TMI Blog2019 (11) TMI 701X X X X Extracts X X X X X X X X Extracts X X X X ..... o be Arm's length rate of interest, and as for the case at hand, the interest charged by the assessee from its AE is higher than LIBOR plus 2%, the adjustment made by the Ld. TPO in the case is held to be unjustified and not sustainable. CIT(A) has followed the propositions of law laid down by different benches of the Tribunal on this issue, we find no infirmity in the same. The Kolkata Bench of the ITAT has in a number of cases including M/s. EIH Ltd. vs. DCIT [ 2018 (1) TMI 1372 - ITAT KOLKATA] followed the same principles. Hence the order of the Ld. CIT(A) on this issue is upheld and Ground No. 1 of the revenue is dismissed Adjustment of interest on a loan issue by AE - HELD THAT:- In subsequent FYs balance 0.4% of the FCCBs were also converted to equity. Hence, it stands established that cost investment in 6.5% bonds is 1% as opposed to 6.5% worked out by the TPO. Thus, 100% of the FCCBs were converted to equity when the order of TPO was passed i.e. 31.10.2011. In view of the above discussion and the fact that the ALP rate of 13.95% computed by the TPO cannot be compared with that charged by the assessee from its AE, we uphold the deletion of the addition by the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justment by the ld. CIT(A) for the very same reasons given for the AY 2009-10. Transfer pricing adjustment on loan advanced to AE - TPO made a Transfer pricing adjustment of interest receivable amounting to ₹ 34,46,885/-. Similar issue was dealt by us for the earlier year as ground no. 2. We have held that international transaction involving cross-border loan to AE can be benchmarked against LIBOR. The RBI Circular states that the range from 1-2% for LIBOR is reasonable for advancing loans. Interest rate of LIBOR +2% can be held as an arm s length rate of interest. As the assessee has charged an interest higher than LIBOR +2%, the ld. CIT(A) has held that the same is at arm s length and deleted the adjustment. We find no infirmity in this order. Even otherwise the loan transaction can be benchmarked against the credit facilities provided to the AE by SBI, Sidney. Though the credit facilities were guaranteed by the assessee, such guarantee did not have any bearing on the facilities and rate of interest charged by the bank. Hence, this rate is an independent benchmark. When this benchmark is applied to the facts, no adjustment is called for. Thus for these reasons this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance u/s 14A r.w. Rule 8D of the Act. 6. Aggrieved, the assessee carried the matter in appeal and ld. CIT(A) has granted relief. Further aggrieved the Revenue has filed an appeal. 7. We have heard Dr. P.K. Srihari, the ld. CIT(DR) on behalf of Revenue and Sri Ravi Tulsiyan, ld. Counsel for the assessee. Paper books were filed running into 297 and 94 pages along with written submissions. We have carefully considered rival contentions, perused the paper on record and the orders of the authorities below as well as case laws cited and held as follows. 8. We first take up appeal in ITA No. 1150/Kol/2017 for the AY 2008-09. 9. The first issue is regarding the transfer pricing adjustment made u/s 92CA(3) of the Act on account of Guarantee Commission fees. The ld. CIT(A) brought out the facts relating to the fee paid for providing guarantee (Guarantee Commission) at page 36 of his order. Some portions are extracted for ready reference: Fee for providing Guarantee (Guarantee Commission) 33. During the course of the Transfer Pricing proceedings u/s 92CA(2), it is seen from the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay the Guaranteed money to the Financier on demand. The Financier may make this demand at any time whether or not a demand has been made by the Financier of the debtor. Thus, in the eyes of the Lender, the assessee is considered as the principal debtor and the unconditional guarantee requires the assessee to pay the guaranteed money even when no demand has been placed on the actual debtor. Clause 2 of the agreement mentions that The Guarantor unconditionally and irrevocably indemnifies the Financier....against all loss, damages, liabilities, costs, charges, expenses....of any kind or nature suffered or incurred by the Financier..... Clause 4 mentions that . This guarantee and indemnity is a continuous security and extends to the whole of the Guaranteed money. The Guarantor waives any right of first requiring the financier to proceed against or enforce any other right, power, remedy or security, or claim payment from the debtor or any other person before claiming from the Guarantor. Clause 9.1.3 stipulates that the Guarantor warrants that it has fully disclosed in writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions of providing corporate guarantee prior to the amendment brought in by way of an explanation to Section 92B of the Act, by Finance Act, 2012. Further at page 45 he held that the methodology applied by the TPO in computing the ALP of the transactions was without reasonable and justifiable basis. We find that the findings of the Ld. CITCA), are in line with the decision of the Kolkata 'C' Bench of the Tribunal in the case of M/s. EIH Ltd. vs. DCIT (supra) wherein it was held as follows:- 12.11. Coming to the alternate plea of the assessee that, in the facts and circumstances the corporate guarantee is not an International Transaction u/s. 92B of the Act. we note that term 'guarantee' was inserted in the definition of 'international transaction' in section 92B by inserting an Explanation in the Finance Act, 2012 with retrospective effect from 01/04/2002. The Explanation 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-term borrowin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprise with an AE irrespective of the fact that it has bearing on the profits, incomes, losses, or assets of such enterprises at the time of transaction or at any future date. 12.12. Thus, we hold that when a parent company extends an assistance to the subsidiary, being associated enterprise, such as corporate guarantee to a financial institution for lending money to the subsidiary, which does not cost anything to the parent company, and which does not have any bearing on its profits, income, losses or assets, it will be outside the ambit of international transaction under section 92B(1) of the Act In this regard, we would like to hold that issuance of corporate guarantee by the assessee to its AE would have 'influence on the profits, incomes, losses or assets of enterprise' but not necessarily have 'any impact on the profits, incomes, losses or assets' as admittedly no consideration was received by the assessee in respect of this corporate guarantee from its AE. We find that the Ahmedabad Tribunal in the case of Micro Ink in ITA No. 2873/Ahd/2010 had observed that if a subsidiary (AE in the instant case) could not borrow money from third part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price for corporate guarantee should be that which would have been paid and accepted by independent enterprises in comparable circumstances. In that case transfer pricing adjustments are required. In that case, it has to be determined what will be the ALP of corporate guarantee commission paid by associate enterprise to the parent company providing corporate guarantee. Since that is not the case before us, we need not go into it. 12.15. We also find that this very same issue came up for adjudication by this tribunal in assessee's own case for the Asst Year 2010-11 in ITA No. 530/Kol/2015 dated 9.6.2017 , wherein by placing reliance on the decision of co-ordinate bench of Mumbai Tribunal in the case of a) Marico Ltd vs ACIT reported in (2016) 70 taxmann.com 214 [Mumbai Trib] wherein it was held that corporate guarantee was not an international transaction; and b) Siro Clinpharm P Ltd vs DCIT in ITA No. 2618/Mum/2014 dated 31.3.2016 , wherein it was held that the Explanation introduced by Finance Act 2012 can be made applicable only from Asst Year 2013- 14 onwards. 12.16. Moreover, we f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est receivable thereon, of an amount of ₹ 35,69,109/-, which has been added back in the assessment. (b) Interest on bond: The appellant company had invested in Australian Dollar denomination fixed rate convertible bonds issues by its Associated Enterprise M/s Gujarat NRE Australia Pty Ltd. (GNAL). The interest available on these bonds was @ 6.5% (the bonds were redeemable at 100% plus the coupon rate). The TPO held that the appellant should expect a return on investment in these bonds at the rate of 13.95% (Cost of funds being 6.45% and spread should be 750 basis points). Accordingly, the TPO calculated expected interest from the bonds at the hypothetical rate of 13.95% and made an upward adjustment of ₹ 11,06,479/-. The A.O. also added back the said amount of ₹ 11,06,479/- in the assessment. 13. The ld. CIT(A) at para 3 page 28 29 held as follows: 3. I have carefully considered the submissions of the appellant-assessee in the light of the adjustment made by the Ld. AO / TPO. There is no dispute on facts that the interest charged by the appellant was@ BBSY + 2.5%. This according to the appellant is arm' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merit in the contention of the appellant that the Ld. TPO in computing the ALP has considered the average cost of borrowed funds to the assessee/ domestic interest rates and added a spread of 750 basis points to the same. However, for the case at hand, there is no dispute that loan to the AE was made out of own funds of the appellant-company and therefore there would be no cost appellant while extending such a loan. The order of the Ld. TPO has remained silent about such factual contention of the appellant, and he has held the average cost of borrowed funds as the cost of making loan to the AE, which in my considered view is without factual and legal justification. Also, the contention of the appellant-company has strength that the loan was made in Australian Dollars i.e. foreign currency and hence domestic lending rates cannot be used as a base for calculating ALP, as has beer calculated by the Ld. TPO. Such a view is well supported by the decisions of the Hon'ble ITAT discussed supra, about what rates should be used for benchmarking a case. I has also been advanced by way of argument by the appellant that the computation on spread of 750 bp by the Ld. TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer [TPO] for calculation of arm s length interest rate in respect of loan advanced by the assessee company to its Associate Enterprise [AE], EuroAsian Ventures FZE. The TPO arrived at arm s length interest rate of 20.15%, by applying Comparable Uncontrolled Price (CUP] method and benchmarking the same against local interest rates and accordingly calculated the upward adjustment at ₹ 6,97,64,000/-. Before the Ld. CIT(A], the assessee submitted that it had charged interest @ 5% on the loan given to its AE i.e. EuroAsian Ventures FZE, which is at arm s length when benchmarked against LIBOR and hence no adjustment on this account was called for. He further relied on the decision of the Chennai Bench of the Tribunal in the case of Siva Industries Holdings Ltd. vs. ACIT (145 TTJ (Chennai) 497) and other decisions of the Tribnal for the proposition that if the loan advanced to an AE is denominated in foreign currency then interest rate thereon should be benchmarked against international rates being LIBOR and not against the domestic lending rate. Further, reliance was placed on the decision of the Delhi Bench of the ITAT in the case of Kohinoor Foods Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coupon rate of 6.5% p.a. The bondholder has the right to convert these bonds into newly issued fully paid ordinary shares of common stock of GNAL at 50 cents per share any time after 30.06.2009. On the other hand, the redemption value at maturity is stated as 100% of unpaid Principal Amount of outstanding Bonds plus the accrued interest on the maturity date (10.05.2011). The assessee in its Transfer pricing study has reported that the 'management believes that the rate of interest received from GNML (as GNAL was known at that time) is at arm's length and no further analysis is required for the same'. 19. The ld. CIT(A) at para 13.4 page 34 concluded as follows: In my considered view in the given situation, it appears that the Ld. TPO has overlooked the fact that the said premium is payable only on redemption of bonds. It has also been factually brought on record by the appellant that the major portion of the bond issue, namely 2191 out of 2200 or 99.6% of the bonds were converted to equity as on 31.3.2008. on which no premium was payable at all, and that such a fact was well within the knowledge of the Ld. TPO at the time of passin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued by the assessee-company (in USD) which is even listed on Luxembourg Stock Exchange. The said bonds are similar to the bonds issued by the AE as both are quasi-equity in nature. Since the coupon rate of 6.5% is higher than 1% charged by the assessee in US markets, it can be said that the bond transaction with the AE is at arm s length. 3.6 Similarly, the assessee-company has even issued zero coupon unsecured bonds which are convertible to equity. Thus, subscription to 6.5% FCCBs issued by the AE is at arm s length. 3.7 Further, it is submitted that proceeds from the 1% FCCB have been utilized in subscribing to the bond issue. Thus, following the cost plus method (as done by the TPO) also, the said bond transaction is at arm s length. The assessee has clearly earned a spread of 5.5% by investing the funds raised at 1% interest in 6.5% convertible bonds issued by the AE. 3.8 Coming to the cost of 6.45% computed by the TPO, it is submitted that the same is erroneous and is clearly contrary to the facts of the case. The TPO, while recomputing cost at 6.5% (as opposed to 1%) has spread the premium of 27.25% over the life of 5 y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectrical installations acquired during the year. The electrical installations in question are essential parts of the plant and machinery, without which the plant manufacturing low ash metallurgical coke cannot function. This plant is integrated with co-generation power plant. During the year a total addition of ₹ 24,58,98,728/- was made in the block Plant and Machinery . Out of this total addition, an amount of ₹ 95,06,000/- represented new electrical installations installed during the year. The issue is whether the assessee is entitled to additional depreciation on this electrical installations u/s 32(1)(iia) of the Act. The AO s case is that, the various items of electrical equipment as claimed by the assessee do not fall under the definition of Plant and Machinery for claiming additional depreciation. Hence he disallowed the claim of additional depreciation. The ld. CIT(A) allowed the claim of the assessee by holding as follows: 3. I have carefully examined the factual matrix emanating in the case. I have also weighed the arguments and submissions of the Ld. A.R for the assessee-company as against the findings of the Ld. AO, as recorded in the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble jurisdictional Tribunal delivered in the case of DCIT Vs Kumarhatty Company [2014] ITA No. 947/Kol/2012. In that case, the assessee had claimed additional depreciation on electrical installation acquired during the year. The assessee contented that electrical installation was a part of the plant machinery newly installed. According to the assessee, section 32(1)(iia) of the Act specifically mentioned those items of plant and machinery on which additional depreciation could not be claimed. As per assessee electrical installation was not a prohibited item. However, the Ld. AO held that plant and machinery by its very nature did not include electrical installation and accordingly disallow the additional depreciation claimed by the assessee. The assessee filed an appeal before the Ld.CIT(Appeals) which was allowed wherein it was held that electrical installation which formed a part of plant and machinery was also eligible for claim of additional depreciation. Aggrieved by the order of the CIT(A), Revenue filed an appeal before the ITAT wherein dismissing the appeal of the Revenue, it was held that, There is no dispute that assessee was engaged in manufacture of jute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprise during the period beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020 in the said backward area, then, the provisions of clause (iia)shall have effect, as if for the words twenty per cent , the words thirty-five per cent had been substituted: Provided further that no deduction shall be allowed in respect of- (A) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or (B) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or (C) any office appliances or road transport vehicles; or (D) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head Profits and gains of business or profession of any one previous year. 29. Applying the Section to the facts of the case we hold as follows: A close observation of the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of business or profession of any one previous year Hence as per the above provision i.e. Section 32(1)(iia) of the Income Tax Act, 1961, it is submitted that the said electrical installations stands very much eligible for additional depreciation of 20% of its actual cost in the A.Y. under consideration. In the case of the assessee, Electrical installation was a part of the plant machinery newly installed. Section 32(1)(iia) of the Act specifically mentions those items of plant and machinery on which additional depreciation could not be claimed. In view of the above submission, it stands clear that electrical installation is not a prohibited item. In the present case, there is no dispute that the assessee is engaged in the manufacturing of low ash metallurgical coke. 30. Hence, we uphold the order of the ld. CIT(A) and dismiss the ground of the Revenue. 31. Employees contribution towards PF: We find that the ld. CIT(A) has followed the judgement of the Hon ble Supreme Court in the case of CIT vs. Alom Extrusions Ltd. [2010] 319 ITR 306 (SC) and judgement of the jurisdictional High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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