9911796707
TMI Blog2023 (5) TMI 350X X X X Extracts X X X X X X X X Extracts X X X X ..... Length Price of the international transaction undertaken by the assessee. The TPO passed order dated 26.10.2017 u/s 92CA of the I.T.Act, determining the TP adjustment at Rs.1004,25,07,785. The Assessing Officer passed the draft assessment order on 26.12.2017 u/s 143(3) r.w.s. 144C(1) of the I.T.Act, wherein he incorporated the TP adjustment suggested by the TPO. Further, the A.O. also proposed certain additions / disallowances on the corporate tax front. 3. Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 29.09.2018, disposed off the objections of the assessee. The DRP upheld the TP adjustment proposed by the TPO. As regards the corporate tax additions / disallowances proposed in the draft assessment order, partial relief was granted by the DRP. 4. Pursuant to the DRP's directions, the impugned final assessment order was passed on 10.10.2018. In the final assessment order, the total income assessed was Rs.1609,01,40,058 (business income as per the revised computation of the assessee at Rs.407,11,79,829 disclosed during the course of assessment was adopted in arriving at the above m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered by the Tribunal in assessee's own case for assessment year 2013- 2014 in IT(TP)A No.2701/Bang/2017 (order dated 05.04.2022). The above order of the Tribunal for assessment year 2013-2014 had followed the earlier order of the Tribunal in assessee's own case for assessment year 2012-2013 in IT(TP)A No.489/Bang/2017 (order dated 29.05.2020). The Tribunal had upheld the action of the TPO by imputing notional interest on interest free advances extended by the assessee to its AE. However, as regards the computation of ALP, direction was made by the Tribunal for applying LIBOR rate and the matter was restored to the files of the A.O. The relevant finding of the Tribunal for assessment year 2013- 2014 (supra) reads as follows:- "7.7 We have heard rival submissions and perused the material on record. In the instant case the admitted facts are that the assessee provided interest free loans to AEs. These loans were given for the purposes of acquisition of business of various global suppliers of liquor. The TPO made an adjustment of Rs. 548,04,95,014 computed as per Annexure 1 to order passed under section 92CA and the DRP confirmed the same. As mentioned earlier, the learned AR ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, TPO has examined the interest free loan given by the assessee to its AE, as the same falls under the definition of "International Transaction" and made Transfer Pricing adjustment in this year. 27. We shall now deal with various arguments advanced by the assessee. The Ld A.R submitted that Chapter X dealing with determination of Arms Length price of international transactions is a machinery provision and the same cannot acquire primacy over the charging provisions like sec.4,5, 15 etc. Accordingly, he submitted that the "income" should have accrued to the assessee and then only the provisions of Chapter X can be applied to international transactions, i.e., it was submitted that the provisions of sec.92(1) could be invoked only when there arises any "income" from the international transaction, since the provisions of sec.92(1) uses the expression "Any income arising from an international transactions shall be computed having regard to the arms length price". Accordingly, it was contended that existence of "income" is sine qua non for invoking the provisions of sec.92(1) of the Act. It was contended that the assessee does not have any contractual right to receive any income fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons" has been defined to include capital financing, loan transactions etc. Hence there should not be any dispute that the impugned interest free loan given by the assessee to its AE shall fall under the definition of "International transaction". However, it is the case of the assessee that there is no requirement of determining ALP of transactions, when there is no "income" at all from the international transactions. This argument was rejected by the Ld DRP by following the decision rendered by the Special bench of ITAT in the case of Instrumentarium Corporation Ltd (supra) and the Ld DRP has extracted following observations made by the Special bench dealing with the above said contentions of the assessee:- "37. In our considered view, the commercial expediency of a loan to subsidiary is wholly irrelevant in ascertaining arm's length interest on such a loan. There is indeed no bar on anyone advancing an interest free loans to anyone but when such transactions are covered by the international transactions between the associated enterprise, Section 92 of the Act mandates that the income from such transactions is to be computed on the basis of arm's length price. The judici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he benefit test is not really relevant in the context of Indian transfer pricing legislation. Learned counsel has not explained as to how these inputs are relevant in interpreting the scope of the statutory provision before us, nor do we see any relevance of this material in the present context and given the fact situation above. It is also important to bear in mind the uncontroverted findings of the Assessing Officer that the interest was all along charged by the assessee on its loans to Datex but, for some unexplained reasons, the assessee has stopped charging interest in the assessment year 2003-04. The commercial bonafides of the present transactions are not established. As regards the assessee's claim that the revenue authorities have re- characterized the transaction, and that they do not have the powers to do so, we find that the claim of the assessee is ill conceived inasmuch as there is no re-characterization of the transaction, inasmuch as it continues to be a loan transaction and inasmuch as the substitution of zero interest by arm's length interest does not alter the basic character of transaction. The question of re characterization arises only when the very na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n bring the ALP adjustment to tax, since the computation is of income and it is only the price at which transaction is entered into that is to be taken as an arm's length price in computation of that income. The ALP adjustments cannot be treated as income per se. However, the assessee does not derive any support from this decision since consideration for a loan, i.e interest, is inherently in the nature of income. There is no, and there cannot be any, dispute or controversy about this character of income. The point of dispute is whether zero interest, or no interest, is good enough for computing the income or whether an arm's length interest must substitute this zero interest. The answer is obvious. As long as the transaction is an international transaction between the AEs, the computation of income has to be on the basis of arm's length interest. Therefore, in our considered view, even when no income is reported in respect of an item in the nature of income, such as interest, but the substitution of transaction price by arm's length price results in an income, it can very well be brought to tax under Section 92. This plea of the assessee is also, therefore, unsusta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the allowance for any expenses or interest arising from an international transaction shall also be determined having regard to the arms' length price." The argument of the assessee that income should arise out of the international transaction contradicts the above said Explanation, because "allowance for any expenses" per se cannot produce any income. However, if the said claim for any expense falling under international transaction is not at arms' length, then the same shall produce "income" to the extent of payment made in excess of arms' length price. As observed by the Special bench, if the transaction falls under the definition of "international transaction, then the same is required to be tested under arms length principle even if it did not produce any real income to the assessee. Suppose the income that arose to the assessee from an international transaction is Rs.100/- and the arms length price is Rs.125/- For computing total income, the AO shall adopt Rs.125/- only as income arising from the said international transaction. The real income principle fails here, since Chapter X brings in a legal fiction/deeming provision and the same is required to be complied with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as loan transactions in the books, in our view, the contention of any such intention cannot be recognized. Under these set of facts, we are unable to appreciate this alternative contention of the assessee. 34. The Ld A.R submitted that the AO/TPO was not right in adopting yield rate applicable to bonds rated by CRISIL agency. He submitted that the impugned loan has been given to a foreign AE and hence the LIBOR rate should have been applied by the TPO. He also placed his reliance on the decision rendered by Hon'ble Rajasthan High Court in the case of Vaibhav Gems Ltd (supra). He also submitted that the LIBOR has been accepted by the co-ordinate bench of Bangalore ITAT in the case of M/s Sasken Technologies Ltd vs. DCIT (IT(TP)A 550/Bang./2016). In view of these judicial rulings, we restore this issue to the file of AO/TPO with the direction to examine this claim of the assessee by duly considering the decisions referred above and also that may be relied upon by the assessee in the set aside proceedings." 7.7.2 The assessee has filed the additional evidence for conversion of loan to shares subsequent to the year under consideration. However, as the issue of shares was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2012-2013, we restore this issue to the file of AO/TPO. The TPO is directed to follow the direction given at para 34 of decision in assessee's own case in IT(TP)A No 489/Bang/2017 for the AY 2012-2013. The TPO shall ascertain the applicable LIBOR during the year under consideration and make the adjustment. 7.8. In the result, ground 1.1 to 1.13 are partly allowed for statistical purposes." 6.2 In view of the above order of the Tribunal, we uphold the TPO's action, which was affirmed by the DRP in imputing notional interest on interest free advances made by the assessee to its AE. However, the TPO is directed to ascertain and apply the LIBOR rate during the year under consideration and make the TP adjustment accordingly. 6.3 The learned AR, however, for the year under consideration, has advanced additional arguments as to why TP adjustment should not be made on interest free advances to its AEs. It was argued that in view of provision for doubtful loans and advances made to the extent of 36,164.529 (in Rs. Million) against the loans and advances given to AEs, the amount of loans and advances receivable from the AEs have been reduced to that extent and hence no TP adjustment s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have any financial implication and will be reassessed at each reporting date. (iii) The financial closu.re of the proposed transaction as contemplated by the terms of the SPA (as may be amended and modified from time to time). is subject to satisfaction of certain condition precedent. (iv) The equity shareholders of the Company have approved the proposed sale of WMG by USGBL.The Company has filed an application with Reserve Bank of India (through authorized dealer of the Company) for approval. Further to the signing of the SPA. The following provisions has been recorded as an exceptional item. (v) the net proceeds of sale will be insufficient to fully repay the intra-USL Group Loan, the balance of which stands at Rs.47,928.849 Million as of 31 March 2014. The Company, required, pursuant to mandatory applicable accounting standards, to impair its nvestment in USL Holdings Ltd, BVI and provide for the Intra-USL Group Loan as per details below:- Particulars Rs. In Million Provision for investment 22.183 Provision for loans given (net of FCTR balance of Rs.9,378.534 Million) 36,142.346 Total 36,164.529 In addition to the above, based on the Management's assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (e) a transaction of business restructuring or reorganization, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date. The term 'transaction' as per section 92F(v) includes an arrangement, understanding or action in concert (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding. 6.4.1 In the present case, there is no dispute to the fact that the loans and advances given to AEs are an international transaction. However, the reduction of such loans and advances receivable from the AEs by making provision for doubtful loans and advances in the books of account is an unilateral act of the assessee. It may be true that the provision for doubtful loans and advances was necessitated out of doubtfulness of the recovery of loans give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on interest free loans given to AEs. As mentioned earlier, the applicability of LIBOR, the TPO is directed to follow the direction given at para 34 of the order of the ITAT in assessee's own case in IT(TP)A No.489/Bang/2017 for the A.Y. 2012-2013. It is ordered accordingly. Fee Imputed on corporate guarantee extended to subsidiaries (Ground 2) (TP Adjustment) 7. The learned AR submitted that the above issue has been considered by the Tribunal in assessee's own case for assessment year 2013-2014 (supra) and the findings of the Tribunal by restricting the TP adjustment on corporate guarantee at 0.5% may be adopted in the relevant assessment year also. 7.1 The learned DR was duly heard. 7.2 We have heard rival submissions and perused the material on record. The Tribunal in assessee's own case for assessment year 2013-2014 (supra), had reduced the rate of corporate guarantee commission to 0.5% of the corporate guarantee given. The Tribunal had followed the reasoning of the judgment of the Hon'ble Bombay High Court in the case CIT v. Everest Kento Cylinders Ltd. reported in (2015) 378 ITR 57 (Bom) and the Co-ordinate Bench order of the Bangalore Tribunal in the case of Manipal Glob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) (TP Adjustment) 8. It is admitted by both the learned AR and the learned DR that an identical issue was considered by the Tribunal in assessee's own case for assessment year 2013-2014 (supra), wherein the addition made was restored to the files of the AO / TPO for a proper consideration of the facts and to decide as per law after affording sufficient opportunity of hearing to the assessee. The relevant finding of the Tribunal in assessee's own case for assessment year 2013-2014, reads as follows:- "9.5 We have heard rival submissions and perused the material on record. The TPO made an addition of Rs. 68,60,16,563 for the reason that the payments made to W&M for stock purchase has been diverted for onward remittance to Ultra Dynamix and other third parties. The TPO relied on the internal report of the taxpayer submitted to him and held that the international transaction with W&M is same as indicated in the internal report. The TPO therefore determined the ALP of this transaction to be NIL by such other method prescribed by the CBDT and the entire amount of Rs. 68,60,16,563 was determined as the adjustment under section 92CA. Before the DRP, assessee assailed the impugned find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te the disallowance u/s 14A of the I.T.Act. The relevant finding of the Tribunal for assessment year 2013-2014 reads as follows:- "10.6 We have heard rival submissions and perused the material on record. In the final assessment order, following the DRP directions, the AO made the disallowance under section 14A as per rule 8D at Rs. 48,04,00,000. The Tribunal in assessee's own case for the AY 2012-13 in IT(TP)A No. 489/Bang/2017 order dated 29.5.2020 considered the arguments made on similar disallowance and remanded the issue to the AO with various directions. The arguments of the learned AR are similar to the arguments considered by the Tribunal in the above order. The findings of the ITAT for the earlier year are as under:- "36. We heard the parties on this issue and perused the record. The Ld A.R made various contentions and hence this issue requires to be restored to the file of the AO for examining it afresh in the light of various contentions of Ld A.R, which are summarized below:- (a) It is the contention of Ld A.R that the own funds available with it is in excess of the investments. The jurisdictional Hon'ble Karnataka High Court in the case of CIT vs. Microlabs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, ground 4.1 to 4.12 are allowed for statistical purposes." 9.3 In view of the above order of the Tribunal in assessee's own case for assessment year 2013-2014 and 2012-2013 (supra), we restore the issue of disallowance u/s 14A of the I.T.Act to the files of the AO. The AO shall follow the directions of the ITAT given in assessment year 2012-2013 and shall re-compute the disallowance u/s 14A of the I.T.Act. It is ordered accordingly. 9.4 In the result, ground 4 is allowed for statistical purposes. Disallowance of interest u/s 36(1)(iii) of the I.T.Act (Ground 5) (Corporate Tax Issue) 10. We find an identical issue was considered by the Tribunal in assessee's own case for assessment year 2013- 2014 (supra), which had in turn followed the Tribunal's order for assessment year 2012-2013. The Tribunal had directed the A.O. to examine the issue in the light of the judgment of the Hon'ble Apex Court in the case of CIT v. Reliance Industries Limited reported in (2019) 410 ITR 466 (SC). The Tribunal directed the A.O. to examine whether the own funds of the assessee is in excess of the aggregate amount of interest free advances and in such event, the Tribunal held that no disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n view of the above order of the Tribunal, we restore the issue raised in ground 5 to the files of the AO. The learned AR has also pointed out that for the relevant assessment year the assessee has been charging interest (as per the amendment to the Companies Act, 2013) at the rate of 13% on advances made to its subsidiaries. This argument raised by the learned AR is also to be examined by the A.O. for the relevant assessment year and if the assessee is charging interest on the advances made during the relevant assessment year, no disallowance is called for u/s 36(1)(iii) of the I.T.Act in respect of the said advances. It is ordered accordingly. 10.2 In the result, ground 5 is allowed for statistical purposes. Disallowance of payments for promotion and advertisement expenses (Ground 6) (Corporate Tax Issue) 11. At the very outset, we notice that an identical issue was considered by the Tribunal in assessee's own case for assessment year 2013-2014 (supra), wherein the Tribunal following the earlier order of the Tribunal in assessee's own case for assessment year 2012-2013 (supra) had held that deduction of sales promotion expenditure and advertisement expenses are allowable expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see, that the expenditure incurred on IPL sponsorship did not provide it any benefit of enduring nature, that the expenditure had been incurred year after year by the assessee group with a view to get visibility, that it was in nature of some kind of advertisement expenditure, that same should be allowed as revenue expenditure. Referring to the case of Delhi Cloth and General Mills Co.Ltd.(115 ITR 659) of the honorable Delhi High Court, the FAA allowed the appeal filed by the assessee. 3.1.a. With regard to management fee, the FAA observed that there was no doubt about the genuineness of expenditure, that the expenditure was incurred for availing infrastructure facilities administrative support, like manpower recruitment, HR services, uses of computer, telephone, photo copiers, infrastructure set up etc. in order to carryout business operations smoothly, that the parent company had allocated a certain amount to the account of the assessee in the ratio of its turnover. He finally held that expenditure had to be allowed as revenue expenditure. 3.2. Before us, the DR supported the order of the AO and the AR relied upon the order of the FAA. We find that the assessee group had en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n account of AMP expenses. (ii) Assessee has been bearing substantial portion of the fees paid to ICC for acquiring sponsorship rights even though benefit of the same is derived by the other entities of the world. 88. Aggrieved by the addition proposed by the AO, the assessee had filed objections before the DRP. The DRP vide directions dated 20.12.2013 upheld the action of the AO, on the ground, that the expenditure was benefitting all the entities across the globe and hence, it could not be said to have been incurred wholly and exclusively for the business of the assessee. 89. The learned counsel for the assessee submitted that the said disallowance was unwarranted since the said expense was incurred in view of the fact that major viewership of cricket is in the Indian subcontinent. He also referred to various newspapers reports which demonstrated the popularity of the sport in India to support the aforesaid contentions. It was also submitted that the assessee company has consistently promoted its range of products using cricket as an advertising platform. It was also to our notice that payment of sponsorship fees to ICC was remitted by the assessee after deduction of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other entity cannot be a bar for allowance of expenditure u/s. 37. Under the principle of commercial expediency such an expenditure has to be seen from the angle, whether the decision taken by the assessee for paying sponsorship fees was for the purpose of business or not. Here in this case, the commercial expediency has not been doubted but rather it has been held by the AO that in all the years transfer pricing adjustments has been made on this score and benefit is arising to the other AEs also. What is relevant for an expense to be allowable as revenue expense is that, whether it has been incurred during the course of business and is for the purpose of business. Benefit factor to other related parties is relevant under transfer pricing provision and not while allowability of business expense u/s 37(1). It is well known fact that companies use sports event as a platform to advertise their range of products as it has a very high viewership. Any such incurring of expenditure is ostensibly for promotion of business only and hence, no disallowance is called for. Accordingly, Grounds No.7 to 7.3 in ITA No.1044/Del/2014 pertaining to A.Y. 2009-10 are allowed." 47. We notice that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciple to decide whether the expenditure was to facilitate profits, as follows: (iii) that the sum of money was expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee" In Smith Kline & French (India) Ltd. v. CIT [1992] 193 ITR 582/[1991] 59 Taxman 357 (Kar.), it was held that in normal commercial sense and in common parlance sales promotion and publicity are activities aimed at gaining goodwill in the market. They need not be confined to media propaganda but can involve indirect approaches. The judgment of a Division Bench of this Court in CIT v. Adidas India Marketing (P.) Ltd. [2010] 195 Taxman 256 (Delhi) has recognized that brand promotion exercises undertaken through media campaigns, schemes, programmes etc are essential for propagation of the brand. The necessity (or lack of it) is not something which income tax authorities can go into; as long as it is voluntarily undertaken by the business enterprise for profit earning, it would be entitled to claim relief under section 37(1). 23. In the present case, the AO was conscious of the fact that brand promotion expenses are a necessary ingredi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69, in support of their contentions. Mr. Aravind, learned counsel for the Revenue tried to distinguish the ratio laid down by the Supreme Court in this case on the basis of factual matrix involved therein. As against this, learned counsel appearing for the respondent/assessee placed reliance upon the principle laid down by the Supreme Court in the said judgment. 8. We have perused the judgment. We find ourselves in agreement with the learned counsel appearing for the respondent/assessee. It would be relevant to reproduce the relevant observation made by the Supreme Court, in the said judgment, which, in our opinion, support the case of the respondent/assessee to contend that the expenditure of Rs. 10 lakhs would be on revenue account. The relevant observation in the case of Empire Jute Co. Ltd. (supra) reads thus: 'The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is clear that if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. In the present case, except the right to use the court yard, no other rights were created in favour of assessee. In other words, the amount paid to the Trust was for the use of the court yard under the MOU for an indefinite future, and therefore, it would be on revenue account. In other words merely because the advantage may endure for an indefinite future would not mean that the expenditure would be on capital account and not revenue. The advance of Rs. 10,00,000/-, in the present case, consists merely in facilitating the assessee's business operations, enabling the management to conduct their Hotel business more efficiently and profitably. We are, therefore, satisfied that the view taken by the Tribunal in answering this question in favour of Assessee and against the Revenue is correct and deserve no int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of Rs.6,35,10,000 is imputed did not pertain to the assessee and hence the impugned addition of Rs. 6,35,10,000 is bad in law. These arguments have not been considered properly by both AO and DRP. The assessee's claims in the DRP objections [Page 128 to 134 of the appeal memo] regarding deduction under section 28 on account of fraud committed on the company has also not been considered by the AO/DRP. It appears that the AO has made the addition only on the basis of 'Project Spirit Report' without properly examining the claim of the assessee that certain transactions and the addition made thereto does not relate to the assessee. Considering the material on record and for the aforesaid reasoning, we set aside the impugned addition and restore this issue to the file of the AO for proper examination of all the facts relating to the said issue. The assessee shall provide all documentary evidence relating to its claim and the AO also shall make a proper enquiry in this regard. All contentions are left open to be considered by the AO in accordance with the law. 13.4.1 Hence grounds 8.1 to 8.8 are allowed for statistical purposes." 12.1 In the light of the above order of the T ..... 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