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Income Tax Appellate Tribunal, BANGALORE BENCH “ A ”
Before: SHRI A.K. GARODIA & SHRI VIJAY PAL RAO
Per Shri Vijay Pal Rao, J.M. : These appeals by the assessee are directed against the assessment order
dt.16.8.2012 and 20.1.2014 passed under Section 143(3) r.w.s. 144C(13) of the
Income Tax Act, 1961 (in short 'the Act') in pursuant to the directions of the
Dispute Resolution Panel (‘DRP’) for the Assessment Years 2008-09 & 2009-10
respectively.
2 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 2. First we take up the appeal for the Assessment Year 2008-09 wherein the
assessee has filed the following grounds :
The learned TPO and the learned AO have erred, in law and in fact, by failing to take cognizance of the valid business/commercial reasons put forth by the Appellant for not charging a guarantee fee to its Associated Enterprises. 2. The learned TPO and the learned AO have erred, in law and in fact, by ignoring the corporate guarantees obtained from overseas subsidiaries/ parent company for which no guarantee fee has been paid by the Assessee. 3. The learned TPO and the learned AO have erred, in law and in facts, by not giving proportionate effect to the guarantees which existed only for a part of the year. 4. The learned TPO and the learned AO have erred, in law and in facts, by considering corporate guarantee transaction as an intra-group service, warranting an arm’s length remuneration by ignoring the fact that such a transaction is a mere shareholder activity. 5. The learned TPO and the learned AO have erred, in law and in facts, by considering the outstanding dues from the AEs to be in the nature of loan and not considering the business/ commercial expediencies of the arrangement. 6. The learned TPO and the learned AO have erred, in law and in facts, in imputing interest on the loans advanced to the AEs, by completely disregarding the fact that loans given to AEs are in the nature of quasi equity and were commercially expedient from XSL’s perspective. 7. The learned TPO and the learned AO have erred, in law and in facts, in not objectively selecting the interest rate to determine the arm’s length rate of interest applicable for outstanding dues from the AEs. The Appellant submits that each of the above grounds areindependent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon’bleTribunal to decide on the appeal in accordance with the law.
The assessee has also filed the additional grounds as under :
The learned TPO and the learned AO have erred, in law and on facts, by considering the outstanding dues from AEs a separate international transaction subject to transfer pricing.
3 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 9. Without prejudice to Ground No. 8 above, the learned TPO and the learned AO have erred, in law and on facts, by not considering the impact of working capital adjustment and making an addition in this regard. 10. Without prejudice to Ground No. 1, the learned TPO and the learned AO have erred, in law and on facts, in not objectively selecting the arm’s length rate of fee/commission applicable for corporate guarantees issued to AEs. 11. Without prejudice to Ground No. 6, the learned TPO and the learned AO have erred, in law and on facts, in not objectively selecting the arm’s length rate of interest applicable for loans issued to AEs. 12. The learned AO has erred in law and on facts, in not considering the revised Book profit under Section 115JB of the Act, as computed by the Company under the Revised Return of Income filed by it without assigning any reasons thereof. 13. The learned AO has erred in law and on facts, by failing to adjust the amalgamation loss (arising on amalgamation of MatrixOne India Limited with the Company) with the profit for the year, having regard to the provisions of Section 211(6) of the Companies Act, 1956, while computing Book profit under Section 115JB of the Act. 14. The learned AO has erred in law and on facts, by restricting credit towards tax deducted at source (“TDS”) to an aggregate amount of INR 49,79,797 as against INR 53,77,886 claimed by the Appellant in its Revised Return of Income resulting into reduction of TDS claim by INR 3,98,089 and reduction in refund claim by INR 3,98,089 together with applicable interest under Section 244A of the Act.
The Petitioner submits that the above additional grounds are being raised by way of abundant caution. The additional grounds raise issues which are fundamental to the appeal and the non- admission and non-adjudication of the same would result in an incomplete appreciation and adjudication of the matter. The Petitioner submits that the failure to raise these grounds at an earlier stage is neither wilful nor wanton but due to the reasons stated above. No prejudice would be caused to the Respondent by reason of the above additional grounds being admitted and adjudicated and accordingly, the balance of convenience is in favour of such an order being passed by this Hon’ble Tribunal.”
4 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014
Admissibility of Additional Grounds.
The assessee has filed a petition under Rule 11 of the ITAT Rules for
admission of the additional grounds.
The learned Authorised Representative of the assessee has submitted that
the additional grounds are being raised by way of abundant caution. The
additional grounds raised are fundamental to the appeals and non-adjudication
of the same would result in an incomplete appreciation and adjudication of
matter. He has submitted that failure to raise these grounds at an earlier
stage is neither willful nor wanton but due to oversight. In support of his
contention he has relied upon the following decisions :
i. Jute Corporation of India Ltd. Vs. CIT & Anr. 187 ITR 688 (SC) ii. NTPC Co. Ltd. Vs. CIT 229 ITR 383 (SC) iii. Ahmedabad Electric Co. Ltd. Vs. CIT 199 ITR 351 (Bom)
Thus the learned Authorised Representative has pleaded that the additional
grounds raised by the assessee may be adjudicated on merits.
On the other hand, the learned Departmental Representative has
vehemently opposed to the admission of the additional grounds and submitted
5 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 that the assessee has raised these grounds without raising before the
authorities below. Therefore if the additional grounds raised by the assessee
are admitted at this stage it will cause a prejudice to the interest of revenue as
the Assessing Officer as well as DRP did not have the opportunity to deal with
these grounds and examine the relevant record.
We have considered the rival submissions and relevant material on record.
At the outset, we note that the additional ground Nos.9 to 11 are not the fresh
plea raised by the assessee but these are additional/alternative pleas raised by
the assessee in respect of the issue already raised in Ground Nos.1, 6 & 8 of the
main grounds. Further these additional ground Nos.9 to 11 pertains to the
issue arising from the final order passed in pursuant to the directions of the
DRP. Accordingly, in the facts and circumstances of the case as well as in view
of the various precedents as relied upon by the assessee and specifically the
judgment of Hon'ble Supreme Court in the case of NTPC Ltd. Vs. CIT (supra), we
admit the ground Nos.9 to 11 for adjudication on merits.
As regards the Ground Nos.12 & 13, we find that the assessee did not
raise any objection regarding adjustment of the amalgamation loss while
6 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 computing the book profit under Section 115JB which shows that the assessee
accepted the draft assessment order on this issue and therefore did not raise
any objection on this issue before the DRP. The assessee has not explained the
facts and circumstances under which the assessee could not raise these
grounds/objections before the DRP. We further note that the only explanation
put forth by the assessee before us regarding these additional grounds are that
these are being raised by way of abundant caution which suggest that the
assessee is raising some additional plea by way of the additional grounds
whereas the Ground Nos.12 & 13 are fresh grounds before the Tribunal
without raising any objection before the DRP. Further the claim was made by
the assessee only in the revised return which was not considered by the
Assessing Officer. Accordingly, when this issue requires examination of
relevant facts of loss arising on account of amalgamation, we are of the
considered opinion that this issue ought to have been raised before the DRP for
proper adjudication. Accordingly in the facts and circumstances of the case, we
set aside this issue to the record of the DRP for consideration and adjudication
of the issue after giving an opportunity of being heard to the assessee.
7 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014
AS regards the additional ground No.14, this issue was also not raised
before the DRP. Further this is not an issue which requires any adjudication but
it is only at the most a mistake of computation of tax. Therefore the assessee
ought to have taken appropriate step either before the DRP or filing petition
under Section 154 of the Act before the Assessing Officer. In view of the fact
that this issue does not require any adjudication or judgment, the assessee may
raise this issue before the Assessing Officer.
Ground Nos.1 to 4 are regarding Transfer Pricing Adjustment in respect of
Corporate Guarantee provided by the assessee on behalf of its Associated
Enterprise (AE) without charging the guarantee fees.
As per 9CEB Report and TP document, the assessee has reported the
following international transactions :
8 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 International Amount Paid / Amount Transactions Payable (Rs.) Received/ Receivable (Rs.) Provision of management 569,187,095 services Project work 686,582,831 Recovery of expenses 34,249,252 Reimbursement of 2,303,783 expenses Unsecured loan 598,329,762
Apart from the international transactions as reported by the assessee during
the year under consideration the assessee has also provided a corporate
guarantee to bank on behalf of AE without charging any fees. In the TP Study,
the assessee claimed that this transaction was at arm’s length which was not
accepted by the TPO. The TPO made an adjustment on account of guarantee
fees on the guarantee provided to the subsidiary of Rs.3,89,88,802. The
assessee challenged the action of the Assessing Officer/TPO before the DRP but
could not succeed.
Before us, the ld. AR of the assessee has submitted that this transaction
arising on account of ownership linkage which is based on the reputation of the
group as there could be no warranty acceptable to bankers which can be
9 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 provided by the independent third party. Thus the ld. AR has submitted that
the guarantee provided by the financial institution characteristically different
compared to the own guarantee provided by the parent company. Therefore
the guarantee provided by the independent party being financial institution
cannot be considered as a comparable price with the guarantee provided by
the parent company having the advantage in lieu of the equity support or
financial support. The learned Authorised Representative has submitted that
there was no provision under Section 92B as to bring the guarantee provided by
the assessee in the ambit of the definition of international transactions prior to
the amendment in the shape of explanation to Section 92B vide Finance Act,
2012 with retrospective effect from 1.4.2002. The ld. AR has submitted that
this amendment has an effect of expending the scope of the section and
introduced new principle upon which liability arises. Such amendment though
claimed as clarificatory but in fact substantive amendment and incapable of
being given retrospective effect. Thus the ld. AR has submitted that a
subsequent retrospective amendment in Section 92B cannot bring the
transaction of providing guarantee under the ambit of international
transactions as per the amended provision of Section 92B. In support of his
10 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 contention, he has relied upon the decision of Mumbai Bench of the Tribunal
dt.31.3.2016 in case of Siro Clinpharm Pvt. Ltd. Vs. DCIT in IT(TP)A
No.2618/Mum/2014 and 2876/Mum/2014. The learned Authorised
Representative has submitted that the Mumbai Bench of this Tribunal had held
that scope of charging provision can be enlarged with retrospective effect but
the anti avoidance measure that the T.P. Legislation inherently is not primarily a
source of revenue vis-à-vis certain norms and these norms cannot be given
effect from a date earlier than the date when norms are being introduced.
Thus the explanation to Section 92B has to be necessarily be treated as
effective at the best for the Assessment Year 2013-14.
Alternatively the ld. AR has submitted that the guarantee fees cannot be
benchmarked by the fees charged by the bank/financial institutions provided to
the independent parties and further the assessee has received bank guarantees
form the group concern without paying anything and therefore an adjustment
for the value of corporate guarantee received by the assessee is required to be
given while determining the ALP and TP Adjustment on this issue. In support
of his contention he has relied upon the decision of Hyderabad Bench
dt.28.3.2014 in the case of Four Soft Pvt. Ltd. Vs. DCIT in ITA
11 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 No.1903/Hyd/2011. The ld. AR has pointed out that for the Assessment Year
2011-12, the DRP has accepted the claim of assessee regarding the adjustment
for the value of corporate guarantee received by the assessee from its AE. He
has relied upon the para 2.9 of the directions of DRP dt.30.11.2015.
On the other hand, the learned Departmental Representative has
submitted that the corporate guarantee provided by the assessee on behalf of
its AE is having bearing on the profit, income as well as assets of the assessee.
He has submitted that the assessee did not raise any objection or ground
before the DRP that this transaction is not an international transactions but the
assessee had claimed that this transaction is at arm’s length when the other
transactions are accepted by the TPO at arm’s length and further the assessee
has received corporate guarantee from its AE without paying any guarantee
fees. Hence the learned Departmental Representative has submitted that the
new plea raised by the assessee cannot be accepted without raising an
additional ground and explaining the reasons by not raising this objection
before the DRP. He has contended that when the assessee has accepted this
being international transaction and disputed only the rate of arm’s length
12 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014
guarantee fees determined by the TPO then this contention of the assessee
cannot be accepted at this level.
We have considered the rival submissions as well as the relevant material
on record. At the outset we note that the assessee has raised the objection
before the DRP as recorded in paras 6.1 and 6.2 as under :
13 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014
Thus it is clear that grievance of the assessee against the order of the TPO on
the issue of ALP in respect of guarantee fees is limited only regarding the
correct ALP. We further note that prior to the decisions of Mumbai Bench in
the case of Siro Clinpharm Pvt. Ltd. Vs. DCIT (supra) there are series of
decisions of this Tribunal including the decision in cases of Four Soft Pvt. Ltd.
Vs,. DCIT (supra) and Nimbus Communication Ltd. Vs. ACIT (supra) wherein the
Tribunal has taken a consistent view that providing corporate guarantee to AE
is an international transaction however, the ALP of such transaction was to be
computed having regard to the financial consideration as the
nature of transaction between the related parties. The Tribunal has taken a
view that the guarantee fees for providing corporate
14 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 guarantee should not be more than 0.5%. The Hyderabad Benches of this
Tribunal in the case of Four Soft Pvt. Ltd. Vs.DCIT (supra) has considered an
identical issue in paras 24 to 26 as under :
It is noted by the TPO, during the F.Y. 2005-06 the assessee has provided bank guarantees on behalf of its Overseas subsidiary, Foursoft BV, Netherlands for an amount of Rs.69,81,16,000/- which is continuing for the year under consideration also. The TPO following the order passed for A.Y. 2006-07 treated the commission changed by ICICI Bank at 3.75% arms length price for the corporate guarantee provided by the assessee to its AE worked out the TP adjustment of Rs.2,61,79,350/-. The DRP also rejected assessee’s objection on the issue. 25. W e have h eard th e partie s an d perus ed th e mat erial o n reco rd. Th e sum an d s ubst ance of the s ubm issions ma de by t he l earn ed AR is, the co rporat e gu arant ee p rovided by t he a ss essee cannot be e quat ed to ba nk guara nte e and result antl y t he c om missi on rat e f or ba nk guarant e e ca nn ot be appl ied t o the c orp orat e gua rant e e. It was subm i tted t hat th e co rporat e gu arant ee i s not hi ng but a n ad diti onal guarant e e provid ed b y the pa rent comp any a nd it d oes not involve an y cost o r risk t o t h e sh are h old ers. It wa s su bm itted t h at si nc e t he c orporat e gu arant ee was gi ven kee pin g in view pa ramo unt b usiness int erest of the pare nt com pan y it has t o be allo wed as busi n ess ex pendit ure. It is the f urt her su bm issio ns of th e learned AR th at the ret rosp ectiv e am endme nt ef f ecte d t o s ection 92B of the Act, by Finance Act, 2 012 by i nse rtion of Explan ati on (i)(c) t o secti on 9 2B also h as n ot enl arg ed t h e scop e of the ‘intern atio nal trans action’ t o incl ude the corporat e gu arant ee in t h e nat ure provi de d by t he ass esse e. Th e le arne d AR f urth er c ont e nde d t h at the i ss ue is c overed in f avou r of th e ass essee b y vi rt ue of the ord er pass ed b y t he T ri bun al i n assess ee’s o wn c ase f or A Y 200 6-07 (supra). 25. 1 Th e lea rned DR, on th e ot her h and, su bm itted t hat b y virt ue of th e am en dm ent m ad e t o sectio n 9 2B of the Act with ret rospecti ve ef f ect f rom 01/ 04/ 200 2, t he c orp orat e gua ra nt ee provid ed by t he ass essee is to b e co nsi de red as a n in ternati on al t ra nsact ion, and, t heref ore, t he Ass essin g Of f icer was j ustif ie d i n d et erm ini ng arm ’s len gt h price of s uc h tran sa ctio n. 25. 2 Having c onsid ered t he su bm issions of th e pa rties, we are un abl e to acc ept t h e co nt ention of the l earne d AR t hat c orpo rate g uara nt ee of the nat ure p rovi ded by t he a ss essee wi ll not c om e wit hin t h e m eani ng of internation al transa ction in t erm s with secti on 92B of th e Act. It is not di sput ed t hat s ecti on 9 2B of th e Act h as b ee n am end ed b y the Fina nc e Act, 201 2 with t he inse rtion of Expl an at ion I (c) wi t h ret rosp ect ive ef f ect f
15 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 rom 01/ 04/200 2. Ex pla nat ion (i)(c) t o se ction 9 2B, reads as under: “ capital fi nanci n g, including a ny ty pe of l ong-t erm or sh ort-t erm borrowi ng, lending or g uara nt ee , p urc has e or sale of ma rket abl e secu rities or an y ty pe of a dva nc e, payment s or def erred p ay me nt or recei va bl e o r any ot h er de bt a rising d uri ng the course of busin es s. ” 25. 3 A re adin g of the af ores ai d cla us e f rom t he Expl anation woul d m ake i t clear t hat th e corp orat e guara nt ee p ro vi ded by th e assesse e com es wit hin t he scope a nd am bi t of ‘ internati onal trans actio n’ as p er the af oresai d cla us e. Theref ore, t h e co nt ention of t he le arne d AR t h at the i ss ue is c overed in f avou r of th e ass essee b y vi rt ue of the ord er pass ed in ass essee ’s o wn cas e f or A Y 200 6-07 n o lon ger h ol ds goo d si nc e t he ord er passe d by t he co ordi nat e ben ch is pri or t o t h e am en dm ent ma de t o provisi on of sect ion 9 2B of th e Act. It wil l be perti nent t o m ention h ere t hat t hi s issue was also c ons ide red b y th e ITAT M um bai B enc h i n c as e of M ahindra & Mahi ndra Vs. DCI T i n ITA No. 85 97/M um /20 10, 54 S OT (UR ) 14 6. The c oordi nat e bench of thi s Trib unal whil e co nsi deri ng simi lar arg um ent a dva nc ed on behalf of the asse ss ee by placi ng rel ian ce on t h e d ecisi on of the Fo ur S of t Lt d.(su pra), h eld as under: “15. 2 After he arin g t he rival su bmission s w e feel th at Ass es sin g Offic er will have t o f ollow t he de cision of the ITAT Hy de rabad or the amend ed p rovisi on of t he Act in thi s rega rd. If th e Fi n anc e Bi ll of 20 12 is p asse d by t he Pa rlia me nt amending th e provi sions of secti on 9 2B, wit h ef fect f ro m 1s t A pril , 200 2, h e will hav e t o i gno re the d ecisi on of t he ITAT Hy dera bad. I n c as e sectio n 92B is not amen ded with retrosp ective eff ect, h e s ho ul d gra nt relief to t he ap pel lant. ”
4 In t he af oresai d vie w of the matt er, we agree wit h t h e TPO t h at ALP of th e corpora te guarant ee has t o be d et e rm ined as it f all s wit hi n the sc op e an d ambit of an i nt e rnati onal transa ctio n af ter t h e ret rosp ecti ve amen dm ent t o s ecti on 9 2B. H owev er, it ap pears t hat t h e TPO has ap plie d the rat e of 3. 75 %, whi ch i s appli cable t o b ank gu arant ee i ssued b y t h e bank. As t he corpo rat e g uarant ee is n ot in t h e nat ure of bank g uara nt ee, t he rate a ppl ica ble t o ba nk gua rant e e pro vid ed b y t h e bank can not b e ap plied to c orp orat e guarant e e whi ch i s pro vid ed b y a grou p com p an y. I n c as e of Gl enm ark Pharm ac eut icals V s. ACIT in I TA N o. 503 1/M um / 2012, dat ed 13/ 1 1/ 2013, t he Mum bai Be nc h of t he Tri bun al af ter a nal ysi ng t he f acts in t hat cas e ha d h eld t hat 0. 53 % co rporat e gu arant ee rat e in th at c ase was appropri at e. The I TAT H yd erab ad Benc h in ca se of Inf ot e ch E nt erp rises Lt d. i n ITA N o. 11 5/H yd/ 20 11 an d i n I TA No. 21 84/H yd/ 2 01 1, d at e d 1 6/ 0 1/ 2014 whil e
16 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 co nsi de ring id entica l issue of det ermini ng ALP of corporate gua rant e e pro vid ed b y t he ass esse e t o it s AE f ollowed t he rati o laid do wn in c as e of Glenma rk P ha rm ac euticals Vs. A CI T (s upra ) a nd rem itte d the issu e back t o t he TP O t o d eci de t h e quant u m of corporat e g uara nt e e rat e b y f ol lowi ng t h e m et h od a dopted in cas e of Gl enma rk P h arm ace utical s (su pra). 26. Since t he iss ue in th e prese nt c ase is ide ntical t o t h e issu e decid ed b y t he I TA T, H yd erabad B en ch i n case of Inf ot ech E nt erpri ses (su pra), f ollowi ng t he s am e, we also rem it this iss ue to t h e f ile of th e TPO t o d eci de t h e qu antum of corp orate gua rant ee rat es acc ordin gl y. If the assesse e is able t o bri ng o n record an y c om parabl es wit h re gard t o co rporat e gu arant ee, t h e TP O ma y al so c onsid er t he sam e whil e det erm ini ng ALP of corporat e g uara nte e. Th e TP O m ust provide a rea son able op portu nit y of bei ng heard to t he assess ee bef ore d eci din g the issue. This g roun d is al lowed f or st ati stical purp os es.”
It is pertinent to note that in case of corporate guarantee provided to a bank or
financial institution on behalf of the AE, the assessee creates a charge on its
assets in favour of the bank/financial institution and to that extent the
transaction of providing corporate guarantee is having bearing on the assets of
the assessee and in turn the assessee cannot use those assets under charge for
the purpose of availing further financial credit/loans from the bank/financial
institution. Thus this Tribunal held that by providing corporate guarantee falls
in the definition of international transactions as per Section 92B(1) without
considering the Explanation to the said Section. As we have discussed in the
foregoing part of this order that the Tribunal has been taken a consistent view
that corporate guarantee provided to the AE falls in the ambit of international
17 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 transactions as per Section 92B(1) even without considering the Explanation
inserted vide Finance Act, 2012. The Mumbai Bench of this Tribunal in the case
of Siro Clinpharm Pvt. Ltd. Vs. DCIT (supra) has restricted its finding only to
the applicability of Explanation in the cases where the assessment was
completed prior to the insertion of the said Explanation retrospectively. Even
otherwise the earlier decisions of the Tribunal on this issue were not
considered by the Delhi Bench of the Tribunal. In the case of M/s. Nimbus
Communication Ltd. Vs. ACIT in ITA Nos.6816/Mum/2010 and
7105/Mum/2011, the Tribunal vide order dt.7.8.2013 has considered an
identical issue in paras 4 & 5 as under :
“ 4. As regards the issue raised in ground No. 2 relating to TP adjustment made on account of guarantee commission in respect of corporate guarantee given by the assessee to its Associated Enterprises (AEs) for obtaining bank loans, the ld. representatives of both the sides have agreed that a similar issue was involved in assessee's own case for the immediately preceding year i.e. A.Y. 2005-06 and the Tribunal vide its order dated 12-06-2013 passed in ITA No. 3664 & 2359/Mum/2010 has already decided the same vide para No. 9 & 10 which read as under:- "9. We have considered the rival submissions and also perused the relevant material available on record. For the guarantee given to the bank against the financial assistance given to its AEs, no commission was charged by the assessee company on the ground that the said AEs were not benefited by the guarantee so given and it was the assessee who benefited as a result of commercial benefits secured for future. In support of this stand of the assessee, the ld. counsel for the assessee has contended that business strategy should be taken into consideration while making any TP adjustments in respect of such transactions and has relied on the OECD Transfer Pricing Guidelines issued in 2010. As stated in para 1.59 of the said guidelines, the business strategies should also be examined in determining comparability for
18 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 transfer pricing purposes and certain illustrations of such business strategies are also given therein. As stated in para 1.60 of the said guidelines which has been relied upon by the ld. Counsel for the assessee, business strategies also could include market penetration schemes and taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower than the price charged for otherwise comparable products in the same market. As explained further, a tax payer seeking to enter a new market or expand (or defend) its market share might temporarily incur higher costs and hence achieve lower profit levels than other taxpayers operating in the same market. In our opinion, the relevant facts of the present case do not indicate that there was any such business strategy adopted by the assessee in not charging commission in respect of guarantees issued for its Associated Enterprises. As a matter of fact, there is nothing to suggest that any such business strategy was adopted by the assessee with specific intention or motive and the case has been sought to be made out merely on the basis of commercial expediency by claiming that the assessee was benefited as a result of giving the guarantees in the form of commercial benefits secured for future. In our opinion, such commercial expediency cannot be equated with business strategy, which is specific and well laid out. As rightly held by the ld. CIT(A), a financial loan guarantee is a commitment entered into by the assessee company with a third party lender of its Associated Enterprises which obliges the assessee company to cover the risk of default by its Associated Enterprise and this act thus involves performance or carrying out of service to cover the risk of default for which "price" has to be charged. Even the OECD Transfer Pricing Guidelines 2010 supports this view in para 7.13 where it is explained that where higher credit rating of Associated Enterprise is due to a guarantee by another group member, such association positively enhances the profit making potential of that Associated Enterprise. We, therefore, find ourselves in agreement with the contention of the ld. D.R. that there was a clear benefit accrued to the Associated Enterprises by the guarantee provided by the assessee and when such benefit was passed on by the assessee to the said Associated Enterprises, guarantee commission should have been charged at arm's length price. The commercial relationship between the assessee and its Associated Enterprises is distinct and separate from the transactions of giving guarantee and such transactions have to be considered and examined independently in order to determine the arm's length price. 10. As regards the rate of guarantee commission, it is noted that the arm's length price of guarantee commission was determined by the TPO by applying CUP method and the arithmetic mean of 1.5% of the guarantee commission charged by the HSBC Bank in the range of 0.15 to 3% was taken as arm's length price. The ld. CIT(A) upheld the CUP method applied by the TPO but adopted the rate of 0.25% of guarantee fee as arm's length price relying on the decision of French Court in the case of Societe Carrefour. The ld. D.R., at the time of hearing before us has relied on the decision of the co-ordinate Bench of this Tribunal in the case of M/s Everest Kanto Cylinder Ltd. (supra) wherein while accepting the CUP method as the most
19 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 appropriate method for benchmarking the guarantee fee, the Tribunal accepted 0.5% guarantee fee/commission to be at arm's length after taking into consideration the rates of guarantee commission charged by various banks including the guarantee commission charged by the HSBC Bank in the range of 0.15% to 3%. Since the facts involved in the present case are materially similar to the facts involved in the case of Everest Kanto Cylinder Ltd. (supra), we prefer to follow the decision rendered by the co-ordinate Bench of this Tribunal in the said case over the decision of French Court in the case of Societe Carrefour (supra). We, accordingly modify the impugned order of the ld. CIT(A) on this issue and direct the A.O. to recompute the commission for guarantee given by the assessee to its Associated Enterprises @ 0.5% being the arm's length price. Ground No. 1 of Revenue's appeal is thus partly allowed whereas ground No. 2 of assessee's appeal is dismissed". 5. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to A.Y. 2005-06, we respectfully follow the order of the co-ordinate Bench of this Tribunal for A.Y. 2005-06 and direct the A.O. to restrict the TP adjustment by recomputing the commission for guarantee given by the assessee to its AEs at 0.5% being the arm's length price. Ground No. 2 of the assessee's appeal for A.Y. 2006-07 is partly allowed.” As it is clear that the Tribunal has followed the decision of the Tribunal for the
earlier assessment year and while taking a consistent view held that guarantee
provided by the assessee gives the benefit to the AE and such benefit was
passed on by the assessee to the said AE and therefore should have been
charged at ALP.
We further note that the DRP for the Assessment Year 2011-12 vide its
direction dt.3011.2015 as well as for the Assessment Year 2010-11 accepted
the assessee's argument that an appropriate adjustment that the value of
corporate guarantee received from its arm’s length be granted. In para 2.9 of
the said direction of DRP as under :
20 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 “ 2.9 As far as the argument of corporate guarantee received by the taxpayer is concerned the same carries merit. In the interest of fairness, the TPO is directed to provide adjustment for the value of corporate guarantees received by the taxpayer form its AEs after verification of individual transactions.”
Accordingly, we set aside this issue to the record of the A.O./TPO to
recomputed the ALP by considering the arm’s length guarantee fees at 0.5%
and further by providing appropriate adjustment for corporate guarantee
received by the assessee from its arm’s length.
Ground Nos.5 to 7 and 9 are regarding T P Adjustment in respect of the
loan provided to AE.
The ld. Counsel for the assessee has submitted that the transaction of
loan provided to the AE is Shareholder Act to protect its investment interest in
the subsidiary and in furtherance of its own interest. Therefore this transaction
cannot be considered as an international transaction. In support of his
contention, he has relied upon the decision dt.21.9.2016 of Kolkata Bench of
the Tribunal in the case of Tega Industries Ltd. Vs. DCIT in ITA
No.1912/Kol/2012 Dt.21.9.2016. The learned Authorised Representative has
submitted that the Tribunal has held that the motive and expectation of the
21 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 assessee from the provision of loan are not that of a lender or a warrantor to
earn market rate of interest but the expectation of a shareholder to protect its
investment interest. Alternatively, the learned Authorised Representative has
submitted that the arm’s length interest rate should be the rate prevailing in
the country of AE and therefore instead of adopting PLR the Arm’s Length Price
Interest rate should be LIBOR.
On the other hand, the ld. DR has relied upon the orders of the
authorities below.
At the outset, we note that the transaction of loan/advance is clearly
defined in Section 92B(1) as international transaction being lending or
borrowing money or any other transaction having bearing on the profits,
income, loses or assets of enterprises. We find that the Tribunal has been
taking a consistent view on this issue as far as the transaction of lending money
to the AE being international transaction however, the arm’s length rate has
been accepted by the Tribunal by considering LIBOR rate as the transaction is in
foreign currency. Therefore interest rate prevailing in the economic geography
of AE shall be taken into consideration. Accordingly, we direct the Assessing
22 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 Officer / TPO to apply LIBOR + 2% as ALP. We find that the Tribunal in the case
of Four Soft Pvt. Ltd. Vs. DCIT (supra) has held in para 17 as under :
“ 17. We have heard the parties. This issue was considered by this Tribunal in assessee's own case for the A.Y. 2006-07 (supra). The Coordinate Bench while deciding the issue held as under : "19. We have considered the rival submissions and perused the materials available on record. We do not find any merit in the arguments of the learned departmental representative as we find that the ALP is to be determined for the international transaction, that is, on international loan and not for the domestic loan. Hence, the comparable, in respect of foreign currency loan in the international market, is to be LIBOR based which is internationally recognised and adopted. In our considered view, the DRP rightly directed the assessing officer to adopt the LIBOR plus for the purpose of TP adjustment. Our view is fortified by the decision of the Madras Bench in the case of Siva Industries (supra). We do not find any merit in the arguments of the learned counsel for the assessee that the DRP should have adopted the EURIBOR for the purpose of the TP adjustments, as we find that the mostly used and recognised benchmark rate for international loan is LIBOR based. Hence, the DRP rightly directed the assessing officer to adopt the LIBOR rates. We confirm the directions of the DRP. However, by considering the contentions of the learned counsel for the assessee that the actual LIBOR was 4.42% as against the 5.78% approved by the DRP, we find it proper to restore this issue to the file of the assessing officer, to verify the correctness of the claim made by the assessee company. In view of this matter, we remit this matter to the file of the assessing officer to verify the actual average LIBOR prevailed in the financial year relevant to the assessment year under consideration and adopt the interest rate 4.42% if the claim of the assessee is found correct. The ground raised by the assessee on this issue is partly allowed for statistical purpose". Similar view has been taken by the Tribunal in a series of decisions which are
also relied upon by the ld. AR of the assessee on this point. This issue is
accordingly allowed for statistical purpose.
Ground No.8 is regarding T P Adjustment in respect of outstanding
receivable from the AE for abnormal period.
23 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 22. The assessee is providing software development services to the AE. The
assessee has shown an outstanding of Rs.32,06,17,338 from its AE on which no
interest has been charged. The TPO accepted the transaction of providing
software development services to AE at arm’s length however proceeded to
determine the ALP in respect of interest on outstanding receivable from AE.
Accordingly, the TPO made an adjustment of Rs.14,77,227 on account of
interest on receivable from AE. The TPO applied 10.5% as arm’s length interest
rate.
We have heard the learned Counsel for the assessee as well as learned
Departmental Representative and considered the relevant material on record.
At the outset we note that this issue has been considered and decided by this
Tribunal in a series of decisions including the decision in the case of M/s. Dell
International Services India Pvt. Ltd. Vs. JCIT in ITA No.308/Bang/2015
Dt.17.6.2016 wherein the Tribunal has considered this issue in para 7 as
under :
“ 7. We have considered the rival submissions and relevant material on record. At the outset, we note that allowing a credit period on receivable from AE is not an independent international transaction however, it is part of the main international transaction of providing software development services by the assessee to its AEs. There are series of decisions wherein the Tribunal has
24 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 considered this transaction as part of the main international transaction between the assessee and its AE and therefore the treatment of the same at the time of determining the arm’s length of the international transaction has to be given in the shape of allowing the necessary adjustment in the comparable prices on account of working capital adjustment. We find that the Mumbai Bench of the Tribunal in the case of Goldstar Jewellery Ltd. in ITA No.6570/Mum/2012 vide order dt.14.1.2015 as well as the Delhi Bench of the Tribunal in the case of Kusum Healthcare Pvt. Ltd. Vs. ACIT in ITA No.6814/Del/2014 vide order dt.31.3.2015 has taken this view that allowing the credit period over and above normal credit period prevailing in the industry is certainly relevant and part of the main international transaction of sale or purchase between the assessee and the AE. However, it was held that it cannot be treated as an independent international transaction de horse the main international transaction between the parties. We further note that an identical issue was considered and decided by the Mumbai Bench of this Tribunal in the case of Information Systems Resource Centre Pvt. Ltd. Vs. ACIT in ITA No.7757/Mum/2012 and C.O. 282/Mum/2013 vide order dt.29.5.2015 in paras 11 to 13 as under :
“ 11. We have considered the rival submissions as well as the relevant material on record. In the present case, the sale transaction of the assessee with its A.E. have been accepted by the Transfer Pricing Officer / Assessing Officer at arm's length and no adjustment has been made in respect of the sale transaction. However, the Transfer Pricing Officer has made the adjustment on account of credit period provided by the assessee to the A.E. on realisation of sale proceeds. At the outset, we note that an identical issue has been considered by the co– ordinate bench of the Tribunal, Mumbai Benches, in Goldstar Jewellery Ltd. (supra), vide Para–8, held as under:– “8. We have considered the rival submissions and relevant material on record. The assessee has reported international transaction in its TP report regarding sale to its AE from manufacture of jewellery units and diamond trading unit. The TPO accepted the price charged by the assessee from AE at arm’s length. However, the TPO has made the adjustment on account of notional interest for the excess period allowed by the assessee to AE for realization of dues. The TPO applied 18.816% per annum as arm’s length on the over due amounts of AE and proposed adjustment of Rs. 2,49,95,139/-. The DRP though concurred with the view of the Assessing Officer/TPO on the issue of international transaction, however, the adjustment was reduced by applying the interest rate of 7% instead of 18.816% applied by the TPO. The first issue raised by the assessee is whether the aggregate period extended by the assessee to the AE which is more than the average credit period extended to the non- AE would constitute international transaction. We are of the view that after the insertion of explanation to section 92B(1), the payment or deferred payment or receivable or any debt arising during the course of business fall under the expression international transaction as per explanation. Therefore, in view of the expanded meaning of the international transaction as contemplated under
25 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 clause (i) (e) of explanation to section 92B(1), the delay in realization of dues from the AE in comparison to non-AE would certainly falls in the ambit of international transaction. However, this transaction of allowing the credit period to AE on realization of sale proceeds is not an independent international transaction but it is a closely linked or continuous transaction along with sale transaction to the AE. The credit period allowed to the party depends upon various factors which also includes the price charged by the assessee from purchaser. Therefore, the credit period extended by the assessee to the AE cannot be examined independently but has to be considered along with the main international transaction being sale to the AE. As per Rule 10A(d) if a number of transactions are closely linked or continuous in nature and arising from a continuous transactions of supply of amenity or services the transactions is treated as closely linked transactions for the purpose of transfer pricing and, therefore, the aggregate and clubbing of closely linked transaction are permitted under said rule. This concept of aggregation of the transaction which is closely linked is also supported by OECD transfer pricing guidelines. In order to examine whether the number of transactions are closely linked or continuous so as to aggregate for the purpose of evaluation what is to be considered is that one transaction is follow-on of the earlier transaction and then the subsequent transaction is carried out and dependent wholly or substantially on the earlier transaction. In other words, if two transactions are so closely linked that determination of price of one transaction is dependent on the other transaction then for the purpose of determining the ALP, the closely linked transaction should be aggregated and clubbed together. When the transaction are influenced by each other and particularly in determining the price and profit involved in the transactions then those transactions can safely be regarded as closely linked transactions. In the case in hand the credit period extended to the AE is a direct result of sale transaction. Therefore no question of credit period allowed to the AE for realization of sale proceeds without having sale to AE. The credit period extended to the AE cannot be treated as a transaction stand alone without considering the main transaction of sale. The sale price of the product or service determined between the parties is always influenced by the credit period allowed by the seller. Therefore, the transaction of sale to the AE and credit period allowed in realization of sale proceeds are closely linked as they are inter linked and the terms and conditions of sale as well as the price are determined based on the totality of the transaction and not on individual and separate transaction. The approach of the TPO and DRP in analyzing the credit period allowed by the assessee to the AE without considering the main international transaction being sale to the AE will give distorted result by disregarding the price charged by the assessee from AE. Though extra period allowed for realization of sale proceeds from the AE is an international transaction, however, for the purpose of determining the ALP, the same has to be clubbed or aggregated with the sale transactions with the AE. Even by considering it as an independent transaction the same has to be compared with the internal CUP available in the shape of the credit allowed by the assessee to non AE. When the assessee is not making any difference for not charging the interest from AE as well as nonAE then the only difference between the two can be considered is the average period allowed along with outstanding amount. If the average period multiplied by the outstanding amount of the AE is at arm’s length in comparison to the average period of realization and multiplied by the outstanding from non AEs then no adjustment can be made being the transaction is at arm’s length. The third aspect of the issue is that the arm’s length interest for making the adjustment. Both the TPO and DRP has taken into consideration the lending rates, however, this is not a transaction of loan or advance to the AE but it is only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm’s length interest in any case would be the average cost of the total fund available to the assessee
26 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 and not the rate at which a loan is available. Accordingly, we direct the Assessing Officer/TPO to re-do the exercise of determination of ALP in terms of above observation.”
Thus, it is clear that the Tribunal has taken a view that the transaction of allowing the credit period to the A.E. on realisation of sale proceeds has to be considered along with the main international transaction in respect of sale to A.E. A similar view has been taken by the Tribunal, Delhi Bench, in Kusum Healthcare Pvt. Ltd. (supra), wherein the Tribunal, vide Para–7 to 10, held as under:–
“ 7. We have heard rival submissions and perused the material on record. An uncontrolled entity will expect to earn a market rate of return on its working capital investment independent of the functions it performs or products it provides. However, the amount of capital required to support these functions varies greatly, because the level of inventories, debtors and creditors varies. High levels of working capital create costs either in the form of incurred interest or in the form of opportunity costs. Working capital yields a return resulting from a) higher sales price or b) lower cost of goods sold which would have a positive impact on the operational result. Higher sales prices acts as a return for the longer credit period granted to customers. Similarly in return for longer credit period granted, a firm should be willing to pay higher purchase price which adds to the cost of goods sold. Therefore, high levels accounts receivable and inventory tend to overstate the operating results while high levels of accounts payable tend to understate them thereby necessitating appropriate adjustment. The appropriate adjustments need to be considered to bring parity in the working capital investment of the assessee and the comparables rather than looking at the receivable independently. Such working capital adjustment takes into account the impact of outstanding receivables on the profitability. In this regard, the reliance is placed on the following rulings wherein the need to undertake working capital adjustment has been appreciated by the Hon’ble Tribunals : • Mercer Consulting India Pvt. Ltd. [TS-170-ITAT-2014(DEL)] • Mentor Graphics (Noida) Private Limited [109 ITD 101] • Egain communication (P) Ltd. [ITA No. 1685/PN/2007] • Sony India (Pvt.) ltd. [2011-TII-43-ITAT-DEL-TP] • Capgemini India Private Limited [TS-45-ITAT-2013(Mum)-TP] 8. In view of the above, a working adjustment appropriately takes into account the outstanding receivable. Therefore, the assessee has undertaken a working capital adjustment to reflect these differences by adjusting for differences in working capital and thereby, profitability of each comparable company. Accordingly, while calculating the working capital adjusted, operating margin on costs of the comparable companies, the impact of outstanding receivables on the profitability has been taken into account. If the pricing/ profitability of the assessee are more than the working capital adjusted margin of the comparables, then additional imputation of interest on the outstanding receivables is not warranted. 9. The assessee had undertaken a working capital adjustment for the comparable companies selected in its transfer pricing report which was also submitted with the Ld. TPO. A snapshot of the result is provided below: Segment Name Appellant’s Margin (OP/TC) Working capital adjusted margins of comparables (OP/TC) Manufacturing Activity 46.33% 11.84% Trading Activity 17.44% 8.36% 10. The above analysis empirically demonstrates that the differential impact of working capital of the vis-a-vis its comparables has already been factored in the pricing/profitability of the assessee which is more than that working capital adjusted margin of the comparables. Hence, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified.”
27 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 13. Following the orders of the Tribunal, we set aside this issue to the record of the Assessing Officer / Transfer Pricing Officer and direct to re–do the exercise of determination of arm's length price in the light of the above decisions of the Tribunal. The grounds raised in this cross objection are allowed for statistical purposes.”
Following the earlier orders of this Tribunal, we set aside this issue to the record of the A.O./TPO with the direction to redo the exercise of determination of ALP by considering the proper working capital adjustment in the comparable prices in respect of transaction of software development services provider to the AE. We make it clear that if after giving the necessary adjustment the international transaction of the assessee is found at arm’s length then there is no question of any separate adjustment on account of allowing the credit period on the receivable from AE. We further clarify that the normal credit period allowed for the receivable from the AE shall be the credit period prevailing in the industry and therefore we are of the view that two months credit period should be taken as a normal business practice in the industry. The TPO/A.O shall also consider the benchmark interest rate as LIBOR/PLR in the light of various precedents on this issue.”
A similar view has been taken by this Tribunal in a series of other decisions as
referred in the earlier decisions as well as relied upon by the ld. AR of the
assessee. Accordingly, taking a consistent view we set aside this issue to the
record of the A.O./TPO with the direction to redo the determination of ALP in
respect of providing software development services by considering the proper
working capital adjustment in comparable price. In case after giving the
necessary adjustment the international transaction of the assessee is found at
arm’s length then there is no question of separate adjustment on account of
allowing credit period on receivable from the AE.
28 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 IT(TP)A No.166/Bang/2014 for the A.Y. 2009-10
The assessee has raised the following grounds :
The learned TPO and the learned AO have erred, in law and in fact, by failing to take cognizance of the valid business/commercial reasons put forth by the Appellant for not charging a guarantee fee to its Associated Enterprises. 2. The learned TPO and the learned AO have erred, in law and in fact, by ignoring the corporate guarantees obtained from overseas subsidiaries/ parent company for which no guarantee fee has been paid by the Appellant. 3. The learned TPO and the learned AO have erred, in law and in facts, by not giving proportionate effect to the guarantees which existed only for a part of the year. 4. The learned TPO and the learned AO have erred, in law and in facts, by considering corporate guarantee transaction as an intra-group service, warranting an arm’s length remuneration by ignoring the fact that such a transaction is a mere shareholder activity. 5. The learned TPO and the learned AO have erred, in law and in facts, by considering the outstanding dues from the AEs to be in the nature of loan and not considering the business/ commercial expediencies of the arrangement. 6. The learned TPO and the learned AO have erred, in law and in facts, in imputing interest on the loans advanced to the AEs, by completely disregarding the fact that loans given to AEs are in the nature of quasi equity and were commercially expedient from XSL’s perspective. 7. The learned TPO and the learned AO have erred, in law and in facts, in not objectively selecting the interest rate to determine the arm’s length rate of interest applicable for outstanding dues from the AEs.
The learned AO has erred in law and on facts, by reducing Rs 39,07,208 (foreign travel expenses) from export turnover of Bangalore BPO unit in the formula prescribed under section 10A(4) of the Act, even though the Company is not rendering technical services outside India. 9. The learned AO has erred in law and on facts, by placing incorrect reliance on the ruling of the Hon’ble Supreme Court in the case of CIT vs HimatsingikeSeide Ltd, since the ruling is on the fact of an eligibleunit having only unabsorbed depreciation and such unabsorbed depreciation of the eligible unitis to beset-off with the profits of the same eligibleunit, which is not the facts of the Appellant. 10. Further, the learned AO by placing incorrect reliance on the ruling of the Hon’ble Supreme Court in the case of CIT vs HimatsingikeSeideLtd, has also disregarded the jurisdictional ruling of the Hon’ble Karnataka High Court in the case of CIT and Anr. vs Yokogawa India Ltd. and Ors. (341
29 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 ITR 385)and has computed the deduction for Bangalore BPO unit eligible under Section 10A of the Act at Rs 33,79,64,225 after adjusting the eligible profits with the losses of the other eligible units, i.e. Scandent, Bangalore and SSIT Chennai, for the same year. 11. The learned AO has erred in law and on facts, by not considering the profit as per Profit and Loss account as per Schedule VI read with provisions of Section 211 of the Companies Act, 1956 for computation of ‘Book profits’ on the pretext that the profit reflected on the face of the Profit and Loss account are only relevant and by disregarding the adjustment made to the Profit and Loss balance through Schedule to the financial statements of the Company during the subject AY. Based on this, the learned AO has considered Rs 20,44,39,258 as the profits as against Rs 10,16,53,062. 12. The learned AO has erred in law and on facts, by not considering the fact that as per provisions of sub-section (6) of Section 211 of the Companies Act, any reference to a Balance Sheet or Profit and Loss account shall include any notes to accounts thereon or documents annexed thereto and consequently failed to adjust the amalgamation loss to the book profits. 13. The learned AO has erred, in law and on facts, by adding back the provision for onerous leases amounting to Rs 6,41,61,438 (that was debited to profit and loss account of the Company on the basis of contractual obligations) on the pretext that the same constitutes unascertained liability. 14. The learned AO has erred in law and on facts, by contending that Appellant has added the provision for onerous lease in normal tax computation by treating it as an unascertained liability, whereby not appreciating the fact that the disallowance with respect to provision for onerous lease in normal tax computation was on account of non-deduction of taxes under section 40(a)(ia) on the provision made. 15. The learned AO has erred, in law and on facts, by not allowing the deduction of lower of brought forward loss or unabsorbed depreciation amounting to Rs 2,93,60,721 by disregarded the submissions made by the Company providing year wise details of loss before depreciation and unabsorbed depreciation. 16. The learned AO has erred in law and on facts, by computing interest of Rs 6,01,152 under Section 234C of the Act on the demand raised as against Rs 61,448 calculated on the returned income bythe Appellant in its Return of Income.
The assessee has also raised an additional ground as Ground No.21 as
under :
17 : The learned TPO and the learned AO have erred, in law and on facts, by considering the outstanding dues from AEs a separate international transaction under Section 92B subject to transfer pricing.
30 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 18 : Without prejudice to Ground No. 17 above, the learned TPO and the learned AO have erred, in law and on facts, by not considering the impact of working capital adjustment and making an addition in this regard.
19 : Without prejudice to Ground No. 1, the learned TPO and the learned AO have erred, in law and on facts, in not objectively selecting the arm’s length rate of fee/commission applicable for corporate guarantees issued to AEs.
20 : Without prejudice to Ground No. 6, the learned TPO and the learned AO have erred, in law and on facts, in not objectively selecting the arm’s length rate of interest applicable for loans issued to AEs.
Ground Nos.1 to 4 & 21 are regarding the T.P. Adjustment in respect of
the guarantee fees on corporate guarantee provided by the assessee to AE.
This issue is common as for the Assessment Year 2008-09 and in view of
our finding for the Assessment Year 2008-09, these grounds of the assessee's
appeal stand disposed of in the same terms.
The Ground No.5 is regarding TP Adjustment on the outstanding due
from AE. This issue is also common as for the Assessment Year 2008-09 and in
view of our finding for the Assessment Year 2008-09, these grounds of the
assessee's appeal stand disposed of in the same terms.
The Ground Nos.6 & 7 are regarding T.P. Adjustment in respect of
loan/advance given to AE. This issue is also common as for the Assessment
31 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 Year 2008-09 and in view of our finding for the Assessment Year 2008-09, these
grounds of the assessee's appeal stand disposed of in the same terms.
Ground No.8 is regarding exclusion of expenses from export turnover
while computing the deduction under Section 10A of the Act.
We have heard the rival submission and perused the material on
record. The Hon’ble Karnataka High Court in the case of CIT v M/s Tata Elxsi
Ltd. & Others 349 ITR 98 (Kar) had held that while computing the exemption
u/s 10A, if the export turnover in the numerator is to be arrived at after
excluding certain expenses, the same should also be excluded from the total
turnover in the denominator. The relevant finding of the Hon’ble jurisdictional
High Court reads as follows:-
“………..Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be included. However, the word total turnover is not defined for the purpose of this section. It is because of this omission to define ‘total turnover’, the word ‘total turnover’ falls for interpretation by this Court;
32 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 ……..In section 10A, not only the word ‘total turnover’ is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assxcessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term ‘total turnover’ in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, ‘export turnover’ is defined, and when the ‘total turnover’ includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same”.
33 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 In the light of the above binding precedents, we direct the AO to exclude the
above mentioned expenses both from the export turnover as well as from the
total turnover while calculating deduction u/s 10A of the Act.
Ground Nos.9 & 10 are regarding setting off unabsorbed depreciation
against the profits of the eligible units.
Having considered the rival submissions as well as the relevant material on
record, we find that the judgment of the Hon’ble jurisdictional High Court in the
case of CIT Vs M/s Himatasingike Seide Ltd.(Supra) was delivered by considering
the un-amended provisions of Sec.10A/10B of the IT Act, 1961 prior to 2001.
The Hon’ble jurisdictional High Court in a subsequent decision in the case of CIT
Vs M/s Yokogawa India Ltd (341 ITR 385)(Supra), after considering the
amended provisions of Sec.10A/10B of the IT Act, has decided this issue in
favour of the assessee. By following the decision in the case of M/s Yokogawa
India Ltd (341 ITR 385)(Supra) the Co-ordinate Bench of this Tribunal in the case
of M/s Safran Aerospace India Pvt. Ltd Vs DCIT in ITA No.1261(B)/2010, had
considered and adjudicated an identical issue in para-4.4 and 4.5 as under; “4.4 Having regard to the rival contentions and the material on record, we find that it is not clear from the record as to whether brought forward losses and depreciation loss
34 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 pertain entirely to non-STPI unit only or part of it also pertains to STPI unit. The Hon’ble Karnataka High Court in the case of Himatsingika Siede (supra) was considering the case of an assessee which was 100% export oriented unit in terms of sec.10B of the Act and was claiming exemption u/s 10B. In the case of the said assessee, unabsorbed depreciation available to the assessee in the assessment year 1988-89 was carried forward to the assessment year 1994-95 (relevant assessment year) and was claimed by the assessee to be adjusted against income from other sources, thereby reducing the assessee’s income for assessment purposes at ‘nil’. The AO accepted the said claim of the assessee and assessed the total income at ‘nil’. However, the Commissioner of Income- tax (CIT) revised the order u/s 263 stating that the order passed by the AO was erroneous and prejudicial to the interests of the Revenue as exemption u/s 10B was allowed on an inflated amount without deducting unabsorbed depreciation. The CIT directed that unabsorbed depreciation should be adjusted against the income of the export oriented business undertaking and the total income of the assessee should accordingly be recomputed afresh. The assessee therein had appealed to the Tribunal which allowed the same against which the Revenue preferred an appeal before the Hon’ble High Court. The Hon’ble High Court held that sec.10B cannot be read in isolation of other provisions as it is only an exemption provision and exemption provision cannot be fanciful and it has some rationale with other provisions of the Act and therefore after a combined reading of the definition of exemption, total income-tax liability, deductibility etc., one has to come to a conclusion that calculation as far as possible is to be in terms
35 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 of the Act. To arrive at a profit and gain, one has to necessarily take into consideration total income in terms of the Act and to arrive at the income, one has to take into consideration various additions and deletions in terms of the Act, such as allowability of depreciation for the purpose of calculation of total income. The Hon’ble Supreme Court has dismissed the SLP filed by the assessee against the order of the Hon’ble High Court. 4.5 The Hon’ble High Court of Karnataka, in the case of Yokogawa India Ltd (supra) was considering the case of an assessee which was in the business of manufacture and trading of process controlled instruments and it had filed return of income declaring loss. During the assessment proceedings u/s 143(3), the AO had observed that the assessee had claimed exemption u/s 10A for its STPI unit before set off of brought forward losses and depreciation. The AO, therein, had also observed that 10A benefit can be given only after adjusting brought forward loss and depreciation from the total income of the assessee. Aggrieved, the assessee preferred an appeal before the CIT(A) who granted relief to the assessee and on further appeal by the Revenue to the Tribunal, it was held that business loss of other units cannot be set off against the profits of the undertaking engaged in the business of computer software for purposes of determination of the allowable deduction u/s 10B of the Act. The Revenue, therefore, filed appeal before the Hon’ble High Court and the High Court framed the following question for determination: “Whether the Tribunal was correct in holding that the deduction u/s 10A or 10B of the Act during the current
36 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 assessment year has to be allowed without setting off brought forward unabsorbed losses and the depreciation from earlier assessment year or current assessment year either in the case of non-STP units or in the case of the very same undertaking?” The Hon’ble High court has considered the issue at length and at para 31 of its order has held that as deduction u/s 10A has to be excluded from the total income of the assessee, the question of unabsorbed business loss being set off against such profits and gains of undertaking would not arise and in that view of the matter, the approach of the AO was quite contrary to the aforesaid provision and the appellate Commissioner as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of sec.10A to the assessee. Thus, the question of law was answered in favour of the assessee. Thus, there are two judgments of the Hon’ble Karnataka High Court contrary to each other. When there are two judgments of the very same High Court by benches of equal strength, then the later judgment of the High Court has to be followed as held by the Hon’ble Apex Court in the case of Bhika Ram and others vs. UOI reported in 238 ITR 113. The decision of the High Court in the case of Himatsingike Siede (supra) is dated 4th August 2006 whereas the decision of the Hon’ble High Court in the case of Yokogawa India Ltd.(supra) is dated 9th August, 2011. As regards the dismissal of the SLP by the Hon’ble Supreme Court against the decision of the Hon’ble Karnataka High Court in the case of Himatsingike Siede (supra) is concerned, we find that the Hon’ble Supreme Court has dismissed the appeal in limine without laying down any ratio decidendi therein and, therefore, as held by the Hon’ble Apex Court in the case of
37 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 Indian Oil Corporation Ltd. vs. State of Bihar & others, reported in 167 ITR 897, the decision of the Hon’ble Karnataka High Court in the case of Yokogawa India Ltd.(supra) holds the field. Further, the Hon’ble Apex Court in the case of Vegetable Products Ltd., reported in 88 ITR 192 (SC) has held that where two reasonable constructions are possible, then the construction in favour of the assessee must be adopted. Respectfully following the said decision, we allow the ground of appeal No.2.”.
Following the latest judgment of the Hon’ble High Court in case of M/s
Yokogawa India Ltd (341 ITR 385)(Supra) as well as Co-ordinate Bench
decision in case of M/s Safran Aerospace India Pvt. Ltd.,(Supra) we decide
this issue in favour of assessee and direct the AO to allow the claim of
deduction u/s 10A of the IT Act,, without setting off of brought forward
losses/unabsorbed depreciation
Ground Nos.11 & 12 are regarding the adjustment made by the Assessing
Officer on account of loss arising due to amalgamation was not shown in the
profit and loss account but disclosed in the notes to accounts. This issue is
common to the issue raised by the assessee in the additional ground Nos.12 &
As we have set aside this issue to the record of the DRP for the Assessment
Year 2008-09 accordingly, this issue is set aside to the record of the DRP for
38 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 adjudication. Needless to say the assessee be afforded an opportunity of
hearing to the assessee.
Ground Nos.13 & 14 are regarding disallowance of lease charges on the
ground of unascertained liability as well as non-deduction of taxes at source
under Section 40(a)(ia) of the Act.
The assessee claimed to have created a provision for rental liability in
respect of Guindy and Pune facilities. The Assessing Officer found that this
amount of Rs.6,41,61,438 has been added back in the computation under
regular provisions of Act as an uncertained liability but was not added back
while computing book profit under Section 115JB of the Act. Accordingly, the
Assessing Officer increased the book profit under Section 115JB by the said
amount of Rs.6,41,61,438. The assessee raised the objection before the DRP
and submitted that due to presence of a lock in period clause in the agreement
made in respect of Guindy and Pune facilities whereby the premises were
highered for 72 months and 60 months respectively the provision created
represents a certain liability which has to be accounted under Mercantile
System of Accounting. The DRP did not accept the contention of the assessee
and observed that there was no urgency as to why the assessee accounted for
39 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 the entire lease period liability as on 31.3.2009 when the same could have been
accounted during the lease period from year to year. Further when the lock in
period has already expired then this is no more even an anticipated liability.
Before us, the ld. AR of the assessee has submitted that as per the
Accounting Standard 29, the assessee has to take into consideration all
probable outflow of sources and applications on the basis of a reliable
estimate. The ld. AR has submitted that when there is a lock in period in the
lease agreement then the assessee is bound to pay the rent atleast for the lock
in period and therefore the provision is based on prudent accounting principle.
He has further contended that when the accounts of the assessee are
maintained as per Schedule VI of the Companies Act then except the
adjustment provided under Explanation to Section 115JB, the Assessing Officer
is not empowered to tinker with the profits of the assessee.
On the other hand, the ld. DR has submitted that there is no basis of
making the provision of uncertain liability in respect of future rent which does
not pertain to the year under consideration. The ld. DR has pointed out that
the lock in period had already expired and therefore there was no liability in
40 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 existence as on 31.3.2009. He has relied upon the orders of the authorities
below.
We have considered the rival submissions as well as the relevant material
on record. The assessee has made a provision in respect of the entire rent to be
paid for a minimum period of 72 months and 60 months respectively in respect
of the premises at Guindy and Pune. We find that this provision does not
pertain to any liability accrued during the year under consideration but the
provision was made by the assessee for the rent to be paid for future years. As
per the A.S. 29, a provision is recognized when an enterprise has a present
obligation as a result of past event, it is probable that an outflow of resources
will be required to settle the obligation and a reliable estimate can be made of
the amount of the obligation. If these conditions are not met then no provision
should be recognized. Therefore the primary condition is the present
obligation as a result of past event though the settlement of obligation may be
in future. In the case on hand, the future rent to be paid by the assessee in
respect of the premises in question is not a present obligation to be settled in
future. The assessee has not produced any record to show that a decision was
taken by the assessee to vacate the premises prior to the lock in period as per
41 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 the lease agreement. Once there is no decision of vacating the premises prior
to the lock inperiod then making the provision in respect of the future rent
which is otherwise an allowable expenditure for the relevant year does not fall
under the concept of recognizing the provision as per the A.S. 29. The DRP has
recorded the fact that the assessee has retained the premises beyond the lock
in period and therefore the liability for future year not accrued during the
financial year under consideration. The concept of disclosure in notes to
Accounts would amount to disclosure in the financial statement is applied if an
item of income or expenditure is required to be part of profit and loss account
as per Part II of Schedule VI of the Companies Act but the same was not
disclosed in the profit and loss account and has been disclosed in thenotes
forming part of financial accounts. Therefore the said disclosure in the notes to
accounts would be treated as disclosure of particular income or expenditure as
the case may be in the profit and loss account for the purpose of computation
of book profit under Section 115JB of the Act. In the case on hand since this
was not a permissible provision as per Accounting Standard therefore it was not
required to be disclosed in the profit and loss account and accordingly the
disclosure made in notes to accounts would not change the nature of provision
42 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 as accrued expenditure. In view of the facts and circumstances as discussed
above, we do not find any error or illegality in the orders of the authorities
below on this issue.
Ground No.15 is regarding brought forward losses or unabsorbed
depreciation whichever is lessor has to be allowed as deduction.
We have heard the learned Counsel as well as learned Departmental
Representative and considered the relevant material on record. At the outset,
we note that the DRP has allowed the objections of the assessee on this issue in
para 16.2 as under :
“ 16.2 The draft assessment order and the submissions made by the assessee ;have been perused. The dispute arises on a computational issue i.e. what should be the amount of brought forward loss to be reduced from the book profit in terms of Clause III of Explanation 1 to Sec. 115JB. The Assessing Officer adopted the figure of loss as on 1.4.2007 whereas the assessee claims that the figure should be the loss brought forward for the financial year relevant to the Assessment Year 09-10 i.e. as on 1.4.2008. We find that the Assessing Officer has erroneously taken the opening balance of loss for the F.Y. 2007-08 at Rs.6,53,71,386 whereas he should have calculated the loss brought forward as on 1.4.2008 only. The Assessing Officer is directed to recompute the book profits under Section
43 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 115JB by adopting the figure of brought forward loss as on 1.4.2008 accordingly. The objection of the assessee is allowed subject to the above direction.”
Despite the directions of the DRP, the Assessing Officer while passing the final
assessment order has not allowed this claim of the assessee which is a gross
disrespect and derogation on the part of the Assessing Officer to the binding
orders/directions of the DRP. Accordingly, we direct the Assessing Officer to
recompute the book profit under Section 115JB as directed by the DRP. We
make it clear such a conduct of the Assessing Officer is unwarranted and
depreciable and goes even against the interest of revenue being a self inflecting
injury. Even if the directions of the DRP are not acceptable to the Assessing
Officer, the remedy is to file the appeal after passing the final order in terms of
the directions of the DRP. By not following the directions of the DRP, the
Assessing Officer has acted against the interest of revenue/department as in
such a situation the revenue cannot file even an appeal on the issue where the
findings of the DRP are not acceptable to the revenue.
44 IT(TP)A Nos.1294/Bang/2012 & 166/Bang/2014 40. Ground No.16 is regarding levy of interest under Section 234C which is
mandatory and consequential in nature.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 31st Oct., 2016.
Sd/- Sd/- (A.K. GARODIA) (VIJAY PAL RAO) Accountant Member Judicial Member Bangalore, Dt. 31.10.2016.
*Reddy gp
Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File.
By Order
Asst. Registrar, ITAT, Bangalore