2018 (11) TMI 1250 - AT - Income Tax

TPA - MAM selection - benchmarking - application of CUP method the prices of international transactions of export of the various grades of stainless steel products was compared with prices of export of the same grades of stainless steel products to unrelated party on the same or the nearest possible date - rejection of the Chinese market quotation adopted by the assessee applying CUP method for comparability analysis of the export made to the foreign associated Enterprises - Held that - The cardinal principle of the transfer pricing regulations is to compare like with like and to eliminate differences, if any, by suitable adjustment. Rule 10B(3) also provides for appropriate comparability adjustments to made in the PLI of the tested party and comparable companies while computing the arm s length price. In almost all the decisions, the prices are backed by some exchanges or some reputable agencies, which are in the business of providing price-based data. No such evidences were led by the assessee in case of these Chinese quotations, which are downloaded from the Internet without any Comparability analysis, cannot be accepted. Before the learned Transfer Pricing Officer the assessee also did not substantiate that how the Chinese market quotations support the rule 10 B and D of the income tax rules. Further according to the OECD Transfer Pricing Guidelines For Multinational Enterprises And Tax Administration (July 2017) in Para number 2.18 has stated that the term quoted price refers to the price of the commodity in the relevant period obtained in an international or domestic commodity exchange market. The quoted price also include prices obtained from recognized and transparent price reporting or statistical agencies or from governmental price setting agencies where such indexes are used as a reference by unrelated parties to determine prices in transactions between them. Therefore, we fully agree with the order of the learned Transfer Pricing Officer and the learned Dispute Resolution Panel in holding that the Chinese market quotations downloaded from Internet by the assessee of BAO steel and LIiSCO cannot be used for comparability analysis in CUP method. Rejection of bulk discount of 5% relevant for adjustment made in J 4 black coil exported to its associated enterprise - Held that - This case requires an evaluation of whether the different volumes should result in an adjustment of the transfer price. The relevant market should be researched by analyzing transaction in similar products to determine typical volume discounts. No such market research or any other market policy of the assessee was produced before us or authorities below, therefore, the facts of the case before us are not such. Even otherwise, the assessee has not shown that there was any pricing policy with the associated enterprise of giving a bulk discount. It was also not shown that what is the bulk quantity purchased on which discount is eligible. In all the circumstances, the claim of the assessee is merely an ad hoc claim without any supporting evidences. No documents was also placed before the lower authorities or before us that giving the volume discount is a market trend or commercial practice in steel business when assessee is a premium steel manufacturer of the country. In view of this we do not find any infirmity in the order of the lower authorities in rejecting 5% bulk discount to the assessee.Therefore, this contention is rejected. Prices based on the date of order acceptance cannot be applied in the present case - Held that - There has to be a binding element behind all the transactions to make them one and connected. Such data was also not available before the learned Transfer Pricing Officer or learned Dispute Resolution Panel. If this fact is established by the assessee then the issue is squarely covered in favour of the assessee on this point by the decision of the coordinate bench. Therefore, respectfully following the decision of the coordinate bench, we also direct the AO to compute the ALP considering the transactions of export to associated enterprise on aggregate basis after assessee establishes before him that all these export transactions of the associated enterprise are interlinked. To this extent, this issue is sent back to the file of the learned AO/TPO with a direction to the assessee to substantiate the argument that the transactions of export of goods to associated enterprise are interlinked. Analysis based upon the nickel price adjusted export data - Held that - Neither before the learned Transfer Pricing Officer, before the learned Dispute Resolution Panel , or before us this data is made available. Even the composition of the each product with respect to the nickel content, steel content, chromium content et cetera has not been established. Therefore, we do not have any alternative to give such kind of adjustment to the assessee at this stage. Therefore we set aside this issue to the file of the learned assessing officer with a direction to the assessee to substantiate its claim accordingly with respect to the nickel content in the product, nickel price variations over the period, variation in other commodity prices et cetera. The AO may examine the detail and then decide the issue afresh with respect to the alternative claim of the assessee. Alternatively the assessee has also stated that if the CUP method cannot be applied in the case of the appellant due to the reasons stated above, the alternative claim of the assessee is that international transactions undertaken by the assessee to be benchmarked applying the Transaction Net Margin Method - Here the assessee has given multiple data to justify the benchmarking methodology with respect to sale of export of steel material to its Associated Enterprises; therefore, such are not the facts before us as are decided by the coordinate bench. Further the other decisions relied upon are also related to the non-availability of the data. Therefore, unless the assessee says that there are no data available for benchmarking under the CUP method, the TNMM should be the alternative method could not be accepted. Therefore, this argument of the learned authorised representative is rejected. Difference in the arm s-length price of goods exported by the appellant to its associated enterprise fall within the range of 5% of the transacted price as provided under the second proviso to section 92C (2) of the act - Held that - respectfully following the decision of the coordinate bench in the assessee s own case, we set aside this argument of the assessee to the file of the learned assessing officer/Transfer Pricing Officer, with a direction that if there are more than one prices the learned Transfer Pricing Officer is directed to consider the 5 percent as in the case for assessment year 2006 07. Accordingly, this argument of the assessee is accepted. Certain errors in the comparison made by the Transfer Pricing Officer in his order - The errors pointed out by the assessee with respect to assessment year 2008 09 deserve consideration by the learned Transfer Pricing Officer. The assessee is directed to show the error to the learned TPO/assessing officer and the learned AO and TPO are directed to verify the error and if found correct it may be rectified. Therefore, this argument of the assessee is accepted. Adjustment of basic customs duty when the price of the product of export is compared with the domestic market prices - The main claim of the assessee is with respect to the export of J1 black coil for assessment year 2008-09. On careful analysis of page number 168 of the order of the learned Transfer Pricing Officer in category II of the benchmarking, the basic customs duty has been considered by the learned Transfer Pricing Officer therefore this argument has already been addressed by the learned Transfer Pricing Officer by granting appropriate adjustment. It is also clear on reading page number 10 of the order of the Transfer Pricing Officer at para number five. Therefore, now this grievance of the assessee is resolved. Addition in the arm s length price of interest of loan to subsidiaries - Held that - The assessee has granted loan to its subsidiary company. Therefore, economic purpose and substance of the debt claim or debt for which granting of credit calls for the lending rate would be determinative. The commercial expediency and related benefits of close connections with the above transaction, of course, would have a marginal significance and effect. The lending rates shown by the bankers as adopted by the learned Transfer Pricing Officer will not have any factoring of that consideration. Furthermore, the credit rating would also be an issue when the banks are lending to a foreign party. The learned assessing officer has also stated that adjustment for securities also required to be made and the bankers extending loan in foreign currency would be insisting on sufficient security which looking at the financial health of the subsidiary is not possible and therefore interest rates are required to be imputed which will take care of this aspect also. In the present case, the borrower is the subsidiary of the lender company and therefore we do not find it necessary to include the same in the interest cost. Therefore, the interest rate adopted by the learned Transfer Pricing Officer is further required to be reduced by this factor. In view of these facts, we do not find any reason that interest charged by the assessee at LIBOR 200 is not at arm s-length. For ad-hoc adjustment of transaction cost, security and single customer risk upon interest rate - Held that - According to us the markup towards the transaction cost is exorbitant and comparison with the bank is also untenable. In view of this, we do not see any rational in the impugned in further cost and risk premium on the rate directed by the learned Dispute Resolution Panel . Accordingly we direct the learned Transfer Pricing Officer to not to charge any risk premium following the decision of the coordinate bench. In view of this, the transaction cost imputed of 300 basis points cannot be sustained. We find that the learned Transfer Pricing Officer should have considered for both the years the LIBOR 200 basis points in both the financial year financial year for the benchmarking for the interest income of the assessee. Addition on issue of corporate guarantee - international transaction - Held that - In the present case, the assessee itself has charged 1.5% guarantee commission. It has shown this transaction as an international transaction, benchmarked it applying CUP method. Further, no evidence has been laid down before us that it is part of the shareholders activity and not an independent international transaction. No evidence is placed before us that it is not at the behest of the AE but an obligation of the assessee. In view of this we reject this contention of the assessee that corporate guarantee issued by the assessee is not an international transaction. The assessee has charged guarantee commission from AE @ 1.5 %. The ld TPO has bench marked it after obtaining the quotation from various banks, which are 2.68 %. He further added 2 % as mark up because of security and margin adjustments. The assessee substantiated the Alp stating that ING Vasya bank has given a quote of 1.5 % further similar is stated to be the quote of Indusind bank. The TPO has also taken the quotes of Axis Bank, Canara Bank, PNB, and ICICI bank, bank of Baroda, HDFC bank, and SBI. He arrived at Arithmetic mean of 2.68 %. In the present case the ld TPO has benchmarked the transaction by obtaining the quote from bankers and Hon Bombay High court in case of THE COMMISSIONER OF INCOME TAX, MUMBAI Vs M/s EVEREST KENTO CYLINDERS LTD 2015 (5) TMI 395 - BOMBAY HIGH COURT . Even otherwise the commission charged by the assessee also in conformity with the rates quoted by Indusind bank and ING vasya bank. Further, the reasons given by us with respect to Risk adjustments and margins while deciding the issue of Interest receipt relying on the decision of Bharti Airtel decision 2014 (3) TMI 496 - ITAT DELHI are equally applicable for this transaction too. Disallowance under section 14 A r.w.r. 8D - Held that - For assessment year 2007 08 the learned assessing officer has applied rule 8D for making disallowance under section 14 A of the Income Tax Act of ₹ 3 9214001 where the assessee has earned the exempt income of rupees 1162000/ . Now it is a settled judicial precedent that for assessment year 2007 08 the rule 8D the does not apply. The assessee has contested that in assessment year 2006 07 the assessing officer has made an addition of ₹ 50,000 under section 14 A on the ground that assessee has earned a sum of ₹ 482.26 crores as dividend on investment of ₹ 25209.08 lakhs and no disallowance has been offered by the assessee. For that year vide para no. 9 of the order of the coordinate bench following assessee s own case has restricted the disallowance to the extent of ₹ 25,000 under section 14 A of the Income Tax Act. During the year the dividend income on the by the assessee is ₹ 1162000 /- which is far less compared to the earlier year and there is no finding by the learned AO that assessee has spent sums for earning dividend income. Therefore in the interest of justice and following the binding precedent we restrict the disallowance under section 14 A of the Income Tax Act on estimate basis at ₹ 25,000 for this year too. No satisfaction recorded by the assessing officer with respect to the correctness of the claim of the assessee of disallowing u/s 14A - Held that - Now the judicial precedent is settled that before invoking the provisions of rule 8D the learned assessing officer has to record the satisfaction about the correctness of the claim of the assessee and without recording, that satisfaction the disallowance cannot be made. The learned departmental representative also could not show the satisfaction of the learned assessing officer. Even otherwise it is also a settled law that the disallowance under section 14 A of the Income Tax Act cannot exceed the exempt income which is only ₹ 237000/-for this year. In absence of any satisfaction recorded by the assessing officer the disallowance made cannot be sustained. Hence, we direct the learned assessing officer to delete the disallowance of ₹ 4 4808080/- under section 14 A of the act. Accordingly, ground number six of the appeal of the assessee for assessment year 2008 09 is allowed. Disallowance of depreciation on cars sold to employees - Held that - there is still the block of the appreciable asset in existence therefore the depreciation cannot be disallowed if the sale consideration of the assets is less than the written down value of that block. Even otherwise after the concept of the block of assets introduced in the Income Tax Act, the identity, for the limited purpose of the claim of the depreciation, of an individual asset is obliterated. In view of this we do not find any justification for making disallowance of ₹ 1 98212/ of depreciation on account of sale of cars to the employees. Accordingly, ground number seven of the appeal of the assessee for assessment year 2008 09 is allowed. Disallowance of Bad Debts - Held that - Both the parties agreed before us that this issue is covered in favor of the assessee by the decision in the assessee s own case for the assessment year 2006-07 wherein, following the decision of Hon ble Supreme Court in the case of T.R.F. Ltd. vs. CIT 2010 (2) TMI 211 - SUPREME COURT deleted the disallowance of bad debts claimed in that year. Disallowance of depreciation on computer peripherals - Held that - The power supply equipments and computer peripherals are held to be the part of the computers and are eligible for depreciation at the rate of 60%. The issue is squarely covered by the decision of BSES YAMUNA POWERS LLD. / BSES RAJDHANI POWERS LTD. 2010 (8) TMI 58 - DELHI HIGH COURT in favour of the assessee. The learned departmental representative could not point out any other decision, which binds us. Therefore, respectfully following the decision of the honourable High Court s the disallowance deleted by the learned commissioner appeals of ₹ 231402/ on account of excess claim of depreciation is confirmed. Addition on account of interest capitalization to be deleted as relying on assessee own case Tribunal upheld the alternative contention of the assessee and allowed deduction of interest expense incurred on earning interest on short term deposits under section 57 (iii) of the Act.

Summary

Issues Involved:

1. Transfer pricing adjustment for export of goods.
2. Transfer pricing adjustment for interest on loans to associated enterprises.
3. Transfer pricing adjustment for corporate guarantees.
4. Disallowance under Section 14A of the Income Tax Act.
5. Disallowance of depreciation on cars sold to employees.
6. Disallowance of depreciation on computer peripherals.
7. Disallowance of bad debts written off.
8. Disallowance of interest decapitalisation.

Detailed Analysis:

1. Transfer Pricing Adjustment for Export of Goods:

For AY 2007-08 and 2008-09, the assessee's benchmarking using CUP method was contested. The TPO rejected the use of Chinese market quotations for benchmarking, arguing that only actual transacted data should be used. The Tribunal upheld this, emphasizing the need for authentic and reliable data. The Tribunal also rejected the assessee's claim for a 5% bulk discount, noting the lack of evidence. On the issue of comparing prices based on the date of order acceptance, the Tribunal directed the AO to consider transactions on an aggregate basis if the assessee could establish they were interlinked. The Tribunal also remanded the issue of nickel price adjustments back to the AO for detailed examination. The Tribunal rejected the alternative benchmarking using TNMM, stating that CUP was the most appropriate method. However, the Tribunal accepted the argument that if there are multiple prices, the ±5% range should be considered, remanding this issue back to the AO.

2. Transfer Pricing Adjustment for Interest on Loans to Associated Enterprises:

For AY 2007-08 and 2008-09, the TPO's benchmarking of interest rates at LIBOR + 700 basis points and 14% was contested. The Tribunal found the TPO's approach inconsistent, noting that the interest should be based on the currency in which the loan is repaid, as per the Delhi High Court's decision in CIT vs. Cotton Naturals. The Tribunal directed the AO to benchmark the interest at LIBOR + 200 basis points, rejecting additional transaction cost adjustments.

3. Transfer Pricing Adjustment for Corporate Guarantees:

For AY 2007-08 and 2008-09, the TPO's adjustment of 3.5% and 4.68% for corporate guarantees was contested. The Tribunal noted that the assessee had charged 1.5% and upheld the assessee's benchmarking using internal CUP. The Tribunal rejected the TPO's additional markup for risk adjustments, directing the AO to accept the assessee's rate of 1.5%.

4. Disallowance Under Section 14A of the Income Tax Act:

For AY 2007-08, the Tribunal noted that Rule 8D was not applicable retrospectively and restricted the disallowance to ?25,000, following the precedent set in the assessee's own case for earlier years. For AY 2008-09, the Tribunal found that the AO had not recorded satisfaction regarding the correctness of the assessee's claim, directing the deletion of the disallowance of ?4,48,08,080.

5. Disallowance of Depreciation on Cars Sold to Employees:

For AY 2008-09, the Tribunal found that the block of assets concept applied, and the identity of individual assets was obliterated for depreciation purposes. The Tribunal directed the AO to allow the depreciation on the written down value of the block of assets, deleting the disallowance of ?1,98,212.

6. Disallowance of Depreciation on Computer Peripherals:

For AY 2007-08, the Tribunal upheld the assessee's claim for 60% depreciation on computer peripherals, following the Delhi High Court's decision in CIT vs. BSES Yamuna Powers Limited.

7. Disallowance of Bad Debts Written Off:

For AY 2007-08, the Tribunal upheld the deletion of the disallowance of ?4,11,57,000 for bad debts, following the Supreme Court's decision in T.R.F. Ltd. vs. CIT, which requires only the write-off of bad debts in the books of accounts.

8. Disallowance of Interest Decapitalisation:

For AY 2007-08, the Tribunal upheld the deletion of the disallowance of ?21.74 crores on account of interest decapitalisation, following the precedent set in the assessee's own case for earlier years, where such interest was allowed as a deduction under section 57(iii) of the Act.