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TMI Blog2024 (5) TMI 1558X X X X Extracts X X X X X X X X Extracts X X X X ..... xpected to record his satisfaction in that respect before making the reference to the learned TPO. 1.3 Further, the learned Transfer Pricing Officer ("TPO") has failed to prove that any of the conditions laid down in section 92CA(1) of the Act had been satisfied, which made out a case for tax evasion. 1.4 On the facts and in the circumstances of the case, a transfer pricing adjustment cannot be made without arriving at the finding that the intention of the Appellant was to evade tax and shift profits outside of India. Further, such finding of tax evasion and of shifting of profits constitutes a condition precedent for making the transfer pricing adjustment. 1.5 The transfer pricing adjustment made by the Ld AO / Hon'ble DRP is bad in law, illegal, without jurisdiction and contrary to and / or beyond and in excess of the express statutory provisions of the Act including sections 4, 5, 9, 92, 92C, 92CA, etc. The approval of the CIT under section 92CA(1) is also not in accordance with law and hence the adjustment must be quashed. Erroneous adjustment on account of non-recovery of commission on issue of Letters of Comfort ("LOC") 1.6 The Ld AO / Hon'ble DRP erred on f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsequent to the issue by the Appellant to the Bankers of such AE of any LoC(s), no such transfer pricing adjustment ought to be made; and (ii) if the dividend paid to the Appellant by the concerned AE was less than the value of any such alleged benefit(s), then it is only the excess of such alleged benefit(s) over such dividend which ought to be determined as the transfer pricing adjustment. 1.12 The Ld AO / Hon'ble DRP erred in disregarding the fact that this issue is no longer res-integra, and resolved in favour of the Appellant by Hon'ble Commissioner of Income Tax (Appeals) for AY 2005-06, AY 2006-07 and AY 2007-08. Erroneous adjustment on account of rate of interest chargeable in respect of extended period for remittance by AEs of export sales proceeds 1.13 The Ld AO / Hon'ble DRP erred on facts and in law in making an addition of Rs.2,39,940/- on account of notional interest on perceived delay in collection of receivables from the AEs. 1.14 The Ld AO / Hon'ble DRP erred on facts and in law in disregarding the fact that, i) interest on receivables beyond a stipulated credit period is not an international transaction and, thus, does not warrant an im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r determining the arm's length interest; (ii) by considering the interest rate prevailing in lender's country rather than borrower's country; (iii) by not considering the impugned interest on interest free loans by relying upon the RBI's circular in respect of External Commercial Borrowings (ECB); and (iv) by applying the weighted average cost of borrowing ("WACB") instead of LIBOR for the purpose of computing the adjustment towards non-recovery of interest on shareholder loan. 2.3. The Ld. AO-DRP erred on facts and in law in disregarding the fact that, there was no nexus between the funds borrowed and the funds lent by way of advances to subsidiary, as the advances have been made out of own funds of the assesse. Hence, no interest in respect of the borrowings by the appellant could be attributed to such advances and no disallowance should be made thereof U/s. 36(l)(iii) of the Act. 2.4. The Ld. AO-DRP erred on facts and in law in disregarding the fact that, even if any part of interest in respect of borrowings were to be construed, having been incurred towards such advances, the same is considered to be allowable expenditure U/s. 36(l)(iii) of the Act, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed under Section 14-A was not allowable under Section 36(l)(iii). 3.4.2 The learned AO-DRP erred in holding that a part of the Appellant's borrowed funds had been used for the purpose of making investments in shares, particularly in view of the fact thattheAppellant's Own Funds 419.67crores) were far in excess of the Appellant's Total Investments (* 120.17crores). 3.4.3 The learned AO-DRP erred in holding that a part of the Appellant's borrowed funds had been used forthe purpose of making investments in shares, for the reason also that the learned AO-DRP has not brought on record any material establishing any nexus between any part of the Appellant's borrowed funds and the funds utilized by the Appellant to make such investments. 3.4.4 The learned AO-DRP erred in rejecting the Appellant's alternative claim to the effect that the amount disallowed under Section 14-A was allowable under Section 37(1). 3.4.5 The learned AO-DRP erred in rejecting the Appellant's alternative claim to the effect that the amount disallowed under Section 14-A was allowable under Section 57(iii). 3.4.6 The learned AO-DRP erred to appreciate that Section 14-A does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in fact in upholding AO's action in disallowing expenditure amounting to Rs.16,66,520/- by way of professional charges paid toDeloitte Touche Tohmatsu for the purpose of market research and survey incurred wholly andexclusively for the purpose of the present business. 4.2 Without prejudice to the above, the Ld AO-DRP erred in Jaw and in fact in holding that the expenditure has no direct nexus to the income earned and not incurred for the purpose of the business. 4.3 Without prejudice to the above, the Ld AO-DRP erred in making disallowance in respect of out of pocket expenses of Rs.1,22,320 and expenditure on Transfer Pricing study Report of rs.2,20,600 which are in the nature of routine business expenditure and hence disallowance, whilst denying made should be restricted to Rs. 13,23,600 (Rs. 16,66,520-Rs. 1,22,320). Erroneous adjustment on account of disallowance of professional fees paid to Vaishnavi Corporate Communications Pvt Ltd 5. On the Facts & circumstances of the case, the Ld AO-DKP has erred in law and in fact in upholding AO's action in disallowing expenditure amounting to Rs. 38,76,282/- by way of professional charges paid to Vaishnavi Corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.4. The submissions of the assessee on the issue of letter of comfort have been examined and considered. The facts are similar to AY 2009-10. Thus, for the purpose of continuity the issue is being dealt in line with AY 2009-10. The assessee in its submissions has mentioned that the letter of Comfort is not a contract, banks cannot proceed against assessee in case of default of repayment by the AE and the letter of comfort has been given in the business interest. It has also mentioned that the banks to whom the letters of comfort have been given are not the AEs of the assessee" 5.1 The Ld.AR further argued that the issue is squarely covered by the order of the co-ordinate bench of ITAT, Mumbai bearing ITA No. 537/Mum/2013, date of pronouncement 06/02/2024 in assessee‟s own case for A.Y. 2008-09. The Ld.AR drew our attention in the relevant paragraph which is reproduced as below: "13. This issue is covered in favour of the Appellant by the decision of the Hon'ble ITAT in its own case for the A.Y. 2005-06 (bearing ITA No. 4376/Mum/2010 dated 29 January 2020). A copy of the said decision was submitted before the Bench during the course of hearing on 24 January 2024 (refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: "11. The brief facts are that the Assessing Officer has made addition of Rs.5,75,38,800/- on account of transfer pricing adjustment in respect of non-recovery by the assessee from its AE and the issue of letter of credit holding that assessee has not charged any commission from the AE. The ld. CIT (A) has deleted the said adjustment after observing and holding as under:- 9.4 I have considered the facts of the case and written submissions and oral arguments of the appellant advanced during the course of the appeal as against the observations/findings of the TPO/AO in their orders. The contention of the appellant are being discussed and decided as under: i. The international transactions of the appellant were analyzed by the TPO during proceedings. The TPO examined in detail the international transactions of the appellant referred to by the AO and proposed no further adjustment to the value of arm's length price of international transactions benchmarked by the appellant in its TP documentation. In respect of the LOCs issued by the appellant to its AEs, the TPO selected Comparable Uncontrolled Price method ("CUP") as the most appropriate method for determini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OECD Guidelines, July 2011 deal with the issue which is reproduced hereunder: "Similarly, an associated enterprise should not be considered to receive an intragroup service when it obtains incidental benefits attributable solely to its being part of a larger concern, and not to any specific activity being performed. For example no service would be received where an associated enterprise by reason of its affiliation alone has a credit-rating higher than it would if it were unaffiliated, but an intra-group service would usually exist where the higher credit rating were due to guarantee by another group member, or where the enterprise benefited from the group's reputation deriving from global marketing and public relations campaigns. In this respect, passive association should be distinguished from active promotion of the MNE group's attributes that positively enhances the profit-making potential of particular members of the group. Each case must be determined according to its own facts and circumstances." vi. Appellant vide its letter dated 23.08.2012 has submitted that it does not press ground No. 6C(ii) which is in respect of comparable data for benchmarking and accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in term of international transaction 92B of the Act. The TPO made adjustment of Rs. 8.70 crore on account of issuance of Letter of Comfort. The Id. CIT (A) after appreciating the contention of assessee concluded that issuance of Letter of Comfort does not constitute an international transaction. The Id. CIT (A) appreciated the difference between corporate guarantee and Letter of Comfort. The Ld. AR further submits that there is a basic difference between corporate guarantee and Letter of Comfort. In a Letter of Comfort, the party issues only a letter that a subsidiary or group company would comply term of financial transaction and have no obligation to indemnify, however, in case of corporate guarantee, the party issuing guarantee is under obligation to the lender. The Ld. AR further submits that in fact this ground of appeal is also covered by the decision of Tribunal in case of The India Hotel Company Ltd. vs. DCIT in ITA No. 9087/Mum/2010 dated 06.09.2019, wherein similar ground of appeal was considered and by following the decision of earlier years in that assessee and decision of Hon'ble Karnataka High Court in United Braveries Holding Ltd. Karnataka State Industrial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly, the ground of the assessee succeeds. In the result, ground nos. 1.1 to 1.12 are allowed. Ground nos.1.13 and 1.18 8. On this issue, the ld.AR placed that the interest is charged on outstanding receivable from AEs. The assessee itself charged the interest on outstanding @6% to 10% without allowing any credit period. The TPO determined interest @13.10%. But the DRP held prime lending rate to be charged. The ld.AR invited our attention in order of DRP pages 2-3. The relevant paragraph is reproduced as below:- "2.1.....................................The assessee is an Indian entity and in an uncontrolled scenario, any Indian entity would charge interest for the credit period to another unrelated party as per the rates prevalent in Indian financial market. As the range of BPLR for the month of March 2009 was 11% to 12%, for an unsecured loan of more than Rs.2lakhs. The interest chargeable on the outstanding balances by the assessee was estimated at 13.10%, which would adequately take care of the fair market rate of interest that is chargeable by assessee in an arm's length situation and also the currency risks and other risk exposure taken by the assessee. 2.2 The Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of interest of Rs. 20, 70,633/- on delayed realisation of sales proceeds from its AEs. This ground relates to the transfer pricing adjustment vis-à-vis imputing interest on delayed realisation of sale proceeds from its AEs. The Appellant charged interest at the rate of 6% on the realisation of sale proceeds from its AEs for the entire credit period extended to the AEs of 150/180 days. The TPO held that interest chargeable by the Appellant on the outstanding balances should be at par with the Prime Lending Rate ('PLR') in India which according to him was 12.25% prevalent in the month of March 2008. The Ld. DRP confirms the view of TPO on the ground that the transaction originates in India and therefore the TPO has correctly applied the PLR of SBI. 17. As per assessee, Interest rate should be computed based on the interest rate applicable to the currency in which loan has to be repaid. Reliance in this regard is placed on the decision of the Delhi High Court in the case of CIT v/s. Cotton Naturals India Pvt. Ltd. (2015) 231 Taxman 401 (Delhi), a copy whereof is enclosed herewith at Page 100 to 117. The PLR considered by the TPO primarily relates to lendin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is resulted in net assets of TWA falling below 75% of share capital. As per Jebel All Free Zone Rules (Implementing Regulations No. 1/92 of November 1992) JAFZA rules (copy enclosed at Annexure 1) the net assets need to be maintained at 75% of share capital and if there is a shortfall funds need to be infused to remedy the same. The relevant extract of rules is reproduced as under: "if the net assets of a Free Zone Establishment fall below 75% of its share capital the Director(s) shall, not lo.ter than 15 days from the earliest day on which that fact is known to a director, duly notify the FZE Department and the Owner which shall, within 7 days of such notification to it, take such steps as may be appropriate to remedy the situation so as to ensure that the net assets of such Free Zone Establishment are restored to at least 75% of its share capital as soon as reasonably practicable" As a parent company of its wholly owned subsidiary - TWA, the assessee was required to infuse funds to bridge the gap and for protecting its own investments in TWA, This is also evidenced by Board Resolution passed by the assessee at the time of granting the interest free loan to TWA (copy enclose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeals and set aside the impugned judgments of the High Court, /, Tribunals and other authorities and remand the matter to the Tribunal for a fresh decision, in accordance with law and in the light of the observations made above. 37. We also make it clear that we are not setting aside the order of the Tribunal or other income-authorities in relation to the other points dealt with by these authorities, except the point of deduction interest on the borrowed funds.‖ 13. The Ld.DR vehemently argued and fully relied on the orders of Revenue Authorities. The Ld.DR was unable to submit any contrary judgement against the submission of the assessee. 14. We heard the parties and perused the material on record. We notice that the assessee had granted loan to TATA West Asia FZE (wholly owned subsidiary of the assessee) during the financial year 2008-09 & that no new loan has been granted during the year under consideration. Attention was invited to Schedule F(v) of the Audited Financials at Page 22 of APB. Further, since the assessee‟s own funds (Rs.33,581 lakhs) were far in excess of loan granted (Rs.280 lakhs), it should be held that loan was granted from own funds and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee, constituted of Export Packing Credit of Rs. 172.27 crores and term loan of Rs 20.17 Crs, was utilised for the purposes of the assessee'sexport business and capacity expansion project for the purchase of plant & machinery no part of such funds could have been utilised by the assessee for any other purpose, much less for making any investments, since the Reserve Bank of India's regulations prohibit the use of those funds for any other purpose. (2) Without prejudice to the submission at (1) above, the provisions of sec. 14A(2) and rule 8D have no application to the assessee's case, since no part of the interest expenditure of Rs. 12,98,29,264 can be disallowed under those provisions, inasmuch as- (i) the fact that the assessee's funds constitute a mixed fund, comprising both, the assessee's own funds as well as its borrowed funds, and (ii) the fact that the assessee's own funds of Rs.434.29 crores were far in excess of its investments of Rs. 236.61 crores, a presumption arises that such investments were made from the assessee's own funds [ In making this submission, the assessee has relied on the I.T.A.T's order dated 08.06 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, is already negated. The learned counsel for the revenue has failed to refer to any statutory provision which obligate the assessee to maintain separate accounts which might justify proportionate disallowance. 29. In the above context, the following saying of Adam Smith in his seminal work - The Wealth of Nations may aptly be quoted: "The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person." Echoing what was said by the 18th century economist, it needs to be observed here that in taxation regime, there is no room for presumption and nothing can be taken to be implied. The tax an individual or a corporate is required to pay, is a matter of planning for a taxpayer and the Government should endeavour to keep it convenient and simple to achieve maximization of compliance. Just as the Government does not wish for avoidance of tax equally it is the responsibility of the regime to design a tax system for which a subject can budget and plan. If proper balance is achieved between these, unnecessary litig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judicial! defined in SG. Pgnatale[(1980) 124 ITR 391 (Guj.)] by the High Court of Gujarat, in our vie\ correctly, to mean as income "arising or accruing in India". The amendment to the section by way of a Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect . from 1979, "income payable for service rendered in India". 19. When the Explanation seeks to give an artificial meaning to "earned in India" and brings about change effectively in the existing law and in addition is slated to come into force with effect from afuture date, there is no principle of interpretation which would justify reading the Explanation as opera tin, retrospectively." (emphasis supplied) 8. Consequently, this Court is of the view that the am en dine lit of section 14A, which is "for removal o doubts" cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood. Though the judgment of this Court has been challenged and is pending adjudication before die Supreme Court, yet there is no stay of the said judgment till date. Consequently, in view of the judgments passed by tl Supreme Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods. So, the consultancy fees was paid after deducting. But entire consultancy fees was added back with the total income. 19. Ld.DR vehemently argued and relied on the assessment order. The pages 21 & 22 of final assessment order are read. Said pages are reproduced as below: - "6. Legal & Professional fees paid to Deloitte Touche Tohmatsu 6.1 It is also noticed that assessee has paid an amount of Rs. 16,66,520/-to M/s Deloitte Touche Tohmastsu. The assessee was asked why the amount paid to DHS should be treated as revenue expenditure. In this respect assessee submitted the detailed reply vide letter dated 31.12.2013 wherein the assessee provided the detailed break up of the expenses and submitted that :- "Assessee company being one of the largest Export Houses in the country, is a leading manufacturer and exporter of finished leather and leather footwear in the country. Further assessee company is also active in the global export market for leather footwear and manufacturer of leather footwear to major global brands like Hush Puppies, Zara, Marks and Spencer, etc. with annual footwear exports of over Rs. 150 crores. Accordingly assessee company has engaged the servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses has no direct nexus to the incomes reported by the assessee. Hence these expenses are held to be non business and are disallowed & added to the income of the assessee. The directions of the DRP Since the assessee company has not contested this ground of appeal before the DRP-II, the addition made by the AO remains intact." 20. The Ld.AR respectfully relied on the order of Hon'ble Apex Court in the case of Alembic Chemical Works Co. Ltd vs. CIT, 177 ITR 377 (SC) "14. It appears to us that the answer to the questions referred should be on the basis that the financial outlay under the agreement was for the better conduct and improvement of the existing business and should, therefore, be held to be a revenue expenditure. Reference may also be made to the observations of this Court in CIT v. Ciba of India Ltd. [1968] 2 SCR 696 at p. 705. There is also no single definite criterion which by itself, is determinative whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common-sense way having regard to the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rative paints and commercial aspects of distribution. Thus, from the agreements, it is sufficiently evident that the scope of the market survey is in line with the existing business of the assessee of manufacturing paints and enamels. Therefore, we are of the considered view that the expenditure incurred on exploring the decorative paints market in Turkey and Indonesia is for the extension of the existing line of business of the assessee and thus is in the nature of revenue expenditure. Accordingly, the AO is directed to delete the addition in respect of this expenditure." 21. We heard the rival submission and followed the orders of Hon'ble Apex court and coordinate bench of ITAT-Mumbai.Further the assessee company is also active in the global export market for leather footwear and manufacturer of leather footwear to major global brands like Hush Puppies, Zara, Marks and Spencer, etc. with annual footwear exports of over Rs. 150 crores. So, the expenses to DHS for exploring local market is well acceptable before the bench.We respectfully follow the order of honourable apex court in the case of Alembic Chemical Works Co. Ltd (supra) and we follow the order of coordinate bench of IT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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