TMI Blog2019 (1) TMI 345X X X X Extracts X X X X X X X X Extracts X X X X ..... but then rather than taking the comparable uncontrolled price of the transaction, the TPO has compared average of intra AE transactions and independent transactions. We donot see legally sustainable merits in the case of the learned Commissioner (DR) and we reject his plea that on the facts and in the circumstances of this case, CUP method is required to be applied. In any case, the issue is squarely covered by the decision of the coordinate benches, in favour of the assessee. Addition on account of Guarantee fees - International transactions - Held that:- As decided in assessee's own case issuance of corporate guarantees does not constitute an international transaction with the meanings of section 92B. Learned representatives fairly agree that the issue is thus covered, in favour of the assessee and in assessee’s own cases, by coordinate benches of Tribunal. Addition on account of addition u/s 145A - Held that:- we see no need to interfere with the findings of the CIT(A) on this ground either. The law is by now well settled. There is no impact on profitability whether the assessee follows the exclusive method or inclusive method, and there cannot be an addition, thus, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place provides valid inputs for application of Comparable Uncontrolled Price (CUP) method. The TPO has also highlighted the principle that when a direct method like CUP method can be pressed into service, such a method must be preferred over any indirect method such as TNMM. A detailed analysis is then done of the transactions with the non AEs and based on such analysis, the CUP method is adopted. Accordingly, by adopting the arm s length prices on the basis of such internal CUP inputs, the adjustments are made in sale prices of Cetyl Pyridinium Chloride (Rs 42,58,664), Ethyl Triphenyl Phosphonium Bromide (Rs 26,48,310), Phenyl Trimethyl Ammonium Chloride (Rs 62,27,476) and Tetra Butyl Ammonium (Rs 7,52,387). The aggregate of these ALP adjustment thus works out to ₹ 1,38,86,837. Aggrieved by the Alp adjustment so made, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) noted that this issue is covered, in favour of the assessee, by decisions of this Tribunal for the assessment years 2002-03, 2003-04 and 2004-05, which has been followed by his predecessors for the assessment years 2005-06, 2006-07, 2007-08, 2007-08, 2008-09 and 2009-10. Following the view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that this issue is not only squarely covered by the decisions of this Tribunal in assessee s own cases for the earlier years, Hon ble jurisdictional High Court is in seisin of the matter as Their Lordships have admitted questions of law on this issue. He submits that the decisions of the coordinate benches deal with the issue in appeal in a very fair and comprehensive manner, takes us through these decisions and justified the same on merits. Learned counsel then submits that there is no material change in the facts and circumstances of the case so as to warrant a departure from the decision in the earlier year, and that it is only a larger bench which can examine the possibilities of such a departure from views. Our attention is then also invited to Hon ble jurisdictional High Court s judgment dated 31st August 2012 wherein Their Lordships have admitted a question of law against the order passed by the coordinate benches to the effect as to whether the Appellate Tribunal is right in law and on facts in deleting the addition of ₹ 3,06,48,478 under section 92CA(3) of the Act made by the TPO, holding that the TNMM is most appropriate method rather than the Internal CUP meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of CUP method, as most appropriate method, on the facts of this case. He submits that selection of a method of ascertaining the arm s length price cannot be an academic exercise de hors the facts of each case and it does not, as such, take place in vacuum. Therefore, it cannot be said the CUP method will always be most appropriate methods in the case of bulk drugs whether or not sufficient CUP inputs are available. Learned counsel then points out that whatever internal CUP inputs are relied upon by the TPO, are inappropriate inasmuch as the size of the inputs is materially different from the size of actual intra AE transactions and, as evident from a plain look at the quantities involved in comparable cases vis- -vis intra AE transactions, the variations are so significant that the entire comparison is meaningless. Whatever be the academic merits for preference of CUP method, in the present cases, given the limitations of available internal CUP inputs, CUP method cannot be held to be most appropriate method. It is then pointed out is that what is compared is the average transaction price and not the actual price, and such an approach is alien to transfer pricing legislation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taken into account: (a) the nature and class of the international transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method ; (d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method [ Emphasis, by underlining, supplied by us] 9. What is clear from the above analysis is that a method of determining arm s length price, to be held as a most appropriate method (MAM), should be, as provided in rule 10C(1), a method which is best suited to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AE, both these transactions, by applying the mark up on global basis, will meet the test of ALP whereas in the first case, the mark up charged is certainly not a mark-up resulting in an ALP. In this particular case, for example, the normal mark up in transactions with has been computed at 16.31 per cent. and the average of mark up on sales to AEs having been taken at 17.08 per cent. entire sales to AEs has been taken at ALP, but, the mark up in the many cases is clearly less than benchmark. To give one example, at page 221 of the paper-book, margin of 14.15 per cent (4 invoices), 13.95 per cent. 13.81 per cent. 14 per cent (4 invoices), 14.14 per cent (2 invoices), and 14.16 per cent is given by assessee's own computation, and, on the same page, on one invoice, the assessee has shown a margin as high as 27 per cent. The cost plus method, therefore, has not been correctly applied. In any case, one of the most important input, i.e. diamond, has been imported at a price for which no ALP documentation is available and the price of imports have been taken into account in computation of costs as well. The costs of inputs have not been verified either. No efforts are made to show th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inputs are not even referred to and relied upon by the TPO. There are no other independent comparable transactions brought to the analysis by the TPO or the learned Commissioner (DR). All these factors put together donot make out a case for application of CUP in this case. Not only that there is no justification, beyond vague generalities, for CUP in the present case and not only that that CUP method application mechanism is incorrect, we find that sufficient quantity of reliable CUP inputs are not available on the facts of this case. that In the light of these discussions, as also bearing in mind entirety of the case, we donot see legally sustainable merits in the case of the learned Commissioner (DR) and we reject his plea that on the facts and in the circumstances of this case, CUP method is required to be applied. In any case, the issue is squarely covered by the decision of the coordinate benches, in favour of the assessee, and having perused these decisions and material on record, we are not inclined to take any other view of the matter than the view so taken by the coordinate benches. We have also noted that Hon ble High Court is already seized of the matter and it is only a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered facts of the case in the light of applicable legal position. 15. We find that this issue is now covered, in favour of the assessee, in assessee s own case for the preceding assessment years. In this decision dated 20 June 2018, a coordinate has analysed the issue in great detail and taken note of decisions by various coordinate benches, and then come to the conclusion that issuance of corporate guarantees does not constitute an international transaction with the meanings of section 92B. Learned representatives fairly agree that the issue is thus covered, in favour of the assessee and in assessee s own cases, by coordinate benches of Tribunal. As regards the decision of the coordinate bench in the case of Micro Ink Ltd (supra), we find that honourable jurisdictional High Court has admitted appeal to determine the question as to whether or not issuance of corporate guarantees amounts to international transaction within meanings of section 92B. In the case of Micro Ink (supra), the coordinate bench, speaking through one of us (i.e. the Vice President), has held, as summarized by the headnotes on the taxmann.com, as follows: i. It is only elementary that the determina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... read such a test in the definition of the international transaction' under domestic transfer pricing legislation, as is the settled legal position, it is not open to Court to infer the same. [Para 37] iv. One more thing which is clearly discernible from the above discussions is that the tests recognized by these guidelines are interwoven twin tests of benefit and arm's length. Benefit test implies the recipient group member should get economic or commercial value to enhance its commercial position . The benefit test is interlinked with the arm's length test in the sense that it seeks an answer to the question whether under a similar situation an independent enterprise would have been willing to pay for the activity concerned, or would have performed the activity in-house for itself. So far as the benefit test is concerned, it is alien to the definition of international transaction' under the Indian transfer pricing legislation. So far as arm's length test is concerned, it presupposes that such a transaction is possible in arm's length situation. However, in a situation in which the subsidiary does not have adequate financial standing of its own and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ank guarantee. viii. The consideration for the issuance of bank guarantee, so far as a banker is concerned, is this. When the client is not able to honour the financial commitments and when client is not able to meet his financial commitments and the bank is called upon to make the payments, the bank will seek a compensation for the action of issuing the bank guarantee, and for the risk it runs inherent in the process of making the payment first and realizing it from the underlying security and the client. Even when such guarantees are backed by one hundred percent deposits, the bank charges a guarantee fees. In a situation in which there is no underlying assets which can be realized by the bank or there are no deposits with the bank which can be appropriated for payment of guarantee obligations, the banks will rarely, if at all, issue the guarantees. ix. Of course, when a client is so well placed in his credit rating that banks can issue him clean and unsecured guarantees, he gets no further economic value by a corporate guarantee either. One can now compare this kind of a guarantee with a corporate guarantee. The guarantees are issued without any security or underlyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the uncontroverted position on the facts of this case, does not amount to a service in which respect of which arm's length adjustment can be done. [Para 41] xiii. It is thus clear that even if one accepts the contention of the revenue that issuance of a corporate guarantee amounts to a 'provision for service', such a service needs to be re-characterized to bring it in tune with commercial reality as 'arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner'. No bank would be willing to issue a clean guarantee, i.e., without underlying asset, to assessee's subsidiaries when the banks are not willing to extend those subsidiaries loans on the same terms as without a guarantee. Such a guarantee transaction can only be, and is, motivated by the shareholder, or ownerwise considerations. xiv. 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 sco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis that issuance of guarantees is not to be treated as within the scope of normal connotations of expression 'provision for services'. xvii. Under section 92B, corporate guarantees can be covered only under the residuary head i.e. any other transaction having a bearing on the profits, income, losses or assets of such enterprise . It is for this reason that section 92B, in a way, expands the scope of international transaction in the sense that even when guarantees are issued as a shareholder activity but costs are incurred for the same or, as a measure of abundant caution, recoveries are made for this non-chargeable activity, these guarantees will fall in the residuary clause of definition of international transactions under section 92B. As for the revenues argument that whether the service has caused any extra cost to the assessee should not be the deciding factor to determine whether it is an international and then gives an example of brand royalty to make his point. What, in the process, he overlooks is that is that section 92B(1) specifically covers sale or lease of tangible or intangible property . The expression bearing on the profits, income, losses or as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng and (b) business 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 92B, the transactions should be such as to have beating on profits, incomes, losses or assets of such enterprise. xxi. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B(1). [Para 44] xxiv. In the present case, as already held that the issuance of corporate guarantees were in the nature of shareholder activities- as was the uncontroverted claim of the assessee, and, as such, could not be included in the 'provision for services' under the definition of 'international transaction' under section 92B. Taking note of the insertion of Explanation to section 92B, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have bearing on profits, income, losses or assets , it did not constitute an international transaction, under section 92B, in respect of which an arm's length price adjustment could be made. In this view of the matter, and for both these independent reasons, the impugned ALP adjustment is set aside. [Para 48] 16. We are in considered agreement with the views so expressed by the coordinate bench. In any case, it cannot be open to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal before the CIT(A). Leonard CIT(A), relying upon consistent stand being taken by the coordinate benches of the Tribunal and having given the finding that the treatment given by the assessee is completely tax neutral, deleted the said addition. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us. 20. Having heard the rival contentions and having perused the material on record, we see no need to interfere with the findings of the CIT(A) on this ground either. The law is by now well settled. There is no impact on profitability whether the assessee follows the exclusive method or inclusive method, and there cannot be an addition, thus, on that score. That is what the coordinate benches of this Tribunal, including in the cases of ITO Vs Mamta Brampton Engineering Pvt Ltd (ITA No. 2387/Ahd/2013) and DCIT Vs AIA Engineering Ltd (ITA No. 1122/Ahd/2015), have consistently relying upon the judgment of Hon ble Supreme Court in the case of CIT Vs Indo Nippon Chemicals Ltd (261 ITR 275) and of Hon ble jurisdictional High Court in the case of ACIT Vs Narmada Chematur Petrochemicals (327 ITR 369). Learned Departmental Representative does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own case, by order dated 20th June 2018 wherein the coordinate bench has, inter alia, observed as follows: 10. Next common item in all these three years is adjustment recommended in ALP of interest rate required to be charged by the assessee from its AE on the loans given by it. 11. Brief facts of the case are that in the assessment year 2007-08, he assessee has extended foreign currency loan amounting to ₹ 24,50,70,500/-to Dishman Europe Ltd., and ₹ 5,36,70,000/- to Dishman Pharma Solution AG. The assessee has charged total interest of ₹ 40,93,995/- at the rate of LIBOR plus 1%. The ld.TPO has observed that one of the AEs. borrowed funds from European bank at the rate of EURIBOR plus 3.75%. The ld.TPO confronted the assessee as to why this rate be not taken for benchmarking rate of interest required to be charged by the assessee. In response to the query of the AO, it was contended by the assessee that loan had been granted to the AE in order to create infrastructure facilities for the smooth operation of the AE and this is needed to sustain, survive and grow in most competitive market. The assessee further submitted that basis of charging of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a foreign country at what rate of interest funds are being borrowed by the AE is totally irrelevant aspects. The question before the TPO was at what rate an Indian concern should provide loans in dollar denomination to an unrelated party from India. The AE has obtained loans from European market, which is altogether a different currency and the requirement of AE could be different for that. There may be higher rate of interest prevailing for borrowing funds, but at what rate the loan could be made from India in dollar denomination ?. The assessee has pointed out that LIBOR is the prevailing rate and it has charged LIBOR plus 1%. No defect has been pointed out in this rate. Only thing is that one of the AEs has obtained loan from European market, therefore, the ld.TPO has applied that rate. To our mind this action of the ld.TPO could be justified if he has pointed out that a tested party in India has granted loan to its AE in dollar denomination at a higher rate than the LIBOR plus 1%. It is also pertinent to note the cost of the funds to the assessee. The assessee has contended that it has raised funds by issuing of FCCB at nominal cost 0.5% to 1% and it has given these funds to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for earning of such income. According to the ld. Revenue authorities, the assessee has failed to demonstrate that this expenditure was incurred for earning such prior period income. Accordingly, the ld.AO did not allow set off expenditure against prior period income. 25. With the assistance of ld. representatives, we have gone through the record carefully. It is pertinent to note that along with this appeal, we have heard appeals for the assessment year 2005-06 and 2006-07. In the assessment year 2006-07, the assessee has prior period income at ₹ 46,50,648/- and it has debited prior period expenditure of ₹ 43,11,114/-. The net differential amount of ₹ 3,39,534/- has been credited to profit loss account and offered for taxation. The AO did not allow set off prior period expenditure and taxed the gross income. The issue came up before the Tribunal. We have upheld taxability of net differential amount. The Tribunal observed that once the assessee has been offering income of prior period as an entity, then its prior period expenditure cannot be disallowed simply by observing that it is not ascertainable whether this expenditure were incurred for earning a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of section 10B of the Act. 9. Both the lower authorities ought to have appreciated that on account of disallowances/additions made to the business income of the appellant, eligible profit for claiming deduction u/s 10B of the Act has also increased to that extent and therefore, both the lower authorities have erred in law and on facts of the case in not allowing further deduction u/s 10B of the Act on enhanced eligible profit on account of disallowance/additions so made. 41. Learned representatives fairly agree that the issues so arising in connection with the claim under section 10B are also covered, in favour of the assessee and in assessee s own case for the earlier years, by decisions of the coordinate benches including the decision dated 20th June 2018 which was filed before us. This decision, inter alia, observes as follows: 61. Ground Nos.25 to 27, ground no.16 to 19 and 14 to 16 (assessee s appeals); ground no.5 to 8, ground no.4 to 6 and ground no.2 (in Revenue s appeal) for the assessment years 2007-08 to 2009-10 respectively. The issue agitated in all these years and all these grounds relates to determination of correct amount for grant of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to be allocated on the imports made for the EOU units. The ld.CIT(A) after making a detailed analysis held that there was no custom duty on the imports made required to be consumed in EOU units. If that be a fact, then how the AO could allocate such amount to such units ? The assessee has been maintaining separate books of accounts and debited actual expenditure in each unit. Therefore, the ld.CIT(A) is justified in holding that custom duty which is not incurred by the assessee on the imports of raw-material meant for EOU units cannot be allocated. We do not any merit in this fold grievance raised by the Revenue. It is rejected. 49. Next three fold grievances are common. The grievance of the Revenue in these folds of grievances relates to allocation of expenditure incurred towards packing material, clearing and forwarding expenses, administrative and interest expenses. It is pertinent to observe that where mixed accounts and common management is there, then certain overhead expenses required to be allocated at the level of HO, but if an assessee is maintaining separate books accounts and demonstrate all expenditure incurred by it; identifiable and allocatable, then on estim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 218 in coming to the conclusion that other incomes viz. sale of scrap etc. are not to be considered as derived from export activities. It is pertinent to observe that in the case of Sonic Technology P.Ltd. the assessee has claimed deduction after including interest income, sale of scrap, sundry balance written off, exchange rate fluctuations and incremental turnover and disbursement of subsidy from the government. These items were held to be eligible for grant of deduction under section10B of the Act. The ITAT in the case of Sonic Technology has further observed that order of the Special Bench Indore Bench has been upheld by the Hon ble Delhi High Court. Discussion made by the ITAT qua this issue reads as under: 11. We also find that the decision of Special Bench of Tribunal in the case of Maral Overseas Ltd. (supra) was upheld by Hon'ble Delhi High Court in the case of Hritnik Export Pvt. Ltd.(ITA No. 219/2014 239/2014 order dated 13.11.2014) wherein Hon'ble High Court dismissed the appeal of Revenue by holding as under:- By way of these appeals, the Revenue has challenged the orders passed by Income Tax Appellate Tribunal (Tribunal, for short) dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits of the business'' eligible for deduction u/s 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act. As per the computation made by the Assessing Officer himself, there is no dispute that both these incomes have been treated by the Assessing Officer as business income. The CBDT Circular No. 564 dated 5th July, 1990 reported in 184 ITR (St.) 137 explained the scope and ambit of section 80HHC and the mode of determination of profits derived by an assessee from the export of goods. I.T.A.T., Special Bench in the case of International Research Park Laboratories v. ACIT, 212 ITR (AT) 1, after following the aforesaid Circular, held that straight jacket formula given in sub-section (3) has to be followed to determine the eligible deduction. The Hon'ble Supreme Court in the case of P.R. Prabhakar; 284 ITR 584 had approved the . A.Y. 2007-08 principle laid down in the Special Bench decision in International Reserarch Park Laboratories v. ACIT (supra). In the asses see's own case the I.T.A.T. in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the formula stipulated in Sub-Section (4), otherwise Sub-section (4) would become otise and irrelevant. The issue in question in this appeal which pertains to the Assessment Year 2009-10, relates to duty draw back in the form of DEPB benefits. As per Section 28, clause (iii-c), . A.Y. 2007-08 any duty of customs or excise repaid or repayable as drawback to a person against exports under Customs and Central Excise Duties Draw Back Rules, 1971 is deemed to be profits and gains of business or profession. The said provision has to be given full effect to and this means and implies that the duty draw back or duty benefits would be deemed to be a part of the business income. Thus, will be treated as profit derived from business of the undertaking. These cannot be excluded. Even otherwise, when we apply Sub-section (4) to Section 10B, the entire amount received by way of duty draw back would not become eligible for deduction/exemption. The amount quantified as per the formula would be eligible and qualify for deduction/exemption. The position is somewhat akin or close to Section 80HHC of the Act, which also prescribes a formula for computation of deduction in respect of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55. Respectfully following the above, we allow second fold of grievance raised by the assessee in its ground no.27 and direct the AO to include this other income in the eligible profit for the purpose of grant of deduction under section 10B of the Act. 56. In view of the above discussion, we do not find any merit in the appeal of the Revenue. It is dismissed. 63. Before us no disparity of the facts has been pointed out by the ld.DR in these years in this behalf. Therefore, following our order for the assessment year 2006-0 in assessee s own case we direct the AO to allow the claim of the assessee under section 10B in accordance with our directions contained in order for the assessment year 2006-07. Accordingly, we allow the grounds of appeals of the assessee and reject that of the Revenue. 42. No distinguishing features were pointed out to us. Learned Departmental Representative has also fairly accepted this position. In view of these discussions, as also bearing in mind entirety of the case, we direct the Assessing Officer to allow the claim of deduction under section 10B in the terms indicated above. The observations so made will apply mutatis mutandis in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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