TMI Blog2018 (4) TMI 1742X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, moreover, the AO has to pass draft assessment order as per provision and was accordingly passed by him. The accompanying notices along with the draft assessment order are only procedural mistakes, it cannot tantamount to passing of final assessment order. Accordingly ground raised by the assessee is dismissed. Addition in respect of corporate guarantee provided to AE - HELD THAT:- This Tribunal in the case of Four Soft (P.) Ltd. v. Dy. CIT [ 2014 (4) TMI 285 - ITAT HYDERABAD] agreed with the contention of ld. DR's submission that the corporate guarantee of the nature provided by the assessee is covered under the expanded definition of international transaction post amendment to international transaction. Further, the Hyderabad Benches consistent with the view that corporate guarantee provided by the taxpayer prior to amendment are not international transaction. Hence, it meant that post amendment, corporate guarantee provided by the taxpayer are international transaction. Therefore, corporate guarantee provided by the assessee will fall within the expanded definition of international transaction. Quantum of guarantee fee to be charged - We are in agreement wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search and seizure, notice u/s 153A of the Act, dated 29/10/2014 was issued and served on the assessee. In response to the notice issued, the assessee filed its return of income on 13/01/2015 declaring total income of ₹ 80,18,23,430/-. Notice u/s 143(2) dated 18/05/2015 was issued and served on the assessee. Thereafter, a detailed questionnaire was issued vide notice u/s 142(1), dated 20/05/2015. A reference was made to the Transfer Pricing Officer (TPO) as the assessee had entered into international transaction worth ₹ 12,68,25,000/- with its Associate Enterprise M/s BS Global Resources Pvt. Ltd. for determination of arm's length price. 2.1 Assessee's Profile: The assessee company is engaged in the business of providing a range of services to power transmission companies for setting up transmission lines and sub-stations. The company has two manufacturing facilities which are located near Hyderabad with an annual installed capacity of 2,40,000 MTPA. Company is certified with quality management (ISO 9001:2008), Environmental Management (ISO 14001:2004) and occupational Health and Safety (OHSAS 18001:2007) 2.2 International Transactions: As per 3CEB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction is capital in nature, it is treated at arms length, hence, no adjustment was proposed. 2.7 TPO observed that the assessee has extended corporate guarantee to its AE and the closing balance as on 31/03/2014 is ₹ 13,58,87,500/-. On Query, the assessee submitted that the corporate guarantee extended to AE without any charge/fee and in compliance of the requirement of business. When the assessee was show caused as to why a corporate guarantee fee @ SBI is not to be charged and proposed for adjustment, the assessee submitted its reply stating that corporate guarantee is not an international transaction as per income-tax Act and adopting the SBI rate corporate guarantee fee is not appropriate for the CUP method. 2.8 The TPO after considering the submissions of the assessee, referring to the provisions of section 92B by the Finance Act, 2012 and OECD guidelines, did not accept the contention of the assessee that corporate guarantee of the nature provided will not come within the meaning of international transaction in terms with section 92B of the Act and he collected the information from SBI by issue of notice u/s 133(6), as per which, loans upto ₹ 5 crores, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Receipts of BS Ltd. from related concerns 1. SB Mebtals Pvt. Ltd. 2,84,31,49,925/- 9,71,29,700/- 2. Adarsh Global Trades Pvt. Ltd. 71,54,26,344/- 1,98,00,000/- 3. Resources Metals Pvt. Ltd. 56,90,95,433/- 15,52,00,000/- 4. Vedika Steels Pvt. Ltd. 16,59,64,599/- 2,17,69,93,000/- 5. United Minerals Pvt. Ltd. - - Total 429,36,36,301/- 244,91,22,700/- The AO found that during the year, there is excess payment of ₹ 184,45,13,601/- i.e. (4293636301 - 2449122700) by the assessee company resulting in unwarranted financial burden. 5.2 The financial cost of the assessee company debited to P L A/c for AY 2013-14 are as under: Particulars AY 2013-14 Interest on cash credit 38,95,48,064 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Other purchases (unrelated concerns) 102,92,43,281/- Total purchases debited to P L A/c 480,56,58,684/-. Thus the disallowance of interest was worked out by the AO as under: = 377,64,15,403 Disallowance 480,56,58,684 x 90,77,36,013 = 71,33,23,290/- 5.4 Aggrieved, the assessee raised objections before the DRP about the said disallowance. After considering assessee's objection, the DRP considered it appropriate to direct the AO to verify the claims as to correctness of payments made to the related parties and also as to correctness of interest debited in the P L A/c. The DRP directed the AO to examine the plea whether the interest expenses has to be disallowed with reference to the other costs or could be attributable to purchase after examining the cash flow/fund flow statement. The DRP also directed the AO to compute interest disallowance on day to day basis. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c) and 271AAB along with Draft assessment order dated 30-12-2016, which tantamount to passing of Final Assessment Order. 2. Erred in making adjustment u/s. 92CA(3) of the Act for ₹ 4,79,143/- in respect of transaction of Corporate Guarantee provided to DCO Bank, Singapore on behalf of loan to BS Resource Pte Limited, Singapore by charging rate of 1.30% on Outstanding amount of ₹ 13,58,87,500/- on hypothetical and notional basis without there being any material on record. 2.1 Erred in making the ALP adjustment u/s. 92CA(3) of the Act for ₹ 4,79,143/- in respect of Corporate Guarantee without issuing any show cause notice and without allowing an opportunity of being heard to the assessee. 2.2 Erred in treating the transaction relating to corporate guarantee as international transaction u/s.92B of the Act without appreciating that such an assistance or accommodation do not have any bearing on Appellant's profits, income, losses or assets, and, therefore, will be outside the ambit of 'international transaction' under section 92B(1) of the Act. 2.3 Erred in not appreciating the fact that corporate guarantee was given by Appellant as a procedural ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nance cost claimed in profit and loss account) of ₹ 71,33,23,290/- by concluding that the purchases with various parties such as Vedika Steels Private Limited, SB Metals Pvt Ltd, Adarsh Global Traders and services Private Limited, Resource Metals Minerals Private Limited United Mineral Resources Private Limited are Paper transactions and non-genuine. DRP Directions are not followed: 3.1 Erred in not following the directions of DRP in para 2.5 wherein the honourable DRP has directed to compute the interest after examining payments and receipts with the alleged parties in the cash flow/fund flow statement. 3.2 Erred in calculating disallowance by considering only purchases without taking into account the receipts. The action of the AO is against the directions of DRP. 3.3 Ought to have considered the interest calculation submitted by the assessee wherein the receipts and payments from the alleged parties were considered and the interest disallowance was calculated. Transactions are audited 3.4 Erred in not appreciating the fact that the transaction relating to purchases and sales are entered into during the course of regular business with proper documentat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in calculating the disallowance of interest expenditure on the basis of proportion of the purchases without considering the ageing of debtors and creditors. The period of transaction between purchase and sale with the parties is very short which shows that no interest bearing funds were used. 3.14 Without prejudice, the Ld. AO has taken two divergent views on the issue that: 3.14.1 The entire trading activity between the alleged companies as sham and in disallowing interest allegedly relating to bogus purchases. 3.14.2 Accepted the profit arrived at basing on the entire sales Turnover admitted in P L a/c by the assessee. 3.15 Ought to have appreciated the fact that the assessee has purchased with the above alleged parties and sold to the outside party and accordingly profit arrived is offered to tax. 3.15.1 Erred in disallowing the proportionate expenditure of interest without appreciating the fact that the said sales related to purchases are offered as income and hence the entire purchases cannot be treated as bogus. 3.15.2 Erred in making proportionate disallowance of interest without appreciating the fact that the assessee has already offered profit and paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome Tax Act. The appellant may add, alter or modify any other point to the Grounds of appeal at any time before or at the time of hearing of the appeal. 8.1 Before hearing, the bench asked the ld. AR to specify the grounds of appeal, which are contested, reason being there are so many sub-grounds. Ld. AR submitted that he will press only the main grounds and press the argument placed before the Bench. The bench will adjudicate only the main grounds of appeal and not its sub-grounds. 9. As regards ground No. 1, the ld. AR of the assessee submitted that the AO erred in not issuing draft assessment order as per procedure laid down u/s 144C(1) of the Act by issuing the notice of demand u/s 156 of the Act penalty notices u/s 271(1)(c) and 271AAB along with draft assessment order dated 30/12/2016, which tantamount to passing of final assessment order: 1. Vijay Television Pvt. Ltd. Vs. DRP, [2014] 369 ITR 113 (Mad.) 2. Capsugel Healthcare Ltd. Vs. ACIT, ITA No. 1356/Del/2012 3. ACIT Vs. Getrag Hi Tech Gears Pvt. Ltd., ITA No. 823/Chd/2012. 10. Ld. DR, on the other hand, relied on the orders of revenue authorities and further submitted that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasonable rate of corporate guarantee fee percentage, say 0.20%. He relied on the following cases: 1. Bharati Airtel Ltd. Vs. ACIT, ITA No. 5816/Del/2012 2. Aban Offshore Ltd. vs. DCIT, ITA No. 585/Mds/2015 3. Videocon Industries Ltd. Vs. ACIT, ITA No. 6145/Mum/2012/55 Taxmann.com 263 4. Manugraph India Ltd., Vs. DCIT, [2016] 69 Taxmann.com 400(Mum. Trib) 5. Rusabh Diamonds Vs. ACIT, 68 Taxmann.com 141 ( Mum.Trib) 6. Asian Paints Ltd. Vs. ACIT, ITA No. 7801/Mum/2010 7. Lanco Infratech Ltd. Vs. DCIT, ITA No. 450/hyd/2016 8. Aster Pvt. Ltd., Vs. DCIT, ITA No. 220/Hyd/2015. 13. Ld. DR submitted that corporate guarantee is international transaction following the amendment introduced in Finance Act, 2012. The current AY falls subsequent to the amendment. Further, he submitted that it is not shareholders obligation owing to that fact that assessee is a limited company and AEs' are separate entity. The AE has gained financially by taking favourable interest rate from the financial institution because of corporate guarantee by the parent company. With regard to ld. AR's submission that corporate guarante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uantum cannot be determined in full value of corporate guarantee. We are in agreement with the assessee that corporate guarantee is contingent liability, relevant consequence depends upon future event. However, the quantum of exposure should be on the basis of actual exposure. In this case, it is not clear from the document submitted before us the actual exposure. Therefore, we find it appropriate to remit this issue back to the file of TPO/AO to determine the actual exposure of contingent liability for this AY and apply the rate of 0.53% as per the ratio of Glenmark Pharmaceuticals Ltd. (supra) on the actual contingent liability. It is needless to say that assessee may be given proper opportunity of being heard. Accordingly, ground raised by the assessee is allowed for statistical purposes. 15. As regards Ground No. 3 regarding the disallowance of interest expenses on Sham transactions of ₹ 27,94,43,971/-, the ld. AR submitted that the AO ought to have appreciated the fact that the transaction relating to purchases and sales are entered into during the course of regular business. The Ld. AO ought to have appreciated that the assessee has done all the transaction with prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee and the Assessing Officer cannot sit in the arm chair of the businessman to decide, how the funds should have been utilized. The AO ought to have appreciated the fact that it is well settled law that the AO cannot sit in the arm chair of the businessman and substitute his views for that of the businessman. In this regard, reliance is placed on the decision of High Court of Delhi in the case of CIT v. Oracle India (P.) Ltd. [2011] 11 taxmann.com 139 (Delhi) (Mag.). 15.4 Ld. AR submitted that the AO erred in disallowing the interest expenditure without appreciating the fact that the purchases and sales with the above referred parties were made in the earlier assessment years also wherein they are accepted and assessment were completed without any additions. It is pertinent to note that the purchases and sales made with the above mentioned alleged parties are already accepted by the Income Tax department in the concerned parties assessment. 15.5 Without prejudice, the Ld. AR submitted that AO has erred in disallowing the interest by disbelieving certain portion of purchase but taking into account the entire profit which includes profit relatable to so called bog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... genuine and sham. He submitted that funds may be granted by the bank for specific purpose but the assessee has not pointed specific nexus to its utilization. The disallowance of interest expenses were made considering the purchases made with related concerns. He pointed out that this issue was duly considered by the Hon'ble DRP-1, Bengaluru and disallowance was made in pursuance to directions issued. AO has not estimated the disallowances and for which the books need not be rejected. 16.1 Ld. DR submitted that the Assessee has stated income from trading at ₹ 80,18,23,430/- and claimed that if ₹ 377,64,18,403/-being purchases from related parties are added back, then how assessee can earn income of ₹ 80,18,23,430/- from sale of goods purchased from other parties amounting to ₹ 102,92,43,281 i.e ratio of 78%. However this is factually incorrect. The amount of ₹ 80,18,23,430/- is not income from trading but it is the total income declared in the Return of Income which includes trading as well as non trading income. Hence the ratio cited by the Assessee is not applicable. 16.2 He referred to the decision in the case of Sri Jagdish H Patel (IT Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or AY 2013-14 AY 2014-15 amount to ₹ 726,19,42,991/-Having regard to the decision of the Hon'ble Gujarat High Court discussed above, GP rate of 8% on ₹ 726,19,42,991/- works out to ₹ 58,09,55,439/-. Against this the AO has already made addition of ₹ 60,00,00,000/- as admitted by Shri Shri Rajesh Satyanarayana Agarwal with a view to take care of the inconsistencies, in respect of the purchase transactions. This addition of ₹ 60 crores is made by the AO in A Y 2014-15 with regard to purchases, the basis for which is described elaborately in the assessment order under the head Interest disallowance on account of sham transactions (para 4 of Asst. order for AY 2013-14 para 6 of Asst. order for AY 2014-15). 16.6 He submitted that it is pertinent to note that M/s BS Ltd is a listed Company with declared Turnover of more than ₹ 1500 crores. The assessee had claimed that ₹ 60 crores declared during search (FY 2013-14) is included in business income. However, the Annual Report makes no mention of any such extraordinary income if any earned by the company. 16.7 Finally, the ld. DR submitted that the sham transactions with regard to pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 100/- for a period of 7 days. (In this case cash to cash basis.) Scenario 2: On the same example of above, 'A' buys goods from 'B' with the credit period of 15 days and sells the same to 'X' on cash basis, there is no finance cost to Mr. 'A' as the transaction was done on buyer's credit. Scenario 3: On the above example, Mr. 'A' buys on cash basis and sells the same to 'X' on one moth credit, then, Mr. 'A' has financial burden of 37 days. From the above, it is clear that the financial cost depends upon the terms of payment between the parties. In the given case, AO has not understood the above aspect and calculated the interest for the complete year from the date of purchase in each case. The proper way of calculating interest on outstanding balance of supplier on day to day basis. Since, AO has not disallowed any purchases that means these transactions are considered to be genuine. Therefore, AO cannot disallow any associate cost of purchase. 17.4 We find that assessee has entered into transaction with the alleged related parties and kept a margin, which will take care of the financial cost. Assessee has s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cussion, in our view, AO has not made any disallowance in purchases even though he satisfied himself that these are sham transactions. Further, he proceeded to disallow interest on purchases, which is not proper, even though, he proceeded to disallow the interest with improper data and improper method. Therefore, the disallowance made by the AO on interest is deleted. 18. As regards the disallowance on interest payments to M/s Silver Point Infratech Ltd., ld. AR submitted that AO has disallowed the interest of ₹ 1,37,88,369/- stating that assessee has used borrowed funds for making payment to Silver Point Infratech Limited, which is not correct as explained in the above paras. 18.1 Without prejudice to the above, He submitted that the AO has calculated interest for the entire year (12 months) which is not correct, interest disallowance if at all is made, it should be calculated on day to day basis from the date of payment and not for the entire year. Accordingly the disallowance of notional interest of ₹ 1,37,88,369/- towards amount paid to M/s. Silver Point Infratech Limited is not correct. 18.2 Ld. AR submitted that the assessee has received contracts from Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sunag Engg. Pvt. Ltd. 15,13,316 04-11-2012 Sunag Engg. Pvt. Ltd. 11,89,034 02-03-2012 Maco Corporation India Pvt. Ltd. 25,94,256 05-03-2012 Silver Point Infratech Ltd. 25,94,256 20-03-2012 Maco Corporation India Pvt. Ltd. 20,00,000 21-03-2012 Silver Point Infratech Ltd. 20,00,000 24-03-2012 Maco Corporation India Pvt. Ltd 23,66,998 26-03-2012 Maco Corporation India Pvt. Ltd 44,85,901 26-03-2012 Silver Point Infratech Ltd. 23,89,391 27-03-2012 Silver Point Infratech Ltd. 43,99,944 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any has received amounts and the same was later paid to Silver Point Infratech Ltd., which tantamount that assessee has not utilized any of its own fund, therefore, question of utilization of borrowed funds for making payment to silver point infratech ltd does not arise. 18.5 In view of the above submissions, ld. AR requested the Bench to delete the disallowance made towards Notional Interest of ₹ 1,37,88,369/- towards amount paid to M/s. Silver Point Infratech Limited. 19. Ld. DR, on the other hand, submitted that for A.Y. 2012-13, against contract received from the above entities amounting to ₹ 5,60,13,796/-, work amounting to ₹ 5,34,76,748/- was given on subcontract to Silverpoint Infratech Ltd for which M/s B S Ltd has paid ₹ 1,13,83,335/- in AY 2012-13 and ₹ 4,10,23,613/- in AY 2013-14. Apart from the above, M/s BS Ltd has made payments of ₹ 5,79,00,000/- in AY 2013-14 and the amount is still outstanding as on date. He submitted that Assessee was not able to substantiate as to why interest expenses should not be disallowed on account of diversion of funds for non business purpose inspite of issuing show cause notices. The assessee coul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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