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TMI Blog2014 (9) TMI 348X X X X Extracts X X X X X X X X Extracts X X X X ..... (CMUs) which manufacture Parle-G, Cream Biscuits and Marie. The return of income for the year under consideration was filed by it on 30-11-2006 declaring total income of Rs. 76,96,42,872/-. During the course of assessment proceedings, it was noticed by the A.O. that addition was made to the total income of the assessee in the earlier years on account of difference between actual consumption of raw materials and the standard consumption treating the same as excess consumption. He therefore proceeded to examine the consumption of raw materials claimed by the assessee during the year under consideration and found that the standard formula for working out the consumption of raw materials was taken by the assessee for its CMUs at 110.607 kg for 100 kg of final products as against the standard formula of 108.19 kg for 100 kgs of final product taken for its own units at Bahadurgarh, Neemrana and Rudrapur. In this regard, the explanation offered by the assessee that the higher ratio of 110.607 kgs was taken in case of CMUs in order to give effect to the burnt biscuits as well as excess weight packed in biscuits was not found fully acceptable by the A.O. As regards the reliance placed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r noted that the input-output ratio in the CMUs are shown by the assessee at 110.60:100 as against 108.19:100 in case of own factory. We find the Assessing Officer rejected the various submissions given by the assessee and applied the ratio of 108.19:100 for the CMUs also. We find the CIT(A) directed the Assessing Officer to make the same adjustments to the CMUs which are applicable to own factory. Based on the figures given by the assessee, he directed the Assessing Officer to verify these figures subject to the condition that no adjustment in the case of left over maida is to be made. Admittedly, the assessee has no full control over the CMUs. At the same time it cannot be blindly accepted as to whatever figures given by the assessee on account of manufacturing of biscuits through the CMUs has to be accepted. Some sort of control, in our opinion, is required as there is every possibility of leakage of revenue through excess consumption of raw material in absence of any control mechanism. Under the peculiar facts and circumstances of the case, we find merit in the submission of the learned counsel for the assessee that if the input-output formula of 108.19:100 for the CMIJs is app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9-8-2005 whereas the share certificates were actually issued by the said company only on 14-6-2006. As the explanation offered by the assessee for this delay in issue of certificates which was not found acceptable by the A.O., he treated the amount of share application money up to the date of allotment of certificates as loan and made TP adjustment of Rs. 69,843/- on account of interest on such loan calculated at LIBOR 4% plus 300 basis point for the period from 19-8-2005 to 31-3-2006. The TPO has also found that the assessee had extended a loan of Rs. 6,83,78,989/- to its AE in Nigeria at 6% interest and taking LIBOR 4% plus 300 basis point at arm's length rate, the TP adjustment of Rs. 2,39,062/- was made by the TPO for the difference amount. In another international transaction, the assessee company had paid share application money of Rs. 3,13,276/- to its AE Parlite Foods SARL, Cameroon on 22-8-2005 whereas the shares were issued by the said company only on 22-7-2007. The share application money paid by the assessee therefore was treated as loan given to its AE till the date of issue of shares and TP adjustment of Rs. 9733/- was made by him on account of interest at LIBOR p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) The TPO rejected the Parle's contention that the interest charged on loans to subsidiary in Bangladesh and Nigeria are at arm's length. (vi) Parle submits that if at all adjustment needs to be done, Libor being an international standard, be used instead of taking an adhoc number of 4%. (vii) There was only a procedural delay in issuance of physical share certificates by the company. The TPO himself had accepted the fact that the date of allotment of shares was prior to the date of remittance of monies by Parle. (viii) Thus assuming (but denying) that adjustment need to be done on account of delayed allotment /issue of shares, that adjustment recomputed using LIBOR as on the relevant dated and the spread of 200 bps and considering the effect of submission of share certificates would work out to the following: Subsidiary As computed by TPO (4%+300 bps) Using LIBOR+200 bps Difference (A-B) Arctic Biscuits, Bangladesh 474,263.61 150,820.98 323,442.63 Pardee foods, Nigeria 69,843 60,264.18 9,578.82 Parl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an interest free loan, for the period between the dates of payment till the date on which shares were actually allotted, and partly as capital contribution, i.e. after the subscribed shares were allotted by the subsidiaries in which capital contributions were made. No doubt, if these transactions are treated as in the nature of lending or borrowing, the transactions can be subjected to ALP adjustments, and the ALP so computed can be the basis of computing taxable business profits of the assessee, but the core issue before us is whether such a deeming fiction is envisaged under the scheme of the transfer pricing legislation or on the facts of this case. We do not find so. We do not find any provision in law enabling such deeming fiction. What is before us is a transaction of capital subscription, its character as such is not in dispute and yet it has been treated as partly of the nature of interest free loan on the ground that there has been a delay in allotment of shares. On facts of this case also, there is no finding about what is the reasonable and permissible time period for allotment of shares, and even if one was to assume that there was an unreasonable delay in allotment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In our opinion, the interest rate of LIBOR plus 200 basis point therefore should be taken as arm's length rate of interest to bench-mark the international transactions of the assessee company with its AE involving giving the loans on interest. Accordingly, we direct the A.O./TPO to recompute the TP adjustment to be made in respect of the loan transactions by applying the arm's length rate of interest of LIBOR plus 200 basis point. Ground No. 2 of the assessee's appeal is accordingly treated as partly allowed.
13. As regards the issue raised in ground No. 3 relating to granting short credit of TDS of Rs. 59,91,009/-, the ld. Counsel for the assessee has sought only a direction from the Tribunal to the A.O. to give such credit after necessary verification. Accordingly, we direct the A.O. to grant credit of TDS, if any, after necessary verification.
14. The issue involved in ground No. 4 relating to granting interest u/s 244A of the Act is consequential and the A.O. is accordingly directed to given consequential relief to the assessee.
15. In the result, appeal of the assessee is partly allowed.
der pronounced in the open court on 11th April, 2014. X X X X Extracts X X X X X X X X Extracts X X X X
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