to be a proximate nexus of an expenditure with exempt income before a disallowance of same can be made unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come, before rejecting the claim of appellant and computing disallowance under section 14A as per Rule 8D of the Rules. The relevant observations of the High Court are as under: .. Thus, we will have to consider the argument of the asssessees in respect of the expression expenditure incurred in the context of the expenditure being in connection with or pertaining to income which does not form part of the total income under the said Act. 27. A reference was made to the decision of the Punjab and Haryana High Court in the case of CIT-II v. Hero Cycles Ltd [ITA No. 331/2009: decided on 4/11/2009] wherein it was observed that:- Disallowance under Section 14A requires finding of incurring expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand. 28. It was contended that unless and until there was actual expenditure for earning the exempted income, there could not be any disallowance under section 14A. While we agree that the expression expenditure incurred refers to actual expenditure and not to some imagined expenditure we would like to make it clear that the 'actual' e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer and thus disallowance was justified. We are unable to accept the submission. 4. In view of finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under Section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under Section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of Section 14A, cannot be accepted. Disallowance under Section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand. In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible. Reliance in this regard is further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim of the appellant and only thereafter can the assessing officer proceed to complete disallowances as per Rule 8D of the I.T. Rules. On the other hand, we find that the appellant considering the time span by the employee in relation to the investment activity has attributed 10% of the salary and other overheads relating to said employee as having relation with making investment /earning exempt dividend income has computed the amount of ₹ 2,40,000 as disallowable under section 14A of the Act, and in the manner as explained above in the submissions of the Learned AR. In addition to above the appellant has further allocated 10% of administrative expenses per head amounting to ₹ 15,252 to cover further indirect cost in relation to various services that the financial controller may have used while performing investment decision. In absence of dissatisfaction recorded by the assessing officer on the working of the above disallowance made under section 14A of the Act and offered by the appellant, we are of the view that the assessing officer was not justified in making the disallowance of ₹ 30,29,248 (Rs.32,84,500 ₹ 2,55,252).In this regard, we also find streng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1] 199 Taxman 149 (Punj. Har.) (Mag.) Wimco Seedlings Limited vs. DCIT : 107 ITD 267 (Del.) (TM) Minda Investments Ltd. v. DCIT: 138 TTJ 240 (Del.) Maruti Udyog Limited V. DCIT: 92 ITD 119 (Del.) ACIT v. Eicher Limited: 101 TTJ 369 (Del.) DLF Ltd. vs. CIT: 27 SOT 22 (Del) Punjab National Bank V. DCIT: 103 TTJ 908 (Del.) Vidyut Investment Ltd: [2006] 10 SOT 284 (Del.) Impulse (India) Pvt. Ltd.: (2008) 22 SOT 368 (Del.) D.J. Mehta v. ITO: 290 ITR 238 (Mum.) (AT) Jindal Photo Ltd vs. DCIT: ITA No. 814 (Del) 2011 CIT v. K. Raheja Corporation Ltd.: ITA No. 1260/2009 (Bom.) Hence, only expenditure which has direct nexus with the earning of exempt income, ought to be disallowedunder section 14A of the Act. That apart and without prejudice to the above, even otherwise, no expenditure debited to the profit loss account including interest expenditure has proximate, leave alone remote nexus with investments in shares/ mutual funds, as demonstrated as under: On perusal of the balance sheet of the appellant for the relevant previous year ending 31st March, 2007, it would be noted that the appellant held investments aggregat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed funds with investments. The Gujarat HC in the case of CIT vs UTI Bank Ltd: 215 Taxman 8, held that where there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A of the Act. Relevant extract of the judgment is reproduced as under: 3. The issue pertains to disallowance under Section 14A of the Act made by the Assessing Officer which was partially deleted by the CIT(A). Such order of CIT(A) gave rise to cross appeals at the hands of the appellant as well as the revenue. Tribunal confirmed the view of the CIT(A) making following observations: 33. We have heard the rival contentions and perused the material on record, The undisputed facts are that during the year the appellant has earned interest of ₹ 17.45 crore on tax free bond and debentures as against which the appellant had suomotu disallowed ₹ 5.53 crore being the interest expenses u/s. 14A as against which the AO has worked out the disallowance of ₹ 32.76 crore. After giving the credit of disallowance of ₹ 5.53 crore made by the Appellant, the AO disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 272 (Guj) M/s Agrovet Ltd. v. ACIT: ITA No. 1629/Mum/09 (Mum.) Dy.CIT v. EimcoElecon (India) Ltd.: 142 ITD 52 (Ahd) Dy.CIT v. Jammu Kashmir Bank Ltd.: 142 ITD 553 (Asr.) Hero Honda Finlease Ltd vs. ACIT: ITA No. 3726/Del/2012 (Del) ACIT vs. Champion Commercial Co Ltd: 152 TTJ 241 (Kol) TML Drive Lines Ltd vs. ACIT : ITA No. 6064/Mum/2010 (Mum) Kulgam Holdings Pvt. Ltd. vs. ACIT : ITA No. 1259/Ahd/2006 (Ahd) Max India Limited vs. DCIT: ITA No. 103/2006 (Amr) It is submitted that the aforesaid interest expenditure being presumed to have not been incurred for investment in shares/mutual funds cannot even be disallowed under section 14A by applying sub-rule 2(ii) of Rule 8D for the following reasons: In accordance with provisions of Sub-Rule (2)(ii) of Rule 8D of the Rules, interest expenditure, which is not directly attributable to any particular income or receipt, can be disallowed by applying formula prescribed therein, viz., ratio of average value of investment to average value of total assets. As a necessary corollary, interest expenditure which is directly related to other business activity, other than resulting in earning of exempt income, canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant, which is not directly attributable to any particular income or receipt, can be disallowed proportionally as per prescribed method. The provisions of the aforesaid sub-rule, in our respectful submission, are attracted, where borrowed funds are not directly attributable to any particular activity, i.e., taxable or non-taxable. However, where borrowed funds have direct relation with particular activity/ income/ expenditure, the interest expenditure incurred thereon, is not liable for apportionment in that Rule. Reliance in this regard is placed on the decision of Kolkata Bench of Tribunal in the case of ACIT vs Champion Commercial Co Ltd: ITA No. 644/ Kol./2012, wherein, the Tribunal held that, while computing disallowance under Rule 8D(2)(ii), only common interest expenditure is to be considered, i.e., after excluding interest directly relatable to any particular income/ expenditure, including amount considered for disallowance under Rule 8D(2)(i) of the Rules. The relevant extract of Tribunal s observations in this regard is reproduced hereunder for your Honour s reference: Viewed thus, the correct application of the formula set out in rule 8D(2)(ii) is that, as h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) states that the expenditure in relation to income which is exempt shall be the aggregate of (i) the expenditure attributable to tax exempt income, (ii) and where there is common expenditure which cannot be attributed to either tax exempt income or taxable income then a sum arrived at by applying the formula set out thereunder. What the formula does is basically to allocate some part of the common expenditure for disallowance by the proportion that average value of the investment from which the tax exempt income is earned bears to the average of the total assets. It acknowledges that funds are fungible and therefore it would otherwise be difficult to allocate the sum constituting borrowed funds used for making tax-free investments. Given that Rule 8 D (2) (ii) is concerned with only 'common interest expenditure' i.e. expenditure which cannot be attributable to earning either tax exempt income or taxable income, it is indeed incongruous that variable A in the formula will not also exclude interest relatable to taxable income. This is precisely what the ITAT has pointed out in Champion Commercial (supra). There the ITAT said that by not excluding expenditure directly rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me on the by the assessee is ₹ 1162000 /- which is far less compared to the earlier year and there is no finding by the learned AO that assessee has spent sums for earning dividend income. Therefore in the interest of justice and following the binding precedent we restrict the disallowance under section 14 A of the Income Tax Act on estimate basis at ₹ 25,000 for this year too. Accordingly, ground number five of the appeal of the assessee for assessment year 2007 08 is partly allowed. 73. For assessment year 2008 09, admittedly the provisions of rule 8D are applicable. Assessee has also disallowed a sum of ₹ 1 lakh on its own. The assessee is also on dividend income of ₹ 237000/ during the year. The learned AO made disallowance applying the provisions of rule 8D of ₹ 44808080/ . However on reading para number four of the order of the learned assessing officer straightway jumped to the issue of show cause notice to the assessee as to why disallowance under section 14 A read with rule 8 D should not be made. Therefore it is apparent that there is no satisfaction recorded by the assessing officer with respect to the correctness of the claim of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03-04 HR20J-3912 516,404 Total 3,527,637 The difference in WDV and actual sale consideration comes to ₹ 13,21,410. The assessing officer, denied depreciation amounting to ₹ 1,25,330 in the relevant previous year on the WDV value of cars sold. 75. The LD AR submitted that the action of the assessing officer is inconsistent with the scheme of depreciation provided under section 32(1) of the Act. Under the scheme of the Act, depreciation is allowed on the written down value of the block of assets less the sale consideration of the assets sold during the year. Under the scheme of the Act, depreciation is allowed on the written down value of the block of assets less the sale consideration of the assets sold during the year. Reliance in this regard is placed on the decision of High Court of Delhi in the case of CIT vs Oswal Agro Mills Ltd. and Oswal Chemicals and Fertilizers Ltd. 341 ITR 467, wherein it was held that depreciation is to be allowed on the asset, forming part of the 'block of assets' even if it is not used, i.e. the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial year 2004-05. The customer, arbitrarily and without providing any computation, deducted the balance outstanding to the assessee. The details are at pages 345-346 of the paper book accordingly, during the year under consideration, the assessee has written off ₹ 411.57 lacs as irrecoverable bad debts in the books of accounts. The various correspondence entered into with the customer is enclosed as pages 345-366 of the paper book. The assessing officer, however while completing the assessment made disallowance of deduction of bad debts amounting to ₹ 411.57 Lacs, alleging that (i) large part of bad debt is related to Public sector undertaking, which by no stretch of imagination can be construed as bad debt and (ii) the deduction claimed by the assessee does not qualify the condition as enunciated in the provision of 36(2) of the Act. 79. Both the parties agreed before us that this issue is covered in favor of the assessee by the decision of Hon ble ITAT in the assessee s own case for the assessment year 2006-07 in ITA No. 4111/Del/2013, wherein, following the decision of Hon ble Supreme Court in the case of T.R.F. Ltd. vs. CIT (323 ITR 397), Hon ble ITAT, dele ..... X X X X Extracts X X X X X X X X Extracts X X X X
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