2018 (11) TMI 990 - AT - Income Tax

Transfer pricing - Income on account of the alleged difference in arm s length price of exports made by the appellant to its associated enterprises - benchmarking analysis - Most Appropriate Method - Held that - Tribunal 2018 (5) TMI 581 - ITAT DELHI has remanded back the issue to the file of the TPO, directing to accept assessee s contention of foreign AE to be a tested party in the event assessee is able to provide complete financials of GDM Dubai along with complete financials of relevant comparables required to benchmark the international transaction. Tribunal further directed that the TPO shall then consider the foreign AE to be tested party and then verify whether the Foreign AE could be considered as least complex with minimum adjustments and for which comparables are available easily on public domain. It can be seen that in this year assessee submitted that all three AEs had incurred losses in their audited financial statement for the relevant period before. As per the direction of the Tribunal for A.Ys. 2003-04, 2005-06 and 2006-07, the foreign AE can be considered as a tested party. TPO in the event assessee is able to provide complete financials of foreign AE along with complete financials of relevant comparables required to benchmark the international transaction. We further direct the TPO to consider the foreign AE to be tested party and then verify whether the Foreign AE could be considered as least complex with minimum adjustments and for which comparables are available easily on public domain. Thus, we are remanding back this issue to the file of A.O/TPO. Transfer Pricing addition in respect of interest on loan given to foreign A.E - Held that - The contention of the Ld. AR are accepted that where the transaction was of lending money in foreign currency to its foreign subsidiaries the comparable transactions, therefore, was of foreign currency lent by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In such a situation, domestic prime lending rate would have no applicability and the international rate fixed being EURIBOR 200 points was properly taken by the assessee. Therefore, the TPO s treatment of benchmarking the aforesaid transaction @ 17.26% by applying the yield rate on corporate bonds as well as the DRP directing the TPO to apply the Prime Lending Rate ( PLR ) prescribed by RBI @ 13.25% to benchmark the transaction, both were not correct. Deduction u/s 10B to be allowed without setting off the losses of other units - Held that - issue of claiming deduction u/s 10B of the Act in respect of eligible unit without setting off losses of other units stands settled in favour of the assessee by the decision of Supreme Court in the case of CIT vs Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT , wherein, it has been held that, the state of deduction for section 10A would be while computing across total income of eligible undertaking under Chapter IV of the Act and not at the state of computation of total income under Chapter VI of Act, i.e. before setting off losses of other units. Reduction of deduction u/s 10B on account of scrap sale - Held that - Scrap sales are sales made by assessee s existing exports business only and the Revenue was not able to point out any other business from which such sales were made. The decisions relied by the Ld. AR are applicable in the present case.In the present case in fact, scrap sales are sales made by assessee s existing exports business only. There is the direct nexus between the profits and gains derived from the assessee from export business and therefore, it satisfies the requirements of Section 10B of the Act. Thus, the Assessing Officer was not correct in disallowing this claim of the assessee. Disallowance of royalty/technical know-how - Held that - In the present assessment year as well the assessee made payment on account of royalty/ technical know-how and claimed deduction for the same. From the perusal of the agreements, it can be seen that the assessee acquired merely right to draw upon technical knowledge of foreign companies for a limited purpose of carrying on its business, and that foreign companies did not part with any of their assets absolutely for ever or for a limited period of time, that they continued to have the right to use their knowledge and, even after agreements had run their course, their rights in this behalf was not lost, that assessee had not, therefore, acquired any asset or advantage of an enduring nature for benefit of its business and that payments were, therefore, revenue in nature and were deductible. This position remains identical to that of earlier Assessment years wherein the Tribunal decided this issue in favour of the assessee Disallowance u/s. 14A - Held that - In fact, the assessee in its return of income has not determined any administrative expenditure incurred in relation to those investments, which would earn tax-free income. The assessee has also not determined or allocated any expenditure on account of interest in relation to the average investment of ₹ 157,63,33,630/-. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for re-computation of disallowance under Section 14A of the Act as per the law. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Disallowance of FCCB issue expenses - Held that - The bond-holders also had an option of converting their FCCB s into equity shares anytime on or after 31.07.2007 until 11.06.2012. The assessee incurred expenses of ₹ 10,33,76,854 on issue of FCCB s and claimed the same as deduction in the return of income. These facts were not disputed by the Revenue at any point of time. The said expenditure, in accordance with the provisions of Section 78 of the Companies Act, 1956, was debited to Securities Premium account and not charged to P&L account by the assessee. Accordingly, the same was claimed as deduction in the return of income as a separate line item. The Hon ble Delhi High Court in the case of CIT vs. Havells India Limited 2012 (5) TMI 449 - DELHI HIGH COURT had held that expenditure incurred on issue of debentures is to be allowed as revenue expenditure despite indications to effect that debentures are to be converted in near future into equity shares. Thus, the issue is squarely covered by the Hon ble Delhi High Court decision. Disallowance of redemption premium amortised in respect of FCCB - Held that - At the end of the relevant assessment year, the FCCB were in the nature of debt and conversion thereof into equity, was solely at the option of the bond-holder. Accordingly, as a prudent businessman, the assessee was required to ascertain the future liability and create provisions in respect thereof. The Ld. AR reliance upon the decision of Supreme Court in the case of Taparia Tools Limited vs JCIT 2015 (3) TMI 853 - SUPREME COURT is very much applicable in the present case. The Apex Court further held that, one time upfront discounted interest payment in respect of 5 years debentures was to be allowed as deduction in year of payment itself. The Apex Court also held that a different treatment towards interest in books of accounts could not be a factor which would deprive assessee from claiming entire expenditure as a deduction. Further, the Courts in various decisions have also held that, premium on redemption of FCCB can be amortized over the life of FCCB and be claimed as deduction in the return of income. Thus, the Assessing Officer was not correct in disallowing the same. Transaction of payment of share application which does not fall within the purview of term international transaction under Section 92B - Held that - In the present case, transaction of payment of share application does not fall within the purview of term international transaction under Section 92B as there is no direct bearing on the profits, income, losses or assets of the enterprise and, therefore, it is outside the ambit of international transaction to which ALP adjustment can be made. Thus, the issue is squarely covered in favour of the assessee and the DRP rightly directed the AO that no interests need to be charged on share application money pending with its foreign subsidiaries. - decided against revenue.

Summary

Issues Involved:
1. Computation of taxable income.
2. Transfer pricing adjustments on exports to associated enterprises.
3. Transfer pricing adjustments on interest charged to associated enterprises.
4. Deduction under Section 10B of the Income Tax Act.
5. Disallowance of foreign exchange gain under Section 10B.
6. Disallowance of scrap sales under Section 10B.
7. Disallowance of royalty expenditure as capital expenditure.
8. Disallowance under Section 14A for expenses attributable to exempt income.
9. Disallowance of FCCB issue expenses.
10. Disallowance of amortization of premium on redemption of FCCB.
11. Revenue's appeal on the application of PLR for interest receivable from loans to subsidiaries.
12. Revenue's appeal on charging interest on share application money.

Detailed Analysis:

1. Computation of Taxable Income:
The assessing officer computed the taxable income of the appellant at ?62,39,09,420 against a returned loss of ?79,08,80,137 for A.Y. 2008-09. For A.Y. 2009-10, the taxable income was computed at ?54,71,49,400 against a returned loss of ?1,93,73,70,310. For A.Y. 2010-11, the taxable income was computed at ?1,43,95,15,290 against a returned loss of ?6,63,65,973.

2. Transfer Pricing Adjustments on Exports to Associated Enterprises:
The assessing officer made an addition of ?73,99,46,465 for A.Y. 2008-09, ?1,78,26,66,433 for A.Y. 2009-10, and ?41,53,41,460 for A.Y. 2010-11 on account of the alleged difference in arm's length price of exports to associated enterprises. The Tribunal remanded the issue back to the TPO for verification, directing the TPO to consider the foreign AE as the tested party if the assessee provides complete financials of the foreign AE and relevant comparables.

3. Transfer Pricing Adjustments on Interest Charged to Associated Enterprises:
The assessing officer made an addition of ?98,88,047 for A.Y. 2008-09, ?9,12,25,805 for A.Y. 2009-10, and ?5,20,26,523 for A.Y. 2010-11 on account of the alleged difference in arm's length price of interest charged by the appellant from its associated enterprises. The Tribunal held that the interest rate should be based on the currency in which the loan is to be repaid, and allowed the assessee's contention of using EURIBOR + 200 basis points.

4. Deduction under Section 10B of the Income Tax Act:
The assessing officer reduced the deduction claimed under Section 10B to NIL by setting off the losses of other units. The Tribunal allowed the assessee's claim, following the Supreme Court decision in CIT vs Yokogawa India Ltd., which held that the deduction under Section 10B should be computed before setting off losses of other units.

5. Disallowance of Foreign Exchange Gain under Section 10B:
The assessing officer disallowed the deduction under Section 10B in respect of foreign exchange gain, holding it to be income not derived from the industrial undertaking. The Tribunal allowed the deduction, following its own decision in the assessee's case for previous years, where it was held that foreign exchange gain arising out of business of eligible undertaking is eligible for deduction under Section 10B.

6. Disallowance of Scrap Sales under Section 10B:
The assessing officer disallowed the deduction under Section 10B in respect of scrap sales, holding it to be income not derived from the industrial undertaking. The Tribunal allowed the deduction, following the decision of the Karnataka High Court in GE BE (P) Ltd. vs ACIT, which held that scrap sales arising out of the business of eligible undertaking are eligible for deduction under Section 10B.

7. Disallowance of Royalty Expenditure as Capital Expenditure:
The assessing officer disallowed 25% of the expenditure on royalty as capital expenditure. The Tribunal allowed the deduction, following its own decision in the assessee's case for previous years, where it was held that the payment for royalty/technical know-how was revenue in nature and deductible.

8. Disallowance under Section 14A for Expenses Attributable to Exempt Income:
The assessing officer disallowed a sum invoking provisions of Section 14A read with Rule 8D, holding it to be expenses attributable towards investments made for earning exempt dividend income. The Tribunal remanded the issue back to the assessing officer for re-computation, directing the officer to record satisfaction regarding the nexus of exempt income with expenses incurred.

9. Disallowance of FCCB Issue Expenses:
The assessing officer disallowed the deduction of expenses incurred on the issue of FCCB, holding it to be capital in nature. The Tribunal allowed the deduction, following the decision of the Delhi High Court in CIT vs Havells India Limited, which held that expenditure incurred on the issue of debentures is to be allowed as revenue expenditure.

10. Disallowance of Amortization of Premium on Redemption of FCCB:
The assessing officer disallowed the deduction of amortized premium on redemption of FCCB, holding it to be unascertained and contingent in nature. The Tribunal allowed the deduction, following the decision of the Supreme Court in Taparia Tools Limited vs JCIT, which held that premium on redemption of FCCB can be amortized over the life of FCCB and claimed as deduction.

11. Revenue's Appeal on the Application of PLR for Interest Receivable from Loans to Subsidiaries:
The Revenue appealed against the DRP's direction to apply PLR of RBI for determining ALP of interest receivable from loans to subsidiaries. The Tribunal dismissed the Revenue's appeal, following its decision on the assessee's appeal regarding the use of EURIBOR + 200 basis points for benchmarking the interest rate.

12. Revenue's Appeal on Charging Interest on Share Application Money:
The Revenue appealed against the DRP's direction that no interest need to be charged on share application money pending with foreign subsidiaries. The Tribunal dismissed the Revenue's appeal, following the decision of the Delhi Tribunal in Bharti Airtel Ltd. vs Additional CIT, which held that such transactions do not fall within the purview of 'international transaction' under Section 92B.

Conclusion:
The assessee's appeals for A.Y. 2008-09, 2009-10, and 2010-11 were partly allowed for statistical purposes, and the Revenue's appeal for A.Y. 2009-10 was dismissed.