9911796707
TMI Blog2015 (7) TMI 215X X X X Extracts X X X X X X X X Extracts X X X X ..... tances of the case as explained above we deem it appropriate to remit back the whole issue relating to transfer pricing to the office of Assessing Officer who will re-adjudicate the issue keeping in view all facts and circumstances. - Decided in favour of assessee for statistical purposes. Disallowance u/s 40(a)(i) of the Act for discounting charges - Held that:- Since the facts involved for the year under consideration for this issue are similar to the facts involved in the preceding assessment year 2006-07 wherein held that the discounting charges are not in the nature of interest paid by the assessee. Rather after deducting discount, the assessee received net amount of bill of exchange accepted by the purchaser CFA not having any PE in India is not liable to tax in respect of such discount earned by it and hence the assessee is not under obligation to deduct tax at source u/s 195 of the Act. Accordingly, the same amount cannot be disallowed by invoking section 40(a)(i) of the Act. - Decided in favour of assessee. Addition on account of deemed dividend u/s 2(22)(e) - Held that:- As decided in assessee's for the assessment year 2006-07 Assessing Officer himself arrived at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deleted and the income as returned by the appellant deserves to be accepted as the correct taxable income. 1.2 The order of the Learned Transfer Pricing Officer ( TPO ) u/s 92CA(3), part directions issued by the Dispute Resolution Panel ( DRP ) and consequently the additions made in impugned assessment order for Assessment year 2007-08 are contrary to law to the extent additions are made to returned income as the same are made in gross violation of the principles of natural justice without considering all the relevant materials on record and by relying on irrelevant materials. 1.3 On the facts and in the circumstances of the case and in law, the Hon ble DRP erred in partly confirming the draft order passed by the Learned Assistant Commissioner of Income Tax, Circle 3(1), New Delhi (hereinafter referred to as AO ) thereby partly confirming the order under section 92CA(3) of the Act passed by the Learned TPO. A part of the directions of the DRP/Learned TPO are contrary to law inter alia for the following reasons: 1.3.1 The Hon ble DRP Learned TPO erred in concluding that Return on Value Added Costs (ROVAC), used by appellant as Profit Level Indicator ( PLI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act with respect to discounting charges incurred by it while getting Demand Promissory Notes ( PN ) discounted with CTSFA. 2.1.2 That on the facts and circumstances of the case and in law, the Hon ble DRP and Learned AO failed to appreciate that the discounting of PN results in business income for CTSFA, and in the absence of its Permanent Establishment ( PE ) in India under the relevant Double Tax Avoidance Agreement ( the treaty ), the same cannot be brought to tax in India, and therefore the assessee was not liable for deduction of tax at source under section 195 of the Act. 2.1.3 That on the facts and circumstances of the case and in law, the Hon ble DRP and Learned AO failed to appreciate that by discounting of PN from CTSFA, the assessee has neither borrowed any loan nor incurred any debt, but has merely sold the PN at a discount. 2.1.4 That on the facts and circumstances of the case and in law, the Hon ble DRP and Learned AO erred in holding that the discounting charges were interest under section 2(28A) of the Act and therefore liable for tax withholding under section 195 of the Act. The Hon ble DRP and Learned AO also erred in completely ignoring th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the course of assessment proceedings. 2.4 The Learned AO has erred on the facts and circumstances of the case and in law by initiating penalty proceedings u/s 271(1)(c) against the appellant for furnishing inaccurate particulars or for failure to disclose true particulars of income. The above grounds are independent and without prejudice to each other. The Appellant craves leave to add, alter, supplement, amend, vary, withdraw or otherwise modify the ground mentioned herein above at or before the time of hearing. 3. The present case was fixed for hearing on 16.03.2015, during the course of hearing the ld. Counsel for the assessee Mr. Iyar, CA stated that all the issues raised in this appeal are covered vide order dated 28.11.2013 in ITA No. 4095/Del/2010 for the assessment year 2006-07 is assessee s own case. Mr. J. James, Adv. was present on behalf of the Department as a Standing Counsel on the said date. The case was adjourned for 19.03.2015, so that the Departmental Representative may go through the small synopsis addressing the issues, filed by the ld. Counsel for the assessee. However, on 19.03.2015, the ld. Standing Counsel for the Revenue, Mr. Judi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue might seek an opportunity to address the issues by moving an appropriate petition. Since no such request till date was made on the face of apathy of the Revenue representing the case, we propose to consider the issues ourselves and decide the appeal on merit after considering the submissions of the ld. Counsel for the assessee and perusing the material available on the record. 4. Ground Nos. 1.1 to 1.3.8 are co-related and relates to the transfer pricing matter. Vide these grounds the grievance of the assessee relates to the Return on Value Added Costs (ROVAC) used by the assessee as Profit Level Indicator (PLI) for its merchanting business which the AO held as not permissible for applying Transactional Net Martin Method (TNMM). 5. The facts of the case in brief are that the assessee is a wholly owned Indian subsidiary of M/s Cargil Mauritius Ltd. and was engaged in the business of import, export and domestic trading in edible oils, fertilizers, grains, oil seeds and other food products/processed food. It was also engaged in the business of processing crude oil. The assessee filed its return of income on 31.10.2007 declaring loss of ₹ 136,18,93,333/-. Later on, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst the multiple year data used by the assessee, to compute the arm s length price of the international transaction of the assessee using TNMM method. Ground 12: The Learned TPO have erred in law in not applying the Proviso to section 92C of the Act and has failed to allow the Appellant the benefit of upward variation of 5 percent in determining the Arm s Length Price. 6. The assessee filed the following evidences for the international transaction pertaining to the import of oil before the DRP: a) Comparable quotes from Chicago Board of Trade ( CBOT ); b) Internal comparable uncontrolled prices; c) Comparable uncontrolled transaction prices for import of oil sourced from Customs Authorities. 7. The DRP observed that CBOT is an internationally recognized and accepted commodity exchange based in Chicago, USA and that the quotations provided by commodity exchanges are squarely covered by Rule 10D(3). It was further observed that the TPO has accepted the commodity exchange quotes used by the assessee in support of international transaction prices for other commodities such as sugar, where data from National Commodities Derivatives Exchange was used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating margin had been incorrectly computed and that the interest income should have been considered operating. It was further stated that there was no consistency on the treatment of interest income and expenses, therefore, either both of them should have been considered operating or non-operating and should have matched with the position adopted in case of comparable companies. 8. The DRP after considering the submissions of the assessee observed as under: Ground Nos. 5 to 10 are related and hence considered together. For the international transactions pertaining to merchanting activities the assessee has raised the objections which have been discussed above. Our observations with regard to these objections are as under: 1. The TPO in his order has clearly shown that all the transactions of purchase and sale are carried out by the assessee in its own name which was evident from the fact that the assessee had reported all the sales and purchase in the audited annual accounts. It has never been the claim of the assessee that its audited annual accounts are liable to be rejected. Therefore we don t find any merit in argument that the assessee is participating in risk fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)(e)(i) the relevant base has to be cost incurred or sales effected or assets employed or to be employed . In view of the facts and circumstances of the case we reject the objection of the assessee and direct that Ground No. 6 does not require any interference. 3. Objections at Ground Nos. 7 and 8 are discussed together. The TPO has chosen the comparables for the merchanting segment by way of a logical search carried out by him. The filters have been chosen by the TPO based on the turnover of the assessee. It is a fact that a company having huge turnover of ₹ 4172 Crores cannot be compared with companies having small turnover. The TPO has therefore applied the turnover filter correctly. The TPO has also referred to the decision in the case of Quark Systems Pvt. Ltd. 2010-TIOL-31-ITAT-CHD-SB in which it was held by the Hon ble ITAT that turnover filter should be applied while selecting the comparables. The objection of the assessee also does not hold good because the TPO has also examined all the comparables selected by the assessee and have reached a logical conclusion. The objection of the assessee that Food Corporation of India should not be selected as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ues that use of multiple year data normalizes the operating margins of comparable companies and reflects a better trend of industry in which the assessee operates. 9) Ground No. 12: Benefit of range under proviso to section 92C The assessee has argued that while making adjustments to merchanting and manufacturing segments, the assessee should get the benefit of standard deduction allowed by the proviso to section 92C of the Income Tax Act, 1961. 9. The AO on the directions of the DRP made an adjustment of ₹ 992,520,677/- on account of Arm s Length Price by observing that on the directions of the DRP, the TPO recomputed the ALP and intimated vide order dated 18.10.2011 as under: The DRP-I passed an order u/s 144C(5) on 9th August 2011 in this case. After perusal of order of the Hon ble DRP, it has been found that the DRP has directed the TPO to verify the CUP data supplied by the assessee in manufacturing segment. The same has been checked and found to be correct. Accordingly the revised adjustment is given below: Segment As per TPO order As per revised order Merchanting Segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with respect to action of Assessing Officer by which he combined the three business activities of assessee and calculated TNMM on a company wide basis and compared it with the comparables which in the opinion of assessee were not comparables as major comparables chosen by TPO were manufacturing companies. The assessee is further aggrieved with the action of Assessing Officer by which he had considered interest income as non operating as compared to interest expense which he had considered as operating expense. Since the Assessing Officer has adopted TNMM method on a company wide basis, so we first go to the relevant rules contained in rules 10A, 10B 10C:- Rule 10A: Rule 10A provides meaning of expression used in computation of ALP and clause (d) defines transaction to include number of closely linked transaction. Rule 10B(1)(e): For the purpose of sub section (2) of section92C, the arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method in the following manner namely:- a) Comparable uncontrolled price method, b) Resale price method, c) Cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between 72[the international transaction or the specified domestic transaction] and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between 73[the international transaction or the specified domestic transaction] and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method. 27. From the combined reading of above rules we observe that TNMM method profit margin realized by an enterprise from an international transaction is first adjusted to take into account the difference if any between the international transaction and comparables uncontrol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me were directed to be filed by DRP in assessee s own case for assessment year 2007-08 2008-09 and DRP on the basis of these had not made any addition in these years. Therefore, we admit the additional evidence as these are documents to arrive at the correct conclusion. 31. In view of all facts and circumstances of the case as explained above we deem it appropriate to remit back the whole issue relating to transfer pricing to the office of Assessing Officer who will re-adjudicate the issue keeping in view all facts and circumstances. The assessee will be free to argue its case from all angles. Needless to say that assessee will be given sufficient opportunity of being heard. In view of the above, ground No.1 is allowed for statistical purposes. 11. Since the facts for the year under consideration are identical to the facts involved in the aforesaid referred to assessment year 2006-07. So, respectfully following the order dated 28.11.2013 in assessee s own case for the assessment year 2006-07 in ITA No. 4095/Del/2010 this issue relating to adjustment in Arm s Length Price is set aside to the AO for fresh adjudication as in the preceding year. 12. Vide Ground Nos. 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent value which is lesser than the face value and the difference is regarded as discount value; 3. CTSFA does not get any right against the assessee in case of any dispute or default with or by overseas buyer in encashment of PN on maturity or otherwise; and 4. CTSFA gets the right to collect the money in its own name from the overseas buyer who has accepted the PN. In view of the above, it can be said that once the PN is purchased by CTSFA, the assessee, who is the seller of PN, discharge all its liability. Thus, the property in the PN, including all risks and rewards, passes on to CTSFA. In case the foreign buyer makes a default of the payment, under no circumstances the assessee is required to make good the loss to CTSFA. 5. While framing assessment for AY 2006-07 and 2004-05, the discounting charges has been treated as interest and has been disallowed the same under section 40(a)(i) of the Act on the ground that no tax has been deducted at source from such discounting charges. The discounting charges has been treated as interest on the ground that this transaction of discounting can be compared with a transaction that involves taking a loan equal to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Schedule to indicate and denote money actually borrowed as a loan in the ordinary sense and not also to indicate and denote money which, though obtained on some other basis and in some other kind of transaction, could be, on the failure of such basis and such transaction, made out to be borrowed money in essence and in law. In the assessee s case, it is mere sale of negotiable instruments under the Negotiable Instruments Act, 18881 and thus, the payment of discounting charges cannot be regarded as interest payments. 2. Debit owed or Debt claim Oxford dictionary defines the term Debt as something that is owed, esp. money and a state of obligation to pay something owed . Supreme Court in case of Kesoram Industries and Cotton Mills Ltd. VS CWT (59 ITR 767W) The word owe meant to be under an obligation to pay. It did not really add to the meaning of the word debt . That debt owed within the meaning of section 2(m) of the Wealth Tax Act, 1957 could be defined as the liability to pay in present or in future and ascertainable sum of money that, therefore, the amount of the provision for payment of income tax and super tax . A debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey did under the Interest-tax Act, 1974. 3. Also under the provisions of Double Taxation Avoidance Agreement (DTAA) between India and Singapore, such discounting charges cannot be characterized as interest. As per Article 11(3) the definition of interest is provided in an exhaustive manner. 3. The term Interest as used in this Article means income from debit claims of every, kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor s profits; and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Atricle. The definition of Interest as provided in the DTAA is narrower than the definition provided in section 2(28A) of the Act. In DTAA, the interest is confined only to income from debtclaims of every kind, while section 2(28A) also covers money borrowed or debit incurred. Therefore, it appears and your good self would also appreciate that the definition of interest under the provisions of Income-tax Act is w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, no legal finality on the matter can be concluded by the DRP. Accordingly, for the present, the DRP declines to intervene in the matter and for statistical purposes, the objection of the assessee is rejected. 18. Now the assessee is in appeal. The ld. Counsel for the assessee submitted that the issue under consideration has been allowed by the ITAT and the disallowance of discounting charges has been deleted by following judgment of the Hon ble Delhi High Court in the case of Cargill Global Trading India Pvt. Ltd. (CGTIPL) reported at 335 ITR 94. It was also pointed out that the SLP filed by the department against the said order has been dismissed by the Hon ble Supreme Court. 19. We have considered the submissions of ld. Counsel for the assessee and carefully gone through the material available on the record. It is noticed that an identical issue having similar facts was subject matter of the assessee s appeal for the assessment year 2006-07 in ITA No. 4095/Del/2010 (supra) wherein vide order dated 28.11.2013. The issue has been decided in favour of the assessee and relevant findings have been given in paras 32 to 34 which read as under: 32. Now coming to the is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Circular the Board has clarified the issue in the following manner: 3. A question has been recently raised as to whether the difference between the issue price and face value of these instruments should be treated as interest in which case it would be liable to deduction of tax at source u/s 194A of the Income Tax Act, 1961 or it should be treated as discount which is not liable to deduction of tax at source. 4. It is clarified that the information of all concerned that the difference between the issue price and the face value of the Commercial Papers and the Certificates of Deposits is to be treated as discount allowed and not as interest paid. Hence the provisions of the Income Tax Act, relating to deduction of tax at source are not applicable in the case of transactions in these two instruments. 13. Having regard to the aforesaid, we are of the opinion that no substantial question of law arises as the matter stands settled by the dicta of the Supreme Court as well as clarification of CBDT itself. 14. These appeals are accordingly dismissed. We further find that Hon'ble Supreme Court has dismissed SLP filed by the revenue against the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(22)(e) of the Act should not have been invoked. 24. The AO did not find merit in the submissions of the assessee by observing as under: 5.5 The opening lines of section 2(22)(e) state that dividend includes any payment by a company, not being a company in which the public are substantially interested, of any sum, made after the 31st day of May, 1987 by way of advance or loan to shareholder. The plain reading of these lines shows that dividend includes any payment made by a Pvt. Ltd. Company by way of an advance or a loan to a shareholder. The next question which arises is that who is a shareholder? for the purpose of section 2(22)(e). The answer to this question is available in the next few lines of section 2(22)(e) itself, wherein it is stated that shareholder is a person who is the beneficial owner of shares holding not less than 10% of the voting power . Thus, as per section 2(22)(e), shareholder, for the purposes of section 2(22)(e), means a person who is the beneficial owner of shares holding not less than 10% of voting power. The amendment of section 2(22)(e) by way of the Finance Act, 1987 has put an end all ambiguities with reference to the meaning of the word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O incorporated the submissions of the assessee on account of quantum addition in para 5.11 of the assessment order, the same are reproduced verbatim as under: 5.11 Regarding the quantum of addition under section 2(22)(e), the assessee vide submission dated 15 December 2010 has submitted as under: 2.18 Without prejudice to our above submission, it is humbly submitted that if such loan is to be treated as deemed dividend under section 2(22)(e), then it can be taxed only to the extent of accumulated profits of the lender company up to the date on which loan is given. In this regard attention is invited to explanation 2 to section 2(22) of the Act which reads as under:- Explanation 2-The expression accumulated profits in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in subclause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded in favour of the assessee and the relevant findings have been given in para 35 which read as under: 35. Ground No.2.2 to 2.4. deals with the issue of deemed dividend u/s 2(22)(e) of the Act. The assessee received a loan of ₹ 21.74 crores from M/s Cargill Global Trading India Pvt. Ltd. (CGTIPL) which is a group company of the assessee company. In fact both the assessee company as well as lender company are subsidiaries of Cargill Inc. USA through its separate subsidiary companies Cargill Asia Pacific Ltd. (CAPL) and Cargill International Trading Pte Ltd. Singapore and the group structure of the companies can be explained as under:- It was contended that CGTIPL i.e. lender company was a subsidiary of Cargill Int. Trading Pte Ltd. Singapore with 99% shareholding and none of the shares of lender company were held by assessee company and therefore provisions of section 2(22)(e) were not applicable. For the sake of convenience, we analysis the provisions of section 2(22)(e). Section 2(22)(e) applies to a shareholder being a person who is the beneficial owner of share holdings not less than 10% of the voting power of that company. Thus in order to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al available on the record, it is noticed that a similar issue having identical facts was a subject matter of the assessee s appeal in the assessment year 2006-07 in ITA No. 4095/Del/2010 wherein vide para 37 of the order dated 28.11.2013 it has been held as under: 37. Ground No.2.4. relates to grievance of assessee for the action of Assessing Officer by which he did not allow credit of additional TDS certificates amounting to ₹ 51,97,370/-. The contention of assessee is that same were filed before assessment was completed therefore Assessing Officer should have considered the same for determining the tax payable by assessee. The provisions of section 155(14) empowers the Assessing Officer to give credit for tax deduction certificates which could not be filed with the return of income provided they are filed within two years from the end of assessment year in which such income was assessable and further provided that such income from which tax was deducted was disclosed in the return of income filed by assessee for that relevant assessment year. The assessee in the present case did not file such certificates within prescribed period of two years but filed these before th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
