M/S PRAXAIR INDIA PVT LTD ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX LTPU CIRCLE-1 , BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “A”, BANGALORE Before Shri George George K, JM & Shri Laxmi Prasad Sahu, AM IT(TP)A No.2839/Bang/2017 : Asst.Year 2013-2014 M/s.Praxair India Private Limited The Deputy Commissioner of Mercury 2B Block, 6th Floor Income-tax, Large Tax Payer v. Prestige Technology Park Unit, Circle 1 Bangalore. Outer Ring Road, Marathahalli Bangalore – 560 103. PAN : AAACP9993J. (Appellant) (Respondent) Appellant by : Sri.T.Suryanarayana, Senior Advocate Respondent by : Sri.Bijoy Kumar Panda, CIT-DR Date of Pronouncement : 25.08.2022 Date of Hearing : 26.07.2022 O R D E R Per George George K, JM : This appeal at the instance of the assessee is directed against final assessment order dated 30.10.2017 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2013-2014.

2 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. assessee had entered into several international transactions with its Associate Enterprises (AEs). The international transactions entered by the assessee with its AEs exceeded Rs.15 crore. The assessee had made payment of royalty, payment towards technical and support services and payment of interest on CCDs. The transaction of payment of royalty and towards technical and support services were aggregated with certain other transactions and all the transactions were benchmarked on application of Transactional Net Margin Method (TNMM). The margin of the assessee on aggregating the transactions stood at 13.38%. Accordingly, the assessee sought to justify the Arm’s Length Price (ALP) of the transaction in respect of payment of royalty and towards technical support services (since comparable margin stood at 11.03%). With respect to the transaction of payment of interest on Compulsorily Convertible Debentures (CCDs) at 9% and 12%, the assessee benchmarked the same using an independent CCD benchmarking study and concluded the transaction to be at arm’s length.

3 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. was passed by the A.O. incorporating the aforesaid TP adjustments and making certain additions / disallowances on corporate tax front.

(i) Transfer Pricing adjustment of Rs.27,17,30,661 in respect of the international transaction of payment of royalty by the assessee to its AEs by restricting the same to 1%; (Grounds 4 to 9) (ii) TP adjustment of Rs.27,23,55,735 in respect of the international transaction of payment towards technical services by the assessee, by restricting the same to 1% of sales; (Grounds 10 to 15) (iii) TP adjustment of Rs.67,08,42,381 in respect of international transaction of payment of interest on CCDs by re-characterizing the same to be external commercial borrowing (ECB); (Grounds 16 to 21) (iv) Disallowance of Rs.5,99,10,687 made u/s 14A of the I.T.Act; and (Grounds 22 & 23)

4 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. (v) Disallowance of Rs.13,96,49,900 made u/s 37 of the I.T.Act, being foreign exchange fluctuation loss incurred in respect of loan availed. (Ground 24 and its sub grounds) We shall adjudicate the above issues as under:

Ground 4 to 9 (TP adjustment of Rs.27,17,30,661 in respect of Royalty Payment) 6. Grounds 4 to 9 in respect of payment of royalty, reads as follows:-

“4. The Hon'ble DRP has erred in not giving any cogent reason while adjudicating on the Appellant's arguments on restricting the payment of royalty at 1 % of net sales. 5. The Hon'ble DRP has erred in upholding the contention of the learned TPO that the ALP for the payment of' Royalty' should be restricted to 1 % and thereby erred in: (i) Upholding that the international transaction pertaining to payment of royalty cannot be aggregated under the manufacturing operations of the Appellant with the application of Transactional Net Margin Method ("TNMM") for the transfer pricing analysis without appreciating the fact that the principle of aggregation of closely linked transactions is a well-established rule prescribed by the Organisation for Economic Co-Operation and Development guidelines ("OECD Guidelines") and referred to for guidance in various rulings of Income Tax Appellate Tribunal ("ITAT"): (ii) Not appreciating the fact that the international transaction pertaining to payment of royalty cannot be tested in isolation as the same is interlinked to the primary operations of the Appellant; and (iii) Upholding the contentions of the learned TPO that the CUP Method is the most appropriate method in determining the ALP of payment of royalty to AE despite the learned TPO not following the provisions prescribed in clause (a) of the sub- rule (I) of Rule 10B of the Rules for determination of ALP in relation to an international transaction under CUP.

5 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 6. The Hon'ble DRP / learned TPO have erred in not appreciating the evidences submitted in respect of the payment of royalty by the Appellant to prove that the Appellant has derived economic benefit from licensing of intangibles and services from AEs and thereby erred in concluding that the Appellant has not derived any benefits. 7. The Hon'ble DRP / learned TPO have erred in not giving cognizance to the supplementary analysis submitted by the Appellant to demonstrate the arm's length nature of the international transaction pertaining to payment of royalty. While doing so, the learned TPO / Hon'ble DRP have erred in: (i) Not appreciating the external comparable uncontrolled transaction ("CUT") analysis identifying comparable licensing arrangements between third parties which is provided by the Appellant as a supplementary analysis to demonstrate the arm's length nature of the international transaction pertaining to payment of royalty. (ii) Not appreciating the internal CUT analysis identifying comparable licensing arrangements between AEs and third parties which is provided as a supplementary analysis by the Appellant to demonstrate the arm's length nature of the international transaction pertaining to payment of royalty. (iii) 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 Hon'ble DRP has erred in relying on the analysis provided by the Appellant to demonstrate the fact that independent comparable companies such as Linde India Ltd who are industrial gas manufacturers and have been in the business for a considerable period of time have made payment towards technology and technical support to arrive at the arm's length price. Thereby the Hon'ble DRP has erred in not appreciating that this comparison was provided as a persuasive value that technology and other support services is must to undertake business operations of the Appellant. 9. The Hon'ble DRP / learned TPO has erred in not appreciating the fact that for assessment year 2009-10, the same transaction was considered to be at arm's length by the Income Tax Appellate Tribunal based on identical facts and circumstance.

6 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 7. As regards the above issue, the assessee benchmarked the transaction of payment of royalty by aggregating it with certain other transactions. The assessee had also done a separate benchmarking study using CUP method, to justify the arm’s length nature of the transaction. The TPO rejected the method adopted by the assessee and proceeded to benchmark the transaction in an independent manner. The TPO determined the ALP of the transaction at 1% in an adhoc manner (refer pages 15-18 of the TPO’s order). The DRP rejected the objections of the assessee by relying on the directions issued in the case of the assessee for the assessment years 2011-2012 and 2012-2013 (refer pages 2-3 of the DRP’s directions).

7 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. issue in favour of the assessee. The relevant finding of the Tribunal reads as follows:-

“9. The first issue we will take up the transfer pricing adjustment made by the TPO with respect to payment of royalty @ 1%. 10. The ld.AR submitted that this issue is covered in assessee’s own case in ITA No.506/Bang/2016 vide order dated 6/12/2021 for the asst. year 2011-12 wherein the coordinate bench of this Tribunal has allowed the appeal in favour of the assessee. 11. The ld.DR relied on the written submissions. 12. We have heard the rival submissions and perused the materials on record. We notice that the coordinate bench of the Tribunal in assessee’s own case (Supra) has held that – “7.4 We have heard rival submissions and perused the material on record. The Tribunal in assessee’s own case for assessment year 2009-2010 in IT(TP)A No.315/Bang/2014 (order dated 31.03.2017) and for assessment year 2010-2011 in IT(TP)A No.361/Bang/2015 (order dated 04.06.2018) had restored the issue of determination of 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.

8 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 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 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.”

9 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. Ground 10 to 15 (TP adjustment of Rs.27,23,55,735, being payments made towards fees for technical services) 12. Grounds 10 to 15 in respect of payment towards technical services fees, reads as follow:-

“10 The Hon'ble DRP has erred in not giving any cogent reason while adjudicating on the Appellant's arguments on restricting the payment of technical service fees at I % of net sales. 11. The Hon'ble DRP has erred in upholding the contention of the learned TPO that the ALP for the payment of technical service fees should be restricted to 1% of net sales and thereby erred in: (i) Upholding that the international transaction pertaining to payment of royalty cannot be aggregated under the manufacturing operations of the Appellant with the application of TNMM for the transfer pricing analysis without appreciating the fact that the principle of aggregation of closely linked transactions is a well-established rule prescribed by the OECD Guidelines and referred to for guidance in various rulings of ITAT; (ii) Not appreciating the fact that the international transaction pertaining to payment of technical fees cannot be tested in isolation as the same is interlinked to the primary operations of the Appellant; and (iii) Upholding the contentions of the learned TPO that the CUP Method is the most appropriate method in determining the ALP of payment of royalty to AE despite the learned TPO 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. 12. The Hon'ble DRP / learned TPO have erred in not appreciating the evidences submitted in respect of the payment of technical fees by the Appellant. 13. The Hon'ble DRP / learned TPO have erred in not appreciating the evidences relating to the man-hour rates submitted in respect of the payment of technical fees by the Appellant. 14. The Hon'ble DRP / learned TPO have failed to

10 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 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. 15. The Hon'ble DRP / learned TPO have erred in not taking cognizance of the fact that the payment of technical service fee amounting to INR 36,31,40,980/- formed part of 'capital work in progress' as on 3lst March, 2013 which was not claimed as a business expenditure during A Y 2013-14 and therefore, the same cannot be added to the total income of the Appellant.” 13. As regards the above issue, it is submitted that the assessee is engaged in the business of manufacture and supply of industrial gases. It was stated that the assessee supplies industrial gases via advanced air separation plants and delivery systems and the assessee’s business model for distribution of the manufactured gases primarily falls into three main categories, namely –

(i) Bulk liquid gases, that are delivered by large transport tankers to the customers site and stored in storage units which are installed by the assessee at the customer’s site; (ii) Packaged gases, that are supplied in cylinders to construction sites, engineering companies, hospitals, etc.; and (iii) Large onsite plants, that supply gases via pipeline to the customers. Where the customers require a large quantity of gases on a continuous basis, the assessee constructs / builds a plant either in the premises of the customer or adjacent to it and

11 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. supplies the gases through pipelines. The plant is operated by the assessee on Build Own Operate (BOO) basis, predominantly by obtaining technical assistance from its AEs, for which it makes the payments under question.

12 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited.

(i) Knor Bremse India Pvt Ltd. v. ACIT reported in (2016) 77 taxmann.com 101 (Del-Trib) (ii) Bosch Ltd. v. DCIT in IT(TP)A No.1581/Bang/2014 (order dated 31.05.2022) 16. The learned DR submitted that the TPO has elaborately discussed and has come to a conclusion that the payment of technical fees is primarily a duplication of payment of royalty. Further, the learned DR contended that the assessee has not been able to prove the nature of services rendered by the AE’s in respect of payments of technical service fees.

13 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. assessee made payments in the nature of technical and related services fees to following AEs.

Sl. Technical and related service fees Amount (Rs.) No. paid 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 5. SAID Machine Impianti SpA 89,358 6. Praxair China Investment Co. Ltd. 7,52,349 7. Praxair Surface Technology Inc 41,07,004 Total 36,31,40,980

17.1 For the purpose of computation of ALP, the assessee was of the view that the above transactions are closely linked to the manufacturing operations of the company accordingly, benchmarked using aggregation approach with the application of TNMM. The entire level margin of the assessee was computed at 13.38% and arithmetic mean of margins of the comparables was computed at 11.03%. As the assessee’s margin was higher than the average margin of comparables, the assessee projected that the aforesaid payments of technical service fees to AEs are at arms length. The TPO held that the technical service payments are essentially 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.

14 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 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 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

15 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited.  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:-  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

16 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 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

17 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 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. "

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

18 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 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.

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

19 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. Commercial 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. 18. The Hon'ble DRP / learned TPO has erred in not appreciating 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. 19. The Hon'ble DRP / learned TPO have erred in stating that 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. 20. The Hon'ble DRP has erred in stating that conversion 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.”

20 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. companies stood at 9.5% and 12.25%, the assessee concluded the international transaction of payment of interest at 9% and 12% to be at arm's length. The TPO treated the CCDs as ECB and bench marked the interest rate paid against LlBOR rate of 6.37% (pages 21-27 of the TP Order). The DRP rejected the Appellant's objections and upheld the TPO's order (pages 4 and 5 of the DRP's directions).

(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

21 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 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 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

22 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 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

23 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 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 debtclaim 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

24 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 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 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.

25 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited.

Grounds 22 & 23 (Disallowance u/s 14A of the I.T.Act in computation of total income under regular provisions and book profits) 23. The grounds in respect of disallowance u/s 14A of the I.T.Act, reads as follows:-

“22.1. The learned AO erred in disallowing expenditure amounting to Rs.59,910,687 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. 22.2. The learned AO erred in not appreciating that the investments made in Praxair Carbon Dioxide Private Limited ('PCPL') (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. 22.3. '''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 22.4. The learned AO failed to appreciate the fact that no additional investments in the subsidiaries were made during the year, instead JPOCPL has brought back portion of its shares on which capital gain was computed by the Appellant and offered to tax. 22.5. The learned AO has 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 earning any exempt income. 22.6. The learned AO erred in holding that investment to the tune of Rs.217 crores has been made on 31.03.2013 in subsidiary companies when no fresh investments were made during the year in its subsidiary companies. 22.7. The Honourable DRP erred in holding that the Appellant has admitted during hearings before the Panel that its accounts are maintained in a consolidated manner whereby all funds and receipts are intermingled in a common pool and attribution of specific expenditure and investment out-flow to specific receipts is not possible to co-relate or verify. The Appellant had not accepted any such statement. Moreover, the Honourable DRP ought to have appreciated that the Appellant has not incurred any expenditure during the year towards the investment. Further, the Appellant has not made any investment during the year. Accordingly, there is no question of having a common pool of expenditure for investments. Notwithstanding and without prejudice ground

26 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 22.8. Notwithstanding and without prejudice to the above, the learned has AO erred in invoking the provisions of Rule 8D(2)(ii) and disallowing the interest expense, when such interest is attributable to a taxable business activity, without appreciating the fact that the assessee has not utilized any borrowed funds for investment purpose. 23. Addition of Rs.5,99,10,687 as per clause (f) of section 115JB of the Act for computing book profits: 23.1 The learned AO has erred in adding Rs.5,99,10,687 as per clause (f) of section 115JB for computing the book profit without appreciating the fact that – (i) The computation provisions of section 14A(2)/(3) 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 itself can be made to the book profit.” 24. The A.O. made disallowance u/s 14A of the I.T.Act amounting to Rs.5,99,10,687 computed as per Rule 8D(ii) of the Income-tax Rules, 1962 (refer pages 3 and 4 of the final assessment order). The DRP rejected the objections of the assessee and affirmed the disallowance (refer page 8 to 10 of the DRP’s directions).

27 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. this regard is placed on the following decisions:

(i) Godrej & Boyce Manufacturing Company Ltd. v. DCIT (reported in [2017] 81 taxmann.com 111 (SC)); (ii) Eicher Motors Ltd. v. CIT ([2017] 86 taxmann.com 49 (Delhi)); (iii) 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).

28 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. assessee. Therefore, it was contended that in view of the assessee having obtained the shares in a share swap arrangement, no disallowance is warranted. Reliance in this regard is placed on the decision of the Mumbai Bench of this Hon'ble Tribunal in the case of DCIT v. Trigyn Technologies Ltd. (reported in [2013] 37 taxmann.com 454 (Mumbai - Trib.)). Further, it was argued that the disallowance made by the Assessing Officer is in excess of the dividend income earned by the assessee, and therefore, is wholly unsustainable. Reliance in this regard was placed on the judgment of the Hon’ble High Court of Delhi in the case of PCIT v. Caraf Builders & Constructions P.Ltd. reported in (2019) 101 taxmann.com 167 (Delhi). Without prejudice to the above contentions, it was it is submitted that no such disallowance can be made while computing the book profits u/s 115JB of the Act. Reliance in this regard is placed on the judgment 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.).

29 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 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

30 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.

"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

31 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. Aeronautics Ltd v ACIT, ITA No 404 of 2015 in judgment dated 9.12.2020 following the Supreme Court's decision in Godrej and Boyce Manufacturing Ltd (supra) deleted the disallowance made under section 14A without recording the satisfaction having regard to the accounts of the assessee.

28.3 In the present case, the AO has recorded vague, stereotyped reasons de hors the accounts of the assessee for making the disallowance under section 14A. There is no satisfaction of the AO having regard to the accounts of the assessee. Further, the Hon’ble Karnataka High Court in the case of CIT v. Gokaldas Images P Ltd. reported in (2020) 122 taxmann.com 160) has held that disallowance u/s 14A of the I.T.Act cannot be added to book profits of assessee under section 115JB. Thus, we delete the disallowance made under section 14A amounting to Rs. 5,99,10,687 in computing the total income under regular provisions and book profits under section l15JB of the I.T.Act. Ground 24 (Disallowance of Rs.13,96,49,400 u/s 37 of the I.T.Act, being foreign exchange fluctuation loss incurred in respect of loans availed) 29. The above ground is in respect of disallowance of loss incurred on fluctuation of foreign currency. The grounds relating to the above issue read as follows:-

“24.1 The learned AO/ Honourable DRP erred in disallowing the foreign exchange loss amounting to Rs.139,649,900 under section 37 of the Act as not being revenue in nature. 24.2. The learned AO failed to give an opportunity to the Appellant to substantiate that forex loss on kelvin loan is

32 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. revenue in nature. 24.3. The learned AO/ Honourable DRP erred in not appreciating the fact that the Kelvin loan has been utilized for general corporate purposes which is revenue in nature. 24.4 The learned AO erred in concluding that the short term borrowings which are repaid by Kelvin loan are not utilized for working capital. 24.5 The learned AO / Honourable DRP failed to appreciate the fact that the foreign exchange gain on the same loan have been offered to tax in earlier year.”

33 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. for general corporate working capital purposes as is evident from the loan agreement and the RBI's approval dated 25.03.2003. Therefore, it is submitted that since the loan was obtained for working capital purposes, the loss arising on account of fluctuation in foreign currency ought to be allowed as a deduction. Further, it is submitted that in the assessment years when the assessee realised gains in respect of the said loan, the same were offered to tax, which was accepted by the Revenue. Therefore, it is submitted that the Revenue having accepted the gains to tax, and thereby having accepted the loans to be obtained for working capital purposes, cannot disallow the loss in the year under consideration. Therefore, the loss claimed by the assessee ought to be allowed. It is submitted that this issue is covered in the assessee’s favour in the assessee’s own case for assessment year 2012-13 (Order dated 25.02.2022 passed in IT(TP)A No. 2209/Bang/2016).

34 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. 9. We have given careful consideration to the rival submissions. We find that the foreign exchange loss claimed by the assessee was on account of reinstatement of the liability of the assessee as on the last date of the previous year. It is no doubt true that there has been no actual payment and at the time of ultimate settlement, there may not be a loss also. Nevertheless, AS - 11 of ICAI requires such liability also to be reflected in the financial statements. The Hon'ble Supreme Court considered all these aspects in the case of CIT(A) Vs. Woodward Governor (2009) 312 ITR (P.) Ltd. (2011) 200Taxman 179. The first aspect examined by the Hon'ble Supreme Court was as to whether the additional liability due to exchange rate fluctuation was a liability. The Hon'ble Supreme Court held that the expression "expenditure" as used in s. 37 may, in the circumstances of a particular case, cover an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee. The Court explained that the word "paid" in s. 43(2) means actually paid or incurred according to the method of accounting on the basis of which profits or gains are computed under s. 28/29 and that Sec. 37(1) has to be read with ss. 28, 29 and 145(1). Therefore, loss suffered by the assessee in respect of a revenue liability ITA Nos.2547 and 2548/Bang/2018 on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable under s. 37(1). The Court explained that under para 9 of AS-11, exchange differences arising on foreign currency transactions have to be recognized as income or expense in the period in which they arise, except as stated in para 10 and para 11. An enterprise has to report the outstanding liability relating to import of 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.

35 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited. assessee has offered the forex gain in respect of the same loan in the previous year and in the interest of justice it is only correct when the loss arises out of forex movement the same be allowed. Pursuant to the binding decision of the coordinate bench of the Bangalore Tribunal and based on the facts placed before us we hold that the loss claimed by the assessee due to the forex fluctuation of the loan is to be allowed. This ground is allowed in favour of the assessee.” 35. In view of the above order of the Tribunal, in assessee’s own case, the issue raised in ground 24 with regard to disallowance of loss incurred on fluctuation of foreign currency is decided in favour of the assessee. It is ordered accordingly.

Order pronounced on this 25th day of August, 2022.

Sd/- Sd/- (Laxmi Prasad Sahu) (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore; Dated : 25th August, 2022. Devadas G*

36 IT(TP)A No.2839/Bang/2017. M/s.Praxair India Private Limited.

Copy to : 1. The Appellant. 2. The Respondent. 3. The DRP-2, Bengaluru. 4. The Pr.CIT-1, Bengaluru. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore