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TMI Blog2011 (9) TMI 634X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign currency loan in the international market, is to be LIBOR based which is internationally recognized and adopted. In view of this matter, matter is remitted back 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. Partly allowed in favor of assessee for statistical purpose. Corporate guarantee provided to banks on loans taken by its subsidiary - Held that:- The corporate guarantee provided by the assessee company does not fall within the definition of international transaction. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. Thereby no TP adjustment is required. Decided in favor of assessee. Exclusion of communication charges and implementation expenses from the export turnover and further not reducing the same from the total turnover for the purpose of computation of benefit under section 10A of the Act - Held that:- The telecommunication charges and implementation expenses incurred by the assessee company, which has been excluded by the assessing officer from export turnover, has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry documentation requirements. (6) Erred in rejecting the use of multiple year data and using data for the FY 2005-06 only in determination of ALP under TNMM. (7) Erred in using selective information/ documents obtained by the learned TPO using powers and under section 133(6) of the Act 3which are not available in public domain for determination of ALP of the international transactions of the appellant. (8) Failed to appreciate that the appellant is eligible for tax holiday benefit under section 10A of the Act, and there is no incentive for shifting of profits. (9) Erred in inter-alia use of the following additional filters in undertaking the comparative analysis: Rejection of companies having onsite revenue in excess of 75%; Rejection of companies having different financial year-end. Rejection of companies having diminishing revenue/loss making filter for the last 3 years. Rejection of consolidated financial statements of the Indian parent companies; One side turnover filter (i.e., rejecting companies having turnover less than ₹ 1 crore and selecting companies having high turnover); (10) Without prejudice to the gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture relating to exempt income and disallowing the same under section 14A. (20) Erred in disallowing expenses incurred towards professional and legal fees in relation to its global business and investments; (21) Erred in the imposition of interest under section 234B of the Act on additional income arising due to the transfer pricing adjustment. (22) Erred in initiating penalty proceedings u/s. 271(1)(c) of the act. 3. Facts of the case, in brief, are that the assessee company had international transactions with an Associated Enterprise (AE) during the assessment year 2006-07 to an extent of ₹ 21,56,22,574 relating to software development services. Besides the above it had other internal transactions as under: i. Payment of management allocation expenses Rs.2,77,76,497 ii. Reimbursement of expenses (Received) Rs.13,11,19,575 iii. Reimbursement of expenses (paid) Rs.2,29,60,060 iv. Interest paid on loan Rs.82,16,457 4. The assessee c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.2,61,79,350 Total Rs.7,21,42,251 6. The Assessing Officer reduced the following expenses fromthe export turnover in the computation of deduction under section 10A of the Act: i. Communication charges considered as attributable to the delivery of software outside India ₹ 41,67,242 ii. Salaries and implementation expenses considered as expenses in foreign currency for providing technical services outside India; and ₹ 1,60,24,557 iii. Export turnover not realised during the year ₹ 1,41,51,830 Total ₹ 3,43,43,629 7. Aggrieved with the adjustments, additions proposed in the draft assessment order, the assessee filed objections before the Dispute Resolution Panel [DRP] on 29-1-2010. The DRP vide its direction under section 144C (5) of the Act on 30-9-2010 had directed to effect certain changes to the adjustments/additions proposed in the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held that acceptance of the ALP declared by the assessee is the rule and its rejection is the exception. It is submitted that since the transfer pricing in India being in a nascent stage, that there are varied interpretations as to what is the ALP. This is implicitly recognised the circular 12 of 2001 dated 23.8.2001 issued by the CBDT. For this purpose the learned counsel for the assessee relied on the decision of Delhi ITAT in the case of Mentor Graphics (Noida) (P) Ltd. vs. DCIT reported in 109 ITD 101. The learned counsel for the assessee contended that in the light of the above guidance, it would be against the provisions of the law to reject the TP analysis done by the assessee. 10. The learned counsel for the assessee also submitted that there are errors in computing the net margin of the assessee. He submitted that the TPO computed the adjustments considering the total cost of the assessee (including the cost of transactions with non-AEs). An analysis under TNMM considers only the profit that is attributable to particular controlled transactions. The TPO should have determined the ALP for the international transaction with AE considering only the operating cost allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over companies and higher margin companies as comparables. In the rejoinder, the learned counsel for the assessee submitted that the assessee company vide its submissions before the TPO dated 16-9-2009 has worked out margins separately in respect of AE and non-AE transactions and the TPO simply rejected the claim of the assessee company for the reason that those segmental details are not audited and no books of accounts are maintained separately. It is also submitted that TPO himself followed the segmental financials in respect of comparables like Infosis. Therefore, it is submitted that the plea of segmental financials to be adopted was taken both before the TPO as well as DRP. 13. On the other hand, the learned departmental representative while relying on the order of the AO and directions of the DRP, submitted that the assessee company has not taken the specific ground in the grounds of appeal stating that segmental financials prepared by the assessee company is to be adopted for the purpose of arriving ALP. It is also submitted that the TPO rightly rejected the multiple year data adopted by the tax payer in its TP study. As per Rule 10B[4], the data relating to the financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of computing the margins on the transactions relating to the associated enterprises, the net margin comes to 19.07%, which is well comparable with the Arms Length Margin of 19% determined by the Transfer Pricing Officer. In our considered view, for computing the net margin of the assessee for the purposes of transfer pricing, only the cost related to the transaction with the Associated Enterprises has to be considered and accordingly, we approve that segmental financials is to be considered for the purpose of arriving at the net margin on the international transaction with the assessee s enterprise in respect of software development services. In that process, bad debts/reimbursements has to be excluded and segmental profitability has to be adopted. We find support in this behalf from various decisions of the Tribunal relied upon by the learned counsel for the assessee duly filing copies thereof in the paper-book, which have been noted hereinabove. That being so, the TPO should have determined the Arms Length Price for the international transactions with associated enterprises considering only the operating cost allocable to the Associated Enterprises segment. Since the assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 18. Now, we will take up the next issue [Ground No.13] relating to loan to its subsidiary company, 4S BV, Netherlands. The learned counsel for the assessee submitted that the DRP has taken the LIBOR at 5.78% for the TP adjustment in respect of loan transactions, whereas the actual average LIBOR rate for the year is only 4.42%. For these propositions, he relied on the decision of the Madras Bench in the case of Siva Industries and Holdings Limited in ITA No.2148/mad/2010 for the same year under consideration and submitted that the Tribunal approved the LIBOR rate at 4.42% as bench mark for determination of the Arms length interest rate. It is also submitted that, in Netherlands, the bank lending rates are based on the European inter-bank offer rates, that is, EURIBOR and hence, the EURIBOR of 2006 at 3.44% is to be considered as the benchmark for determination of the Arms length interest rate for the said transaction. Whereas, the learned departmental representative submitted that the DRP has erred in determining the correct ALP for the loan transaction. It is submitted that the TPO was correct in determining the ALP interest rate by comparing the interest rate on corporate bon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of the commission charged by the ICICI bank as bench mark. The DRP confirmed the action of the TPO. Hence, the assessee is in appeal before us. The learned counsel for the assessee submitted that TP legislation provides for computation of income from international transaction as per Section 92B of the Act. The corporate guarantee provided by the assessee company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provisions, the lower authorities are not correct in bringing aforesaid transaction in the TP study. The learned counsel for the assessee made elaborate discussions on several points that include normal practice followed by the companies in providing the corporate guarantee to its subsidiary companies, etc. It is also submitted that the subsidiary company has not received any benefit in the form of lower interest rate by virtue of the corporate guarantee given by the assessee company and at the same time, the assessee company significantly benefited from such transaction. He relied on the following decisions. a] Judgement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 10A of the Act. We direct accordingly. Hence, the ground raised by assessee is allowed. 23. The Ground No.19 relates to disallowance of expenditure under section 14A of the Act. This issue is covered by the judgement of the Bombay High Court in the case of Godrej Boyce vs. DCIT reported in 328 ITR 81 wherein it was held that Rule 8D read with section 14A[2] of the Act is not arbitrary or unreasonable but can be applied only if assessee s method is not satisfactory. Rule 8D is not retrospective in nature and the same has to be applied from the assessment year 2008- 09. For the earlier assessment years, disallowance has to be worked out on reasonable basis under section 14A [2] of the Act. Accordingly, we restore this issue to the file of the assessing officer to rework the disallowance on reasonable basis in accordance with the ratio laid down by the aforesaid judgement. The ground raised by the assessee is allowed for statistical purpose. 24. The Ground No.20 relates to disallowance of expenses incurred towards professional and legal fees in relation to its global business and investments. The learned counsel for the assessee not pressed this issue. Hence, this ..... X X X X Extracts X X X X X X X X Extracts X X X X
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