DCIT CEN CIR 8(1), MUMBAI vs. ALLCARGO LOGISTICS LTD, MUMBAI

The ld. CIT(A) erred in not directing the AO/TPO to delete the addition made on account of guarantee commission on the ground that provision of guarantee is not an international transaction.

3. We have seen that the Cross Objection of the assessee is barred by 228 days of prescribed period of limitation. The assessee has filed application for condonation & C.O. 108/M/2016- M/s Allcargo Logistics Ltd. of delay which is supported by the affidavit of Shri Shashi Kiran Shetty, Managing Director of the company. In the affidavit, the assessee has contended that after service of notice of appeal the assessee was required to file Cross Objection within 30 days. However, the same could be filed after 229 days of service of notice of appeal filed by Revenue. It is further contended that the assessee has raised a purely legal issue in the objection that guarantee commission is not an international transaction. The ld. AR of the assessee argued that the Cross Objection raised by assessee is purely point of law and does not require any fresh fact for consideration before the Tribunal. The ld. AR of the assessee further argued that a lenient view may be taken while deciding the application for condonation of delay. On the other hand, the ld. DR for the Revenue not objected in case the delay is condoned.

Considering the contention of both the representative of the parties and the cause of delay explained in the application for condonation of delay, the delay in filing the Cross Objection by assessee is allowed.

S.No. Nature of transaction Amount in Rs. 1 Purchase of cranes 21,64,83,567 2 Incentive (receipts) 27,94,04,356 3 Incentive (payments) 15,51,79,882 4 Loan provided 15,29,67,774 5 Cost allocation 2,64,07,157 6 Investment in shares 6,86,88,000 7 Reimbursement of freight (receipts) 17,59,03,995 Reimbursement of miscellaneous expenditure (receipts) 8 20,05,28,507 Reimbursement of expenses (others) 9 63,47,676 Reimbursement of freight (payments) 10 25,02,47,534 Reimbursement of miscellaneous expenditure (payments) 11 8,31,32,767 Total: 161,52,91,175 5. The Transfer Pricing Officer (TPO) entered into reference and vide notice dated 08.02.2013 asked the assessee to make the submission in support of Arm’s Length Price (ALP) reported in Form No. 3CEB. After hearing the assessee, the TPO made the following upward adjustment into the international transaction:

S.No. International transaction Adjustment Amount (Rs.) 1 Arm’s length interest receivable 18021952 on loans advanced to AE 2 Arm’s length compensation 1428409 receivable on money advanced as share capital lying as share application money. 3 Arm’s length compensation for 32633608 guarantees issued on behalf of AEs 4 Adjustment to the international 29360700 0 transaction of purchases of crane is Rs. 2,93,60,700/-. The 5 & C.O. 108/M/2016- M/s Allcargo Logistics Ltd.

AO is requested to consider this price for allowance of depreciation in respect of these cranes in future Less: Depreciation @ 15% 4404105 24956595 Total arm/s length price as per TPO 7,70,40,564 6. Besides the Transfer Pricing Adjustment (TPA), the AO disallowed the deduction u/s 80IA of the Act. On appeal before the ld. CIT(A), the TPA and disallowance u/s 80IA of the Act was allowed. However, with regard to the adjustment by bench marking guarantee charges @ .05% guaranteed amount given to the AE, the AO was directed to re-compute the charges. Aggrieved by the order of ld. CIT(A), the Revenue has filed the present appeal challenging the deletion of disallowance u/s 80IA and the deletion on account of adjustment of international transaction with regard to purchase of 7 cranes. The assessee in its Cross Objection has challenged the order for re-computing the Guarantee Commission.

Adjustment on account of Corporate guarantee of Rs. 3.26 crore, Ground No. 15 to 19 relates to T.P. Adjustment of Rs. 2.49 crore for purchase of cranes from its AE and Ground No. 20 relates to deduction u/s 80IA(4). Thus, basically there is five effective grounds of appeal are raised in the present appeal.

8. Ground No. 1 to 6 relates to T.P Adjustment of Rs. 1.80 Crore on account of interest of loan advanced to its AE. The ld. DR for the Revenue argued that & C.O. 108/M/2016- M/s Allcargo Logistics Ltd. assessee has advanced a loan of Rs. 4,14,02,724/- its AE, Asia Lines Pvt. Ltd. and Rs.11,15,65,050/- to Allcargo Belgium NV respectively, this loan was advanced to Asia Lines Pvt. Ltd. for five years and Allcargo Belgium NV for three years @ Libor + 300 points. In the T.P. study the assessee stated that the rate at which interest is received by assessee from its AE are in line with interest rate bench mark as per R.B.I. Policy and submitted that the same was at ALP. The TPO on the basis of Crisil Credit Rating determined the bench mark and suggested the adjustment of Rs. 1,80,21,952/-. The ld. CIT(A) deleted the adjustment directing the AO/TPO to delete the adjustment on the basis of decision of Hon’ble Bombay High Court in CIT vs. Tata Autocomp System Pvt. Ltd. (374 ITR 516). On the other hand, the ld. AR of the assessee is relied upon the order of ld. CIT(A). the ld AR for assessee further argued that the ld CIT(A) decided the ground of appeal on the basis of the decision of jurisdictional High Court in CIT vs. Tata Autocomp System Pvt Ltd. and by Mumbai Tribunal in case of Ion Exchange (I) Ltd. vs. ACIT in ITA No. 5109/Mum/2013 and .

9. We have considered the rival contention of the parties and gone through the orders of authorities below. The ld. TPO while making adjustment observed that for Asia Lines Pvt. Ltd. as no details regarding Credit Rating for Asia Lines Pvt. Ltd. was produced and claimed that Credit Rating of Asia Lines Pvt. Ltd. should be adopted as A+. However, the assessee produced the Credit Rating by Crisil for its AE Allcargo Belgium NV as “A+”. Thus, the Credit Rating for Asia Lines Pvt Ltd. was considered by TPO at BBB-. For Allcargo Belgium the TPO observed that the Credit Rating was obtained on 31.10.2013, which cannot be said to be a valid ITA No.4786/M/2015 & C.O. 108/M/2016- M/s Allcargo Logistics Ltd. documentation. Further, the Credit Rating was arrived by taking into consideration the result of Allcargo Belgium on 31.12.2001, 31.03.2012 and 31.03.2013 and all three years are subsequent to the year under consideration. Thus, the Credit Rating claimed by assessee for its AE “A+” was deducted and adopted as “BBB-” and on the basis of information collected by the TPO from Crisil u/s.133(6) for Financial Year 2009-10. The TPO suggested the adjustment of Rs. 1,80,21,952/-. Before the ld. CIT(A) it was argued that Asia Lines Pvt. Ltd. was set up to engage in the business of acquiring and leasing equipment and cranes in the territory of middle east. The loan was provided to AE as capital to enable it to set up its business and to acquire necessary operational resources. Allcargo Belgium mainly was a special purpose vehicle set up by the assessee for holding its various group companies. The loan was given to AE for funding acquisition of company abroad and for providing capital to downstream subsidiaries. The assessee-company given a trade advance to its AE which did not result any income. Further, an amount of Rs. 1,72,30,927/- and Rs. 21,64,83,567/- were adjusted against purchase of cranes by assessee. The ld. CIT(A) while relying upon the decision of Hon’ble Bombay High Court in Tata Autocomp System Ltd. (supra) wherein it was held that ALP in case of loan advanced to Overseas AE should be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. The Hon’ble High Court made the following observations:

“7. We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. v. Dy. CIT [IT Appeal No. 673 (Mum.) of 2006] and Dy. CIT v. Tech Mahindra Ltd. [2011] 12 taxmann.com 132/46 SOT 141 (Mum.) (URO) to reach the conclusion that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr. Suresh Kumar the learned counsel 8 & C.O. 108/M/2016- M/s Allcargo Logistics Ltd. for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra) on the above issue. No reason has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). The Revenue not having filed any appeal, has in fact accepted the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra).

are covered in favour of assessee in assessee’s own case for Assessment Years 2007-08 & 2008-09. It was explained that the Share application money was given in the assessment year 2009-10, but no adjustment by way of interest on delayed allotment of Shares was made.

12. We have considered the rival contention of the parties and have gone through the orders of authorities below. We have seen that similar grounds of appeal arised for consideration of Tribunal in assessee’s own case for AY 2007-08 & 2008-09 in 4910/M/2012 and the same was decided by Tribunal in favour of assessee holding as under:

“6. We have heard the arguments of both the sides and also perused the relevant material available on record. In ground No. 1 of both the present appeals, the assessee has raised a 9 & C.O. 108/M/2016- M/s Allcargo Logistics Ltd. preliminary issue challenging the validity of assessments made by the A.O. u/s 143(3) r.w.s. 147 of the Act for both the years under consideration while in ground No. 2, the assessee has challenged the addition made by the A.O. and sustained by the ld. CIT(A) by way of TP adjustment on account of interest chargeable on the amount of share application money paid to its AE and lying unutilized for a period beyond 60 days treating the same as loan. As agreed by the ld. Representatives of both the sides, the common issue involved in ground No. 2 of the assessee’s appeals for both the years under consideration is squarely covered in favour of the assessee by the latest decision of Delhi Bench of ITAT in the case of Bharti Airtel Ltd., vs. ACIT rendered vide its order dated 11-3-2014 passed in wherein a similar issue was decided by the Tribunal in favour of the assessee holding that the transactions involving payment of share application money could not be treated as international transactions of loan given by the assessee company to its AE merely because there was a delay in allotment of shares. A copy of the said order of the tribunal is also placed on record before us and perusal of the same shows that a similar issue has been decided by the Tribunal in favour of the assessee vide para No. 47 of its order which reads as under:- “47. We find that in the present case the TPO has not disputed that the impugned transactions were in the nature of payments for share application money, and thus, of capital contributions. The TPO has not made any adjustment with regard to the ALP of the capital contribution. He has, however, treated these transactions partly as of an interest free loan, for the period between the dates of payment till the date on which shares were actually allotted, and partly as capital contribution, i.e. after the subscribed shares were allotted by the subsidiaries in which capital contributions were made. No doubt, if these transactions are treated as in the nature of lending or borrowing, the transactions can be subjected to ALP adjustments, and the ALP so computed can be the basis of computing taxable business profits of the assessee, but the core issue before us is whether such a deeming fiction is envisaged under the scheme of the transfer pricing legislation or on the facts of this case. We do not find so. We do not find any provision in law enabling such deeming fiction. What is before us is a transaction of capital subscription, its character as such is not in dispute and yet it has been treated as partly of the nature of interest free loan on the ground that there has been a delay in allotment of shares. On facts of this case also, there is no finding about what is the reasonable and permissible time period for allotment of shares, and even if one was to assume that there was an unreasonable delay in allotment of shares, the capital contribution could have, at best, been treated as an interest free loan for such a period of ‘inordinate delay’ and not the entire period between the date of making the payment and date of allotment of shares. Even if ALP determination was to be done in respect of such deemed interest free loan on allotment of shares under the CUP method, as has been claimed to have been done in this case, it was to be done on the basis as to what would have been interest payable to an unrelated share applicant if, despite having made the payment of share application money, the applicant is not allotted the shares. That aspect of the matter is determined by the relevant statute. This situation is not in purl materia with an interest free loan on commercial basis between the share applicant and the company to which capital contribution is being made. On these facts, it was unreasonable and inappropriate to treat the transaction as partly in the nature of interest free loan to the AE. Since the TPO has not brought on record anything to show that an unrelated share applicant was to be paid any interest for the period between making the share application 10 & C.O. 108/M/2016- M/s Allcargo Logistics Ltd. payment and allotment of shares, the very foundation of impugned ALP adjustment is devoid of legally sustainable merits.”

7. As the issue involved in ground No. 2 of the present appeals as well as all the material facts relevant thereto are similar to the case of Bharti Airtel Limited (supra) decided by the Tribunal, we respectfully follow the said decision of the co-ordinate Bench of this Tribunal and delete the addition made by the A.O./TPO and sustained by the ld. CIT(A) by way of TP adjustment on account of interest chargeable on the amount of share application money paid by the assessee and lying unutilized with its AE treating the same as the transaction of loan. Ground No. 2 of the assessee’s appeals for both the years under consideration is accordingly allowed.”

for AY 2007-08 & 2008-09 in 4910/M/2012, we do not find any merit in the grounds of appeal raised by Revenue and the same are dismissed.

14. Ground No. 10 to 14 relates to T.P. Adjustment on account of corporate guarantee of Rs. 3.26 crore. The assessee has also raised cross objection against the direction of ld. CIT(A) for not deleting the guarantee commission on the ground that provision of guarantee is not an international transaction. The ld. DR for the Revenue relied upon the order of TPO/AO.

15. On the other hand, the ld. AR of the assessee argued that assessee-company has given guarantee to All Cargo Belgium NV of Rs. 458160000/- and to ECO International NV of Rs. 332000000/-. The TPO computed ALP @ 4.13% on the outstanding corporate guarantee. However, the ld. CIT(A) restricted the T.P.

Adjustment to 0.5% based on decision of Mumbai Tribunal in case of Manugraph India Ltd. Vs DCIT in dated 25.03.2015. In alternative, it was argued that the T.P. Adjustment may be restricted to amount determined by the ld CIT(A). The ld. AR of the assessee relied upon the decision of Hon’ble Bombay High Court in CIT v/s Everest Kento Cylinders Ltd. [2015] 378 ITR 57/232 Taxman 307/58 taxmann.com 254 (Bom.) and the decision of Delhi Tribunal in 11 ITA No.4786/M/2015 & C.O. 108/M/2016- M/s Allcargo Logistics Ltd. Bharti Airtel Ltd. vs. ACIT (63 SOT 113). In the rejoinder argument, the ld. DR for the Revenue fairly conceded on factual position. The ld. AR of the assessee would argue that in case the grounds of appeal raised by Revenue is dismissed, the assessee would not press the grounds raised in cross objection that guarantee commission is not an international transaction. However, the issue may be kept open for future reference in case the assessee wishes to agitate again before the court of law.

16. We have considered the rival contention of the parties and gone through the order of authorities below. The TPO noted that the assessee has not reported the aforesaid guarantees as international transaction in Form No. 3CEB and not bench marked in the T.P. study report. The assessee was given show-cause notice dated 19.12.2013 as to why it should not be made bench marked. The assessee furnished in reply dated 06.02.2014. The assessee contended that corporate guarantee transaction is not an international transaction as the condition of relevant transaction having a bearing on profits, income, loss or asset still exist for transaction to qualify as an international transaction. The contention of assessee was not accepted by TPO holding that the amendment in section 92B with retrospective effect from 01.04.2002 brings the transaction within the net of international transaction. This aspect has been upheld by the ld CIT(A) above, and the assessee is in appeal before us by way of Cross Objections. This aspect of the matter has not been seriously pursued before us, as the Cross Objections are quite belated and the ld representative has addressed the issue more on the quantum of the addition made by assessing officer. Accordingly, we proceed to adjudicate the issue based on the ITA No.4786/M/2015 & C.O. 108/M/2016- M/s Allcargo Logistics Ltd. assessment made by the CIT(A) on this aspect. The TPO calculated the guarantee @ 4.13% p.a. on amount based on number of days the guarantee was outstanding during the relevant Financial Year and worked the adjustment of Rs. 3,26,33608/-.

On the rate of guarantee commission, before ld. CIT(A), the assessee submitted that 4.13% was excessive and unreasonable. The assessee referred to the proposal “Yes Bank” to charge guarantee fees of 0.85% p.a., and also to the quotation from HDFC Bank proposing to charge guarantee commission of 1% of the value of guarantee. The ld. CIT(A) observed that rate of interest @ 4.13% for bench marking guarantee adopted by TPO was not supported by any valid material and relying upon the decision of Mumbai Tribunal in Manugraph India Ltd. vs. DCIT in dated 25.03.2015 directed the AO to recompute the T.P.

Adjustment by bench marking guarantee charge at 0.5% of the guarantee given by assessee to its AEs and granted partial relief to the assessee. This is in line with the judgment of Hon’ble Bombay High Court in Case of Everest Kanto Cylinders Ltd (supra).

raised by Revenue is dismissed and the cross objection raised by assessee is dismissed being infructuous.

18. Ground No. 15 to 19 relates to T.P. Adjustment of Rs. 2,49,56,595/- for purchase of cranes. The ld. DR for the Revenue argued that the AEs had purchased the cranes from third parties in and around the same time and sold the cranes to assessee. The TPO after allowing the depreciation suggested the adjustment of Rs. 2,49,56,595/-.

The approach of ld. CIT(A) was not correct while accepting the bench mark.

However, the AO disallowed the entre T.P. Adjustment without allowing depreciation which was considered by ld. CIT(A) and allowed accordingly. The ld. AR relied upon the decision of Mumbai Tribunal in case of Global Payments Asia Pacific (India) (P.) Ltd. v. DCIT [2017] 78 taxmann.com 262 (Mumbai Trib.) and in ACIT vs. Koch Chemical Technology Group (I) Ltd. (ITA No. 8091/M/11 dated 30.11.2015). & C.O. 108/M/2016- M/s Allcargo Logistics Ltd.

S. Particulars Year Dt. Of Sale Price Purchase Difference No. of purchase/ (USD) for price USD mfr. sale for AE the AE (USD) for the AE 1 CK 2500 crane 2000 1150000 Invoice not available 2 Terex American HC-110 1994 24.6.2008/ 625000 1192000 243000 Crawler Crane 11.10.2009 Manitowoc Terex American HC-110 24.6.2008/ 3 2007 810000 Crawler Crane AC 4209 11.10.2009 4 Crane 2000 Demag AC- 2000 31.01.2008 464642 620429 80 Hydraulic Truck /8.7.2009 5 Terex American HC-110 2002 21.07.2008 599960 1173880 0 Crawler Crane AC 3914 /8.10.2009 6 Terex American HC-110 2001 21.07.2008 573920 Crawler Crane AC 3803 /8.10.2009 7 Crane AC-3893 2000 13.09.2009 240000 272000 /30.09.200 9 & C.O. 108/M/2016- M/s Allcargo Logistics Ltd.

After perusing the details and the invoices furnished by assessee, the TPO made the adjustment in the following manner: “9.5 On going through the above tabulation it is seen that the cranes at S.No. 2 & 3 above purchased for USD $ 11,92,000 by the AE at USD $ 1435000. Thus the AE has purchased the cranes used them for a year and yet sold them for USD 1435000. As can be seen from the purchase invoices produced by the assessee, the purchases of the AE are from 3rd parties and hence can be taken to be as CUP. Having used these cranes for a year, it would be reasonable to assume a minimum depreciation of 10%. Hence the arm's length sales value of the crane in the hands of the AE would be 1192000 X 90% i.e. = 1072800. Hence the assessee has paid an excess consideration on these cranes amounting to USD 362200. Assessee was therefore required to show cause as to why an adjustment of USD 362200 should not be made to the transaction of purchase of two cranes by the assessee from the AE. The rupee equivalent of the adjustment is proposed to be taken at Rs. 1,62,99,000/- (taking one USD @ Rs. 45/-). 9.6 Similarly as regards the crane listed at S.No.1 of the tabulation, the assessee has not been able to produce the purchase invoice. The crane is also very old (manufactured in the year 2000). In the absence of any supporting documentation, the same ratio of adjustment proposed in para 6.5 above, is proposed to be applied to this transaction as well. This crane is purchased by the assessee for a consideration of USD $ 1150000. The adjustment as proposed in para 6.5 above is 25.24% of the purchase price paid by the assessee. Hence applying this ratio, the adjustment of USD $ 290260 or INR 1,30,61,700/- is proposed to be made to the transaction of purchase of this crane. Assessee was therefore required to show cause as to why this adjustment of INR 1,30,61,700/- should not be made. 9.7 To sum u this discussion an adjustment of Rs.2,93,60,700/- was proposed to the international transaction of purchase of cranes.”

expenditure on freight, insurance, transport, performance of working test, supervision of process of inspection, approval purchases, dispatch and delivery of Cranes. All the expenses were born by assessee. In alternative, it was pleaded that ld. TPO cannot make cherry picking of only those transaction wherein the sale price of cranes were more than the purchase price by the AE and the adjustment if any should be only on net profit earned by AE i.e. USD 14651/- (which is without considering expenses). The ld. CIT(A) after considering the fact of the case, the submission made and the decision of Bangalore Tribunal in case of Asia

Electronics vs. ADIT (2011) 9 taxman.com(Bangalore) wherein it was held that in absence of identical transaction,as opted by assessee, the valuation determined by 16 & C.O. 108/M/2016- M/s Allcargo Logistics Ltd. registered Valuer would be the most appropriate means under the CUP Method and directed the AO to delete the addition. Though, the ld. CIT(A) has referred to the decision of the Bangalore Bench of the Tribunal for the proposition that the valuation report of an expert is a valid cup data. So, however, in the present case, the certificate so given by the Chartered Engineer is a qualified one. It has been noted by the TPO in para-9.2 of his order. Moreover, we find that in relation to the transaction of purchase of CK-2500 Crane for USD 11,50,000, there was no information regarding the purchase price in the hands of AE. Secondly, with respect to purchase of other two Cranes, one of the Cranes was purchased from AE for USD 8,10,000 as against the purchase price in the hands of the AE of USD 5,22,000/-. At the time of hearing, it was put to the ld. representative for the assessee that in the context of the purchase of Crane for a consideration of USD 8,10,000, the principle adopted by the CIT(A) is not tenable. However, the plea of the ld. representative was that an appropriate reduction on account of depreciation be allowed by determining the ALP in such transaction. This plea of the assessee in our view is quite reasonable and therefore, we affirm the decision of the CIT(A) except to the extent of retaining adjustment in relation to purchase of Crane for USD 8,10,000 from the AE (depict as item

3 in the tabulation in para-9.4 of the order of the TPO). In this regard, the ALP shall be determined after allowing for a depreciation of 10%. The & C.O. 108/M/2016- M/s Allcargo Logistics Ltd.

Assessing Officer is directed to re-compute the ALP accordingly. Thus, on this aspect revenue partly succeeds.

is covered in favour of assessee in assessee’s own case for AY 2004-05 to AY 2009-10. The ld. AR of the assessee appreciated the fairness of ld. DR for the Revenue and would argue that the ld. CIT(A) granted the relief to the assessee on the basis of special bench decision in assessee’s own case for AY 2004-05 to 2009-10. It was further argued that against the decision of Special Bench, the Revenue filed appeal before the Hon’ble jurisdictional High Court and the same has been dismissed vide order dated 21.04.2015 in of 2013 [374 ITR 645 (Bom.)].

23. Considering the contention of ld. representatives of the parties wherein both the parties agreed that the grounds of appeal is covered in favour of assessee. Thus, the ground no. 20 raised by Revenue is dismissed.

24. In the result the appeal filed by the revenue is dismissed.

CO No. 108/Mum/2016 25. Considering the facts that the appeal filed by the Revenue is dismissed, the C.O. filed by assessee have become infructuous, hence, dismissed.