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Income Tax Appellate Tribunal, MUMBAI BENCHES “J”, MUMBAI
Before: SHRI G.S. PANNU (VP) & SHRI RAM LAL NEGI (JM)
O R D E R PER RAM LAL NEGI, JM These are the cross appeals filed by the assessee and the revenue against the assessment order dated 29.01.2015 passed by the AO pursuance to the directions dated 11.12.2014, passed by the Ld. Dispute Resolution Panel-II (DRP), Mumbai, u/s 144C (5) of the Income Tax Act, 1961 (for short ‘the Act’), Assessment Year: 2010-2011 2. Brief facts of the case are that the assessee company engaged in the business of manufacturing auto component, filed its return of income for the assessment year under consideration declaring the total income under the normal provisions as nil and book profit of Rs. 18,02,656/- u/s 115JB of the Act. Since, the assessee had entered into international transactions during the previous year, the AO referred the said transactions to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act for determining Arm’s Length Price (ALP) and as per the adjustment made by the Ld. TPO an amount of Rs. 6,15,13,667/- was added to the income of the assessee. The AO also made addition on account of disallowance of interest expenditure amounting to Rs. 3,65,37,000/- claimed by the assessee and addition of Rs. 4,56,21,337/- u/s 14A of the Act and accordingly determining the total income of the assessee at Rs. (-) 92,21,31,724/- under the normal provisions of law and book profit of Rs. 22,74,23,993/- u/s 115JB of the Act.
The assessee filed objections in respect of the variations proposed by the Assessing Officer before the Ld. DRP. The Ld. DRP after hearing the assessee passed direction dated 11.12.2014 on the basis of which the AO completed the assessment order determining the total income of the assessee at Rs. (-) 98,73,24,190/- and book profit of Rs. 22,74,23,993/-u/s 115JB of the Act. Against the impugned order passed by the AO pursuant to the directions of the Ld. DRP, the assessee is in appeal before the Tribunal.
4. The assessee has challenged the assessment order passed as per the direction of the Ld. DRP by raising the following effective grounds of appeal:
A) “Transfer Pricing Matters On the facts and circumstances of the case, and in law:
Ground No. 1: Transfer Pricing Adjustments Assessment Year: 2010-2011 The Learned Assessing Officer (‘Ld. AO’) pursuant to the directions of the Hon’ble Dispute Resolution Panel (Hon’ble DRP) has erred in disregarding the arm’s length price, as determined by the Appellant in the Transfer Pricing (“TP”) documentation maintained by it in terms of section 92D of the Income Tax Act, 1961 (‘the Act’) read with Rule 10D of the Income Tax Rules, 1962 (‘the Rules’) and making a TP adjustment of: a) Rs. 21,41,569 to the international transaction pertaining to sale of finished goods to associated enterprise (‘AE’). b) Rs. 25,09,990 to the international transaction pertaining to provision of engineering services to AE. c) Rs. 2,82,06,640 in respect of the corporate guarantee extended by the assessee on behalf of the AEs And by holding that these transactions do not satisfy the arm’s length principle envisaged under the Act.
2. Ground No. 2 : Violation of principles of natural justice by making adjustment without issuing show cause notice The Learned Transfer Pricing Officer (‘Ld. TPO’) erred in not issuing a show cause notice nor granted the Appellant an opportunity to provide its submissions against the approach adopted and has violated the principles laid down in section 92C (3) of the Act.
Grounds in respect of international transactions pertaining to sale of finished goods to AE and provision of engineering services of AE.
3. Ground No. 3: Erroneous application of Transactional Net Margin Method (‘TNMM’) at entity level and erroneous rejection of audited transactional profitability analysis undertaken by the Appellant Assessment Year: 2010-2011 The Hon’ble DRP/Ld. TPO erred in applying TNMM at entity level to determine the arm’s length nature of the international transactions pertaining to sale of finished goods to AE and provision of engineering services to AE and rejecting the audited transactional profitability analysis conducted by the Appellant under TNMM with respect to the aforesaid transactions.
Ground No. 4 : Errors in computation of Profit Level Indicator (‘PLI’) of the Appellant at entity level Without prejudice to the above, the Ld. AO/Ld. TPO committed errors in computing the PLI of the Appellant at entity level. While doing so the Ld. AO/Ld. TPO have ignored the directions of the Hon’ble DRP to consider the arithmetically correct operating margins of the assessee and the comparable companies by following a consistent approach.
5. Ground No. 5: Errors in computation of PLI of the comparable companies.
Without prejudice to the above, the Ld. AO/TPO has committed errors in computing the PLI of certain comparable companies with respect to the export of finished goods to AE. While doing so the Ld. AO/Ld. TPO have ignored the directions of the Hon’ble DRP to consider the arithmetically correct operating margins of the assessee and the comparable companies by following a consistent approach.
Ground No. 6: Erroneous consideration of companies at entity level as against comparable segment and rejection of certain comparable companies for cause of insufficient data.
Without prejudice to Ground No. 4, 5 and 6 above, the Ld. AO/TPO has erred in computing the PLI of Kriti Industries (India) Limited and Prima Plastics Limited (comparables with respect to export of finished goods) and K L G System Limited (comparable with Assessment Year: 2010-2011 respect to provision of engineering services) at entity level instead of PLI for comparable segment. The Ld. AO/TPO has also erred in rejecting Peacock Industries Limited and Shaily Engineering Plastics Limited (comparables with respect to export of findished goods) for cause of insufficient data inspite of the fact that the annual reports of the companies were submitted to the Ld. TPO.
7. Ground No. 7: Rejection of use of multiple year data for comparables The Hon’ble DRP/Ld. AO/Ld. TPO erred in considering the single year data for the comparables i.e. data for Financial Year ‘(FY’) 2009-10 only and disregarding multiple year data which was considered by the Appellant in accordance with the provisions of Rule 10B (4) of the Rules.
Grounds pertaining to the international transaction of provision of corporate guarantee
8. Ground No. 8: Computing arm’s length guarantee fee without conducting any analysis of comparable uncontrolled transaction.
The Ld. AO/Ld. TPO erred in computing arm’s length price for provision of guarantee without conducting any analysis for selection of most appropriate method and identification of comparable uncontrolled transaction.
B) Corporate Tax Matters.
9. Ground No. 9: Non application of provision of section 14A of the Act read with Rule 8D With regards to the investments made by the Applicant in joint ventures and subsidiary companies which are engaged in the similar business activities as that of the Applicant and as the object of making the said investments is to hold a Assessment Year: 2010-2011 controlling/dominant stake and not to earn income by way of dividend, the provisions of section 14A of the Act read with Rule 8D has no application and no disallowance can be made and even the disallowance of Rs. 6,14,78,616 offered by the Applicant in the Return of Income ought to be deleted.
10. Ground No. 10: Erroneously invoking rule 8D of the Income- tax Rules, 1962 and thereby disallowing additional expenditure under section 14A of the Act.
Without prejudice to Ground No. 9, on the facts and circumstances of the case and in law, the Ld. AO/Hon’ble DRP has erred in erroneously invoking the provisions of Rule 8D and thereby disallowing amount of Rs. 4,56,21,537/- as additional disallowance under section 14A read with Rule 8D of the Act.
Ground No. 11: Erroneously applying rule 8D of the Income- tax Rule, 1962 and thereby disallowing additional expenditure under section 14A of the Act.
Without prejudice to the Ground 9 and 10, on the facts and circumstances of the case and in law, the Ld. AO/Hon’ble DRP has erred in erroneously applying the provisions of Rule 8D and thereby disallowing amount of Rs. 4,56,21,337 as additional disallowance under section 14A read with Rule 8D of the Act.
12. Ground No. 12: Erroneously invoking rule 8D whilst computing book profits under section 115JB of the Act.
Without prejudice to the Ground 9, 10 and 11, on the facts and circumstances of the case and in law, the Ld. AO/Hon’ble DRP has erred in erroneously invoking the provisions of Rule 8D and thereby disallowing additional amount of Rs. 4,56,21,337 whilst computing book profits under section 115JB of the Act.”
Before us, the Ld. counsel for the assessee submitted that the assessee does not want to press Ground No. 1 to 7 of the appeal. Hence, we dismiss Ground No. 1 to 7 of the assessee’s appeal as not pressed. Assessment Year: 2010-2011
6. Ground No. 8 pertains to computation of arm’s length guarantee fee by the Ld. TPO on the basis of which the AO made addition of Rs. 4,23,09,960/-. The Ld. counsel for the assessee submitted that since the Ld. TPO has determined arm’s length price for provision of guarantee without taking any analysis for selection of most appropriate method and identification of comparable uncontrolled transaction, the Ld. DRP ought to have deleted the addition. The assessee entered into the transaction of provision of guarantee in respect of loan taken by two AEs namely Kunstsoffetechnik GmbH (“TKT”) and TACO Grundstucksverwaltungs GmbH, Germany (“TACO GmbH). The Ld. TPO made an addition of Rs. 4,23,09,960/- on account of guarantee fees in respect of provision made by the assessee observing that the assessee should have charged the guarantee fee @ 3% of the total loan taken by the associate enterprises. The Ld. counsel further contended that the TPO has erred in computing ad-hoc arm’s length price for provision of guarantee without taking any analysis for selection of most appropriate method and identification of comparable uncontrolled transaction. The Ld. counsel further submitted that in the light of the aforesaid facts, the Ld. DRP has wrongly directed the AO /TPO to re-compute the ALP of guarantee commission by applying at the rate of 2%. The Ld. counsel further pointed out that the ITAT has set aside the identical issue to the file of AO for deciding the rate of commission afresh in the assessee’s own case for the A.Y. 2009-10.
On the other hand, the Ld. Departmental Representative (DR) submitted that the assessee had also entered into such transactions in the earlier years and had not charged any guarantee fee. Since the Ld. DRP has directed the AO to apply the rate of 2% by following the order of the Ld. DRP passed in the assessee’s own case for the A.Y. 2009-10, there is no infirmity in the order Assessment Year: 2010-2011 passed by the AO pursuant to the directions of the Ld. DRP in the present case.
We have heard the rival submissions and perused the material on record. We notice that the Ld. DRP has partly allowed this ground of appeal of the assessee by following the assessee’s own case for the A.Y. 2009-10. The observations of the DRP directions read as under:-
The Panel has carefully considered the draft assessment order, submission of the assessee and material on record. In view of the facts narrated by the Ld. TPO in his order, it is apparent that the purchase guarantee is a financial serive provided by the assessee to its AE. It is not under dispute that it is the AE which has concluded the transaction and it was in no position to do so without the guarantee of the assessee. The bases of transfer pricing analysis is that a transaction between an assessee and its AE should happen as if it were happening between two unrelated parties. Corporate Guarantee Agreement between the bank and the assessee clearly stipulates that in case of default by the AE, the loan has to be refunded to the bank by the guarantor. But the assessee has not covered/rewarded itself for this risk. The assessee’s arguments that Sec. 92B do not cover the provisions of guarantee as an international transaction is also not material since the provision has been brought in the Finance Act, 2012 with retrospective effect from 1/4/2002. The assessee’s argument that there is considerable difference in the guarantee provided by a bank in its normal course of business vis-à-vis a loan guarantee, also cuts across the basic principle behind the transfer pricing adjustment policy. If a service has been rendered by the assessee which is normally rendered by a bank, the arm’s length price will have to be determined on the basis of the financial considerations of the bank. However, it is seen that the Ld. TPO has applied rate of 3% for guarantee commission which is on the higher side even considering the safe harbor rules notified later. The Ld. AO/TPO is directed to recomputed the ALP of guarantee commission by applying the Assessment Year: 2010-2011 rate of 2%. This ground of objection is, accordingly partly allowed.
Since the facts of the case remain the same, the AO is directed to apply the rate of 2% for this year as well. This ground of objection is partly allowed.”
As pointed out by the Ld. counsel for the assessee, the assessee challenged the directions given by the Ld. DRP before the coordinate Bench and the coordinate Bench after hearing both the parties set aside the issue to the file of AO with the direction to decide the rate of commission afresh after giving an opportunity of being heard to the assessee. The relevant para of the decision of the coordinate Bench reads as under:-
“6.5 We have gone through the submissions made by both the sides as well as material placed before our consideration. There is unanimity on the point that some amount should be charged by the assessee from its AE on account of corporate guarantee issued by the assessee on behalf of its AE. The only controversy to be decided is that how much rate should be applied. Ld. Counsel has relied upon the judgment of Hon’ble Tribunal in the case of Everest Kanto (supra). This judgment has been accepted to be applicable on law, by both the parties. But it has been argued by the ld. CIT (DR) that rate of 0.5% has been decided in that case keeping in view the specific facts of the actual cost incurred by the AE of Everest Kanto, and also that 0.5% was too low a rate, and therefore, it cannot be blindly applied, universally or uniformly, in all other cases. Ld. Counsel has also fairly accepted the argument of ld. CIT (DR), to the extent that ALP rate of corporate guarantee can be determined, keeping in view the actual cost incurred by the AE or as it would have been incurred by the AE with respect to a similar transaction between the AE and any other independent party. But, no information in this regard was available. Thus taking into account all the facts and circumstances as well as submissions made by both the parties before us, and in the Assessment Year: 2010-2011 interest of justice, we find that this case should sent back to the file of the TPO. Therefore, we send this issue back to the file of the TPO for deciding the rate of commission. He will give opportunity to the assessee to submit all the details and documents as may be considered appropriate by it, and shall decide this issue after taking into consideration all the facts and circumstances of this case, and by exercising his suitable powers under the law to get the required information from the concerned agencies, and thereafter he shall take a judicious view of the matter, taking into account all the judgments available including the judgment of the Tribunal as confirmed by the Hon’ble High Court in the case of Everest Kanto (supra). Thus, these grounds are allowed for statistical purposes.
Since, the coordinate Bench has dealt with the identical issue in the assessee’s own case for the assessment year 2009-10 and remitted issue to the file of AO for deciding afresh after taking into consideration all the details and documents submitted by the AO, we respectfully following the order of the coordinate Bench, set aside this issue to the file of the AO for deciding the same afresh after giving opportunity of being heard to the assessee. Hence, this ground of appeal is allowed for the statistical purposes.
11. Ground No. 9, 10 and 11 pertain to the application of provision u/s 14A read with rule 8D of the Act. The Ld. counsel for the assessee submitted that the assessee has made suo moto disallowance of Rs. 6,14,78,616/- u/s 14A of the Act. The assessee was accordingly asked to explain as to why the disallowance u/s 14A read with rule 8D should not be determined. The assessee contended that since the assessee has made reasonable disallowance, no further disallowance under rule 8D is required to be made. The AO rejecting the contention of the assessee determined the total disallowance u/s 14A at Rs. 10,70,99,553/- before the Ld. DRP. The assessee contended that the AO has erred in invoking rule 8D and submitted that AO should be directed to accept the computation of voluntarily disallowance made by the assessee u/s Assessment Year: 2010-2011 14A of the Act. However, the Ld. DRP upheld the disallowance made by the AO following the decision of the direction of the DRP in the assessee’s own case for the A.Y. 2009-10. The Ld. counsel further pointed out that the ITAT has set aside this issue to the file of AO for deciding the same afresh in the light of the decision of the Hon’ble High Court in the case of CIT vs. Cheminvest Ltd. of 2014.
On the other hand, the Ld. DR submitted that since the Ld. DRP has passed the direction by following the direction of the Ld. DRP in the assessee’s own case for the A.Y. 2009-10, there is no infirmity in the order passed by the AO. Therefore, this ground of appeal is liable to be dismissed.
We have heard the rival submissions also gone through the entire material on record. We notice that the Ld. DRP has upheld the action of the AO by following the direction issued by the Ld. DRP in the assessee’s own case for the A.Y. 2009-10. We further notice that in the further appeal, the coordinate Bench set aside this issue to the file of AO for fresh determination in the light of the decision of the Hon’ble Delhi High Court in the case of CIT vs. Cheminvest Ltd. (supra) and further direction to exclude the amount of investment made in joint ventures subsidiaries and other companies as strategic investment for computing the average amount of investment for the purpose of rule 8D.
The Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT 91 taxman.com 154 (SC) has held that only that expenditure which is in relation to earning dividends can be disallowed u/s 14A read with rule 8D. The dominant purpose for which investment into shares is made by the assessee may not be relevant as section 14 applies irrespective of whether shares are held to gain control or as stock in trade. Assessment Year: 2010-2011
Hence, respectfully following the decisions of the coordinate Bench rendered in the assessee’s own case for the A.Y. 2009-10, we set aside this ground of appeal to the file of AO for determined the disallowance afresh in the light of the law laid down by the Hon’ble Delhi High Court in the case of Cheminvest Ltd. (supra) and the Hon’ble Supreme Court in the case of Maxopp Investments Ltd. (supra) after giving a reasonable opportunity of being heard to the assessee. Hence, these grounds are allowed for statistical purposes.
16. Ground No. 12 pertains to application of rule 8D while computing book profits u/s 115JB of the Act. Without prejudice to Ground No. 9,10, and 11, the Ld. counsel for the assessee submitted that since the AO has computed the book profits u/s 115JB of the Act, the Ld. DRP ought to have directed the AO to compute the books of account without resorting to section 14A read with rule 8D. The Ld. counsel relying on the decision of the Special Bench of ITAT, Delhi in the case of AICT vs. Vireet Investment Pvt. Ltd. 82 taxman.com 415 (Del) submitted that the impugned order is erroneous therefore liable to be set aside. The Ld. DR relied on the order passed by the AO as per the directions passed by the Ld. DRP.
We notice that the directions of the Ld. DRP on the basis of which the AO has passed the final assessment order computing the book profit u/s 115JB of the Act by making addition of disallowance u/s 14A read with rule 8D, is erroneous in the light of the decision of the Special Bench of the Delhi Tribunal rendered in the case of ACIT vs. Vireet Investment Pvt. Ltd. (supra). In the said case the Special Bench of the ITAT, Delhi has held that computation under clause ‘f’ of the Explanation u/s 115JB is required to be made without resorting to computation as contemplated u/s 14A read with rule 8D of the Income Tax Rules. Hence, we set aside this issue to the file of AO for computing the book profit u/s 115JB of the Act in accordance with the Assessment Year: 2010-2011 decision of the Special Bench in the case of ACIT vs. Vireet Investment Pvt. Ltd., (supra). Hence, this ground of appeal is allowed for statistical purposes. The revenue has challenged the impugned order passed by the AO pursuant to the directions passed by the Ld. DRP u/s 144C(5) of the Act by raising the following effective grounds:-
1. “On the facts and circumstances of the case and in law, the Ld. DRP erred in re-computing the ALP of Guarantee Commission at the rate of 2% without appreciating that the A.E. was in financial distress and therefore the rate of 3% was justifiable.
2. On the facts and circumstances of the case and in law, the Ld. DRP erred in directing to delete the addition u/s 36(1)(iii) of the Act of Rs. 3,65,37,000/- when the loan was used for purpose of investment only.”
Vide ground No. 1, the revenue has challenged the directions passed by the Ld. DRP to re-compute the ALP of Guarantee Commission @ 2% from 3% determined by the Ld. TPO. Since, we have set aside the said issue to the file of AO for determining the guarantee commission afresh after hearing the assessee, this ground of appeal has become infructuous. Hence, we dismiss this ground of appeal of the revenue.
3. Vide ground No. 2, the revenue has challenged the direction passed by the Ld. DRP u/s 144C(5) to delete the addition made u/s 36(1)(iii) of the Act. So far as this ground is concerned, we notice that the Ld. DRP has directed to delete the addition in question by following the order of the Ld. DRP issued in assessee’s own case for the A.Y. 2009-10. The findings of the Ld. DRP passed in A.Y. 2009-10 reads as under:- Assessment Year: 2010-2011 “The AO in the assessment order has not given any reason to counter the plea of the assessed that the investment was for the business purpose of the assessee. Admittedly the interest expenditure was incurred to obtain a controlling interest in a foreign company. If it is demonstrated that the capital was utilized for business purpose, this section makes no distinction between money borrowed to acquire capital assets or a revenue assets. There is no doubt that the assessee being a holding company has its strategic and business interest in making investments in subsidiaries for expansion of its activities and developing synergies with AE. Thus, considering the fact of the case, legal position and respectfully following the decision of jurisdictional High Court, we are also of the view that the deduction of interest expenditure is allowable u/s 36(1)(iii) of the Act. The AO is directed to delete this addition.”