TMI Blog2022 (8) TMI 1272X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty and the factum of assessee having received the services from the AEs for which the payments were made, the AO / TPO is directed to revisit the TP analysis of the assessee and determine whether payments are at ALP. TPO shall follow one of the prescribed methods to arrive at ALP of payments towards fees for technical service. TP Adjustment on payments of interest on Compulsory Convertible Debentures (CCDS) - HELD THAT:- Tribunal, in assessee s own case [ 2022 (2) TMI 1279 - ITAT BANGALORE] the issue raised with regard to payment of interest on CCDs is decided in favour of the assessee. Disallowance u/s 14A in computation of total income under regular provisions and book profits - HELD THAT:- In the present case, the AO has recorded vague, stereotyped reasons de hors the accounts of the assessee for making the disallowance under section 14A. There is no satisfaction of the AO having regard to the accounts of the assessee - in the case of CIT v. Gokaldas Images P Ltd. [ 2020 (11) TMI 345 - KARNATAKA HIGH COURT] has held that disallowance u/s 14A cannot be added to book profits of assessee under section 115JB. We delete the disallowance made under section 14A in comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action to be at arm s length. 3. The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) to determine the ALP of the said international transactions. The TPO vide order dated 25.10.2016 determined the TP adjustment in respect of international transaction of payment of royalty, payment towards technical and support services and payment of interest on CCDs aggregating to Rs.121,49,28,777. Pursuant to the TPO s order, draft assessment order dated 16.12.2016 was passed by the A.O. incorporating the aforesaid TP adjustments and making certain additions / disallowances on corporate tax front. 4. Aggrieved, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 18.09.2017, largely confirmed the draft assessment order. Pursuant to the DRP s directions, the final assessment order was passed on 31.10.2017. 5. Aggrieved by the final assessment order, the assessee has filed the present appeal before the Tribunal. The issues raised before the Tribunal are as follows:- (i) Transfer Pricing adjustment of Rs.27,17,30,661 in respect of the international transaction of payment of royalty by the assessee to its AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to an international transaction under CUP. 6. The Hon'ble DRP / learned TPO have erred in not appreciating the evidences submitted in respect of the payment of royalty by the Appellant to prove that the Appellant has derived economic benefit from licensing of intangibles and services from AEs and thereby erred in concluding that the Appellant has not derived any benefits. 7. The Hon'ble DRP / learned TPO have erred in not giving cognizance to the supplementary analysis submitted by the Appellant to demonstrate the arm's length nature of the international transaction pertaining to payment of royalty. While doing so, the learned TPO / Hon'ble DRP have erred in: (i) Not appreciating the external comparable uncontrolled transaction ( CUT ) analysis identifying comparable licensing arrangements between third parties which is provided by the Appellant as a supplementary analysis to demonstrate the arm's length nature of the international transaction pertaining to payment of royalty. (ii) Not appreciating the internal CUT analysis identifying comparable licensing arrangements between AEs and third parties which is provided as a suppleme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial on record. We find that on identical facts, the Tribunal in assessee s own case for assessment year 2012- 2013 in IT(TP)A No.2209/Bang/2016 (supra) decided the issue in favour of the assessee. The relevant finding of the Tribunal reads as follows:- 9. The first issue we will take up the transfer pricing adjustment made by the TPO with respect to payment of royalty @ 1%. 10. The ld.AR submitted that this issue is covered in assessee s own case in ITA No.506/Bang/2016 vide order dated 6/12/2021 for the asst. year 2011-12 wherein the coordinate bench of this Tribunal has allowed the appeal in favour of the assessee. 11. The ld.DR relied on the written submissions. 12. We have heard the rival submissions and perused the materials on record. We notice that the coordinate bench of the Tribunal in assessee s own case (Supra) has held that 7.4 We have heard rival submissions and perused the material on record. The Tribunal in assessee s own case for assessment year 2009-2010 in IT(TP)A No.315/Bang/2014 (order dated 31.03.2017) and for assessment year 2010-2011 in IT(TP)A No.361/Bang/2015 (order dated 04.06.2018) had restored the issue of determination of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed. 13. Considering the decision of coordinate Bench in assessee s own case (supra) we allow this ground in favour of the assessee and hold that payment of royalty @ 4% is at arm s length. 11. In view of the above order of the Tribunal, in assessee s own case (supra), we hold that payment of royalty at 4% on sale is to be treated at arm s length. It is ordered accordingly. Ground 10 to 15 (TP adjustment of Rs.27,23,55,735, being payments made towards fees for technical services) 12. Grounds 10 to 15 in respect of payment towards technical services fees, reads as follow:- 10 The Hon'ble DRP has erred in not giving any cogent reason while adjudicating on the Appellant's arguments on restricting the payment of technical service fees at I % of net sales. 11. The Hon'ble DRP has erred in upholding the contention of the learned TPO that the ALP for the payment of technical service fees should be restricted to 1% of net sales and thereby erred in: (i) Upholding that the international transaction pertaining to payment of royalty cannot be aggregated under the manufacturing operations of the Appellant with the application of TNMM for the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ckaged gases, that are supplied in cylinders to construction sites, engineering companies, hospitals, etc.; and (iii) Large onsite plants, that supply gases via pipeline to the customers. Where the customers require a large quantity of gases on a continuous basis, the assessee constructs / builds a plant either in the premises of the customer or adjacent to it and supplies the gases through pipelines. The plant is operated by the assessee on Build Own Operate (BOO) basis, predominantly by obtaining technical assistance from its AEs, for which it makes the payments under question. 14. The assessee submits that the plant constructed and operated by the assessee under BOO basis predominantly has involvement of the team of AE to provide technical assistance. The technical services provided by the AE for the construction and operation of such plants are primarily in the nature of process design, mechanical design and engineering, control system design and engineering, advanced computerized control system, safety engineering, project management and start up. It was further submitted that the assessee also made payment for related services pertaining to the container cooldown charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 42,90,204 3. Praxair Asia Inc 32,22,21,276 4. Praxair NV 55,88,845 5. SAID Machine Impianti SpA 89,358 6. Praxair China Investment Co. Ltd. 7,52,349 7. Praxair Surface Technology Inc 41,07,004 Total 36,31,40,980 17.1 For the purpose of computation of ALP, the assessee was of the view that the above transactions are closely linked to the manufacturing operations of the company accordingly, benchmarked using aggregation approach with the application of TNMM. The entire level margin of the assessee was computed at 13.38% and arithmetic mean of margins of the comparables was computed at 11.03%. As the assessee s margin was higher than the average margin of comparables, the assessee projected that the aforesaid payments of technical service fees to AEs are at arms length. The TPO held that the technical service payments are essentially dupl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ety issues; and Review of construction safety procedure. e) Project Management - This comprises of:- Co-ordination with engineering, procurement, vendors and related departments during project execution; Cost update, monitoring and control; Schedule update, monitoring and control; and Co-ordination with client. f) Start - Up - This comprises of:- Review of plant operation manual; Review of initial plant evaluation and final plant evaluation; and Continued engineering report for the first year operation. 17.3 During the transfer pricing assessment, the assessee vide letter dated 8.10.2016 [page 212 of the paper book] submitted the break-up of technical services fees payment and explained the nature of services provided by the AEs. In order to demonstrate the factum of services rendered by the AEs and tangible benefit received by the assessee for a particular project (Indian Oil Corporation Ltd), 'the assessee submitted (a) sample agreement copies entered between the assessee and Praxair Asia Inc, (b) copies of engineering design memorandum, (c) sample technical design and drawings for construction of plant (d) drawing issue bulletins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the engineering services are juxtapose, it is evident that royalty is paid for use of technical information, patent rights and trademark in connection with manufacture and sale of licensed products and licensed processes whereas technical services fees is paid specifically for availing the technical and engineering services rendered by the AEs for design, construction, maintenance etc of the industrial gas plants based on the customer requirements. The payment of royalty and technical services fees is made for different deliverables and there is no duplication as held by the TPO. 17.6 In view of the above, there is no merit in the finding of the TPO that the payment of technical services fees is already covered by the royalty payment. Similarly, the TPO has not explained on what basis and under which method of computation of ALP (CUP, TNMM etc) 1 % is to be determined as the ALP for the payment of engineering and technical services fees. The aggregation of these transactions with other transactions on account of close linkage to the manufacturing operations, thereby warranting the application of TNMM has not been found fault or disputed by the TPO. Having found that payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble DRP / learned TPO have erred in not taking cognizance of the fact that a part of the interest paid on CCD amounting to INR 118,54,82,351/- formed part of 'capital work in progress' as on 31st March, 2013 which was not claimed as a business expenditure during A Y 2013-] 4 and therefore, the same cannot be added to the total income of the Appellant. 19. During the financial year 2012-2013, the assessee paid interest of Rs.166,32,46,020 to Praxair International Finance (PIxF Ireland) at interest rate of 9% and 12% on CCDs which have been transferred to Praxair Luxembourg S.A.R.L. with effect from March 2013, the assessee, in its TP study, benchmarked the transactions of payment of interest by applying CUP method. Using a CCD benchmarking study, the assessee selected certain companies as comparables, and since the arithmetic mean of the interest rate paid by the companies stood at 9.5% and 12.25%, the assessee concluded the international transaction of payment of interest at 9% and 12% to be at arm's length. The TPO treated the CCDs as ECB and bench marked the interest rate paid against LlBOR rate of 6.37% (pages 21-27 of the TP Order). The DRP rejected the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e value of debenture at INR at Rs.10 each. The CCDs are recorded in the financial statements in INR. The CCDs were also subsequently repaid in INR. The true copy of the statement setting out the details of payment and demand deposit transaction clearly demonstrate that the remittance is in INR. 8.6.1 The TPO and DRP erred in treating CCDs as ECBs and benchmarked the interest rate against LIBOR rate. The CCDs is a hybrid instrument and cannot be per se treated as ECB / loan. The Hyderabad Bench of the Tribunal in the case of Adama India (P.) Ltd. v. DCIT (supra) had held that CCDs cannot be categorized as a loan. The relevant finding of the Tribunal reads as follows:- 8. We have considered the issue and examined the rival contentions. There is no dispute with reference to the fact that the CCDs were issued in Indian Rupees. Accordingly, following the principles laid down by the Coordinate Benches and the Hon 'ble High Court as relied on by the assessee in the submissions, we have to hold that TPO has wrongly treated the issuance of CCDs as a loan, by treating it as an external commercial borrowing, ignoring the fact that loan is a debt, whereas CCD is hybrid instrument i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specfic loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lenders State or that in the borrowers is decisive, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also tobe repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency and different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply. 8.6.3 In the instant case, admittedly, the CCDs are issued in JNR, interest is paid in INR and CCD's are repaid also in INR. Therefore, placing reliance on the judgment of the Hon ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Pvt. Ltd. (supra), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earning any exempt income. 22.6. The learned AO erred in holding that investment to the tune of Rs.217 crores has been made on 31.03.2013 in subsidiary companies when no fresh investments were made during the year in its subsidiary companies. 22.7. The Honourable DRP erred in holding that the Appellant has admitted during hearings before the Panel that its accounts are maintained in a consolidated manner whereby all funds and receipts are intermingled in a common pool and attribution of specific expenditure and investment out-flow to specific receipts is not possible to co-relate or verify. The Appellant had not accepted any such statement. Moreover, the Honourable DRP ought to have appreciated that the Appellant has not incurred any expenditure during the year towards the investment. Further, the Appellant has not made any investment during the year. Accordingly, there is no question of having a common pool of expenditure for investments. Notwithstanding and without prejudice ground 22.8. Notwithstanding and without prejudice to the above, the learned has AO erred in invoking the provisions of Rule 8D(2)(ii) and disallowing the interest expense, when such inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in Praxair Carbon Dioxide Pvt. Ltd., the investment were made during the financial years 1999-2000 to 2003-2004 and thereafter no investments were made during the relevant year. Further, it was stated that the assessee did not earn any exempt income during the year under consideration. Moreover, with effect from 01.04.2013, the said entity stood merged into the assessee and therefore, there is no scope for earning any dividend income. Hence, it was submitted that in any absence of earning any exempt income, no disallowance is warranted. As regards the investments made in Jindal Praxair Oxygen Company Ltd., it was submitted that the same was not made out of cash, but was made by way of share swap arrangement, wherein the assessee issued shares to Praxair Pacific Ltd., in exchange for the shares in Jindal Praxair Oxygen Company Ltd. Moreover, during the financial year 2012-2013 under consideration, the said company bought back its shares from the assessee and the gains arising from which were offered to tax by the assessee. Therefore, it was contended that in view of the assessee having obtained the shares in a share swap arrangement, no disallowance is warranted. Reliance in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1 The Hon ble Supreme Court in Godrej Boyce Manufacturing Company Ltd v DCIT reported in [2017] 81 taxmann.com 111 deleted the disallowance made u/s 14A of the I.T.Act, where the AO did not record the satisfaction regarding the incorrectness of the claim of the assessee having regard to the accounts of the assessee. Relevant observations of the Supreme Court are as under:- 37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure Incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or ill the best judgment of tile Assessing Officer, what tile law postulates is the requirement of satisfaction ill the Assessing Officer that having regard to the accounts of the assessee, as placed before him; it is not possible to generate tile requisite satisfacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without any deductions. 28.2 The Hon ble Karnataka High Court in Hindustan Aeronautics Ltd v ACIT, ITA No 404 of 2015 in judgment dated 9.12.2020 following the Supreme Court's decision in Godrej and Boyce Manufacturing Ltd (supra) deleted the disallowance made under section 14A without recording the satisfaction having regard to the accounts of the assessee. 28.3 In the present case, the AO has recorded vague, stereotyped reasons de hors the accounts of the assessee for making the disallowance under section 14A. There is no satisfaction of the AO having regard to the accounts of the assessee. Further, the Hon ble Karnataka High Court in the case of CIT v. Gokaldas Images P Ltd. reported in (2020) 122 taxmann.com 160) has held that disallowance u/s 14A of the I.T.Act cannot be added to book profits of assessee under section 115JB. Thus, we delete the disallowance made under section 14A amounting to Rs. 5,99,10,687 in computing the total income under regular provisions and book profits under section l15JB of the I.T.Act. Ground 24 (Disallowance of Rs.13,96,49,400 u/s 37 of the I.T.Act, being foreign exchange fluctuation loss incurred in respect of loans availed) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rency ought to be allowed as a deduction. Further, it is submitted that in the assessment years when the assessee realised gains in respect of the said loan, the same were offered to tax, which was accepted by the Revenue. Therefore, it is submitted that the Revenue having accepted the gains to tax, and thereby having accepted the loans to be obtained for working capital purposes, cannot disallow the loss in the year under consideration. Therefore, the loss claimed by the assessee ought to be allowed. It is submitted that this issue is covered in the assessee s favour in the assessee s own case for assessment year 2012-13 (Order dated 25.02.2022 passed in IT(TP)A No. 2209/Bang/2016). 33. The learned Departmental Representative supported the orders of the TPO and the DRP. 34. We have heard rival submissions and perused the material on record. We find that on identical facts, the Tribunal in assessee s own case for assessment year 2012- 2013 in IT(TP)A No.2209/Bang/2016 (supra) decided the issue in favour of the assessee. The relevant finding of the Tribunal reads as follows:- 28. We have heard both the parties and perused the material on record. It is a settled law that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ognized in the P L a/c for the reporting period. 10. In the present case, there is no dispute that the outstanding liability was in respect of trade receivables and payables and therefore loss would be on revenue account. In such circumstances, we are of the view that the CIT(A) was justified in allowing the claim made by the assessee. We find no grounds to interfere in the order of the CIT(A). Accordingly, appeal by the Revenue is dismissed. 29. We have perused the RBI approval letter where it is clearly stated that the loan is required to be used only for the purpose for which it is approved that is the general corporate purposes. We are of the considered view that the cash flow statement does not provide any basis to the finding that the amount is used for the repayment of short term loans unless there is a thorough examination is done on the inflows and outflows in the cash flow statement. We also take into consideration the fact that the assessee has offered the forex gain in respect of the same loan in the previous year and in the interest of justice it is only correct when the loss arises out of forex movement the same be allowed. Pursuant to the binding decision of t ..... 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