TMI Blog2023 (12) TMI 585X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome tax act, it has to fall basically within one of the heads of the income as per section 14 of the act. It may be the case that income may either be chargeable to tax under article 11 or under article 22, according to section 14 of The Income Tax Act such income is chargeable to tax under the head income from other sources . Purpose of Double Taxation Avoidance Agreement is to distribute the tax between the source country and the country of residence whereas the purpose of the domestic tax law is to compute the income under the various heads as prescribed under section 14 of the act. The distributive rule of the Double Taxation Avoidance Agreement only classifies income into various types. This is not relevant for determining the head of income according to section 14 of the act in spite of similarity in terminology. The purpose of both is quite different. However, as for assessment year 2014 15 the issue has been set-aside to the file of the learned assessing officer to first determine whether the income of the assessee is classified as interest under article 11 or under article 22 of the double taxation avoidance agreement. The issue is still not decided. Therefore i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to these basic aspects. Therefore, we remit this issue back to the file of the ld AO with direction to assessee to benchmark interest on loan transaction taking all these issues in consideration. Appeal of the assessee is partly allowed as indicated above for statistical purposes. - Shri Prashant Maharishi, AM And Shri Rahul Chaudhary, JM For the Assessee : Shri Kishore Phadke, AR For the Revenue : Shri Mehul Jain, DR ORDER PER PRASHANT MAHARISHI, AM: 01. ITA No.1867/Mum/2022, is filed by Nipro Corporation, Japan (the assessee / appellant) for A.Y. 2017-18, against the assessment order passed under Section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (the Act), dated 27th May, 2022, by the Dy. Commissioner of income Tax, International Taxation, 3(3)(1), Mumbai, (the learned Assessing Officer) determining the total income of assessee at ₹6,65,24,700/- against the returned income of ₹2,80,77,580/-, wherein the order passed by the learned Asst. Commissioner of Income Tax, Transfer Pricing, 3(1)(1), Mumbai (the learned Transfer Pricing Officer) under Section 92CA[3] of the Act dated 31st December, 2022, and direction of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction is at arm's length from AE's point of view, the same transaction cannot be unfavorable from assessee's point of view. The learned TPO erred in law in proposing and the learned DRP Panel erred in law in sustaining the upward adjustment in interest on ECB as it is against the principle of Section 92(3). 8. The appellant craves leave to add/modify/delete/amend all/any of the grounds of appeal. Issue no. 3-Double addition of Interest on ECB. 9. The learned AO erred in law and on facts in making double addition of Interest on ECB amounting to Rs. 28,64,302 in the appellant's assessed income charged by appellant on JPY denominated loan given to AE (Nipro Pharma packaging India Pvt. Ltd.). 10. The appellant craves leave to add/modify/delete/amend all/any of the grounds of appeal. 03. Brief fact of the case is that assessee is a company incorporated in Japan, engaged in the business of manufacturing of medical equipments. 04. For AY 2017-18, Assessee filed its return of income on 29th November, 2017, at a total income of ₹2,80,77,580/-. In the computation of total income all these income is a disclosed under the head income from other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me by the assessee of ₹ 5,416,947/ has not been offered for taxation in the return of income. Thus the assessee has disclosed this as international transaction but the above guarantee fee income is stated to be not chargeable to tax in the hands of the assessee for the reason that it is chargeable to tax as business income and as the assessee does not have any permanent establishment in India, in terms of article 5 and article 7 of the Double Taxation Avoidance Agreement between India and Japan, such income is not taxable in India. 09. The learned Transfer Pricing Officer passed an order under Section 92CA (3) of the Act on 31st December, 2020, making a transfer pricing adjustment of ₹6,75,36,860/- on account of two international transaction. [1] Arm s length price of Guarantee fee on corporate guarantee transaction of Rs 54,16,947/- was determined at ₹5,41,69,470/- by adopting CUP method as Most Appropriate method by taking comparables of four banks having Average rate of Guarantee charged by banks determined at 1.15% reducing therefrom 0.15 % as downward adjustments and arriving at Alp rate of 1 % of Guarantee amount. [2] [a] On interest from ECB Loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 014. The draft assessment order under Section 144C of the Act was passed on 30th July, 2021, at the total income of ₹9,56,14,440/-. 015. Against the above adjustment, assessee preferred the objection before the learned Dispute Resolution Panel, wherein the directions were issued on 29 April 2022. i. On objection of the assessee to taxability of corporate guarantee fee at the rate of 40%, The learned Dispute Resolution Panel vide paragraph no.5, categorically held that guarantee fee and commission is chargeable to tax as interest under Article 11 of DTAA and not as income from other source as other income under Article 22(3) of the Double Taxation Avoidance Agreement. The Arm's Length Price of the guarantee commission of ₹ 5,41,69,470/-, was also reduced to ₹2,70,84,745/-. In fact, the guarantee commission at 1% determined by the learned Transfer Pricing Officer was reduced to 0.5% against international transaction of 0.10% amounting to ₹54,16,947/-. ii. With respect to the adjustment of interest receivable it was found that assessee has provided loans to two different Indian entities and rates charged on a loan given to Nipro Pharma Packa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urces and taxed it @ of 40%. Therefore, the learned Assessing Officer has failed to carry out the direction of the learned Dispute Resolution Panel and therefore, such adjustment is not valid. 019. With respect to ground no.2, it was submitted that the assessee received interest from Indian Associated Enterprise wherein adjustment is made by the learned Transfer Pricing Officer/Dispute Resolution Panel/Assessing Officer, stating that assessee should have received higher interest by the permanent establishment of Japanese company in India. This resulted in Arm s Length price of interest paid by an Indian entity to the PE of a Foreign entity at higher sum. Therefore, such an adjustment will result into the erosion of tax base in India for the reason that Indian entities would claim higher deduction of interest. He relied upon the Pune Bench decision of Cummins Incorporation Vs. ACIT, in ITA No.2181/Pun/2013 and Kolkata Bench decision of At S Austria Technologie Systemtechnik Aktiongesellschaft DCIT in ITA No. 95/Kol/2018. Even with respect to the rupee loan, he submits that the State Bank of India PLR rate are ranging from 11% and therefore, the Arm's Length Price determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e return of income. It is always the claim of the assessee that guarantee fee income cannot be taxed in India in the hands of the assessee as the same is a business income and in absence of any permanent establishment in terms of article 5 and article 7 of the double taxation avoidance agreement, same cannot be taxed. The learned that assessing officer while passing the draft assessment order the assessee was categorically asked that such a receipt should be brought to tax in view of article 22 (3) of the Double Taxation Avoidance Agreement as the corporate guarantee fee of crude and arises in India as it is linked to the Indian associated enterprises availing credit facility from banks. The assessee has categorically denied that such guarantee fee can only be taxed as business income as per article 7 and in absence of permanent establishment it cannot be taxed. With respect to applicability of article 22 does not apply in view of the guarantee fee being a business income. It was further stated that even if with respect to applicability of article 22 (3), the other income may be taxed in the country in which it arises i.e. where such income is sourced. It was submitted that guarant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om definition of interest under that article as well as the definition of interest under section 2 (28A) of the income tax act. Therefore it held that the action of the learned assessing officer to tax the guarantee fee under article 22 (3) is not sustainable. DRP was of the opinion that guarantees fee in question is taxable as interest in India under article 11 of the double taxation avoidance agreement. The arm s-length price was upheld at 0.5% of the guarantee sum. Indian the DRP held that as a matter of utmost precaution, in case, in any future litigation in higher judicial forum, if the guarantee fees commission in question is held to be not interest within meaning of article 11 (5) of the double taxation avoidance agreement, then alternatively the same would need to be taxed under article 22 of the double taxation avoidance agreement. Based on such direction the learned AO in the final Assessment Order considered such direction at paragraph number 4.1 consequently the arm s-length price at 0.5%. Therefore, according to the above direction of the learned dispute resolution panel the guarantee fee income is chargeable to tax as interest under article 11. The learned that AO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source country and the country of residence whereas the purpose of the domestic tax law is to compute the income under the various heads as prescribed under section 14 of the act. The distributive rule of the Double Taxation Avoidance Agreement only classifies income into various types. This is not relevant for determining the head of income according to section 14 of the act in spite of similarity in terminology. The purpose of both is quite different. However, as for assessment year 2014 15 the issue has been set-aside to the file of the learned assessing officer to first determine whether the income of the assessee is classified as interest under article 11 or under article 22 of the double taxation avoidance agreement. The issue is still not decided. Therefore in the interest of justice, we also set-aside issue number 1 as per ground number 1 4 of the appeal of the assessee back to the file of the learned assessing officer to 1st decide how the income is chargeable to tax according income tax act, as per distributive rule what is the classification of income on what is the tax rate as per the double taxation avoidance agreement, and then compute tax according to income tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of overall tax base in India and therefore the transfer pricing provisions will not apply. The proposed addition is against the principles of provisions of section 92 (3) of the act. For this proposition, the decision of the coordinate bench in case of Cummins Ltd [ 2181/PN/2013] and AT S Austria technology and Systemtechnok V DCIT (ITA 95/Kol/2018) was relied upon. It was further stated that the reserve bank of India Masters circular prescribes the maximum rate, which can be charged for interest by a foreign enterprise from an Indian entity, and therefore the arm s-length price of the same cannot be higher than that. Even otherwise, the state bank of India prime lending rate cannot be applied to the loan provided by foreign company to Indian entity and only the interest rates in Japan are to be compared with the rates charged by the assessee. It was stated that the rates charged by the long-term prime lending rates by a bank is 1% and therefore the interest charged by the foreign entity at 10.50% cannot be disturbed. On the issue whether the tested party should be taken as an Indian entity or a foreign associated Enterprises, the learned dispute resolution panel held that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to its Indian associated enterprises in Japanese yen, adoption of SBI PLR is not relevant. The Transaction is to be benchmarked by taking in to consideration whether any third party would give loan to Indian entity at those interest rates and on those conditions for that tenure. Therefore, taking Foreign AE as tested party is irrelevant. Even otherwise it is not a profit based method applied. It is the borrower whose condition and financial health needs to be ascertained first. That is Indian entity. Further, for determination of Arm s length price of interest received it is necessary to determine the credit rating of borrower. Thereafter the External comparables for benchmarking can be searched on publicly available financial databases, by applying appropriate filters to find comparable loan transactions with the same characteristics such as [1] Currency type, [2] Tenure, [3] Purpose of loan General/Working Capital/Capital Expansion/Re-financing, etc. [4] Tranche Type such as Term Loan/Revolving Credit, [5] Covenants , and [6] Credit Rating. Such Interest rate is further required to be adjusted to meet the economic conditions of the tested loan transaction to Interest Swa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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