ADAMA INDIA PRIVATE LIMITED ,HYDERABAD vs. INCOME TAX OFFICER, WARD-1(3), HYDERABAD

PER S. RIFAUR RAHMAN, A.M.: This appeal of the assessee is directed against the order passed u/s 143(3) rws 144C(13) of the Income-tax Act, 1961 (in short ‘the Act’), dated 29/10/2018, for the AY 2013-14. 2. Brief facts of the case are, assessee company, engaged in the business of manufacturing and trading in agricultural crop protection products, filed its return of income for the AY 2014-15 on 29/11/2014 declaring income of Rs. 11,41,63,280/- under normal provisions and book profit of Rs. 6,30,07,146/- under the provisions of section 115JB of the Income-tax Act, 1961 (in short ‘the Act’). Subsequently, the case was selected for scrutiny under CASS and issued notice u/s 143(2). In response to the said notices, the AR of the assessee furnished the information called for. 2.1 After verification of the information, the AO referred the matter to TPO u/s 92CA of the Act, with the prior approval of the Pr.CIT-2,

2 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. Hyderabad for determination of arm’s length price in respect of international transaction reported by the assessee for the AY 2014- 15.

Adama India was incorporated on 27 July 1998 as a wholly owned subsidiary of Makhteshim Agan Holdings BV under the provisions of Companies Act, 1956. The company commenced its commercial operation from 13 July 2009. It is engaged in the manufacture and supply of agricultural crop protection products in India. ADAMA India is offering comprehensive solutions to the farmers by providing broad product portfolio with high international quality standards. ADAMA India has established a very good logistic infrastructure for enabling the availability of its products to the farmers. These warehouses are equipped with well developed SAP system, which are operated by experienced and professional people.

3.1 Examination of TP study conducted by assessee:

The assessee has carried out the economic analysis and has summarized it as under:

S.No. Nature of international Amount in Rs. transactions 1. Purchase of raw materials 211,22,26,013 2. Sale of finished products 21,60,91,129 3. Management Services 3,37,08,260 4. Reimbursement of expenses 50,09,585 5. Recovery of expenses 8,21,85,531 6. Provision of research & 7,55,08,974 development services 7. Interest on CCDs 1,84,93,230 8. Interest received on loan 65,55,787 9. Corporate guarantee 0 10. Outstanding trade receivables 14,76,49,445 11. Outstanding payables 175,65,89,799 12. Outstanding loan 5,40,89,100 13. Outstanding interest receivables 1,29,81,384 14. Outstanding interest accrued on 28,58,32,840 CCD

3 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad.

3.2 Financial analysis of the assessee:

As per the audited statement of accounts, the financials of the assessee for the AY 2014-15 are as under:

Operating revenue Rs. 929,14,30,000 Operating Cost Rs. 876,54,20,000 Operating Profit Rs. 52,60,10,000 OP/TC 5.95% OP/Sales(PLI) 5.66%

3.3 The TPO determined the adjustment to ALP as under:

Nature of Value of Arms Adjustment transaction transaction as Length price (Rs.) per books of (Rs.) account Amount paid for 3,37,08,260 Nil 3,37,08,260 management services availed Interest on 86,90,683 88,12,925 receivables Interest on CCDs 18,14,93,230 3,97,77,266 14,17,15,964 4,84,67,949 18,42,37,149

5 Aggrieved by the order of DRP, the assessee is in appeal before us raising the following grounds of appeal:

1.Receipt of Management Services: “1.1. On the facts and in the circumstances of the case and in contrary to law, the Ld. AO/Ld. TPO erred in determining the ALP of the receipt of management services to be Nil without following any of the prescribed methods under section 92C(1) of the Act. 1.2. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in going beyond the scope under section 92CA in questioning the commercial rationale of

4 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. the legitimate business expenses incurred by the Appellant and further erred in determining the ALP of receipt of management services to be Nil. 1.3. On the facts and in the circumstances of the case and in contrary to law, the Ld. AO / Ld. TPO erred in not appreciating the facts of the case that the receipt of management services is closely linked to the overall business of the Appellant and the same was aggregated under Transactional Net Margin Method ('TNMM'). 1.4. On the facts and in the circumstances of the case and in contrary to law, the Ld. AO / Ld. TPO, having considered the transactions aggregated under manufacturing function to be at ALP, erred in not considering an aggregate benchmarking approach for receipt of management services from AE, being a closed linked transaction, in line with the TP documentation maintained by the Appellant. 1.5. On the facts and in the circumstances of the case and in contrary to law, the Ld. AO/TPO further erred in not appreciating the fact that the operating profit earned by the Appellant after considering management services as operating I cost falls within the arm's length range of the comparable companies. 1.6 On the facts and in the circumstances of the case and in contrary to law, the Ld. AO/ ld. PO erred in ignoring the documentation, factual and legal submissions provided by the Appellant to substantiate the benefit, corresponding economic or commercial value derived on receipt of management services. 2. Re-characterization of Compulsory Convertible Debentures & interest thereon: 2.1. On facts and in the circumstances of the case and in contrary to law, the Ld. TPO / Ld. AO has erred in going beyond the scope to re-characterize the Compulsory Convertible Debentures ('CCD') as loan for benchmarking the international transaction of interest payments on CCD and the Hon'ble DRP has further erred in upholding the action of Ld. TPO / Ld. AO. 2.2. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO / Ld. AO erred and subsequently Hon'ble DRP further erred in upholding the action of Ld. TPO / Ld. AO by not appreciating the fact that CCDs are consumed in India and interest on CCDs should be benchmarked using State Bank of India ('SBI') Prime Lending Rate ('PLR') rather than London Inter-Bank Offered Rate ('LIBOR') rate.

5 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. 2.3. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO / Ld. AO erred and subsequently Hon'ble DRP further erred in upholding the action of Ld. TPO / Ld. AO in considering LIBOR plus 200 basis points as an arm's length interest on CCD on ad hoc basis which is complete violation of transfer pricing provisions and against the principles of law. 2.4. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO / Ld. AO erred on facts and in law in disregarding the independent I alternative analysis carried out by the Appellant based on the data available \ from public database i.e., NSDL website; and subsequently DRP further erred in not providing any directions / findings by completely ignoring the independent analysis undertaken by the Appellant in this regard. 2.5. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO/ Ld. AO erred and subsequently Hon'ble DRP further erred in [I upholding the action of Ld. TPO / Ld. AO in not following the Hon'ble : Hyderabad Tribunal's decision in Applicant's own case for benchmarking of , interest on CCDs for the A Y 2011-12, when there is no change in the facts for the year under assessment. 3. Interest on Outstanding receivables: 3.1 On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO / Ld. AO erred by considering receivables from AEs as a separate international transaction and further erred in making transfer pricing adjustment by imputing interest amounting to INR 8,812,925 on receivables from AEs by ignoring various rulings as submitted by the Appellant. 3.2 Without prejudice to above ground, the Ld. AO / Ld. TPO erred in bringing notional interest to tax without appreciating the fact that neither the AE nor the Appellant has the practice of charging interest on overdue balances from each other. Without prejudice to the fact that no arm's length determination and consequential TP adjustment is warranted on outstanding receivables, the Appellant would like to raise the following grounds against the computation methodology of the Ld. TPO: 3.3 On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO further erred by adopting the Term deposit rates of State Bank of India ('SBI') as an arm's length rate for calculating interest on the receivables from AE by treating the trade receivables as short term funding.

6 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. 3.4 On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in adopting 30 days as arm's length credit period based on Appellant's intercompany agreement with AEs on an ad-hoc basis without carrying out any methodical analysis which is complete violation of transfer pricing provisions and against the principles of law. 3.5 On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO further erred in imputing interest on invoice to invoice basis, however failed to compute the weighted average receivables in days for all the invoices raised during the year under consideration. 4. Other grounds: 4.1 On the facts and in the circumstances of the case and in contrary to law, the Ld. AO / Ld. TPO erred in rejecting the transfer pricing ('TP') documentation and the economic analysis undertaken by the Appellant without any robust reasons to determine the arm's length price (' ALP') for receipt of management services. 4.2 On the facts and in the circumstances of the case and in contrary to law, the ld. AO/ld. TPO erred in not satisfying any of the conditions prescribed u/s 92C(3) of the Income-tax Act, 1961 (‘the Act’) while making TP adjustments and accordingly the order passed by the ld. TPO/Ld. AO should be set aside in entirety. 5. The ld. AO, on the facts and circumstances of the case and in law, has erred in invoking section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 (‘the Rules’) for disallowing interest expenditure amounting to Rs. 29,15,240/- without appreciating the fact that thee assessee has not incurred any expenditure which is directly attributable towards investments in mutual funds. 6. The ld. AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act.” 6. As regards ground No. 1 ( 1.1 to 1.6) regarding receipt of management services from AEs, the TPO observed that the assessee had carried out the economic analysis in the TP documentation by clubbing management services under manufacturing function. He, therefore, requested the assessee to furnish clarification and submission along with proper documents on the following issues:

a) The benefit derived from the receipt of services.

7 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. b) Whether the payment made is commensurate with the benefits received. c) Whether as a result of such payment, the recipient of the services, the taxpayer, resulted in any economic or commercial value to enhance its commercial position. The expected benefit must be sufficiently direct and substantial so that an independent recipient, in similar circumstances, would be prepared to pay for it. If no profit has been provided (or was expected to be provided), the service cannot be charged for. d) Whether the services are actually rendered. If yes please quantify such services in terms of actual expenditure incurred and commensurate benefits derived there from. e) The determination of an arm's length charge must take into consideration the amount that an arm's length entity is prepared to pay for such a service in comparable circumstances. f) The taxpayer's level of documentation and evidence to show that the services are actually rendered by the AEs to the taxpayer. If the services are actually rendered, the level of documentation and also evidence to show that a tangible and direct benefits derived by the taxpayer in paying the above amounts to the AEs. g) The allocation key based on which your AE has charged the amount on you. As also whether the AE has provided the same services to all other group concerns. 6.1 The TPO observed that just by describing various sectors, it will not suffice to justify the price charged in intra group services. The assessee has to prove with proper documentation and evidence that the services are actually rendered and payment is commensurate with the benefit derived there from. Unless it is shown that tangible and direct benefit is derived by such payment or that the payment made is commensurate with the benefit that is derived or expected to be derived when parties deal with each other at arm's length, the arm's length price of such payment for intragroup services would be treated as either Rs. Nil or to the extent it is shown that the benefit actually derived from such payment under CUP method.

6.2 The TPO opined that however, the submissions filed on 24.10.2017 by the assessee could not justify the benefit received from the receipt of the management services from AE. Therefore, the

8 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. submission and the TP documentation maintained by the taxpayer were rejected and the arm's length price is determined at nil due to below reasons:

The TP documentation maintained does not meet the criteria required under Rules 10B of the Income Tax Rules, 1962 and the benchmarking analysis suffers from errors and cannot be relied upon. The taxpayer did not produce any cogent evidence, except a write-up, intercompany agreement, intercompany invoices and email exchanges to demonstrate that management service assistance was actually received. The taxpayer has also not been able to show that has derived any economic benefit from the alleged assistance from AE. The analysis conducted by the tax payer is not according to the rules requiring maintenance of TP documentation. The taxpayer has relied on the following case laws in support of benefit test analysis undertaken by the taxpayer which are fact based and cannot be relied upon:- Safran Aerospace India Pvt. Ltd. (ITA No.1261/Bang/2010) TNS India Pvt. Ltd. (ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012) AWB India Pvt. Ltd (ITA No.4454/Del/2011) AXA Technologies Shared Services Pvt. Ltd. (IT (TP) No. 659/Bang/2012) 6.3 In view above, the TPO rejected the submission of the Assessee. The benefits derived out of management services normally depend on various factors. In this regard, following points are worth mentioning:

“1. Universally, management services are being treated at arm's length only when it- is proved substantially by the taxpayer that such intangibles were actually received and further proving that such services have benefitted it.

9 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. services reflect the same charges for the intangible that would have been, or would reasonably be expected to be, levied between independent parties dealing at arm's length for comparable circumstances. 3. How much a comparable independent benefit recipient, under comparable circumstances, would be willing to pay for that service? 4. Whether as a result of such payment, the recipient of the service, the taxpayer, resulted in any economic or commercial value to enhance its commercial position. The expected benefit must be sufficiently direct and substantial so that an independent recipient, in similar circumstances, would be prepared to pay for it. If no benefit has been provided (or was expected to be provided). 5. What is the benefit received / receivable on account of such services for which the amount was paid by the taxpayer. Also quantification of the benefit in terms of value addition achieved by the usage of such services, to the final value of the product and thereby justification for the amount paid. 6. The tangible benefit accrued to the taxpayer in this year or coming years. An analysis of profitability of the company in the past, present and future years to show that the payment resulted in a tangible benefit. 7. Unless it is shown that tangible and direct benefit is derived by payment of such amount is commensurate with the benefit that is derived or expected to be derived when parties deal with each other at arm's length, the arm's length price of such payment would be treated as either Rs. Nil or to the extent it is shown that the benefit actually derived from such payment under CUP method.

6.4 Based on above reasons, the TPO rejected the submissions made by the assessee and the ALP of payment to AE for management services is determined at Rs. Nil. Hence, the adjustment u/s 92CA(3) towards receipt of management service computed at Rs 3,37,08,260/-

6.5 Before the DRP, the assessee submitted that it had aggregated the transaction of receipt of management services along with the manufacturing function and benchmarked under TNMM. It was argued that the TPO was not justified in analyzing the transaction relating to

10 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. management fee separately after accepting the ALP of manufacturing function and that the TPO was not consistent in his approach.

6.6 The DRP after considering the submissions of the assessee, discussed the issue at length with various case law and, inter-alia, held that the assessee failed to prove the rendition of alleged services to it by the AE, the basis and evidence of costs incurred, the tangible benefits that accrued to the assessee from the so-called services and, therefore, upheld the adjustment made by the TPO.

6.7 Before us, ld. AR submitted the facts of the case and brought to our notice that TP study on entity level and TNMM was accepted by TPO. But the payment to its AE towards management services are part of overall business. TPO cannot carve out a line of services by its AE and cannot evaluate on benefit test. As per judicial pronouncements, he cannot evaluate benefit test. For this proposition, he relied on the following case laws:

6.8 Before us, ld. DR filed written submissions as under: “1. The additions in this case are on account of adjustment to ALP. DRP has considered the objections of the assessee and granted due relief. It is submitted that the assessee aggregated management services with manufacturing function. It is not proper on the part of the assessee to aggregate functions like assistance in accounting matters, assistance in process and quality control matters, support services, assistance in procurement and sales and assistance in HR matters with manufacturing activity. Even on first principles of accounting, the assessee cannot club such functions with manufacturing activity. Also, the claim that contemporaneous documents were maintained and FAR analysis was done for management

11 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. services is not borne out by facts. No documentation or evidence for receipt of such services could be furnished by the assessee. The assessee filed additional evidence before DRP, which is in the nature of vague e-mails and the claim was duly rejected. 2. It is humbly submitted that margins have to be worked out separately for different activities. Reliance in this regard is placed on the decision of Hon'ble ITAT, Delhi Bench in the case of Cargill India limited [2018] 89 taxmann.com 446 (Delhi-Trib.). Besides, before the TPO and the DRP, the assessee could not establish that the management services are part of manufacturing function. No doubt the benefits have to be viewed from the angle of businessman but the conduct of the businessman cannot be in total contradiction of principles of accounting which mandate that accounting services, HR services etc. are not part of manufacturing activity. It is also submitted that merely because there is increase in sales over the years, the same cannot be simply attributed to the management assistance functions of the AE. The marketing network in India and the product strength are primary factors for increase in sales and not assistance in accounting services, assistance in HR, assistance in procurement or sales functions etc which may help in optimizing the efficiency of the enterprise but do not have direct bearing on increase of sales.” 6.9 Considered the rival submissions and perused the material on record. We observe from the records that assessee is a wholly owned subsidiary of Makhteshim Agan Holdings BV, Singapore. The holding company has commenced its operation in India with full integrated programme and services to assist the operation in India i.e. to assist all the operation in India with integrated solution from procuring, manufacturing, management and sales. Since, it is an integrated programme and the whole set up of the group company, are such that it takes intercorporate services from the same group companies. As per the agreement entered with the assessee and other AEs, it allows the service provider to extent the services with the services charges. The agreement clearly indicates the services and the compensation for the same. Assessee has entered into two service agreements, which is placed on record. We notice from the manufacturing services agreement, the parties have benchmarked the sale considering the

12 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. ALP range and no such benchmarking was done in management services.

6.10 However, we noticed that TPO has accepted the TP documentation for the international transaction like purchases, sales and manufacturing services as within Arm’s Length by considering TNMM as the most appropriate method and singled out the management services. TPO has considered the ALP of management services as ‘NIL’. We do not agree with the TPO that ALP is ‘NIL’ and he analysed the management services on benefit test. There is no such method in the TP study. You cannot adopt a method which is not embedded in the study. It is difficult to prove the services in terms of numbers but it can be seen only in ease of doing business in India and satisfaction of the farmers who are availing the services. Without the integrated services, the assessee would not have achieved the results. In our considered view, when TPO accepts the other international transaction under TNMM and it can also accept the management services also under TNMM. It is an integrated solution offered by the AEs for the overall benefit and performance of assessee. The ALP itself cannot be NIL. The various judicial pronouncements in this regard are as under: 1. In the case of Sabic Innovative Plastics India Pvt. Ltd., ITA No. 2730/Ahd/2017, vide order dated 8 th March, 2019, the coordinate bench of ITAT, Ahmedabad Bench, observed as under:

“11. As learned representatives fairly agree, even as the learned Departmental Representative dutifully relies upon the stand of the authorities below and urges us to take an independent view on the subject, this issue in appeal is squarely covered, in favour of the assessee, by decisions of the coordinate benches in assessee's own cases for the three immediately preceding assessment years. While dealing with the appeals of the assessee for the assessment years 2009-10 and 2011-12, a coordinate bench of this Tribunal, in a judgment reported as 186 TTJ 214 and through one of us (i.e. the Vice President), has observed as follows:

13 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. 8. We may at the outset note that the DRP's observations justifying the impugned ALP adjustment on the ground of benefit not reaching the assessee from rendition of services, are somewhat irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining ALP of that service. When evaluating the ALP of a service the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. This process of determination of arm's length price has to be done on the basis of a recognized method of determining arm's length price, rather than on the basis of subjective perceptions, divorced from ground realities of business, of the TPO. While on this issue, we may also refer to the following observations made by a coordinate bench of this Tribunal in the case of A WB India (P.) Ltd. v. Dy. CIT [2014] 50 taxmann.com 323/[2015] 152 ITO 770 (Delhi· Trib.) and which are equally applicable in the present context: 15. One of the very basic pre condition for use of CUP method is availability of the price of the same product and service in uncontrolled conditions. It is on this basis that ALP of the product or service can be ascertained. It cannot be a hypothetical or imaginary value but a real value on which similar transactions have taken place. Coming to the facts of this case, the application of CUP is dependent on the market value of the arrangements under which the present payments have been made. Unless the TPO can identify a comparable uncontrolled case in which such services, howsoever token or irrelevant services as he may consider these services to be, are rendered and find out consideration for the same, the CUP method cannot have any application. His perception that these services are worthless is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble jurisdictional High Court in the case of CIT v. EKL Appliances Limited (345 ITR 241), "Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same". 16. The very foundation of the action of the TPO is thus devoid of legally sustainable merits. There is no dispute that the impugned payments are made under an arrangement with the AE to provide certain services. It is not even the TPO's case that the payments for these services were not made for specific

14 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. services under the contract but he is of the view that either the services were useless or there was no evidence of actual services having been rendered. As for the services being useless, as we have noted above, it is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are actually rendered in the uncontrolled conditions. 17. As for the evidence for each of the service stated in the agreement, it is not even necessary that each of the service, which is specifically stated in the agreement, is rendered in every financial period. The actual use of services depends on whether or not use of such services was warranted by the business situations whereas payments under contracts are made for all such services as the user may require during the period covered. As long as agreement is not found to be a sham agreement, the value of the services covered under the agreement cannot be taken as 'nil' just because these services were not actually required by the assessee. In any case, having perused the material on record, we are satisfied that the services were actually rendered under the agreement and these services did justify the impugned payments. 18. We are also of the considered view that in the absence of prerequisites for application of CUP methods being absent in the present case, it was not open to the TPO to disregard the TNMM employed by the assessee. No defects have been pointed out in application or relevance of TNMM in this case. Under these circumstances, the TPO's impugned action cannot meet our judicial approval. For the detailed reasons set out above, we uphold the grievance of the assessee and direct the AO to delete the impugned ALP adjustment of Rs. 31,23,325. The assessee gets the relief accordingly. 9. The only justification for taking ALP of services at NIL is under CUP but then there has to be something on record to show that in an arm's length situation these services are rendered without consideration. The worth of services cannot be decided by the TPO, nor is it open to him to question, as such an approach implicitly does, the commercial expediency of these services. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for them to decide what is necessary for an assessee and what is not. It is not for the TPO to question assessee's wisdom in making payment for the services, which, in the opinion of the TPO, are not of "much" use. The TPO has travelled much beyond his powers in questioning commercial wisdom of

15 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. assessee's decision to take benefit of expertise of its AEs. The DRP is also in error, in the light of these discussions, evaluating the worth of services on the basis of benefit of these services. The very foundation of the impugned ALP adjustment was thus devoid of any legally sustainable basis. 10. In any case, we have carefully perused the evidence of services rendered and the nature of services in question, on random sample basis. In our considered view, there is reasonable evidence of the rendition of service and it cannot be open to TPO to proceed on the basis that the services were not rendered. The method of ascertaining the arm's length price, on the basis of TPO's subjective perception about worth of services, is not sustainable in law either. In view of these discussions, as also bearing in mind entirety of the case, we deem it fit and proper to delete the impugned ALP adjustments.” 2. In the case of Siemens Gamesa Renewable Power Pvt. Ltd., ITA No. 1420 & 376/Mds/2017, the ITAT, Chennai Bench observed as under: “20.6 In our considered opinion, ALP of management service cannot be said to be Nil in the absence of a valid comparable. Since no effort had been made by TPO to determine market value of services received by assessee, adjustment made by TPO as a disallowance of expense could not be upheld. In other words, the TPO cannot simply arrive at a conclusion that quality and volume of services received by the Appellant were not commensurate with payment made by the Appellant. This view is fortified by the order of Tribunal in the case of Merck Ltd. vs DCIT [148 ITD 513] (Mumbai) - upheld by Bombay High Court [ITA 272 of 2014] 24.7 Such argument in our view is not convincing. The argument would have been valid if fees was fixed in respect of each service, which was compulsorily required tobe provided to the assessee, but it is not so in the present case. The agreement listed certain services on which the assessee requires guidance! assistance from time to time. The assessee was thus entitled to any of the services as and when required. Therefore, applying CUP method to the service not availed by the assessee during the year is not justified. It would have been appropriate if the AO had applied CUP method to the payment made during the year by the assessee for the three services and compared with similar payment for such services by an independent party. No efforts have been made by TPO/ AO to determine the market value of services received by the assessee during the year relating to SAP implementation and quality control to show that the assessee had paid more compared to any independent party for the same services. The assessee had submitted that in case the assessee had paid to

16 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. the AE at man hour rate for the technical services provided during the year in relation to SAP implementation, the fees payable would have been significantly higher. There is nothing produced before us to controvert the said claim. The assessee has applied TNMM which shows that the margin shown by the assessee was higher than the comparable companies. The case of the assessee is also supported by the decision of Tribunal in case of Me Can Erricson India Pvt. Ltd. (Supra) in which the decision of TPO to take the value of certain services at nil has not been upheld. Considering the entirety of facts and circumstances, the adjustment made by TPO which is nothing but disallowance of expenses cannot be upheld. We, therefore, set aside the order of CIT (A) on this point and delete the addition made.” 3. In the case of Schneider Electric India Private Limited (ITA No. 2091 Ahd/2015, the ITAT, Ahmedbad Bench observed as under:

“'9 ... The TPO has rejected the determination of arm's length price on the basis of TNMM, at entity level, but then he has not adopted any other permissible method for determination of arm's length price. Such a course of action, as noted above, is not permissible in law. Just because these services are worthless in the eyes of the revenue authorities, the arm's length price of these services cannot be held to be NIL. Similarly, the findings that no services were rendered and that the Appellant could have performed these services on its own are contradictory. Coming to the question of business expediency, which has been questioned by the authorities below, in our considered view it was also not for the TPO to bother about business expediency of these services; all he was to see was what would be arm's length services of these services in an uncontrolled situation. That has to be done on the basis of a permissible method of ascertaining the arm's length price. It cannot be open to the TPO to reject a method of ascertaining the arm's length price without fining a legally permissible method to substitute for the method of ascertaining ALP as adopted by the Appellant. To hold that the arm's length price of these services was NIL under the CUP method, the TPO had to necessarily to demonstrate that the same services, whatever be its intrinsic worth, were available for NIL consideration in an uncontrolled situation; that is not, and that cannot be, the case. It is also not the case of the authorities below that the arm's length price of these services, under any other legally permissible method is, NIL. There is thus no legally sustainable foundation for the impugned ALP adjustment. "

17 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. "10... We have also noted that the managerial services, availed by the Appellant under the same cost contribution arrangement, have been allowed all these years and have been accepted to be at an arm's length transaction. While there is indeed no res judicata in tax proceedings, it is important to bear in mind the observations of Hon'ble Supreme Court in the case of Radhasoami Satsang Vs CIT [(1992) 193 ITR 321 (SC)}, to the effect that "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.” 4. In the case of Durr India Private Limited (ITA Nos. 754/Mds/2014, 972/Mds/2015, and 455/Mds/2016), the ITAT, Chennai Bench observed as under:

“10. Ld. TPO did not discuss anything regarding the comparables considered by the Appellant for the TNMM study. Ld. TPO had summarily rejected the TNMM study citing a reason that intra-group services had to be benchmarked separately by analyzing the actual services received. No doubt there can be no quarrel on the view taken by the ld. TPO that arm's length price should be determined on a transaction by transaction basis. However, where the international transactions are closely linked this approach may not be feasible and a method of aggregation which is more amenable to a TNMM methodology could be better. Ld. TPO ought not have considered the rule regarding transaction to transaction comparison as so rigid that it could not give way to an aggregate method, where the transactions were so interconnected and intertwined, when an independent analysis would not give reasonably fair results" 5. In the case of AWB India Pvt. Ltd (ITA No.4454/DeI/2011), the ITAT, Delhi Bench observed as under:

“23. It is also noteworthy in this regard that the TPO has nowhere disputed the Appellant's contention to the effect that it was not possible for the Appellant to document every record of receipt of the services in question, since the services were received by the Appellant in the form of directions and recommendations through e-mails/phone calls/some reports, etc. In spite of the nature of the services received, the Appellant had, along with its reply, appended as Annexure-1, samples of evidence of availment of such services. Copies of the said Annexure-1 to the Appellant's reply have been filed before us. Having gone through the same, we find the contents

18 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. thereof to be amply supportive of the claim of the Appellant. The TPO's Order is found to have been passed in 'utter oblivion of these details also. 27 In 'CIT vs. EKL Appliances Ltd.', vide order dated 29.03.2012 passed in ITA Nos.1068/2011 and 1070/2011 (copy placed on record), the Hon'ble Delhi High Court has, inter alia, observed that Rule 10B(1)(a) of the Rules does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the Appellant to have incurred the same, or that in the view of the revenue the expenditure was un-remunerative, or that in view of the continued losses suffered by the Appellant in his business, he could have faired better, had he not incurred such expenditure; that these are irrelevant considerations for the purpose of Rule 10B; that it is for the Appellant to decide whether or not to enter into the transaction; that though the quantum of expenditure can be examined by the TPO as per law, in judging the liability thereof as business expenditure, the TPO has no authority to disallow the entire expenditure or a part thereof on the ground that the Appellant has suffered continuous losses,' that the financial health of an Appellant can never be a criterion to judge the allowability of an expense; that so long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purpose of business, it is no concern of the TPO to disallow the same on any extraneous reasoning; and that as provided in the OECD guidelines, the TPO is expected to examine the international transaction as he actually finds the same and then make suitable adjustment, but a wholesale disallowance of the expenditure, particularly on extraneous grounds is neither contemplated, nor authorized.” 6. In the case of AXA Technologies Shared Services Pvt. Ltd. (IT (TP) A No. 659/Bang/2012), the ITAT, Bangalore Bench observed as under:

“9. The action of the TPO in determining the ALP of management fees at NIL is not justified because the Appellant has paid the management fees under the agreement wherein the services provided by the AE has been enlisted Therefore, without giving a finding that the Appellant has also incurred expenditure in respect of the same services over and above the management fees paid to the AE it cannot be said that the Appellant has not received the alleged management services. Thus only when it is found that the Appellant has also incurred the expenditure on account of the same services and also paid the management fees to the AE then the TPO/A.O may come to the conclusion that the Appellant has paid the management fees without availing the services from the AE. Even otherwise when

19 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. the management fees paid under the agreement and there is no finding by the authorities below that the same services also availed by the Appellant separately from 3rd party and booked the expenditure in the profit and loss account then determination of the ALP at NIL is not acceptable.” 6.11 Considering the ratios laid down in the above cases, we are inclined to accept the contention of the assessee. However, we also noticed from the records that assessee entered into agreement with other AEs to get the services and to compensate for the services. But, the compensations made by assessee are USD $ 134,000 for 3 quarters and USD 148,000 for 4th quarter. As read from the agreement, it gave an impression that it is on actual basis. The relevant clauses of the agreement are reproduced below:

“3. Compensation: As compensation for the services to be provided by the Service Provider pursuant to this Agreement, the Services Provider shall be entitled to receive from the Company compensation as specified in Annex 2 and as updated from time to time by the agreement of the parties. The Service Provider shall furnish to the Company a quarterly invoice for the compensation due from it. Payment will be made within 15 days following the receipt of the invoice. All payments will be made in US Dollar. The Company shall not apply withholding taxes to payments made to the Services Provider unless required to do so under the provisions of their respective local laws. Annex 2 – Compensation The Services Provider shall be entitled compensation to be computed at cost plus mark up of 5% (or such other percentage as may be mutually agreed from time to time). For the purpose of this Article, Cost shall include all operating expenses allocable/attributable to the Company including but not limited to, normal recurring costs such as office, communication charges, salaries, employee benefits, depreciation, amortizations, assets written off and loss on foreign exchange translations. Cost shall specifically exclude interest paid and loss on sale of fixed assets.” 6.12 But, in actual practice, it is paid on fixed compensation basis. In our considered view, TPO should have made separate bench

20 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. marking for all the international transactions. But, he chose to accept the TNMM on the basis for allowing other international transactions. In our view, for the management services, TPO should evaluate the nature of services and the compensation for the same and should be bench marked separately considering the compensation adopted by the assessee. It may be classified under Royalty or FTS. We noticed that the additional evidences submitted by the assessee in paper book are all relating to assistance to assessee on the regular business and assistance in processing and administration issues. This is in support of overall system introduced in the business i.e. like ERP solutions. TPO should bench mark this transaction separately and we do not agree with TPO that the ALP for this transaction as “NIL”. Accordingly, this issue is remitted to the file of TPO to bench mark the transaction separately and grounds raised by the assessee are partly allowed.

21 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. 7.1 The assessee further stated that the Hon'ble ITAT, Hyderabad in the assessee in case for the AY 2011-12 vide ITA No.497/HYD/2016, has granted relief to the assessee by considering the fact CCDs were denominated in Indian currency and consumed in India , the appeal against which is still pending before High court. Further the assessee has provided benchmark results from the information available from NSDL website, in which average coupon rate range from 0.50% to 16.50% with an arithmetic mean of 12.50%, which is more than PLR rate 12.26, which is appropriate to benchmark interest on CCD.

7.2 The TPO rejected the submissions of the assessee and observed that the assessee paid an interest of 12% to Its AE during the F.Y. under consideration as interest on compulsory convertible debentures (CCDs). Further, he observed that as per the RBI guidelines the CCDs are in the nature of loans. In various decisions the Hon'ble ITAT has clearly held that on international loans, LIBOR is appropriate for benchmarking. The ITAT decision in the case of Foursoft Ltd, Market Tools, Aurobindo Pharma Ltd, Dr. Reddy Laboratories etc. upheld the use of LIBOR.

7.3 Further, he observed that on perusal of the financial statements of the company, the revenues as well as the profits of the taxpayer have significantly increased over the last three years (upto F.Y. 2012-13 to 2013-14). Thus, the creditworthiness of the assessee is much better. Considering the tenure and nature of the transaction being CCDs, LIBOR plus 200 points is appropriate.

7.4 In view of the above reasons the TPO adopted LIBOR plus 200 basis points. The average 1 year Libor during the year is 0.63%. Thus the total interest payable worked out to 2.63% as arm’s length interest.

7.5 The total amount of interest paid/payable as per form 3CEB is Rs. 18,14,93,230/-. The arm’s length price at LIBOR plus 200 basis

22 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. points determined at Rs. 3,97,77,266/-. Thus, the excess interest paid of Rs. 14,17,15,964/- is treated as adjustment to be added to the total income of the assessee. When the assessee raised objections before the DRP, the DRP upheld the addition made.

7.6 Before us, ld. AR submitted that the issue under consideration is squarely covered by the decision of the coordinate bench of this Tribunal in assessee’s own case in ITA No. 497/Hyd/2016 for AY 2011-12 vide order dated 13/01/2017.

7.7 Before us, ld. DR filed written submissions, which are as under:

“3. On the argument of the assessee that CCDs should be treated as part of equity and not as loans, it is submitted that the said argument is self-contradictory. If CCDs are part of equity, finance cost could not have been debited to P&L Account. Till the date of conversion, CCDs would be of the character of debt. It is humbly submitted that though the jurisdictional bench have decided in favour of the assessee for AY 2011-12, there are later decisions of Hon'ble ITAT which support that CCDS are in the nature of debt and hence the interest is amenable to TP adjustment. In the case of Granite Gate Properties Pvt Ltd [2029] 101 taxmann.com 38 (Delhi - Trib.), interest on FCCDs was treated as international transaction and the dispute was on the rate adopted for adjustment to ALP. 4. Reliance is also placed on the decision of Hon'ble Delhi High Court in the case of Zaheer Mauritius (230 Taxman 342) where in it was held that "There is no dispute as to the nature of Compulsorily Convertible Debentures. A debenture indisputably creates and recognizes the existence of a debt and till it is discharged, either by payment or by conversion, the debenture would essentially represent a debt. A Compulsorily Convertible Debenture is a debt which is compulsorily liable to be discharged by conversion into equity. Any amount payable by the issuer of debentures to its holder would usually be interest in the hands of the holder". It is humbly submitted that the decision in case of Zaheer Mauritius was not brought to the notice of Hon'ble ITAT in the proceedings for the earlier year in case of the assessee. The decision is squarely on facts similar to the present facts.” 7.8 Considered the rival submissions and perused the material on record. As submitted by the assessee, the issue in dispute is squarely

23 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. covered by the decision of ITAT in assessee’s own case (supra) wherein the coordinate bench has held as under:

“9. Coming to the issue of adopting the benchmark rate in Indian context, assessee has justified the ALP not only on the basis of SBI PLR, which was at 12.26% for the year under consideration, but also from the data from NSDL website in which average coupon rate ranged from 0.50% to 16.50% with an arithmetic mean of 12.50%. These rates were already before the TPO. Therefore, we are of the opinion that there is no need to restore the matter to the file of the AO for re-examination, when assessee has justified the issuance of CCDs at 12%. In view of that we are of the opinion that the rate at which the CCDs were given are within the range, therefore, no further addition can be considered under the TP provisions. In view of that, the addition so made is deleted and grounds of the assessee from 4 to 6 are accordingly considered allowed. Since the addition is deleted, we do not wish to consider Ground Nos. 1 & 2 as has already been indicated above.” Following the said decision, we direct the AO/TPO to delete the addition made on this count. This ground is allowed.

8.1 The TPO submitted that with the retrospective introduction of explanation to section 92B, receivables form a part of international transaction and no further analysis is required. The assessee further submitted that notional interest cannot be charged as primary transactions were considered at ALP. TPO rejected the submissions of the taxpayer as baseless.

24 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. 8.2 The TPO observed that various judicial forums did not consider the above facts. Hence, once the transaction is an international transaction then the Arm's Length Price has to be determined. It is not the case of aggregation of transactions which the taxpayer is projecting. Reliance is placed on Chiel India Pvt. Ltd [TS145-ITAT- 2014(DEL)-TP1, which also took into account judgement dated 07-10- 2010 of ITAT Bangalore Bench in the case of M/s Logix Micro Systems Ltd. Vs. ACIT (ITA no. 524/Bang/2009). In view of these observations, the TPO charged interest as per the rate of interest available on SBI website given on short term deposits. Accordingly, the TPO worked out the interest on outstanding receivables received beyond due date at Rs. 88,12,925/- and the same is made as adjustment u/s 92CA(3) of the Act.

8.3 When the assessee raised objections before the DRP, the DRP upheld the action of TPO.

8.4 The ld. AR brought to our notice the details of outstanding from the TPO order in page 12 and except few invoices, all other outstandings are less than 6 months. He relied on the case of C3i support Services in ITA no. 503/Hyd/2017, the Hyderabad ITAT allowed the outstanding period of 6 months. He submitted that the average period of outstanding in the case of assessee is 135 days. Further, he relied on the decision in the case of Netcracker Technology Solutions (India) Pvt. Ltd., in ITA No. 1746/Hyd/2017, order dated 31/01/2019.

8.5 Ld. DR submitted written submission, which is as under: “5. On the issue of TP adjustment on account of delay in realization of receivables, it is humbly submitted that the sample copies of invoices mentioned by the assessee are apparently in contradiction to the intercompany agreements (copies are also not filed with the stay application). As mentioned by the DRP as per the intercompany agreement, the payments are to be made within 15 days. TPO adopted 30 days period. There is delay ranging between 44 days to 314 days. The assessee could not bring any evidence to counter the terms

25 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. of intercompany agreement. Merely because the AEs did not charge interest, the transaction would not be outside the purview of TP adjustment. As per the provisions of the Act (sub- clause (c) of clause (i) of Explanation to section 92B(2)), the interest on receivables is an international transaction. Reliance is also placed on the decision of Hon'ble ITAT Delhi Bench in the case of Bechtel India Private Limited [2017] 85 taxmann.com 121 (Delhi - Trib.). 6. Reliance in this regard is also placed on the decision of Hon'ble Delhi High Court in the case of Mckinsey Knowledge Centre India (P.) Ltd[2018] 96 taxmann.com 237 (Delhi), wherein it was held that if there is any delay in realization of a trading debt arising from sale of goods or services rendered in course of carrying on of business, assessee is liable to be visited with transfer pricing adjustment on account of interest income short charged/uncharged. This decision of the High Court is also confirmed by the Supreme Court which dismissed the SLP as reported in [2019]102 taxmann.com 439 (SC)” 8.6 Considered the rival submissions and perused the material on record. In the case of Netcracker Technology Solutions (India) Pvt. Ltd., (supra), the coordinate bench held as under:

“9. Considered the rival submissions and perused the material on record. We noticed that the TPO has made the independent TP analysis and found that the tax payers margins are within +/- 3% variation of the comparable companies and has not made any working capital adjustment. However, noticed that assessee has huge outstanding in receivables and made adjustment on interest receivable on such outstandings. We noticed that TPO has allowed the credit period at 90 days as per agreement and wherever assessee allowed the credit period beyond 90 days, he made the adjustment. In our view, TPO has made the adjustment wherever assessee has allowed the credit period beyond 90 days and failed to acknowledge that assessee has received certain payment within 90 days also. We are in agreement with ld. AR that we need to consider the overall average credit period for the AY or should be compared with the industry average. TPO has applied 90 days period selectively. In our view, we need to calculate the average period of collection for the period and in case any deviation noticed that the period allowed beyond reasonable period should alone be considered for making adjustment. 9.1 In the given case, ld. AR also disputed the fact that no such period was agreed between the parties that the credit period was fixed at 90 days. Therefore, in our view, TPO should calculate the average of collection for the year under

26 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. consideration of all the transactions carried on by the assessee. In case, it is found that such collection period is beyond 90 days, he can do the adjustment only to the extent it crossed 90 days. TPO cannot calculate the collection period selectively for those which are beyond 90 days. Therefore, we remit this issue back to the TPO to calculate the average collection period for this AY and determine the adjustment as per the above directions. Accordingly, the grounds raised by the assessee on this issue are treated as allowed for statistical purposes.” Following the said decision, we remit this issue back to the file of TPO to calculate the average collection period for this AY and determine the adjustment as per the above directions. Accordingly, the grounds raised by the assessee on this issue are treated as allowed for statistical purposes.

“4.1 On the facts and in the circumstances of the case and in contrary to law, the Ld. AO / Ld. TPO erred in rejecting the transfer pricing ('TP') documentation and the economic analysis undertaken by the Appellant without any robust reasons to determine the arm's length price (' ALP') for receipt of management services. 4.2 On the facts and in the circumstances of the case and in contrary to law, the ld. AO/ld. TPO erred in not satisfying any of the conditions prescribed u/s 92C(3) of the Income-tax Act, 1961 (‘the Act’) while making TP adjustments and accordingly the order passed by the ld. TPO/Ld. AO should be set aside in entirety.” 9.1 The above grounds are general in nature and interconnected to Ground No. 2, hence, need no adjudication.

27 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. from the Profit & Loss account that the assessee company has debited Rs.37,36,48,729/- to P&L account towards interest expense under the head finance cost. Since the assessee has investments, income arising from which is exempt in nature and also incurred interest expense on the borrowings, disallowance u/s. 14A of the I.T. Act, 1961 is squarely applicable.

10.1 During the course of scrutiny proceedings, the assessee was asked to explain why disallowance U/s. 14A should not be made. In response, the assessee submitted as under:

"The company has earned dividend from mutual funds amounting to Rs.55,91,455/- which is exempt u/s 10(35) of the Act. However, the said investments in mutual funds were made by the company in the earlier years and no fresh investments were made by the company during the year under consideration. Accordingly, there is no expenditure incurred in relation to the said investment. Hence, the provisions of section 14A of the Act read with Rule 8D of the IT Rules are not applicable.” 10.2 The AO observed that the contention of the assessee is not tenable having regard to the accounts of the assessee. The assessee's above submissions are also not satisfactory in explaining the correctness of the claim in respect of expenditure incurred in relation to earning of exempt income. Though there is no fresh investment, the assessee could not establish that the investment made earlier were out of its own funds. In the absence of evidence that the borrowed capital was exclusively utilized for the specific purpose, there could be no presumption that borrowed funds were used for such specific purpose and not for investments. The matter has to be decided on the basis of facts and not on presumptions. Until and unless nexus is shown with reference to assessee's account that the investments were financed from own capital, the rule of apportionment prescribed by Rule 8D of Income Tax Rules, 1962, mandatory, w.e.f. Asst. Year 2008-09 shall apply. The deduction u/s. 14A is a statutory disallowance, constituting a complete code in itself.

28 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. 10.3 The AO observed that it is pertinent to mention here that Hon'ble Apex Court in the case of Godrej & Boyce Mfg. Co. ltd. Vs. Oy. CIT held that Rule 8D can be applied w.e.f. A. Y. 2008-09 in the cases where the Assessing Officer is not satisfied with the accounts of the assessee. The expenditure directly relates to exempt income gets disallowed under Rule 8D(2)(i) of Income Tax Rules, 1962. The expenditure incurred towards interest which is not directly attributable to any particular income or receipt, the disallowance has to be computed on proportionate basis in accordance with Rule 8D(2}(ii) of Income Tax Rules, 1962. Further, 0.5% of the average value of investments gets disallowed under Rule 8D(2)(iii) of Income Tax Rules, 1962. Since it is not possible to identify the direct expenditure relating to exempt income in all the cases, the legislature in its wisdom considered to disallow the expenditure on proportionate basis as per Rule 8D(2)(ii) and (iii) of Income Tax Rules, 1962.

10.4 Further, the AO observed that on perusal of the details filed and considering the facts and circumstances of the case, no expenditure directly relating to earning of exempt income is found to be incurred in this case. Therefore, disallowance under Rule 8D(2)(i) of Income Tax Rules, 1962, is not warranted. The assessee has debited a sum of Rs.37,36,48,729/- towards interest on borrowed funds. The assessee could not prove that the interest expenditure is directly attributable to taxable receipt. Therefore, disallowance under Rule 8D(2)(ii) of Income Tax Rules, 1962, is applicable. The assessee also claimed the indirect administrative expenditure of Rs.43.22 crores towards employee benefit expenses and Rs.145.00 crores towards other expenses which got direct and proximate nexus with investment activity which yields exempt income. Therefore, disallowance under Rule 8D(2)(iii) of Income Tax Rules, 1962, is warranted in this case.

10.5 In view of the above observations, the AO computed the disallowance u/s 14A as under:

29 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. to exempted income (interest paid on loan for investment in shares & MF Nil 2. Interest expenditure which is not directly attributable to particular receipt is worked out as per the formula AXB/C, where A. Interest expenditure during the year Rs. 23,19,32,765 (though the assessee has claimed an Amount of Rs. 37,36,48,729/- towards interest, since the TPO in his order u/s 92CA(3), dated 30/10/2017 has proposed adjustment to the tune of Rs. 14,17,15,964/-, the remaining interest viz., Rs. 23,19,32,765/- (Rs. 373648729-141715964) is considered for calculating disallowance) B. The average value of investment : 9,30,00,600 + 9,30,00,600 = Rs. 9,30,00,600 2 C. The average value of total assets: 9145600059+8460765980 = Rs. 880,31,83,020 2

AXB = 231932765 x 930006000 = Rs. 24,50,237

10.6 Ld. AR filed written submission, which is reproduced below:

“The Ld. AO, on the facts and circumstances of the case and in law, has erred in invoking section 14A of the Income TaxAct, 1961 ('the Act') read with Rule 8D of the Income-tax Rules, 1962 ('the Rules') for disallowing interest expenditure amounting to INR 2,915,240 withtout appreciating the fact that the Assessee has not incurred any expenditure which is directly attributable towards investments in mutual funds. Facts of the case: The Company has investments in mutual funds as on 31 March 2014, to the tune of INR 93,000,000. The break-of investments

30 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. held in mutual funds as on 31 March 2014 is mentioned in below mentioned table: Sl. Investments as on 31 March 2014 Amount No. (Rs.) 1. 753,541.65 units of Axis Liquid Fund 9,00,000 2 802,916.19 units of Birla Sunlife Dynamic 15,000,000 Bond Fund 3 791,882.68 units of IDFC SSIF Medium 15,000,000 Term 4 565,060.08 units of Birla Sunlife Income 30,000,000 Plus 5 246,208.34 units of Kotak Bond Scheme 8,000,000 Plan 6 500,112.53 units of Templeton India Low 6,000,000 Duration Fund 7 4,513.29 units of Templeton India Short 10,000,000 Term Income Plan Total 93,000,000

The Company submits that all the aforesaid investments in mutual funds were made in FY 2012-13 and the closing balance of investments in mutual funds as on 31 March 2013 and 31 March 2014 remains statusquo. Relevant extract of the financial statements evidencing the same is attached herewith and marked as Annexure B for your Honour's reference. During the current FY 2013-14, the Company has earned dividend income of INR 5,590,000 on the aforementioned investments in mutual funds. The Ld. Assessing Officer (AO) while passing the final assessment order, has invoked Section 14A of the Act read with Rule 8D of the Rules and disallowed interest expenditure amounting to INR 2,915,240. Our Submission During the captioned FY 2013-14, the Company has debited the following interest costs to the profit and loss account:

S.No. Nature of interest Amount (in INR) Sl. Nature of interest Amount No. (Rs.) 1. Interest on Compulsorily Convertible 181,493,230 Debentures ('CCDs') 2 Interest on working capital loan 176,001,103

31 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. 3 Interest on others - Interest on income tax 7,077,395 - Interest on indirect taxes 128,776 4 Interest on customer deposits 8,948,225 Total 373,648,729

The Ld. AO after removing the impact of transfer pricing adjustment of INR 14,171,5964 from the total interest cost of INR 373,648,729, has considered the balance interest cost of INR 231,932,765 as interest not directly attributable to any taxable receipt and computed the disallowance as per Rule 8D(ii) of the Rules. In this regard, the Company submits the following for your Honours kind consideration: 1. Interest on CCDs (Refer S.No. l in above mentioned Table) - During the FY 2012-13, the Company has borrowed funds to the tune of INR 1,856,258,152 by issuing CCDs. As per the terms and conditions of the CCD agreement, the amount received by issuance of CCD can be only utilized for business expansion plans in India. Accordingly, the Company had utilize the amount borrowed in the form of CCDs for its business purpose and not for making investments in the mutual funds. The rate of interest chargeable on CCDs is around 12%, while the dividend earned on the investments is around 6%. Ideally, no business man would borrow at a high interest rate for making investment for earning low interest/dividend rate. Hence the same also goes to substantiate the fact that the amount of CCDs was not utilized for the purpose of making investments, in the instant case. 2. Interest on working capital loan from banks (Refer S.No.2 of above mentioned Table) - The purpose for which the loan was granted by the bank was towards meeting working capital requirement. In the instant case, the investments are made much prior to availing working capital loan since the said investments are used as a collateral security to avail the aforementioned working capital loan. In other words, the bank has granted the working capital loan to the extent of 85% of the collateral security i.e. investments in mutual funds, produced by the Appellant Company. Therefore, it is not a case where the working capital loan is utilized for making captioned investments. Instead, investments are to be made prior to taking of loan, since it is used as a collateral security. In view of same, the interest expenditure directly relates to loan taken from banks for working capital purpose and hence there is no interest which cannot be directly attributable to any particular income or receipt.

32 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. Copy of letter sanctioning the overdraft limit basis the investment in mutual as a collateral security is attached to the Paper Book at Page No.1021. 3. Interest on others i.e. income tax and indirect taxes (Refer S.No.3 of above mentioned Table) - Interest on income tax and service tax are not in the nature of interest on 'borrowings' and should not be considered for the purposes of computing disallowance as per Rule 8D(ii) of the Rules. Further, the Company itself in the computation of income has disallowed the interest on income tax of INR 7,077 ,395, so, considering the said interest again for the purposes of computing the disallowance as per Rule 8D(ii) of the Rules, would lead to a double disallowance. 4. Interest on customer deposits (Refer S.No.4 of above mentioned Table) - The Company sells its products via distributional channels such as dealers. The dealers have a certain credit period within which they have to pay to the Company. The Company collects deposits from these dealers and pays interest to the dealers on such deposits. Hence, the said interest cost not being in the nature of interest on 'borrowings', should not be considered for the purposes of computing disallowance as per Rule 8D(ii) of the Rules. From the above submission, it can be inferred that each of the interest cost debited to the profit and loss account is directly related to a particular receipt! income, which has a specific end- use. The same are not in the nature of any general borrowing and therefore should not be considered for the purposes of computing disallowance as per Rule 8D(ii) of the Rules. At this juncture, the Company also wishes to reiterate the fact, mentioned in the foregoing paragraphs, that the investments in mutual funds as on 31 March 2014 have remained status-quo as at 31 March 20 13.That is there are no movements in investments as of 31 March 2013 and 31 March 2014. The table belowsummarized the same: Particulars FY 2012-13 FY 2013-14 Opening balance - 93,000,000 of investments Add: Purchases 93,000,000 - made during the year Less: Sale made - - during the year Closing balance of 93,000,000 93,000,000 investments

33 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad.

From the above table it can be inferred that no fresh investments have been made during FY 2013-14 and the investments originally made in FY 2012-13 are the only investments which are carried forward in FY 2013-14 also. Further, the Appellant Company submits that it has always had cash surpluses at the time of making investments and hence the investments in mutual funds have been made out of internal accruals. The statement showing interest free cash surplus funds and borrowings is mentioned herein below: Particulars FY 2013-14 FY 2012- 13 Share capital 56,970,000 56,970,000 Reserves & Surplus Opening Balance 5,880,000 8,110,000 Add: Profit/(loss) for the 148,390,000 (2,230,000) year Closing Balance 154,270,000 5,880,000 Total 211,240,000 62,850,000

The Appellant Company submits that it has been held in a catena of judicial pronouncements that where an assessee possessed sufficient interest free funds of its own, presumption stands established that the investments were made by the assessee out of interest free funds and, therefore, no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. In this regard, the Appellant Company places its reliance on the following judicial precedents (relevant extracts of rulings are reproduced for your Honour' s reference): • CIT vs. Reliance Utilities & Power Ltd. [2009] 178 Taxman 135 (Bombay High Court) "[Para 10] - The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT (Appeals) and ITAT." (Emphasis supplied)

34 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad. • CIT vs. Tin Box Company [2003] 260 ITR 637 (Delhi High Court) Applying the above proposition in the context of section 14A, the Hon'ble Karnataka High Court in the case of CIT & Anr. vs. Microlabs (2016) 383 ITR 490 (Karnataka High Court) has upheld the view of the Tribunal that when investments are made from common pool and non-interest bearing funds are more than the investment in tax free securities, no disallowance of interest expenditure u/s 14A can be made. Similar view has been upheld in the case of CIT vs. HDFC Bank Ltd. [2014J 366 ITR 505 (Bombay High Court). In view of above, the Appellant Company submits that its internal surplus funds have been used for the purposes of making investments in mutual funds. Without prejudice to above, relying on the above judicial precedents, since the amount of own funds (i.e. INR 62,850,000) is less than the total investments in mutual funds (i.e. INR 93,000,000), then the investment to the extent of INR 62,850,000 may be assumed to be out of owned funds and accordingly, disallowance under Section 14A of the Act should at least be restricted to the differential amount (i.e. difference between shareholder funds and investments in mutual funds) of investment. Further, as regards the disallowance computed by the Ld. AO as per Rule 8D(iii) of the Rules, the Company submits that it is a well-settled principle that the intent of Rule 8D(iii) is to disallow overheads/administrative expenditure incurred for purchase/ sale of investment portfolio. As discussed supra, in the instant case, there has not been any fresh investments made during the year. So, no overhead expenses, management fee salary cost etc. have been incurred given that quantum of investments as on 31 March 2014 have remained status-quo as at 31 March 2013. Hence the disallowance made by the Ld. AO to this extent is not in lines with the provisions of the Act and hence to be set aside.” 10.7 Ld. DR relied on the orders of tax authorities.

10.8 Considered the rival submissions and perused the material on record. We notice from the submissions of ld. AR that assessee has not incurred any direct expenditure and with regard to interest expenditure, all the interest paid were towards committed loans like CCD, working capital loan etc. there is no other interest payment

35 ITA No. 2314/Hyd/2018 Adama India Pvt. Ltd., Hyderabad.

towards general category and there was no fresh investment in this year. We are in agreement with the assessee and we direct the AO not to disallow interest under rule 8D(2)(ii). With regard to disallowance under rule 8D(2)(iii), we are not in agreement with the assessee that there is no administrative expenses for the investment, even though, there is no fresh investment, still assessee has to follow up with the investment. Therefore, we sustain the disallowance under rule 8D(2)(iii). Accordingly, ground raised by the assessee is partly allowed.

Pronounced in the open court on 3rd July, 2019.

Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated: 3rd July, 2019. kv Copy to:- 1) Adama India Pvt. Ltd., D.S-13, IKP Knowledge Park, Survey No. 542/2, Genome Valley, Turkapally, Shameerpet, Hyderabad – 500 078. 2) ITO, Ward – 1(3), Hyd 3) DRP -1, Bengaluru 4) Pr. CIT – 1, Hyd. 5) The Departmental Representative, I.T.A.T., Hyderabad. 6) Guard File

S . N o D es c r i p t i o n D a t e I n t l s

1 . D r af t d i c t a t e d o n S r . P . S . / P . S 2 . D r af t p l a c e d b ef o r e a u t h o r S r . P . S / P S 3 D r af t p r o p os e d & p l a c e d b ef o r e t h e s e c o n d M e m b e r J M / A M 4 D r af t d i s c u s s e d / a p p r o v e d b y s ec o n d M e m b e r J M / A M 5 A p p r o v e d D r af t c o m e s t o t h e S r . P . S . / P S S r . P . S . / P . S 6 . K e p t f o r p r o n o u n c e m e n t o n S r . P . S . / P . S . 7 . F i l e s e n t t o t h e B e n c h C l e r k S r . P . S . / P . S 8 D a t e o n w h i c h f i l e g o es t o t h e H e a d C l e r k 9 Date of Dispatch of order