TMI Blog2019 (7) TMI 1316X X X X Extracts X X X X X X X X Extracts X X X X ..... n paper book are all relating to assistance to assessee on the regular business and assistance in processing and administration issues. This is in support of overall system introduced in the business i.e. like ERP solutions. TPO should bench mark this transaction separately and we do not agree with TPO that the ALP for this transaction as NIL . Accordingly, this issue is remitted to the file of TPO to bench mark the transaction separately and grounds raised by the assessee are partly allowed. Recharacterization of Compulsory Convertible Debentures interest thereon - TPO noted that the assessee has stated that it paid interest @12% on the debentures allotted to its AE and compared the same with PLR and concluded the transaction is within arm's length as the PLR is more than the interest charged by the assessee company to it's AE - HELD THAT:- As in assessee's own case [ 2017 (1) TMI 893 - ITAT HYDERABAD] coming to the issue of adopting the benchmark rate in Indian context, assessee has justified the ALP not only on the basis of SBI PLR, which was at 12.26% for the year under consideration, but also from the data from NSDL website in which average coupon rate ran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /10/2018, for the AY 2013-14. 2. Brief facts of the case are, assessee company, engaged in the business of manufacturing and trading in agricultural crop protection products, filed its return of income for the AY 2014-15 on 29/11/2014 declaring income of ₹ 11,41,63,280/- under normal provisions and book profit of ₹ 6,30,07,146/- under the provisions of section 115JB of the Income-tax Act, 1961 (in short the Act ). Subsequently, the case was selected for scrutiny under CASS and issued notice u/s 143(2). In response to the said notices, the AR of the assessee furnished the information called for. 2.1 After verification of the information, the AO referred the matter to TPO u/s 92CA of the Act, with the prior approval of the Pr.CIT-2, Hyderabad for determination of arm s length price in respect of international transaction reported by the assessee for the AY 2014-15. 3. Profile of the taxpayer: Adama India was incorporated on 27 July 1998 as a wholly owned subsidiary of Makhteshim Agan Holdings BV under the provisions of Companies Act, 1956. The company commenced its commercial operation from 13 July 2009. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. Outstanding interest receivables 1,29,81,384 14. Outstanding interest accrued on CCD 28,58,32,840 3.2 Financial analysis of the assessee: As per the audited statement of accounts, the financials of the assessee for the AY 2014-15 are as under: Operating revenue ₹ 929,14,30,000 Operating Cost ₹ 876,54,20,000 Operating Profit ₹ 52,60,10,000 OP/TC 5.95% OP/Sales(PLI) 5.66% 3.3 The TPO determined the adjustment to ALP as under: Nature of transaction Value of transaction as per books of account Arms Length price (Rs.) Adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and in the circumstances of the case and in contrary to law, the Ld. AO/TPO further erred in not appreciating the fact that the operating profit earned by the Appellant after considering management services as operating I cost falls within the arm's length range of the comparable companies. 1.6 On the facts and in the circumstances of the case and in contrary to law, the Ld. AO/ ld. PO erred in ignoring the documentation, factual and legal submissions provided by the Appellant to substantiate the benefit, corresponding economic or commercial value derived on receipt of management services. 2. Re-characterization of Compulsory Convertible Debentures interest thereon: 2.1. On facts and in the circumstances of the case and in contrary to law, the Ld. TPO / Ld. AO has erred in going beyond the scope to re-characterize the Compulsory Convertible Debentures ('CCD') as loan for benchmarking the international transaction of interest payments on CCD and the Hon'ble DRP has further erred in upholding the action of Ld. TPO / Ld. AO. 2.2. On the facts and in the circumstances of the case and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch other. Without prejudice to the fact that no arm's length determination and consequential TP adjustment is warranted on outstanding receivables, the Appellant would like to raise the following grounds against the computation methodology of the Ld. TPO: 3.3 On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO further erred by adopting the Term deposit rates of State Bank of India ('SBI') as an arm's length rate for calculating interest on the receivables from AE by treating the trade receivables as short term funding. 3.4 On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in adopting 30 days as arm's length credit period based on Appellant's intercompany agreement with AEs on an ad-hoc basis without carrying out any methodical analysis which is complete violation of transfer pricing provisions and against the principles of law. 3.5 On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO further erred in imputing interest on invoice to invoice basis, however failed to compute the weig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndered. If yes please quantify such services in terms of actual expenditure incurred and commensurate benefits derived there from. e) The determination of an arm's length charge must take into consideration the amount that an arm's length entity is prepared to pay for such a service in comparable circumstances. f) The taxpayer's level of documentation and evidence to show that the services are actually rendered by the AEs to the taxpayer. If the services are actually rendered, the level of documentation and also evidence to show that a tangible and direct benefits derived by the taxpayer in paying the above amounts to the AEs. g) The allocation key based on which your AE has charged the amount on you. As also whether the AE has provided the same services to all other group concerns. 6.1 The TPO observed that just by describing various sectors, it will not suffice to justify the price charged in intra group services. The assessee has to prove with proper documentation and evidence that the services are actually rendered and payment is commensurate with the benefit derived there from. Unless it is shown that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es have benefitted it. 2. The application of the arm's length principle would be to see whether the amount paid by the taxpayer for the management services reflect the same charges for the intangible that would have been, or would reasonably be expected to be, levied between independent parties dealing at arm's length for comparable circumstances. 3. How much a comparable independent benefit recipient, under comparable circumstances, would be willing to pay for that service? 4. Whether as a result of such payment, the recipient of the service, the taxpayer, resulted in any economic or commercial value to enhance its commercial position. The expected benefit must be sufficiently direct and substantial so that an independent recipient, in similar circumstances, would be prepared to pay for it. If no benefit has been provided (or was expected to be provided). 5. What is the benefit received / receivable on account of such services for which the amount was paid by the taxpayer. Also quantification of the benefit in terms of value addition achieved by the usage of such services, to the final value of the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011 in the case of McCann Erickson India Pvt. Ltd. Vs. Addl. CIT, order dated 8th June, 2012. 3. ITA No. 350/2014 in the case of Magneti Marelli Powertain India Pvt. Ld., Delhi High Court. 4. ITA No. 2730/Ahd/2017 in the case of Sabic Innovative Plastics India Pvt. Ltd. 6.8 Before us, ld. DR filed written submissions as under: 1. The additions in this case are on account of adjustment to ALP. DRP has considered the objections of the assessee and granted due relief. It is submitted that the assessee aggregated management services with manufacturing function. It is not proper on the part of the assessee to aggregate functions like assistance in accounting matters, assistance in process and quality control matters, support services, assistance in procurement and sales and assistance in HR matters with manufacturing activity. Even on first principles of accounting, the assessee cannot club such functions with manufacturing activity. Also, the claim that contemporaneous documents were maintained and FAR analysis was done for management services is not borne out by facts. No documentation or evidence for receipt of such s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done in management services. 6.10 However, we noticed that TPO has accepted the TP documentation for the international transaction like purchases, sales and manufacturing services as within Arm s Length by considering TNMM as the most appropriate method and singled out the management services. TPO has considered the ALP of management services as NIL . We do not agree with the TPO that ALP is NIL and he analysed the management services on benefit test. There is no such method in the TP study. You cannot adopt a method which is not embedded in the study. It is difficult to prove the services in terms of numbers but it can be seen only in ease of doing business in India and satisfaction of the farmers who are availing the services. Without the integrated services, the assessee would not have achieved the results. In our considered view, when TPO accepts the other international transaction under TNMM and it can also accept the management services also under TNMM. It is an integrated solution offered by the AEs for the overall benefit and performance of assessee. The ALP itself cannot be NIL. The various judicial pronouncements in this regard are as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar transactions have taken place. Coming to the facts of this case, the application of CUP is dependent on the market value of the arrangements under which the present payments have been made. Unless the TPO can identify a comparable uncontrolled case in which such services, howsoever token or irrelevant services as he may consider these services to be, are rendered and find out consideration for the same, the CUP method cannot have any application. His perception that these services are worthless is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble jurisdictional High Court in the case of CIT v. EKL Appliances Limited (345 ITR 241), Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same . 16. The very foundation of the action of the TPO is thus devoid of legally sustainable merits. There is no dispute that the impugned payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O, nor is it open to him to question, as such an approach implicitly does, the commercial expediency of these services. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for them to decide what is necessary for an assessee and what is not. It is not for the TPO to question assessee's wisdom in making payment for the services, which, in the opinion of the TPO, are not of much use. The TPO has travelled much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of its AEs. The DRP is also in error, in the light of these discussions, evaluating the worth of services on the basis of benefit of these services. The very foundation of the impugned ALP adjustment was thus devoid of any legally sustainable basis. 10. In any case, we have carefully perused the evidence of services rendered and the nature of services in question, on random sample basis. In our considered view, there is reasonable evidence of the rendition of service and it cannot be open to TPO to proceed on the basis that the services were not rendered. The method of ascertaining the arm's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shows that the margin shown by the assessee was higher than the comparable companies. The case of the assessee is also supported by the decision of Tribunal in case of Me Can Erricson India Pvt. Ltd. (Supra) in which the decision of TPO to take the value of certain services at nil has not been upheld. Considering the entirety of facts and circumstances, the adjustment made by TPO which is nothing but disallowance of expenses cannot be upheld. We, therefore, set aside the order of CIT (A) on this point and delete the addition made. 3. In the case of Schneider Electric India Private Limited (ITA No. 2091 Ahd/2015, the ITAT, Ahmedbad Bench observed as under: '9 ... The TPO has rejected the determination of arm's length price on the basis of TNMM, at entity level, but then he has not adopted any other permissible method for determination of arm's length price. Such a course of action, as noted above, is not permissible in law. Just because these services are worthless in the eyes of the revenue authorities, the arm's length price of these services cannot be held to be NIL. Similarly, the findings that no services were rendered and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... group services had to be benchmarked separately by analyzing the actual services received. No doubt there can be no quarrel on the view taken by the ld. TPO that arm's length price should be determined on a transaction by transaction basis. However, where the international transactions are closely linked this approach may not be feasible and a method of aggregation which is more amenable to a TNMM methodology could be better. Ld. TPO ought not have considered the rule regarding transaction to transaction comparison as so rigid that it could not give way to an aggregate method, where the transactions were so interconnected and intertwined, when an independent analysis would not give reasonably fair results 5. In the case of AWB India Pvt. Ltd (ITA No.4454/DeI/2011), the ITAT, Delhi Bench observed as under: 23. It is also noteworthy in this regard that the TPO has nowhere disputed the Appellant's contention to the effect that it was not possible for the Appellant to document every record of receipt of the services in question, since the services were received by the Appellant in the form of directions and recommendations through e-mails/p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t NIL is not justified because the Appellant has paid the management fees under the agreement wherein the services provided by the AE has been enlisted Therefore, without giving a finding that the Appellant has also incurred expenditure in respect of the same services over and above the management fees paid to the AE it cannot be said that the Appellant has not received the alleged management services. Thus only when it is found that the Appellant has also incurred the expenditure on account of the same services and also paid the management fees to the AE then the TPO/A.O may come to the conclusion that the Appellant has paid the management fees without availing the services from the AE. Even otherwise when the management fees paid under the agreement and there is no finding by the authorities below that the same services also availed by the Appellant separately from 3rd party and booked the expenditure in the profit and loss account then determination of the ALP at NIL is not acceptable. 6.11 Considering the ratios laid down in the above cases, we are inclined to accept the contention of the assessee. However, we also noticed from the records that assessee entere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egular business and assistance in processing and administration issues. This is in support of overall system introduced in the business i.e. like ERP solutions. TPO should bench mark this transaction separately and we do not agree with TPO that the ALP for this transaction as NIL . Accordingly, this issue is remitted to the file of TPO to bench mark the transaction separately and grounds raised by the assessee are partly allowed. 7. As regards ground No. 2 (2.1 to 2.5) regarding recharacterization of Compulsory Convertible Debentures interest thereon, the TPO noted that the assessee has stated that it paid interest @12% on the debentures allotted to its AE and compared the same with PLR and concluded the transaction is within arm's length as the PLR is more than the interest charged by the assessee company to it's AE. A show cause notice was issued on dt.13.10.2017 as to why LIBOR should not be applied to its case as LIBOR is usually applied as a bench mark for all the international loans and advances. The assessee was asked to furnish certain information on this. In response to which, the assessee replied that the assessee had allotted 18,56,25,815 CCDs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income of the assessee. When the assessee raised objections before the DRP, the DRP upheld the addition made. 7.6 Before us, ld. AR submitted that the issue under consideration is squarely covered by the decision of the coordinate bench of this Tribunal in assessee s own case in ITA No. 497/Hyd/2016 for AY 2011-12 vide order dated 13/01/2017. 7.7 Before us, ld. DR filed written submissions, which are as under: 3. On the argument of the assessee that CCDs should be treated as part of equity and not as loans, it is submitted that the said argument is self-contradictory. If CCDs are part of equity, finance cost could not have been debited to P L Account. Till the date of conversion, CCDs would be of the character of debt. It is humbly submitted that though the jurisdictional bench have decided in favour of the assessee for AY 2011-12, there are later decisions of Hon'ble ITAT which support that CCDS are in the nature of debt and hence the interest is amenable to TP adjustment. In the case of Granite Gate Properties Pvt Ltd [2029] 101 taxmann.com 38 (Delhi - Trib.), interest on FCCDs was treated as international transaction a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 3.5) regarding interest on outstanding receivables, the TPO observed that assessee has receivables from AEs at the end of the year. The assessee was asked to submit the details of raising the invoice and subsequent receipt. It was proposed to charge interest @ 14.75% p.a to which the assessee replied that outstanding receivables are consequent to the international transactions and not in the nature of any advance / loans. Since these are closely linked with the functions of the tax payer and have been aggregated with the principle transaction of sales for the purpose of economic analysis. 8.1 The TPO submitted that with the retrospective introduction of explanation to section 92B, receivables form a part of international transaction and no further analysis is required. The assessee further submitted that notional interest cannot be charged as primary transactions were considered at ALP. TPO rejected the submissions of the taxpayer as baseless. 8.2 The TPO observed that various judicial forums did not consider the above facts. Hence, once the transaction is an international transaction then the Arm's Length Price has to be determined. It is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this regard is also placed on the decision of Hon'ble Delhi High Court in the case of Mckinsey Knowledge Centre India (P.) Ltd[2018] 96 taxmann.com 237 (Delhi), wherein it was held that if there is any delay in realization of a trading debt arising from sale of goods or services rendered in course of carrying on of business, assessee is liable to be visited with transfer pricing adjustment on account of interest income short charged/uncharged. This decision of the High Court is also confirmed by the Supreme Court which dismissed the SLP as reported in [2019]102 taxmann.com 439 (SC) 8.6 Considered the rival submissions and perused the material on record. In the case of Netcracker Technology Solutions (India) Pvt. Ltd., (supra), the coordinate bench held as under: 9. Considered the rival submissions and perused the material on record. We noticed that the TPO has made the independent TP analysis and found that the tax payers margins are within +/- 3% variation of the comparable companies and has not made any working capital adjustment. However, noticed that assessee has huge outstanding in receivables and made adjustment on interest receivab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case and in contrary to law, the ld. AO/ld. TPO erred in not satisfying any of the conditions prescribed u/s 92C(3) of the Income-tax Act, 1961 ( the Act ) while making TP adjustments and accordingly the order passed by the ld. TPO/Ld. AO should be set aside in entirety. 9.1 The above grounds are general in nature and interconnected to Ground No. 2, hence, need no adjudication. 10. As regards ground No. 5 regarding invoking section 14A read with rule 8D of the Act, the AO observed that on perusal of Schedule-EI to ITR-6, it is seen that dividend income of ₹ 55,91,455/- was claimed as exempt u/s 10(35) of the I.T. Act, 1961. It is seen from the Balance Sheet that the assessee company has investments to the tune of ₹ 9,30,00,600/- as on 31/03/2014 in units of various mutual funds, income arising from which being dividend is exempt and as such the same is not includable in the total income. It is further seen from the Profit Loss account that the assessee company has debited ₹ 37,36,48,729/- to P L account towards interest expense under the head finance cost. Since the assessee has investments, income arising from which is exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to any particular income or receipt, the disallowance has to be computed on proportionate basis in accordance with Rule 8D(2}(ii) of Income Tax Rules, 1962. Further, 0.5% of the average value of investments gets disallowed under Rule 8D(2)(iii) of Income Tax Rules, 1962. Since it is not possible to identify the direct expenditure relating to exempt income in all the cases, the legislature in its wisdom considered to disallow the expenditure on proportionate basis as per Rule 8D(2)(ii) and (iii) of Income Tax Rules, 1962. 10.4 Further, the AO observed that on perusal of the details filed and considering the facts and circumstances of the case, no expenditure directly relating to earning of exempt income is found to be incurred in this case. Therefore, disallowance under Rule 8D(2)(i) of Income Tax Rules, 1962, is not warranted. The assessee has debited a sum of ₹ 37,36,48,729/- towards interest on borrowed funds. The assessee could not prove that the interest expenditure is directly attributable to taxable receipt. Therefore, disallowance under Rule 8D(2)(ii) of Income Tax Rules, 1962, is applicable. The assessee also claimed the indirect administrative exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;) for disallowing interest expenditure amounting to INR 2,915,240 withtout appreciating the fact that the Assessee has not incurred any expenditure which is directly attributable towards investments in mutual funds. Facts of the case: The Company has investments in mutual funds as on 31 March 2014, to the tune of INR 93,000,000. The break-of investments held in mutual funds as on 31 March 2014 is mentioned in below mentioned table: Sl. No. Investments as on 31 March 2014 Amount (Rs.) 1. 753,541.65 units of Axis Liquid Fund 9,00,000 2 802,916.19 units of Birla Sunlife Dynamic Bond Fund 15,000,000 3 791,882.68 units of IDFC SSIF Medium Term 15,000,000 4 565,060.08 units of Birla Sunlife Income Plus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 373,648,729 The Ld. AO after removing the impact of transfer pricing adjustment of INR 14,171,5964 from the total interest cost of INR 373,648,729, has considered the balance interest cost of INR 231,932,765 as interest not directly attributable to any taxable receipt and computed the disallowance as per Rule 8D(ii) of the Rules. In this regard, the Company submits the following for your Honours kind consideration: 1. Interest on CCDs (Refer S.No. l in above mentioned Table) - During the FY 2012-13, the Company has borrowed funds to the tune of INR 1,856,258,152 by issuing CCDs. As per the terms and conditions of the CCD agreement, the amount received by issuance of CCD can be only utilized for business expansion plans in India. Accordingly, the Company had utilize the amount borrowed in the form of CCDs for its business purpose and not for making investments in the mutual funds. The rate of interest chargeable on CCDs is around 12%, while the dividend earned on the investments is around 6%. Ideally, no business man would borrow at a h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being in the nature of interest on 'borrowings', should not be considered for the purposes of computing disallowance as per Rule 8D(ii) of the Rules. From the above submission, it can be inferred that each of the interest cost debited to the profit and loss account is directly related to a particular receipt! income, which has a specific end-use. The same are not in the nature of any general borrowing and therefore should not be considered for the purposes of computing disallowance as per Rule 8D(ii) of the Rules. At this juncture, the Company also wishes to reiterate the fact, mentioned in the foregoing paragraphs, that the investments in mutual funds as on 31 March 2014 have remained status-quo as at 31 March 20 13.That is there are no movements in investments as of 31 March 2013 and 31 March 2014. The table belowsummarized the same: Particulars FY 2012-13 FY 2013-14 Opening balance of investments - 93,000,000 Add: Purchases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference): CIT vs. Reliance Utilities Power Ltd. [2009] 178 Taxman 135 (Bombay High Court) [Para 10] - The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT (Appeals) and ITAT. (Emphasis supplied) CIT vs. Tin Box Company [2003] 260 ITR 637 (Delhi High Court) Applying the above proposition in the context of section 14A, the Hon'ble Karnataka High Court in the case of CIT Anr. vs. Microlabs (2016) 383 ITR 490 (Karnataka High Court) has upheld the view of the Tribunal that when investments are made from common pool and non-interest bearing funds are more than the investment in tax free securities, no disallowance of interest expenditure u/s 14A can be made. Similar view has been upheld in the case of CIT vs. HDFC Bank Ltd. [2014J 366 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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