M/S PRAXAIR INDIA PRIVATE LIMITED ,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-2 , BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

These appeals by the assessee are against the order passed by the ACIT Circle-2, LTU for the assessment year 2014-15 u/s 143(3) r.w.s. 144C of the Income-tax Act,1961 ['the Act' for short] and against the order passed by the Deputy Commissioner of Income-tax Circle-3(1)(1), Bengaluru for the assessment year 2015-16 u/s 143(3A) & 143(3B) of the Act.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 3 of 62 5. The learned TPO erred in law and facts by holding that the payment of interest to Associated Enterprise ("AE:) on Compulsory Convertible Debentures (-CCD-) is not at arm's length and thereby erred in making an addition of INR 224,03,97,687/- thereby: a. Erred in transgressing their jurisdiction by questioning a genuine transaction and referring to irrelevant arguments and BEPS action plans, and thereby, concluding that CCDs are colorable instrument used to erode the base and shift profits. b. Erred in determining the ALP for payment of interest on CCDs as 'Nil' as against the interest payment made at 9% and 12%. c. Erred in not appreciating the fundamental difference between a CCD and an Equity while determining the ALP for payment of interest on CCD. d. Erred in not appreciating that CCDs are nothing but debt till the date of conversion. e. Erred in placing reliance in FEMA/FDI Regulations to re-characterize the CCDs to Equity thereby failed to appreciate that the treatment of CCDs under FEMA/FDI Regulations cannot determine/change the character of the instrument when it comes to other regulations including the Act. Failed to appreciate that the CCD were already accepted as debt in the f. scrutiny assessment proceedings for the years in which the CCDs were issues. g. Erred in not following the principles of Res Judicata having already accepted the requirement for payment of interest in the same CCDs during the previous assessment years. h. Erred in disregarding the independent benchmarking analysis undertaken by the Assessee identifying the comparable transactions involving the CCDs to demonstrate the arm's length nature of interest payment on CCDs. Without prejudice the learned TPO/ learned AO/ Hon'ble DRP failed to take 6. cognizance of the fact that a part if the interest paid on CCDs amounting to INR 72,46,00,000/- formed part of the "capital work-in progress" as on March 31, 2014 and was not claimed as business expenditure during AY. 2014-15 and therefore the same cannot be added to the total income of the Appellant. 7. The learned AO/ learned TPO/ Hon'ble DRP erred in restricting the royalty payment to 1% of net sales to its AE and thereby:

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru

Page 4 of 62 a. Erred in making an addition of INR 34,08,55,429/- to the total income of the Appellant b. Erred in stating that no direct/primary evidences was furnished to justify the payment of royalty to its Associated Enterprise. Failed to appreciate that the transfer of technology is a continuous c. process and thereby erred in stating that technology was transferred only during the initial year of operation and the Assessee has not received any new technology which necessitates the payment of royalty. d. Erred in rejecting the justification of ALP of royalty payment using TNMM as provided in the TP Report. e. Erred in not appreciating the fact that the OECD guidelines and the Tribunal rulings have approved of aggregation of closely linked transactions by applying Transactional Net Margin Method ("TNMM"). Erred in disregarding the external CUT search performed by The f. Appellant which is provided as a supplementary analysis to demonstrate the arm's length nature of the international transaction pertaining to payment of royalty. g. Erred in disregarding the internal CUT search performed by the Appellant which is provided as a supplementary analysis to demonstrate the arm's length nature of the international transaction pertaining to payment of royalty. h. Erred in restricting royalty payment of 1% of net sales on ad-hoc basis using Comparable Uncontrolled Price Method (“CUP”) despite not following the provisions prescribed in clause (a) of the sub-rule (1) of Rule 10B of the rules for determination of ALP in relation to an international transaction under CUP. i. Erred in not appreciating the similar licensing arrangement entered among group companies as these agreements provide persuasive value and support that the licensing of intangibles and services has been compensated as per the group policy. 8. The learned AO/ learned TPO/ Hon'ble DRP erred in determining the arm's length price of payment towards technical service fees to its AE at 1% of net sales arbitrarily and thereby: a. Erred in making an addition of INR 13,36,41,756/- to the total income of the Appellant

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 5 of 62 b. Erred in not appreciating the evidences furnished by the Appellant to justify the payment of technical services fees to its AE with commensurate benefits, c. Failed to appreciate the difference between the services for which technical service fee is being paid and the technology for which royalty payment is being made and thereby erred in concluding it to be a duplicate payment. d. Erred in ignoring the justification of ALP of payment towards technical service fee using TNMM as provided in the TP Report. e. Erred in not appreciating the fact that OECD guidelines and the Tribunal rulings have approved of aggregation of closely linked transactions by applying TNMM. f. Erred in determining the arm's length price of payment towards technical service fee to AE at INR 13,23,18,570/- at 1% of net sales on ad-hoc basis using CUP method despite not following the provisions prescribed in clause (a) of the sub-rule (1) of Rule 10B of the Rules for determining of ALP in relation to an international transaction under CUP. 9. Without prejudice, the learned AO/ learned TPO/ Hon'ble DRP failed to take cognizance of the fact that the payment towards technical service fee amounting to INR 26,59,60,326/-formed part of the 'capital work in progress' as on March 31, 2013 and was not claimed as a business expenditure during AY. 2014-15 and therefore the same cannot be added to the total income of the Appellant.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 6 of 62 10.5. The Hon'ble DRP erred in relying on its own directions for AY 2013-14 without appreciating the arguments of the Appellant. 10.6. Without prejudice to the above, the learned AO himself has indicated that the surplus cash of the Appellant had been utilized for investment in purchase of fixed assets and investments. Hence, even if the loan had been utilized for the purpose of repayment of short term borrowings as alleged by the AO, then such short term borrowings would have been only for working capital purposes, since the investment in assets had been made out of surplus cash as indicated by the learned AO himself. 10.7. The learned AO further erred in not appreciating the principle that normally long term borrowings are utilized for the purposes of long term investments (assets and investments), whereas short term borrowings are utilized for general corporate borrowing purposes / working capital. 10.8. Without prejudice to the claim of the Appellant that foreign exchange loss is revenue in nature, in the event if it is held that foreign exchange loss is incurred on account of purchase of fixed asset and it is capital is nature, appropriate depreciation on the same should be granted.

11.2. The learned AO erred in not appreciating that the investments made in Praxair Carbon Dioxide Private Limited (`PCPU) (currently merged with the Appellant) and Jindal Praxair Oxygen Company Limited ("JPOCPL") (now known as JSW Industrial Gases Private Limited) are historical in nature and as such no expenditure has been incurred towards the same. 11.3. The learned AO erred in not appreciating the fact that investment in JPOCPL was acquired by way of swap of shares in earlier year and not by way of actual cash 'outflow.

11.4. The learned AO erred in invoking provisions of section 14A of the Act, inspite of the fact that the investments were made in subsidiaries for strategic business reasons and not for earing any exempt income.

11.5. The learned AO erred in holding that investment to the tune of INR 178.32 crores has been made on 31.03.2013 in subsidiary companies without

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 7 of 62 appreciating the fact that no fresh investments were made during the year in its subsidiary companies.

11.6. The learned AO has erred in invoking the provisions of Rule 8D of the Rules without giving any show cause notice to the Appellant as to why the expenditure incurred in relation to exempt income should not be disallowed under section 14A of the Act.

11.7. The learned AO erred in stating that no submissions were filed in this respect by the Appellant, considering that no such opportunity was provided.

11.8. The learned AO/ Hon'ble DRP has erred in not considering the order of the Commissioner of Income-tax (Appeals) in Appellant's own case in AY 2008-09 which directed the learned AO to delete the disallowance under section 14A of the Act on the basis that original investments in the Appellant's case were not geared or intended for earning exempt income such as dividend. Being commercial expedient investments they are to be treated on a different footing from investments made only for earning exempt income. 11.9. The Hon'ble DRP erred in holding that the Appellant has not maintained separate books of account in regard to the investments made that are eligible to earn exempt income. The DRP also erred in stating that based the books of accounts maintained by the Appellant it is not possible to ascertain expenditure incurred in earning exempt income without appreciating the fact that it has not incurred any expenditure during the year towards the investments.

11.10. Notwithstanding and without prejudice to the above, the learned AO and the Hon'ble DRP erred in considering all the investments for computing average value of investments which yielded exempt income during the year.

i. The computation provisions of section 14A(2)/(3) of the Act read with Rule 8D cannot be applied to the book profit computation and only the amount of actual expenditure incurred (being an amount debited to the profit and loss account) which is relatable to the exempt income should be added to the book profits.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 8 of 62 ii. Section 115JB is a complete code by itself and no adjustments other than those which are prescribed in section 115JB of the Act itself can be made to the book profits.

12.2. The learned AO/ Hon'ble DRP erred in not placing reliance on the decision of Special Bench of the Delhi Tribunal in the case of ACIT Vs. Vireet Investment Pvt. Ltd. [2017] 82 taxmariil.com 415.

12.3. The learned AO erred in applying the provisions of section 14A to Chapter XII-B of the. Act without having regard to the restriction that the provisions of section 14A of the Act is restricted to computing the total income under Chapter IV of the Act. 12.4. The learned AO erred in not giving reasons as to why the disallowance as mentioned above has been added back in computing book profits under section 115JB of the Act.

12.5. The learned AO erred in disallowing the amount of INR 56,98,912 without issuing any show cause to the Appellant as to why disallowance under section 14A of the Act should not be made while computing book profits under section 115JB of the Act.

12.6. The learned AO/ Hon'ble DRP erred in not considering the order of the Commissioner of Income-tax (Appeals) in Appellant's own case in AY 2008- 09 which directed the learned AO to delete the disallowance under section 14A of the Act in computation of book profits under section 115JB of the Act on the basis that section 115JB of the Act is a complete code by itself and the importing of such disallowances into the scope of adjustment of book profit is not permissible.

13.1. The learned AO erred in disallowing 25% of the expenses under the sub- head miscellaneous expenses which is under the broad head miscellaneous expense in the statement of profit and loss amounting to INR 10,02,063 (being 25% of INR 40,08,250) on the basis that Appellant has not provided any ledger extract or proper evidences in this regard. The learned AO erred in not appreciating the fact that the Appellant had provided ledger extract of miscellaneous expenses vide e-mail dated 27 December 2017.

13.2. The learned AO erred in treating miscellaneous expenses amounting to INR 55,25,705 being product purchase expenses as capital in nature and allowed depreciation @ 15% on the same without appreciating that these expenses are revenue in nature.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 9 of 62 13.3. The Hon'ble DRP erred in not appreciating the submission made by the Appellant that the Appellant has inadvertently classified the expense of INR 55,25,705 under the sub-head product purchase which is under the broad head miscellaneous expenses amount, inter-alia, includes electrical goods, hardware tools, dry ice, IT Pro expense, gases etc. being revenue in nature.

“The grounds hereinafter taken by the Appellant are without prejudice to one another.

I. Transfer Pricing The learned Assessing Office (-AO"), learned Transfer Pricing Officer 1. ("learned TPO") and the Honourable Dispute Resolution Panel("DRP")grossly erred in adjusting the transfer price by INR 307,31,86,126/- with respect to the international .transaction rendered by the Appellant under section 92CA of the Income-tax Act, 1961 ("the Act").

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 10 of 62 Debentures (-CCD-) is not at arm's length and thereby erred in making an addition of INR 255,76,70,520/- thereby: a. Erred in transgressing their jurisdiction by questioning a genuine transaction and referring to irrelevant arguments and BEPS action plans, and thereby, concluding that CCDs are colorable instrument used to erode the base and shift profits. b. Erred in determining the ALP for payment of interest on CCDs as 'Nil' as against the interest payment made at 9% and 12%. c. Erred in not appreciating the fundamental difference between a CCD and an Equity while determining the ALP for payment of interest on CCD.

d. Erred in not appreciating that CCDs are nothing but debt till the date of conversion.

e. Erred in placing reliance in FEMA/FDI Regulations to re-characterize the CCDs to Equity thereby failed to appreciate that the treatment of CCDs under FEMA/FDI Regulations cannot determine/change the character of the instrument when it comes to other regulations including the Act.

f Failed to appreciate that the CCD were already accepted as debt in the scrutiny assessment proceedings for the assessment years of AY 11-12 to AY 13-14 and erred in not following the principles of Res Judicata having already accepted the requirement for payment of interest in the same CCDs during the previous assessment years of AY 11-12 to AY 13-14.

g. Erred in disregarding the independent benchmarking analysis undertaken by the Assessee identifying the comparable transactions involving the CCDs to demonstrate the arm's length nature of interest payment on CCDs.

a. Erred in making an addition of INR 51,55,15,606/- to the total income of the Appellant

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 11 of 62 b. Erred in stating that no direct/primary evidences was furnished to justify the payment of royalty to its Associated Enterprise. c. Failed to appreciate that the transfer of technology is a continuous process and • thereby erred in stating that technology was transferred only during the initial year of operation and the Assessee has not received any new technology which necessitates the payment of royalty. d. Erred in disregarding the external CUT search performed by the Appellant which is provided as a supplementary analysis to' demonstrate the arm's length nature of the international transaction pertaining to payment of royalty. e. Erred in disregarding the internal CUT search performed by the Appellant which is provided as a supplementary analysis to demonstrate the arm's length nature of the international transaction f. pertaining to payment of royalty. g. Erred in restricting royalty payment to 1% of net sales on ad-hoc basis using Comparable Uncontrolled Price Method ("CUP") despite not following the provisions prescribed in clause (a) of the sub-rule (1) of Rule 10B of the rules for determination of ALP in relation to an international transaction under CUP.

h. Erred in not appreciating the similar licensing arrangement entered among group companies as these agreements provide persuasive value and support that the licensing of intangibles and services has been compensated as per the group policy. 6. Without prejudice, the learned AO/ learned TPO/ Hon'ble DRP erred in ignoring the justification of ALP of payment towards royalty using TNMM as provided in the TP Report and erred in not appreciating the fact that OECD guidelines and the Tribunal rulings have approved of aggregation of closely linked transactions by applying TNMM. 7. The learned AO has erred in considering the Transfer pricing adjustment as INR 51,55,15,606, instead of INR42,95,93,838 as per the rectified order passed under section 92CA read with section 154 of the Act

II. Corporate Tax 8. Disallowance of expenditure under section 14A of the Act by applying the provisions of Rule 8D of the Income-tax Rules, 1962 ("the Rules") 8.1. The learned AO/ Honourable DRP erred in disallowing expenditure amounting to INR 89,27 *0 under section 14A of the Act read with Rule

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 12 of 62 8D of the Rules, despite the fact that no expenditure has been actually incurred/ debited to the profit and loss account on this account. The learned AO ought to have observed that applicability of section 14A of the Act is triggered only if there is any expenditure incurred in this regard. 8.2. The learned AO/ Honourable DRP erred in not appreciating that the investments made in JSW Steel Limited of an amount of INR 100,000 and in Jindal Praxair Oxygen Company Private Limited ("JPOCPL") (now known as JSW Industrial Gases Private Limited) of an amount of1NR 1,78,31,00,000 are historical in nature and as such no expenditure has been incurred towards the same. 8.3. The learned AO/ Honourable DRP erred in not appreciating the fact that investment in JPOCPL was acquired by way of swap of shares during Financial Year (`FY') 2010-11 and not by way of actual cash outflow. Further, investment in JSW Steel Limited was made in the. previous years, out of the own funds of the Appellant. Additionally, investment in TVH Energy Resources Private Limited of an amount of INR 45,00,000 was done during the FY 2014-15, out of the cash flow from operating activities generated during the subject AY. 8.4. The learned AO/ Honourable DRP erred in invoking provisions of section 14A of the Act, inspite of the fact that the investments were made for business reasons and not with the objective of earning any dividend/ exempt income.

8.5. The learned AO/ Honourable DRP has erred in not considering the order of the Commissioner of Income-tax (Appeals) in Appellant's own case in AY 2008-09 which directed the learned AO to delete the disallowance under section 14A of the Act on the basis that original investments in the Appellant's case were not geared or intended for earning exempt income such as dividend. Being investments made for business reasons, they are to be treated on a different footing from investments made only for earning exempt income. On Appeal by the Department, the Honourable ITAT has dismissed the grounds, in view of the categorical finding of the CIT(A). 8.6. The Honourable DRP erred in holding that the Appellant has not maintained separate books of account in regard to the investments made that are eligible to earn exempt income. The DRP also erred in stating that based the books of accounts maintained by the Appellant it is not possible to ascertain expenditure incurred in earning exempt income without appreciating the fact that it has not incurred any expenditure during the year towards the investments.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 13 of 62 9. Addition of INR89,27,000as per clause (f) of Explanation 1 to section 115JB of the Act for computing book profits 9.1. The learned AO/ Honourable DRP has erred in adding INR89,27,000 as per clause (f) of Explanation 1 to section 115JB of the Act for computing book profits without appreciating the fact that —

i. The computation provisions of section 14A(2)/(3) of the Act read with Rule 8D cannot be applied to the book profit computation and only the amount of actual expenditure incurred (being an amount debited to the profit and loss account) which is relatable to the exempt income should be added to the book profits. Section 115JB is a complete code by itself and no adjustments ii. other than those which are prescribed in section 115JB of the Act itself can be made to the book profits. 9.2. The learned AO/ Honourable DRP erred in not placing reliance on the decision of Special Bench of the Delhi Tribunal in the case of ACIT Vs. Vireet Investment Pvt. Ltd. [2017] 82 taxmann.com 415. 9.3. The learned AO/ Honourable DRP erred in applying the provisions of section 14A to Chapter XII-B of the Act without having regard to the restriction that the provisions of section 14A of the Act is restricted to computing the total income under Chapter IV of the Act.

9.4. The learned AO/ Honourable DRP erred in not considering the order of the Commissioner of Income-tax (Appeals) in Appellant's own case in AY 2008- 09 which directed the learned AO to delete the disallowance under section 14A of the Act in computation of book profits under section 115JB of the Act on the basis that section 115JB of the Act is a complete code by itself and the importing of such disallowances into the scope of adjustment of book profit is not permissible.

The learned AO erred in law and on the facts and circumstance of the case by initiating penalty proceedings under section 271(1)(c) of the Act for furnishing inaccurate particulars of income.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 14 of 62 4. Ground Nos.1 to 4 in the AY 2014-15 and ground Nos.1 & 2 in the AY 2015-16 are general in nature, which do not require any adjudication.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 15 of 62 AY 2015-16:

d) Erred in not appreciating that CCDs are nothing but debt till the date of conversion.

e) Erred in placing reliance in FEMA/FDI Regulations to re-characterize the CCDs to Equity thereby failed to appreciate that the treatment of CCDs under FEMA/FDI Regulations cannot determine/change the character of the instrument when it comes to other regulations including the Act.

f) Failed to appreciate that the CCD were already accepted as debt in the scrutiny assessment proceedings for the assessment years of AY 11-12 to AY 13-14 and erred in not following the principles of Res Judicata having already accepted the requirement for payment of interest in the same CCDs during the previous assessment years of AY 11-12 to AY 13- 14.

g) Erred in disregarding the independent benchmarking analysis undertaken by the Assessee identifying the comparable transactions involving the CCDs to demonstrate the arm's length nature of interest payment on CCDs.

5.1. After hearing both the parties, we are of the opinion that CCDs are nothing but debt till the date of conversion and re- characterization of the same is impermissible and this issue stands covered by the order of the Tribunal in the case of ACIT Vs. CAE Flight Training India Pvt. Ltd. in IT(TP)A No.2060/Bang/2016, IT(TP)A No.84/Bang/2015, IT(TP)A No.599/Bang/2016, IT)(TP)

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 16 of 62 No.2178/Bang/2016 & ITA No.2006/Bang/2017 vide Tribunal’s consolidated order dated 25.7.2019 wherein held as under:-

“21. Now we first decide the First and most important issue i.e. this that CCDs are Debts or equity and interest on it is allowable or not? On this issue, in the order of CIT (A) para 4 in the first year i.e. A. Y. 2009 – 10 is relevant and therefore, this Para is reproduced for ready reference hereinbelow. “4. Transfer pricing adjustment of Rs. 7,68,26,983: 4.1 The Transfer Pricing Officer, to whom the case was referred, noticed that the appellant had issued compulsory convertible debentures (CCDs)in December 2008 to its associated Enterprises in Mouritius, Dubai and Hungary at the rate of 15% interest on the funds borrowed'as detailed in the TP order dated 29.1.2013. The total payment of Rs. 7,68,26,983 was treated to be at Arm's length by the appellant in its TP Study by comparing it with 4 uncontrolled comparables (though of multiple years) by CUP method. However, the TPO was of the view that the comparison with non-convertible debentures of years other than the relevant FYs was not valid comparisons and therefore, the ALP determined by the appellant on the interest paid was rejected by the TPO. Also, the TP Officer examined whether the 'interest' paid of Rs. 7,68,26,983 was in the nature of `interest' at all. The Assessing officer concluded that the CCDs were actually equity and not debt since it was compulsorily convertible to equity shares and that the Reserve Bank of India also recognised CCDs as equity instruments. Also, the TPO was of the view that the appellant had junk credit rating, having no operating income or source of cash flow to service the interest payable at 15% and that no third party would make investment in CCDs and that the arrangement amounted to this capitalisation. Holding this, the amount of Rs. 7,68,26,983 was held to be not in the nature of 'interest' and ALP of the transaction by CUP method was held as Nil and adjustment of Rs. 7,68,26,983 was determined u/s 92 CA (3) of Income tax Act, 1961. As grounds No. 1 and 2 are general in nature these do not require adjudication. The relevant grounds of appeal raised by the appellant are "3. That on the facts and in the circumstances of the case, the Learned AO/Learned TPO erred in making adjustment to the transfer price of the Appellant’ international transactions with related parties by INR 7,68,26,983 for interest on debentures and considering the same to be nil.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 17 of 62 documentation by the Appellant in accordance with the provisions of the Act read with the Income tax Rules, 1962 ((the Rules"). 5. That the Learned AO/Learned TPO erred in reclassifying the debenture issued by the appellant form CCD to equity. The Learned YPO during the course of the hearing had not contended on the nature f the intercompany funding and had queried only on the rate of interest charged. Accordingly, the Learned TPO failed to provide to the appellant adequate opportunity to argue on the proposed classification of CCD as equity. The Learned TPO went beyond the brief of arbitrating only on the arm's Length pricing related to the rate of interest, and proceeded to question the nature of the inter-company funding. 6. That the Learned AO/Learned TPO proceeded to apply the principle of thin capitalisation, as contained in the Legislation from UK and Australia, in contravention to confining the assessment based on the principles provided in the Indian

Transfer pricing regulations (as provided in the Act and the Rules).

ii)Whether borrowing is debt or equity; Whether thin capitalisation rules apply? The Assessing Officer has in effect held that CCDs amount to equity, and that the case is of thin capitalisation as the appellant has shown the funds as debt rather than equity although, the debt equity ratio has not been discussed in the order of the Transfer Pricing Officer.

In the case of Besix Kier Dabhol, SA vs DDIT (I Tax),Circle-3(2), Mumbai, ITAT, Mumbai in their order in ITA No.4249/Mum/07 dated

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 18 of 62 20.11.2010 have held on similar facts that in absence of specific thin capitalisation rules in India, recharacterisation of debt capital as equity capital and accordingly disregarding the interest payments as tax deductables is not in order. Drawing support from the above, I hold that the conclusion of the AO that the CCDs is equity and that interest payment is not allowable cannot be upheld.

i. Whether rate of interest charged is at arm's length? It is on record that the funds which have been raised by the appellant through CCDs and have been utilised for the business of the appellant. The appellant has paid 15% as the rate of interest to its AEs for this purpose. It is been that PLR for A.Y.2008-09 as seen from SBI corporate website varies from 12.25% as on 1.1.2009 to 13.00% as on 10.11.2008. At an average, the same can be taken at 12.6% as against 15% claimed by the appellant. Under such facts, the interest paid of Rs.7,68,26,983/- at @ 15% is certainly not at arm's length and is also evidently in excess of the +/- 5% margin allowable. The AO/TPO is therefore required to rework the ALP taking into account, 12.62% rate of interest as the Arm’s Length rate of interest on the borrowing i.e. CCDs and rework the addition made u/s 92CA accordingly. It is held accordingly.”

“18. That takes us to objection of the Revenue authorities to the effect that the borrowings by the assessee, on which interest has been claimed as deduction, are in fact part of the capital of the assessee which is brought in the garb of borrowings purely on tax considerations. Our attention is pointed out to the fact the ratio of debt to the equity is 248 : 1 which is unusually high by any standard and that such a highly geared company only shows that equity is brought in the garb of debt, and it is contended that since what is termed as borrowing by the company is de facto minimum required capital to carry out the business in India, interest cannot be allowed as a deduction on the same. In other words, Revenue’s objection is that the assessee company is so thinly capitalized that its debt capital is required to recharacterized as equity capital for the purpose of examining claim of deduction for interest on such debt capital.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 19 of 62 gearing or leverage ratio i.e. debt equity ratio, is too high. The tax treatment being given to the equity capital and debt capital being fundamentally different, it is often more advantageous in international context to arrange financing of a company by loan rather than by equity. It does affect the legitimate tax revenues of the source country in which business is carried out because while dividends and interest are generally taxable at the same rate in the hands of the recipient in the source country, e.g. under India Belgium tax treaty WHT rate on interest, other than bank interest, as also dividend is at uniform 15 per cent, interest is tax deductible and that results in lower corporate taxes in respect of PE profits. These tax benefits could be further optimized by hybrid financing instruments such as profit participating loans, convertible loans or where instrument is treated as debt in the source country of the income (i.e. resulting in tax deductible interest) and as equity in the residence country of the lender (i.e. where lender may claim the participation exemption of interest income because of its characterization as distribution of profits). That is how tax considerations at times do result in a company being too thinly capitalized, or, to put it differently, financed by a disproportionate ratio of debts. In order to protect themselves against such erosion in their legitimate tax base, several tax jurisdictions enact rules to counter this vulnerability and these rules are termed as ‘thin capitalization rules’.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 20 of 62 ratio applies to loans granted by individual directors, shareholders and non- resident corporate directors to their company [art. 198(10) IR/WIB]. Interest relating to debt in excess of this ratio is recharacterized into a nondeductible dividend. Furthermore, the interest rate may not exceed the market rate. Secondly, a 7.1 debt/equity ratio applies to debt if the creditor (resident or non-resident) is exempt or taxed at a reduced rate in respect of the interest paid on the debt. Interest relating to debt in excess of this ratio is considered a non-deductible business expense [art. 198(11) IR/WIB]. In a 2008 IBFD publication "International Tax Planning and Prevention of Abuse" (by Dr Luc De Broe . ISBN 978- 90-8722-035-08; @ p. 502), these thin capitalization rules are summed up as follows .

"Belgium has five domestic law provisions that are relevant for the discussion of thin capitalization, i.e. art. 26 BITC; art. 54 BITC; art. 198, 11° BITC, art. 18, 4° BITC and the Belgian GAAR. Articles 26, 54 and 198 belong to the first group of aforementioned rules. The deduction of interest is denied if the statutory conditions for deductibility are not satisfied. Articles 26 and 54 are not concerned with the question whether the borrower is undercapitalized but only whether the interest charged is at arm’s length. Excessive interest (i.e. interest charged above the prevailing market conditions) is not deductible. Article 198, 11° is concerned with undercapitalized companies. Interest is not deductible if the statutory 7 . 1 debt/equity ratio is exceeded. Article 18, 4° BITC belongs to second group of aforementioned rules; it recharacterizes certain interest payments into dividends both for corporate tax purposes of debtor and for withholding tax purposes, while curiously it does not recharacterize debt into equity (neither for corporate tax, nor for capital duty purposes). In certain circumstances, the Belgian GAAR may have the potential to recharacterize purported debt into equity. In that case, it also belongs to the second set of rules."

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 21 of 62 be open to us to apply these thin capitalization rules in the hands of the assessee company while computing its taxable income in India, because so far as taxability in India is concerned, the limitation to be placed on deduction of expenses has to be limitation under the laws of the State in which PE is situated i.e. India. It may be useful to recall that in terms of the provisions of art. 7(3)(b) of Indo-Belgian tax treaty, "In the determination of the profits of a PE, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the PE including executive and general administrative expenses so incurred, whether in the State in which the PE is situated or elsewhere, subject to the limitations of the taxation laws of that State". Admittedly, there are no limitations on deduction of interest expenses on borrowings, which can be attributed to thin capitalization rules, in India.

"111. In para 3.3.1 after noticing the growing practice amongst certain entities, who are not residents of either of the two Contracting States to try and avail of the beneficial provisions of the DTAAs and indulge in what is popularly known as ‘treaty shopping’, the report says . ‘3.3.1 ..there is a need to incorporate suitable provisions in the chapter on interpretation of DTAAs, to deal with treaty shopping, conduit companies and thin capitalization. These may be based on UN/OECD Model or other best global practices.’

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 22 of 62 se does not render an attempt by resident of a third party to take advantage of the existing provisions of the DTAC illegal.

(Emphasis, by underlining, italicized in print, supplied by us)

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 23 of 62 mode of computation of income, the same should be followed, irrespective of the provisions in the IT Act. Where there is no specific provision in the agreement, it is the basic law, i.e., the IT Act, that will govern the taxation of income. When no such limitations on benefits or anti-abuse provisions are set out in the tax treaty, it cannot be open to the Revenue authorities to apply the anti-abuse provisions based on the Judge made law in India— which is essentially to be treated as a part of the IT Act as it is based on the interpretation of provisions under the IT Act and apply the same. As observed by this Tribunal, in the case of Motorola Inc. vs. Dy. CIT (2005) 96 TTJ (Del)(SB) 1 : (2005) 95 ITD 269 (Del)(SB), a tax treaty is an alternative tax regime. It has to be treated as a complete code in itself, in that sense. There are thus no legally sustainable merits in learned Departmental Representative’s passionate plea for invoking principles laid down by Hon’ble Supreme Court in McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), which, inter alia, holds that "colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by restoring to dubious methods" and that "it is the obligation of every citizen to pay the taxes honestly without resorting to subterfuge". It is thus not even necessary to examine whether or not the finance structure in question constituted colourable device or sort of subterfuge. As long as finance structure adopted by the assessee was not specifically prohibited by the applicable tax treaty provisions, and as long as there was no specific anti-abuse provision to deal with the same in the tax treaty itself, the effect of the finance structure could not be ignored.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 24 of 62 29. It is also important to bear in mind that when there are no thin capitalization rules vis-a-vis domestic thin capitalization situations and in the light of the s. 90(2) as it exists at present any attempts to neutralize thin capitalization vis-a-vis PEs of Belgian enterprise will be clearly contrary to the scheme of non-discrimination envisaged by art. 24(5) which provides that, "enterprises of a Contracting State, the capital of which is wholly or partly-owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other, or more burdensome, than the taxation and connected requirement to which other similar enterprises of that first-mentioned State are or may be subjected in the same circumstances and under the same conditions". In this view of the matter, it cannot be open to the Revenue authorities to put any limitation on deduction of interest, in respect of funds borrowed by the PE, while computing income in accordance with the provisions of art. 7 of Indo-Belgium tax treaty, when no such limitations are placed on the domestic enterprise.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 25 of 62 assessee’s planning the capital structure, but an element of planning in structuring capital does not transform a tax- deductible expense of interest into an expense that is non-tax deductible. In view of these discussions, it is clear that the impugned disallowance is indeed contrary to the scheme of the law as it exists; the grievance of the taxpayer deserves to be upheld. We, therefore, direct the AO to delete the impugned disallowance.” 23. As per above paras of this tribunal order, it comes out that even if Thin capitalization Principle is on Statute book of the other country, no disallowance can be made in India by applying this Principle. To this extent, we uphold the finding of CIT (A) by respectfully following this tribunal order. But the issue still remains because, the objections of AO/TPO are not merely on the basis of Thin capitalization Principle. Their basic objection is this that since the interest is paid on CCDs, this is not an interest on debt but on equity and hence, not allowable. On page 11 of his order for A. Y. 2009 – 10, the TPO has reproduced certain comments of RBI in 2007 Policy on convertible debentures in which it is stated that fully and mandatorily convertible debentures into equity within a specified time would be reckoned as equity under FDI policy. In view of this RBI Policy, the TPO concluded that these CCDs are equity and not debt and therefore, interest on it is not allowable u/s 36 (1) (iii). This finding of TPO is not by invoking Thin Capitalisation principle and therefore, it has to be decided independently. We find that the decision of TPO is bases on RBI policy of FDI. We all know that RBI policy of FDI is governed by this that what will be future repayment obligation in convertible foreign currency and since, CCDs does not have any repayment obligation, the same was considered by RBI as equity for FDI policy. Now the question is that such treatment given by RBI for FDI policy can be applied in every aspect of CCDs. Whether the holder of CCDs before ins conversion can have voting rights? Whether dividend can be paid on CCDs before its conversion? In our considered opinion, the reply to these questions is a BIG NO. On the same logic, in our considered opinion, till the date of conversion, for allowability of interest u/s 36 (1) (iii) of Income tax Act also, such CCDs are to be considered as Debt only and interest thereon has to be allowed and it cannot be disallowed by saying that CCDs are equity and not debt. We hold accordingly. This issue is decided.”

5.2 Further, as regards the ALP of the interest paid, the Tribunal in assessee’s own case in assessment year 2011-12 in ITA No.506/Bang/2016 vide order dated 6.12.2021 has held as under: “Payment of Interest on Compulsory Convertible Debentures (Ground 4) (Transfer pricing issue)

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 26 of 62 As per the terms of the debenture subscription agreement, the assessee issued unsecured and compulsory convertible debentures bearing interest at the rate of 9% per annum of the issue price. For the relevant assessment year, the assessee paid interest amounting to Rs.61,50,22,027. In the TP study, the assessee benchmarked the transaction of payment of interest by applying CUP method. Using the CCD benchmarking study, the assessee selected two companies as comparables and since the arithmetical mean of interest paid by the two companies stood at 9.5%, the assessee concluded the international transaction of payment of interest at 9% to be at arm’s length.

8.1 The TPO treated the CCDs as External Commercial Borrowings (ECB) and benchmarked the interest rate paid against LIBOR rate of 4.13% (being LIBOR + 350 basis points). (Refer page 25 to 29 of the TPO’s order).

8.2 Aggrieved, the assessee filed objections before the DRP. The DRP rejected the assessee’s objections and upheld the TPO’s order (refer pages 3 and 4 of the DRP’s directions).

8.3 Aggrieved, the assessee has raised this issue before the Tribunal. It is submitted that the TPO and DRP grossly erred in treating the CCDs as ECBs and benchmarking the interest rate against LIBOR rate. It was submitted that CCDs being a hybrid instrument, cannot be treated as an ECB/loan. Reliance in this regard is placed on the order of the Hyderabad Bench of the Tribunal in the case of ADAMA India (P.) Ltd. v. DCIT ([2017] 78 taxmann.com 75 (Hyderabad- Trib.). It is further submitted that the CCDs having been denominated in INR, the interest having been paid in INR, and the CCDs having been repaid in INR, the same cannot be benchmarked against LIBOR. In this context, the learned AR relied on the following case laws:-

(i) CIT v. Cotton Naturals (I) (P.) Ltd. (2015) 65 taxmann.com 523 (Delhi). (ii) PCIT v. India Debt Management (P.) Ltd. (2019) 106 taxmann.com 55 (Bombay) (iii) Adams India (P.) Ltd. v. DCIT (2017) 78 taxmann.com 75 (Hyderabad-Trib.). 8.4 Therefore, it was submitted that the transaction of payment of interest of CCDs ought to be treated as being at arm’s length.

8.5 The learned Departmental Representative supported the findings of the Income Tax Authorities.

8.6 We have heard rival submissions and perused the material on record. The assessee during the financial year 2009-2010, entered into a debenture

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 27 of 62 subscription agreement with its AEs, Praxair International Finance. In the agreement, the term “issue price” is defined as “CCD will be issued at par at Rs.10 each”. Further, the subscription considered shall be converted into INR as per the prescribed exchange rate and the number of CCDs allotted to the holders will be the subscription consideration as converted into INR, divided by face value of the CCD instrument. The debenture certificates issued clearly reflect the face 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 in nature basically categorised as equity in nature. It was accepted by the Hon'ble Supreme Court in the case of Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited & Ors. Vs. Securities and Exchange Board of India & Anr. in Civil Appeal No. 9813 of 2011 dt. 31-08-2012 (supra) while assigning the jurisdiction to SEBI as an ‘equity instrument’. Further, the policy of Govt. of India and also RBI effective from 01- 04-2010 also indicate that issuance of CCD is part of FDI being quasi-equity in nature and considering the same as a loan would be completely against regulations laid by DIPB, RBI and FEMA. It is to be reiterated that issuance of CCDs was denominated in Indian Rupees and not foreign currency. Therefore, TPO has erred in considering LIBOR as benchmark rate which is in complete contradiction to the principles on the issue. The following judicial precedents supports that the rate interest has to be considered in the currency in which loan has originated: i. India Debt Management Pvt. Ltd., IT(TP)A No. 7518/Mum/2014; . CIT Vs. Cotton Naturals (I) Ltd., ITA No. 233/2014 (Del.HC); . M/s. Brahma Center Development Pvt. Ltd., Vs. ITO, ITA No. 373/Del/2016 (ITAT Del). By respectfully following the Co-ordinate Bench and Hon’ble High Court decisions, we agree with the assessee’s contentions that the

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 28 of 62 CCDs cannot be categorised as a loan and LIBOR plus two hundred basis points benchmark cannot be accepted on the facts of the case.” 8.6.2 The Hon’ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Pvt. Ltd. (supra) had held that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. The relevant finding of the Hon’ble High Court reads as follows:-

“39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which 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 specific 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 lender's State or that in the borrower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B 1. II 725 (1994), re 1 § AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 29 of 62 another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Alt. 11 (6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money. 40. The aforesaid methodology recommended by Klaus Vogal appeals 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 INR, 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), we hold that the TP study of the assessee to justify the interest rate by arriving at average rupee cost and comparing the same with SBI prime lending rate is correct. It is ordered accordingly.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 30 of 62 8.6.4 Hence, ground 4 is allowed.”

5.3 Further, in assessment year 2012-13 in IT(TP)A No.2209/Bang/2016 vide order dated 25.2.2022 the Tribunal has held as under:

“The next issue is the adjustment made by the TPO with regard to payment 14. of interest on compulsory convertible debentures (CCDs) by re-characterizing the same to be External Commercial Borrowings (ECB).

8.6 We have heard rival submissions and perused the material on record. The assessee during the financial year 2009-2010, entered into a debenture subscription agreement with its AEs, Praxair International Finance. In the agreement, the term “issue price” is defined as “CCD will be issued at par at Rs.10 each”. Further, the subscription considered shall be converted into INR as per the prescribed exchange rate and the number of CCDs allotted to the holders will be the subscription consideration as converted into INR, divided by face value of the CCD instrument. The debenture certificates issued clearly reflect the face 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

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 31 of 62 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 in nature basically, categorised as equity in nature. It was accepted by the Hon'ble Supreme Court in the case of Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited & Ors. Vs. Securities and Exchange Board of India & Anr. in Civil Appeal No. 9813 of 2011 dt. 31-08-2012 (supra) while assigning the jurisdiction to SEBI as an 'equity instrument'. Further, the policy of Govt. of India and also RBI effective from 01- 04-2010 also indicate that issuance of CCD is part of FDI being quasi-equity in nature and considering the same as a loan would be completely, against regulations laid by DIPB, RBI and FEMA. It is to be reiterated that issuance of CCDs was denominated in Indian Rupees and not foreign currency. Therefore, TPO has erred in considering LIBOR as benchmark rate which is in complete contradiction to the principles on the issue. The following judicial precedents supports that the rate interest has to be considered in the currency in which loan has originated. i. India Debt Management Pvt. Ltd., IT(TP)A No. 7518/Mum12014; ii, CIT Vs. Cotton Naturals (I) Ltd., ITA No. 23312014 (Deli-HC); iii. M/s. Brahma Center Development Pvt. Ltd., Vs. [TO, ITA No. 3 73/Del/2016 (ITA T Del). By respectfully following the Co-ordinate Bench and Hon 'ble High Court decisions, we agree with the assessee 's contentions that the CCDs cannot be categorised as a loan and LIBOR plus two hundred basis points benchmark cannot be accepted on the facts of the case." 8.6.2 The Hon'ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Put. Ltd. (supra) had held that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. The relevant finding of the Hon'ble High Court reads as follows:- “39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which 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

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 32 of 62 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, primarily depends on the currency agreed upon (BFH BSt.B 1. II 725 (1994), re 1 § AStG). A differentiation between debt- claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Alt. 11 (6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 33 of 62 40. The aforesaid methodology recommended by Klaus Vogal appeals 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 to be 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 Honble Delhi High Court in the case of CIT v. Cotton Naturals (I) Pvt. Ltd. (supra), we hold that the TP study of the assessee to justify the interest rate by arriving at average rupee cost and comparing the same with SBI prime lending rate is correct. It is ordered accordingly.

5.4 Further, in assessment year 2013-14 in IT(TP)A No.2839/Bang/2017 vide order dated 25.8.2022, wherein it was held as under: “Grounds 16 to 21 [TP adjustment of Rs.67,08,42,381 on payments of interest on Compulsory Convertible Debentures (CCDS)] 18. Grounds 16 to 21 in respect of Compulsory Convertible Debenture (CCD), reads as follow:-

“16. The Hon'ble DRP / learned TPO has erred in rejecting the transfer pricing analysis undertaken by the Appellant in the transfer pricing documentation to determine the arm's length nature of the international transaction pertaining to payment of interest on CCD and thereby erred in making an addition ofRs.67,08,42,381/- to the total `of the Appellant. 17. The Hon'ble DRP has erred in upholding the contentions of the learned TPO of re-characterizing the CCD to External Commercial

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru

Page 34 of 62 Borrowings ("ECB") by not appreciating the fundamental difference between a CCD and an ECB and thereby erred in applying the 6 Month US London Inter-Bank Offered Rate ("LIB OR") with all-in- celling rate of 500 basis point as a basis for benchmarking the payment of interest on CCD. The Hon'ble DRP / learned TPO has erred in not appreciating 18. the fact that in an ECB the borrower carries the risk related to foreign exchange fluctuation whereas the risk is borne by the lender in case of CCD and thereby failed to appreciate the importance of assumption of foreign exchange risk in the fixation of interest rate. The Hon'ble DRP / learned TPO have erred in stating that 19. the Appellant has not provided any comparable details to demonstrate the arm's length nature of interest payment on CCD and thereby erred in disregarding the independent benchmarking analysis identifying the comparable transactions involving the CCDs which was submitted by the Appellant. The Hon'ble DRP has erred in stating that conversion 20. price has not been fixed upfront either by a fixed method or formula based and thereby erred in concluding that the nature of Appellant's borrowing are closer to ECB. 21. The Hon'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 31 5t 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.”

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 35 of 62 learned AR relied on the decision of the Hyderabad Bench of the Tribunal in the case of ADAMA India (P.) Ltd. v. DCIT ([2017] 78 taxmann.com 7 (Hyderabad- Trib.). It is submitted that the CCDs having been denominated in INR the interest having been paid in INR, and the CCDs having been repaid in INR the same cannot be benchmarked against LlBOR. Reliance in this regard is placed on the following decisions:

(i) CIT v. Cotton Naturals (I) (P.) Ltd. ([2015] 55 taxmann.com 523 (Delhi)

(ii) Assessee’s own case for the assessment year 2012-13 (Order date 25.02.2022 passed in IT(TP)A No.2209/ Bang /2016). Therefore, it is submitted that the transaction of payment of interest of CCDs ought to be treated as being at arm’s length.

“17. 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) on the issue of interest on CCDs has held that – 8.6 We have heard rival submissions and perused the material on record. The assessee during the financial year 2009-2010, entered into a debenture subscription agreement with its AEs, Praxair International Finance. In the agreement, the term “issue price” is defined as “CCD will be issued at par at Rs.10 each”. Further, the subscription considered shall be converted into INR as per the prescribed exchange rate and the number of CCDs allotted to the holders will be the subscription consideration as converted into INR, divided by face value of the CCD instrument. The debenture certificates issued clearly reflect the face 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

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 36 of 62 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 in nature basically, categorised as equity in nature. It was accepted by the Hon'ble Supreme Court in the case of Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited & Ors. Vs. Securities and Exchange Board of India & Anr. in Civil Appeal No. 9813 of 2011 dt. 31- 08-2012 (supra) while assigning the jurisdiction to SEBI as an 'equity instrument'. Further, the policy of Govt. of India and also RBI effective from 01- 04-2010 also indicate that issuance of CCD is part of FDI being quasi-equity in nature and considering the same as a loan would be completely, against regulations laid by DIPB, RBI and FEMA. It is to be reiterated that issuance of CCDs was denominated in Indian Rupees and not foreign currency. Therefore, TPO has erred in considering LIBOR as benchmark rate which is in complete contradiction to the principles on the issue. The following judicial precedents supports that the rate interest has to be considered in the currency in which loan has originated. i. India Debt Management Pvt. Ltd., IT(TP)A No. 7518/Mum12014; ii, CIT Vs. Cotton Naturals (I) Ltd., ITA No. 23312014 (Deli-HC); iii. M/s. Brahma Center Development Pvt. Ltd., Vs. [TO, ITA No. 3 73/Del/2016 (ITA T Del). By respectfully following the Co-ordinate Bench and Hon 'ble High Court decisions, we agree with the assessee 's contentions that the CCDs cannot be categorised as a loan and LIBOR plus two hundred basis points benchmark cannot be accepted on the facts of the case."

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 37 of 62 8.6.2 The Hon'ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Put. Ltd. (supra) had held that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. The relevant finding of the Hon'ble High Court reads as follows:- “39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which 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, primarily depends on the currency agreed upon (BFH BSt.B 1. II 725 (1994), re 1 § AStG). A differentiation between debt- claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic

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Page 38 of 62 criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Alt. 11 (6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money. 40. The aforesaid methodology recommended by Klaus Vogal appeals 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), we hold that the TP study of the assessee to justify the interest rate by arriving at average rupee cost and comparing the

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Page 39 of 62 same with SBI prime lending rate is correct. It is ordered accordingly. 18. Respectfully following the decision of the coordinate bench of the Bangalore Tribunal we uphold the TP study done by the assessee to arrive at the interest rate of 9% and 12% calculated based on the average rupee cost comparing the same with SBI prime lending rate. The assessee’s claim in this ground is allowed.” In view of the above order of the Tribunal, in assessee’s own case, the issue raised in grounds 16 to 21 with regard to payment of interest on CCDs is decided in favour of the assessee. It is ordered accordingly.”

5.5 In view of the above order, taking a consistent view, we remit this issue to the file of AO/TPO in both the years for a decision as per law as discussed in earlier years as above and pass fresh order. This issue is partly allowed for statistical purposes in both the appeals.

“9. The first issue we will take up the transfer pricing adjustment made by the TPO with respect to payment of royalty @ 1%.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 40 of 62 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 ALP for payment of royalty to the files of the TPO. The TPO, pursuant to the Tribunal’s order, passed orders accepting the payment of royalty at 4% to be at arm’s length. The relevant portion of the TPO’s order for assessment year 2009-2010 reads as follows:- “3. In view of above direction of the ITAT, the assessee was asked to submit the details with respect of all comparables vide letter dated 19.06.2017. In response of the same the submission was filed by the assessee on 11.06.2017 which have been considered. As per submission, assessee has stated that out of the total 17 comparable agreements, the related party relationship between licensor and licensee existed in 07 comparable agreements and remaining 10 comparables agreements have unrelated party relationship for which the average royalty rate is computed at 4.10. Submission of the assessee has been considered.

As the average rate of royalty paid by the comparables is more than payment made by the assessee, i.e. at 4%, payment towards royalty is being treated to be at arm’s length.” 7.5 The relevant portion of the TPO’s order for assessment year 2010-2011, reads as follows:- “6. In view of above direction of the ITAT, the assessee was asked to submit the details with respect of all comparables vide letter dated 27.11.2018. In response of the same the submission was filed by the assessee on 12.12.2018 which have been considered. As per submission, assessee has stated that out of the total 17 comparable

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 41 of 62 agreements, the related party relationship between licensor and licensee existed in 07 comparable agreements and remaining 10 comparables agreements have unrelated party relationship for which the average royalty rate is computed at 4.10%. Submission of the assessee has been considered. As the average rate of royalty paid by the comparables is more than payment made by the assessee, i.e., at 4%, payment towards royalty is being treated to be at arm’s length. Taking all these into consideration, the Royalty payment @ 4% made by the taxpayer to its AE is considered at Arm’s Length, hence no adjustment on account of royalty payment is required to be made 7.6 In view of the above orders of the TPO, accepting the payment of royalty at 4% to be at arm’s length, we hold that the payment of royalty at 4% in the year under consideration is to be treated as being at arm’s length. Accordingly ground 3 is allowed.” 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.”

7.1 In view of the above order of the Tribunal, we hold that payment of royalty at 4% on sale is to be treated at Arm’s Length as in earlier year. Ordered accordingly.

“6. Without prejudice, the learned AO/ learned TPO/ Hon'ble DRP erred in ignoring the justification of ALP of payment towards royalty using TNMM as provided in the TP Report and erred in not appreciating the fact that OECD guidelines and the Tribunal rulings have approved of aggregation of closely linked transactions by applying TNMM. 7. The learned AO has erred in considering the Transfer pricing adjustment as INR 51,55,15,606, instead of INR42,95,93,838 as per the rectified order passed under section 92CA read with section 154 of the Act.”

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 42 of 62 8.1 These grounds are infructuous and dismissed accordingly.

“8. The learned AO/ learned TPO/ Hon'ble DRP erred in determining the arm's length price of payment towards technical service fees to its AE at 1% of net sales arbitrarily and thereby: a. Erred in making an addition of INR 13,36,41,756/- to the total income of the Appellant b. Erred in not appreciating the evidences furnished by the Appellant to justify the payment of technical services fees to its AE with commensurate benefits, c. Failed to appreciate the difference between the services for which technical service fee is being paid and the technology for which royalty payment is being made and thereby erred in concluding it to be a duplicate payment. d. Erred in ignoring the justification of ALP of payment towards technical service fee using TNMM as provided in the TP Report. e. Erred in not appreciating the fact that OECD guidelines and the Tribunal rulings have approved of aggregation of closely linked transactions by applying TNMM. f. Erred in determining the arm's length price of payment towards technical service fee to AE at INR 13,23,18,570/- at 1% of net sales on ad-hoc basis using CUP method despite not following the provisions prescribed in clause (a) of the sub-rule (1) of Rule 10B of the Rules for determining of ALP in relation to an international transaction under CUP. 9. Without prejudice, the learned AO/ learned TPO/ Hon'ble DRP failed to take cognizance of the fact that the payment towards technical service fee amounting to INR 26,59,60,326/-formed part of the 'capital work in progress' as on March 31, 2013 and was not claimed as a business expenditure during AY. 2014-15 and therefore the same cannot be added to the total income of the Appellant.”

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 43 of 62 9.1 After hearing both the parties, we are of the opinion that this issue is squarely covered in assessee’s own case in assessment year 2013-14 in ITA No.2839/2017 dated 25.8.2022, wherein held as under:-

“17. We have heard rival submissions and perused the material on record. During the relevant financial year, the assessee made payments in the nature of technical and related services fees to following AEs.

Sl. Technical and related service fees paid Amount (Rs.) No. 1. Praxair Inc 2,60,91,944 2. Praxair Surface Technology SAS 42,90,204 3. Praxair Asia Inc 32,22,21,276 4. Praxair NV 55,88,845 SAID Machine Impianti SpA 89,358 5. Praxair China Investment Co. Ltd. 7,52,349 6. Praxair Surface Technology Inc 41,07,004 7. 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 duplication of royalty payments. However, taking into consideration the assessee’s business model, 1% of sales amounting to Rs.9,07,85,245 was treated as ALP of the technical service fee payments and balance of Rs.27,23,55,735 (36,31,40,980 – 9,07,85,245) was treated as TP adjustment. The view taken by the TPO was affirmed by the DRP. 17.2 The undisputed facts on record are that the global supply systems (GSS) team of the assessee company performs design and engineering function with respect to construction of manufacturing facility to supply industrial gases at the client's place. In this process, the assessee requests the AEs for estimated cost based on man hour for basic technology engineering drawings and detailed engineering services. On finalisation of the contract for building and setting up the plant at the customer site, the AEs provide various technical services to the assessee for the execution of building or setting up of the plant at· customer site. These services include plant layout design, technical design and drawings for construction of plant, responsibility assignment matrix, process design and

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 44 of 62 simulation, detailed engineering and equipment design. The nature of technical services received from the AEs are as under:-

Process Design: - This comprises of:- • Support in selection of plant; • Process flow diagram; • Heat and mass balance; • Engineering design memorandum; • Utility consumption list; • Catalyst and chemical specification; • Review of process safety analysis; • Review of critical operating parameters and operational safety standards; • Critical equipment selection; and • Driox system design. (a) Mechanical Design and Engineering – This comprises of:- • Final pipe sizing calculations; • Safety valve sizing and calculation; • Manual valve specification and sizing; • Basic design and verification of layout; and • Preparation of line index. b) Control System Design and Engineering - This comprises of:- • Process and instrumentation diagram; • Schematic wiring diagram and single line diagram; and • Control valve sizing and specification. c) Advanced Computerised Control System – • This comprises of:- • Advanced control system design of the plant. d) Safety Engineering - This comprises of:- • Review of design safety checklist; • Support in review of layout and process safety 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:-

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 45 of 62 • 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 (e) email communications along with project related technical documents in support of receipt of services from AEs. The assessee also submitted invoices issued by the AEs for which technical service fees was paid. The TPO has not brought contrary evidence on record in order to disregard the factum of technical services rendered by the AEs. Thus, the fact that the technical services are rendered by the AEs for which payments were made by the assessee has to be accepted.

17.4 The entire basis of the TPO in making the TP adjustment is that the payment made for technical services is a duplication as the services for which the said payments are made are already included in the royalty payment. As per the Technology license agreement dated 25.4.2007 [page 3072 of paper book Vol 4] the royalty payment is made in consideration of the rights and licenses granted by the AE to the assessee under Articles II and III of the said agreement. As per these Articles, the AE granted a non exclusive license (a) to use technical information to make, use, offer to sell, sell and import licensed products, (b) under the patent rights to conduct licensed processes within the field of Industrial gas business, (c) to use trademarks in connection with the Industrial gas business. Clause 3.06 of Article III of the said agreement specifically provides that performance of engineering and technical services by the AEs are not covered by the above agreement and the same may be agreed separately on mutually acceptable terms and conditions. The above clause reads as under:-

"3.06 Notwithstanding the foregoing provisions of this Article III, nothing herein shall be construed or interpreted as requiring Praxair Technology or any company of the Praxair Group to perform engineering and technical services in connection with the design, construction, expansion or maintenance of any plant employed or to be employed within the filed of the Industrial Gas Business to Affiliate other than such terms and conditions as are mutually acceptable to both parties. "

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 46 of 62 17.5 From the above it is evident that the engineering and technical services rendered by the AEs in connection with the design, construction, maintenance of the plant at the customer site are not dealt or governed by the technology license agreement for which royalty payment is made. Further, when the agreements for technology license 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 for fees for technical service is not duplication of payment of Royalty 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. The TPO shall follow one of the prescribed methods to arrive at ALP of payments towards fees for technical service. It is ordered accordingly.”

9.2 In view of the above order, we allow these grounds taken by the assessee and we also find merit in the argument of Ld. A.R. Fees paid was amounted from USD 975000 to USD 217500 and this amendment will have no bearing on the issue in hand. Consideration for services can increase or decrease depending on the projects for which services are availed. TPO’s case of declaration of services stand squarely covered in the assessee’s own case as cited (supra), where there is a categorical finding that payment of technical service is not a declaration of royalty payment. Accordingly, these grounds of the assessee’s appeal in AY 2014-15 are allowed.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 47 of 62 Loan amounting to Rs.17,15,12,176/-, which is reproduced as under:- AY 2014-15:

10.1 We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 48 of 62 of the opinion that this issue is squarely covered by the earlier decision of Tribunal in assessment year 2013-14 in ITA No.2839/Bang/2017 dated 25.8.2022 wherein held as under:-

“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 20122013 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 if the loan borrowed is utilized for revenue purposes, the forex loss arising against the loan should be allowed as a deduction. The Apex court in the case of CIT vs Woodward Governor (supra) has settled the issue and the coordinate bench of the Bangalore Tribunal has been consistently following the same view. The coordinate bench of the Bangalore Tribunal in the case of ITO vs Levi Strauss (India) Pvt Ltd (ITA Nos. 2547& 2548 / Bang / 2018) has held that

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 49 of 62 raw materials using closing rate or exchange. Any loss arising on conversion of said liability at the closing rate has to be recognized in the P&L a/c for the reporting period.

10.2 In view of the above order of the Tribunal, taking a consistent view, we allow the ground of the assessee in assessment year 2014- 15. 11. Next ground in ground No.11 in assessment year 2014-15 and ground No.8 in AY 2015-16 are with regard to disallowance u/s 14A of the Act, which are reproduced as under: AY 2014-15: Disallowance of expenditure under section 14A of the Act• by applying the 11. provisions of Rule 8D of the Income-tax Rules, 1962 ("the Rules") 11.1. The learned AO erred in disallowing expenditure amounting to INR 98,98,250 under section 14A of the Act read with Rule 8D of the Rules,

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 50 of 62 despite the fact that no expenditure has been actually incurred/ debited to the profit and loss account on this account. The learned AO ought to have observed that applicability of section 14A of the Act is triggered only if there is any expenditure incurred in this regard.

11.2. The learned AO erred in not appreciating that the investments made in Praxair Carbon Dioxide Private Limited (`PCPU) (currently merged with the Appellant) and Jindal Praxair Oxygen Company Limited ("JPOCPL") (now known as JSW Industrial Gases Private Limited) are historical in nature and as such no expenditure has been incurred towards the same. 11.3. The learned AO erred in not appreciating the fact that investment in JPOCPL was acquired by way of swap of shares in earlier year and not by way of actual cash 'outflow.

11.4. The learned AO erred in invoking provisions of section 14A of the Act, inspite of the fact that the investments were made in subsidiaries for strategic business reasons and not for earing any exempt income.

11.5. The learned AO erred in holding that investment to the tune of INR 178.32 crores has been made on 31.03.2013 in subsidiary companies without appreciating the fact that no fresh investments were made during the year in its subsidiary companies.

11.6. The learned AO has erred in invoking the provisions of Rule 8D of the Rules without giving any,show cause notice to the Appellant as to why the expenditure incurred in relation to exempt income should not be disallowed under section 14A of the Act.

11.7. The learned AO erred in stating that no submissions were filed in this respect by the Appellant, considering that no such opportunity was provided. 11.8. The learned AO/ Hon'ble DRP has erred in not considering the order of the Commissioner of Income-tax (Appeals) in Appellant's own case in AY 2008-09 which directed the learned AO to delete the disallowance under section 14A of the Act on the basis that original investments in the Appellant's case were not geared or intended for earning exempt income such as dividend. Being commercial expedient investments they are to be treated on a different footing from investments made only for earning exempt income.

11.9. The Hon'ble DRP erred in holding that the Appellant has not maintained separate books of account in regard to the investments made that are eligible to earn exempt income. The DRP also erred in stating that based the books of accounts maintained by the Appellant it is not possible to ascertain expenditure incurred in earning exempt income without appreciating the fact that it has not incurred any expenditure during the year towards the investments.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 51 of 62 11.10. Notwithstanding and without prejudice to the above, the learned AO and the Hon'ble DRP erred in considering all the investments for computing average value of investments which yielded exempt income during the year.

AY 2015-16: 8. Disallowance of expenditure under section 14A of the Act by applying the provisions of Rule 8D of the Income-tax Rules, 1962 ("the Rules") 8.1. The learned AO/ Honourable DRP erred in disallowing expenditure amounting to INR 89,27 *0 under section 14A of the Act read with Rule 8D of the Rules, despite the fact that no expenditure has been actually incurred/ debited to the profit and loss account on this account. The learned AO ought to have observed that applicability of section 14A of the Act is triggered only if there is any expenditure incurred in this regard. 8.2. The learned AO/ Honourable DRP erred in not appreciating that the investments made in JSW Steel Limited of an amount of INR 100,000 and in Jindal Praxair Oxygen Company Private Limited ("JPOCPL") (now known as JSW Industrial Gases Private Limited) of an amount of1NR 1,78,31,00,000 are historical in nature and as such no expenditure has been incurred towards the same.

8.3. The learned AO/ Honourable DRP erred in not appreciating the fact that investment in JPOCPL was acquired by way of swap of shares during Financial Year (`FY') 2010-11 and not by way of actual cash outflow. Further, investment in JSW Steel Limited was made in the. previous years, out of the own funds of the Appellant. Additionally, investment in TVH Energy Resources Private Limited of an amount of INR 45,00,000 was done during the FY 2014-15, out of the cash flow from operating activities generated during the subject AY. 8.4. The learned AO/ Honourable DRP erred in invoking provisions of section 14A of the Act, inspite of the fact that the investments were made for business reasons and not with the objective of earning any dividend/ exempt income.

8.5. The learned AO/ Honourable DRP has erred in not considering the order of the Commissioner of Income-tax (Appeals) in Appellant's own case in AY 2008-09 which directed the learned AO to delete the disallowance under section 14A of the Act on the basis that original investments in the Appellant's case were not geared or intended for earning exempt income such as dividend. Being investments made for business reasons, they are to be treated on a different footing from investments made only for earning exempt income. On Appeal by the Department, the Honourable ITAT has dismissed the grounds, in view of the categorical finding of the CIT(A).

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 52 of 62 8.6. The Honourable DRP erred in holding that the Appellant has not maintained separate books of account in regard to the investments made that are eligible to earn exempt income. The DRP also erred in stating that based the books of accounts maintained by the Appellant it is not possible to ascertain expenditure incurred in earning exempt income without appreciating the fact that it has not incurred any expenditure during the year towards the investments.

11.1. Facts of the case are that the Assessing Officer made a disallowance u/s 14A of the Act of Rs.98,98,250/- and Rs.89,27,000/- for AYs 2014-15 and 2015-16 respectively by applying the formula in Rule 8D(iii) of the Income-tax Rules, 1962. The DRP rejected the objections of the appellant and affirmed the disallowance.

11.2 At the outset, on identical facts, the Tribunal has deleted the disallowance in the assessee's own case for AY 2013-14 in para 28.3 at page no. 31.

11.3 The Ld. A.R. submitted that before making a disallowance under Section 14A of the Act, the Assessing Officer is mandatorily required to record his dissatisfaction as to the claim of the assessee, having regard to the accounts of the assessee, not only where some disallowance is made by the assessee but also where it is the assessee claims that no expenditure is incurred. Rule 8D reads as under:

“(1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with—

(a) the correctness of the claim of expenditure made by the assessee; or

(b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 53 of 62 for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).”

11.4 The Ld. A.R. submitted that in the present case, no such satisfaction is recorded, and the Officer merely proceeded on the basis of conjectures and surmises. Therefore, in the absence of compliance with mandatory precondition, the disallowance made is liable to be set aside. Reliance in this regard is placed by him on the following decisions: • Decision of this Hon'ble Tribunal in the assessee's own case for AY 2013-14 (para 28.3 at page no. 31). • Godrej & Boyce Manufacturing Company Ltd. v. DCIT (reported in [2017] 81 taxmann.com 111 (SC)); • Eicher Motors Ltd. v. CIT (120171 86 taxmann.com 49 (Delhi)); • Hindustan Aeronautics Ltd. v. ACIT and Anr. (Order dated 09.12.2020 passed by the Hon'ble High Court of Karnataka in ITA No. 404/2016).

11.5 In any event, the ld AR submitted that the investments made in respect of which the disallowance is made in AY 2014- 15 primarily pertains to the investments made in Praxair Carbon Dioxide Pvt. Ltd. (PCDPL) and Jindal Praxair Oxygen Company Ltd. (JPOCL) for AY 2015-16, the disallowance pertains to the investment made in JPOCL.

11.6 The Ld. A.R. further submitted that as regards the investment made in PCDPL, the investment was made during the financial years 1999-00 to 2003-04 and thereafter no investments were made. Pertinently. the assessee did not earn any exempt income during the year under consideration and also with effect from 01.04.2013, the said entity stood merged into the assessee and therefore, there is no scope for earning

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 54 of 62 any dividend income. Therefore, he stated that in absence of earning any exempt income, no disallowance is warranted.

11.7 The ld AR further stated that as regards the investments made in JPOCL, 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 JPOCL. Therefore. in view of the assessee having obtained the shares in a share swap arrangement, no disallowance is warranted. Reliance in this regard is placed by the ld AR on the decision of the Mumbai Bench of this Tribunal in the case of DCIT v. Trigyn Technologies Ltd. (reported in [2013] 37 taxmann.com 454 (Mumbai - Trib.)). In view of the above, he submitted that no disallowance under Section 14A of the Act is warranted.

11.8 Without prejudice, the ld AR further submitted that no such disallowance can be added while computing the book profits under Section 115JB of the Act. Reliance in this regard is placed by him on the decision of the Hon'ble High Court of Karnataka in the case of CIT v. Gokaldas Images Pvt. Ltd. (reported in (2020) 429 ITR 526 (Kar.)).

“28. We have heard rival submissions and perused the material on record. During the year, vide letter dated 31.08.2016, the A.O. asked the assessee to furnish the

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 55 of 62 details of disallowance u/s 14A of the I.T.Act, the assessee vide letter dated 14.09.2016 submitted that no expenditure is incurred and debited to the profit and loss account on account of investment in its subsidiaries and hence no disallowance is warranted u/s 14A of the I.T.Act read with Rule 8D of the I.T.Rules. However, the AO held that the company has to incur expenses in maintenance of registers stipulated under the Companies Act, audit fees, professional fees, compliance to filing requirements under the Companies Act besides the sharing of resources such as manpower, office space etc in relation to such investment portfolios. It was held by the AO that considering the fact that the investments are made in the subsidiary companies and related concerns, the man hours spent by the directors and management in the affairs of such companies in the capacity of being a representative of the company in their management also needs to be factored in. Considering all these aspects, the AO made the disallowance under section 14A read with rule 8D totally amounting to Rs. 5,99,10,687 and added the same to total income under regular provisions and book profits u/s 115JB of the I.T.Act. The DRP confirmed the findings of the A.O.

28.1 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 satisfaction with regard to the correctness of tile claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 56 of 62 circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and Rs.280.64 crores as on 31.03.2002) remains unproved by any material whatsoever. While it is true that the principle of res judicata would nor apply to assessment proceedings under the Act. the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt our which conspicuously is absent in the present case. In this regard we may remind ourselves of what has been observed that this Court in Radhasoami Satsang v CIT (1992) 193 ITR 321/ 60 Taxman 248 (SC).

"We are aware of the fact that strictly speaking res judicata does not apply to income lax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in The following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year."

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.”

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 57 of 62 13.1 In view of the above, we are inclined to decide the issue in favour of the assessee. Ordered accordingly. 14. Next ground in ground No.12 in assessment year 2014- 15 and ground No.9 in AY 2015-16 are with regard to disallowance u/s 14A of the Act to book profit under clause (f) of explanation – 1 to section 115JB of the Act., which are reproduced as under:

2014-15:

12.Addition of INR 56,98,912 as per clause (f) of Explanation 1 to section 115JB of the Act for computing book profits

12.1. The learned AO/ Hon'ble DRP has erred in adding INR 56,98,912 as per clause (f) of Explanation 1 to section 115JB of the Act for computing book profits without appreciating the fact that —

i. The computation provisions of section 14A(2)/(3) of the Act read with Rule 8D cannot be applied to the book profit computation and only the amount of actual expenditure incurred (being an amount debited to the profit and loss account) which is relatable to the exempt income should be added to the book profits.

ii. Section 115JB is a complete code by itself and no adjustments other than those which are prescribed in section 115JB of the Act itself can be made to the book profits.

12.2. The learned AO/ Hon'ble DRP erred in not placing reliance on the decision of Special Bench of the Delhi Tribunal in the case of ACIT Vs. Vireet Investment Pvt. Ltd. [2017] 82 taxmariil.com 415.

12.3. The learned AO erred in applying the provisions of section 14A to Chapter XII-B of the. Act without having regard to the restriction that the provisions of section 14A of the Act is restricted to computing the total income under Chapter IV of the Act. 12.4. The learned AO erred in not giving reasons as to why the disallowance as mentioned above has been added back in computing book profits under section 115JB of the Act.

12.5. The learned AO erred in disallowing the amount of INR 56,98,912 without issuing any show cause to the Appellant as to why disallowance under section 14A of the Act should not be made while computing book profits under section 115JB of the Act.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru

Page 58 of 62 12.6. The learned AO/ Hon'ble DRP erred in not considering the order of the Commissioner of Income-tax (Appeals) in Appellant's own case in AY 2008- 09 which directed the learned AO to delete the disallowance under section 14A of the Act in computation of book profits under section 115JB of the Act on the basis that section 115JB of the Act is a complete code by itself and the importing of such disallowances into the scope of adjustment of book profit is not permissible.

2015-16: 9. Addition of INR89,27,000as per clause (f) of Explanation 1 to section 115JB of the Act for computing book profits 9.1. The learned AO/ Honourable DRP has erred in adding INR89,27,000 as per clause (f) of Explanation 1 to section 115JB of the Act for computing book profits without appreciating the fact that — The computation provisions of section 14A(2)/(3) of the Act i. read with Rule 8D cannot be applied to the book profit computation and only the amount of actual expenditure incurred (being an amount debited to the profit and loss account) which is relatable to the exempt income should be added to the book profits.

ii. Section 115JB is a complete code by itself and no adjustments other than those which are prescribed in section 115JB of the Act itself can be made to the book profits. 9.2. The learned AO/ Honourable DRP erred in not placing reliance on the decision of Special Bench of the Delhi Tribunal in the case of ACIT Vs. Vireet Investment Pvt. Ltd. [2017] 82 taxmann.com 415. 9.3. The learned AO/ Honourable DRP erred in applying the provisions of section 14A to Chapter XII-B of the Act without having regard to the restriction that the provisions of section 14A of the Act is restricted to computing the total income under Chapter IV of the Act.

9.4. The learned AO/ Honourable DRP erred in not considering the order of the Commissioner of Income-tax (Appeals) in Appellant's own case in AY 2008- 09 which directed the learned AO to delete the disallowance under section 14A of the Act in computation of book profits under section 115JB of the Act on the basis that section 115JB of the Act is a complete code by itself and the importing of such disallowances into the scope of adjustment of book profit is not permissible.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 59 of 62 14.1 After hearing both the parties, we are of the opinion that these grounds in AYs 2014-15 & 2015-16 are infructuous in view of our findings with regard to disallowance of expenditure u/s 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 i.e. ground No.11 in AY 2014-15 & ground No.8 in AY 2015-16. Accordingly, these grounds are dismissed as infructuous.

“13. Disallowance of other expenses

13.1. The learned AO erred in disallowing 25% of the expenses under the sub- head miscellaneous expenses which is under the broad head miscellaneous expense in the statement of profit and loss amounting to INR 10,02,063 (being 25% of INR 40,08,250) on the basis that Appellant has not provided any ledger extract or proper evidences in this regard. The learned AO erred in not appreciating the fact that the Appellant had provided ledger extract of miscellaneous expenses vide e-mail dated 27 December 2017.

13.2. The learned AO erred in treating miscellaneous expenses amounting to INR 55,25,705 being product purchase expenses as capital in nature and allowed depreciation @ 15% on the same without appreciating that these expenses are revenue in nature. 13.3. The Hon'ble DRP erred in not appreciating the submission made by the Appellant that the Appellant has inadvertently classified the expense of INR 55,25,705 under the sub-head product purchase which is under the broad head miscellaneous expenses amount, inter-alia, includes electrical goods, hardware tools, dry ice, IT Pro expense, gases etc. being revenue in nature.”

15.1 Facts of the case are that the AO made an adhoc 25% of miscellaneous expenses on the ground that details were not furnished. While the assessee had submitted ledger extracts under its submission dated 27.12.2017, before this Tribunal, further evidence has been filed by way of an application for production of

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 60 of 62 additional evidence dated 21.11.2022. In view of the same, the ld AR submitted that the disallowance ought to be deleted.

18.1 After hearing both the parties, we are of the opinion that the AO has given short credit of TDS in these assessment years. We

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 61 of 62 direct the AO to give correct TDS credit as appearing in Form 26AS relevant to the assessee in these assessment years. Ordered accordingly. 19. Ground No.15 in assessment year 2014-15 is with regard to short credit of advance tax, which is reproduced below:- 2014-15:

19.1 The contention of the assessee is that due credit has not been given towards advance tax paid by the assessee in the assessment yar 2014-15. We direct the AO to verify the records and give due credit towards the payment of advance tax made by the assessee. Ordered accordingly.

2014-15:

2015-16:

The learned AO erred in law and on the facts and circumstance of the case by initiating penalty proceedings under section 271(1)(c) of the Act for furnishing inaccurate particulars of income.

IT(TP)A No.3336/Bang/2018 & IT(TP)A No.199/Bang/2021 M/s. Praxier India Pvt. Ltd., Bengaluru Page 62 of 62

20.1 This ground is preposterous and hence, dismissed accordingly.

Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 22nd Nov, 2022. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.