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TMI Blog2016 (9) TMI 146X X X X Extracts X X X X X X X X Extracts X X X X ..... : 2. First effective ground of appeal, raised by the AO, is about the deleting the TP adjustment made by him under the heads royalty charged, ii)interest charged on loan and iii)guarantee fee charged. During the TP proceedings, the TPO found that the total operating income of the assessee for the year under appeal was Rs. 1,371.67crores, that it had shown net profit of 150.79 crores. He found that the assessee had reported following ITs with AEs: SN. Nature of transactions FY 2006-07 Method 1. Sale of Bulk coconut oil 185,424,918 CUP 2. Royalty Income 17,359,290 TNMM 3. Interest on loan (received/receivable) 60,068,080 CUP 4. Guarantee fees (received/receivable) 4,726,602 CUP 5. Sale of Finished Goods 97,650,737 TNMM 6. Purchase of Intellectual Property Rights 2,629,000,000 CUP 7. Advances received from M/s. MME 678,561 NA 8. Reimbursement of expenses (received/ receivable) 4,547,145 At Cost 9. Reimbursement of expenses (paid/payable) 560,100 At Cost 10. Sale of Moulds 83,460 CUP 11. Advance given Nil NA TOTAL 300,00,98,893 He found that the assessee was owner of Trade mark(TM) 'Parachute' an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to MBL did not comply with its Arm's length standard, that transaction with other AE of an assessee can very well be considered for understanding the transaction and determining the ALP thereof, that Parachute brand was well tested in India and overseas market, that the benefits would be surely enjoyed by MBL in the near future without much brand development expenditure, that the argument of the assessee about non recognition of brand parachute could not be accepted, that the assessee was not justified in arguing that MBLwould have to incur brand development expenditure to popularise the parachute brand in Bangladesh. He further held that TNMM was not the most appropriate method to determine ALP of the royalty payment, that it would be reasonable and appropriate to benchmark the transaction by taking royalty rate charged to the other AE [email protected]%. Accordingly, he determined the ALP of the royalty to be charged to MBL as under- Period Sales made by AEs on which royalty is charged (Amt. In Rs.) Rate of royalty charged Royalty amount received by the assessee Arm's length rate to be charged (CUP) ALP of the Transaction (B) (Amt. In Rs.) Transfer Pricing adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llion charging interest @9.5%, that the AE got part of its funding finance from ICICI Bank Behrain at the interest rate of 5.5%. The TPO observed that the assessee had charged interest at 9.5% to its AE i.e MME, that it should also have charged at least the rate of interest at the rate 9.5% p.a. to Sundari LLC, as well, that cost of funds had no relevance. In view of the above he concluded that the assessee should have charged the interest rate of 9.5% to Sundari LLC. He proposed following adjustment: Date Amount of outstanding loan amount (in USD) No. of days for which interest to be charged Arm's length interest to be charged @ 9.5% p.a. to M/s. Sundari, LLC 1.4.2006 32, 13, 973 365 305, 327 1.4.2006 15,97,842 365 151,795 4.4.2006 1,00,000 362 9,422 28.4.2006 1,00,000 338 8,797 30.5.2005 1,00,000 306 7,964 16.6.2006 50,000 289 3,761 17.7.2006 1,00,000 258 6,715 14.8.2006 1,00,000 230 5,986 31.8.2006 1,00,000 213 5,544 06.10.2006 2,00,000 177 9,214 16.11.2006 1,00,000 136 3,540 06.12.2006 1,00,000 116 3,019 17.01.2007 1,00,000 74 1,926 12.02.2007 1,00,000 48 1,249 Total 524,260/- Arm's length in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty. With regard to interest on loans, the assessee submitted, before the FAA, that it had made strategic investment by acquiring 63%equity stake in Sundari LLC, vide purchase agreement dt.26.2.2003, that it increased stake to 75.5% during FY.2004-05, that pursuant to the said agreement it extended revolving credit loan, that the rate of interest charged for loans given, prior to 9.6.2005, wasLIBOR+150bps, that vide amendment dated 9.6.2005 and 29.08. 2005 it increased the overall revolving credit loan amount, that the rate of interest fixed was not less than the prevailing bank rate in India as notified by the RBI, that the loan given to Sundari was secured by all of its assets, that the average LIBOR rate during the year under consideration was 5.29%, that the assessee had charged interest to its AE at LIBOR+ 150bps / 6%p.a, that the rate of interest charged by the assessee to its AE was comparable and was at Arm's length. The assessee made a reference to the RBI guidelines in respect of borrowings. Referring to the issue of CG the assessee argued that it had charged GC using external CUP as benchmark, that bank guarantee commission ranged from 0.7% to 1% as per the quotatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artly allowing the appeal of the assessee, he restricted the disallowance to Rs. 18.66 lakhs. 4.2. Deciding the issue of guarantee commission, the FAA held that CG was an IT, that the assessee itself had shown the transaction as IT in form 3 CEB, that it had charged [email protected]% from its AEs, that in the earlie year GC @ 0.8% was accepted by his predecessors. Reversing the order of the TPO/AO, he held that rate of GC adopted by the assessee was justifiable. 5. Before us, Departmental Representative (DR) contended that the TPO had rightly made adjustment about the difference in the royalty, that there was no justification for charging royalty at lower rates from Bangladesh AE , that the TPO had used the LIBOR+bps method to determine the ALP, that CUP method was applicable to the facts of the case, that if the AE.s had taken loan from outsiders they would be required to pay more interest, that non-compete fee was not an asset, that no depreciation was allowable, that the ratio of Meghalaya Steel was not applicable to the facts of the case, that the Leasing was not the business of the assessee, that there was no first level connection between the income earned by the assessee and deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same terms and conditions the brand royalty charged by it to MBL had been accepted by the TPO till the AY.2006-07, that during the year there had been increase in the rate of royalty charged to MBL, that it had been increased from 0.5% to 1% w.e.f. 1.10.2006, that the TPO had not specifically rejected assessee's benchmarking, that overall profitability of the assessee was much higher than the arithmetic mean of the comparables. Considering the above facts, the FAA had held that TP adjustment proposed/ made by the TPO/ AO were liable to be deleted. We do not find any infirmity in the order of the FAA. The AO/TPO had failed to bring anything on record to prove that there was material change in the facts as compared to earlier years. If facts were identical, then justification for deviating from the conclusions of previous year had to be highlighted. 6.1. It is found that during the year under appeal, the assessee had provided working capital loan to Sundari LLC, that it had charged LIBOR +150 bps on loans prior to AY.2006-07 and had charged interest @ 6% for the next year, that it had taken working capital loan from HSBC@ LIBOR+ 150bps, that later on HSBC reduced the rate, that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a company or its Associated Enterprise comes within the ambit of International Transaction and the issue to be examined in such a case would be the ALP of such an International Transaction; and (b) with regard to quantum of addition on account of interest by ALP the impugned order held that as the amounts were advanced Associate Enterprises in Germany, the rate of interest is to be determined on the EURIBOR rate of interest i.e. rates prevailing in Europe. Thus partly allowed the respondent-assessee's appeal by applying the decision of the Tribunal in the case of "VVF Ltd Vs. DCIT (ITA No. 673/Mum/06)" and DCIT Vs. Tech Mahindra Ltd.(46 SOT141) by holding that the loan advanced to an Associated Enterprise situated abroad, the rate of interest to be applied is the rate prevailing in the country where the loan has been consumed." The Hon'ble Court has decided the matter as follows: "7. We find that the impugned order of the Tribunal inter alia has followed the decision of Bombay bench of Tribunal in the case of "VVF Ltd Vs, DCIT (supra) and DCIT Vs. Tech Mahindra Ltd.(supra) to reach the conclusion that ALP in the case of loan advanced Associate Enterprises would be determined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant point of time, and its break up in plain words, shows the following: 1. An international transaction can be between two or more AEs, at least one of which should be a non-resident. 2. An international transaction can be a transaction of the following types: a. in the nature of purchase, sale or lease of tangible or intangible property, b. in the nature of provision of services, c. in the nature of lending or borrowing money, or d. in the nature of any other transaction having a bearing on the profits, income, losses or assets of such enterprises 3. An international transaction shall include shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. 4. Section 92B (2), covering a deeming fiction, provides that even a transaction with non AE in a situation in which such a transaction is de facto controlled by prior agreement with AE or by the terms agreed with the AE. 26. Let us now deal with the Expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization, These items can only be covered in the residual clause of definition in international transactions, as in Section 92 B (1), which covers "any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises". 30. It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92 B, the transactions should be such as to have beating on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression ' international transaction'. This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words "irrespective of the fact that it ( i.e. restructuring or reorganization) has bearing on the profit, income, losses or assets of such enterprise at the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 32. There can be number of situations in which an item may fall within the description set out in clause (c) of Explanation to Section 92 B, and yet it may not constitute an international transaction as the condition precedent with regard to the' bearing on profit, income, losses or assets' set out in Section 92B (1) may not be fulfilled. For example, an enterprise may extend guarantees for performance of financial obligations by its associated enterprises. These guarantees do not cost anything to the enterprise issuing the guarantees and yet they provide certain comfort levels to the parties doing dealings with the associated enterprise. These guarantees thus do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. One may have also have a situation in which there is a receivable or any other debt during the course of business and yet these receivables may not have any bearing on its profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... need not deal with this aspect of the matter in greater detail . 35. When it was put to the learned Departmental Representative that there could be a view that issuance of guarantees could be outside the ambit of scope of ' international transaction' itself, he submitted that there are large number of decisions in India and abroad, notably in Canada, dealing with the determination of arm's length price of guarantees. His argument seemed to be that even such a view is to be upheld, entire transfer pricing jurisprudence will be turned upside down. There does not seem to be any legally sustainable merits in this argument either. As for the decisions dealing with quantum of ALP adjustments in the guarantee charges, in none of these cases the scope of ' international transactions' under section 92B(I) has come up for examination. A judicial precedent cannot be an authority for dealing with a question which has not even come up for consideration in that case. It is only elementary that, as was also held by Hon'ble Bombay High Court in the case of CIT v. Sudhir layantiIal Mulji [1995] 214 ITR 154/[1996] 84 Taxman 205, that a judicial precedent is an authority for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92 B, by amending Explanation to Section 92 B, a corporate guarantee issued for the benefit of the AEs, which does not involve any costs to the assessee, does not have any bearing on 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. As we have decided the matter in favour of the assessee on this short issue, we see no need to address ourselves to other legal issues raised by the assessee and the judicial precedents cited before us. 36. For the reasons set out above, and as we have held that the issuance of corporate guarantees in question did not constitute' international transaction' within meanings thereof under section 92B, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of Rs. 33,10,161. The assessee gets the relief accordingly." Following the above, we hold that GC is not an IT and hence the provisions of chapter X will not be applicable or GC. First effective Ground is decided against the AO. 7. Second ground of appeal is about 80 IB deduction. We find that the issue of deduction un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n intangible assets, not charged to profit and loss account, ii)depreciation on non-compete fee treated as capital expenditure in earlier years and reduction of book profit being depreciation on intangible assets not charged to profit and loss account. 10.1. During the appellate proceedings, the FAA held that without filing a revised return the assessee cannot claim a fresh relief. He referred to the case of Goetz India, wherein it was held that the assessee had to file a return if he want to claim a deduction or exemption. 10.2. Before us, the AR relied upon the case of Prithivi Brokers and shareholders (349ITR336)of the Hon'ble Bombay High Court. The DR stated that assessee had not filed revised return and the AO had rightfully rejected the claim made by it. We have heard the rival submissions and perused the material before us. 10.3. We find that the Hon'ble tradition High Court has decided the issue of relief claimed in the additional grounds, while deciding the matter of Prithvi Brokers(supra). We would like to reproduce the relevant portion of the judgement and same reads as under: "Even assuming that the Assessing Officer is not entitled to grant a deduction on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim and to adjudicate the same. It is not necessary that the deduction be allowed only if a revised return of income would have been filed....." From the above, it is clear that the FAA is empowered to entertain the claim made by way of submission/additional ground, that AO cannot allow such claim if an assessee does not file a revised return. Therefore, we are of the opinion that in the interest of Justice, the matter should be restored back to the file of the FAA, who would decide the fresh claims, made by the assessee, as per law. All the three Grounds are decided in favour of the assessee, in part. 11. The next ground deals with depreciation of Rs. 75.27 lakhs under the head non-compete fees paid in the AY.2006-07. As the claim was not made in the regular return of income, so, the AO rejected the same. During the appellate proceedings, the FAA confirmed the order of the AO. 11.1. Before us, the AR contended that provisions of section 32 mandated the definition should be allowed even though the assessee had not claimed, that the assessee was not aware of depreciation claim on non-compete fee till the date of receipt of assessment order for the AY. 2006-07, that it was beyon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the FAA. Before him, it was argued that the assessee had allocated rent and storage expenses on the basis of cost directly identifiable, that common rent and storage expenses were allocated in the ratio of turnover of each unit, that the AO had not assigned any reason for deviating from the basis of allocation made by the assessee, that it was consistently following the above method of a location in the earlier years. The AR pointed out the mistakes committed by the AO in working out the deduction. With regard to miscellaneous sales(Rs.3.59 crores +Rs.12.5 lakhs +Rs.7.07 crores) the AR contended that the assessee was in the business of manufacturing and dealing in FMCG, that sale of miscellaneous items included sale of by products, scrap that would arise during the course of manufacturing, that at Pondicherry unit crushing of Copra to extract oil, after filtration, would generate by product called cake, that sale of scrap comprised of sale of gunny bags, chemical empty drums and unusable oil, that generation of by products/scrap was directly linked to the manufacture of products by the eligible undertaking, that the by products/ scrap could not be generated independent of the Man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking. He also held that receipts arising on account of exchange gain and money received from material return to the vendor were eligible for deduction, that such receipts had arisen out of the income derived from the eligible industrial undertaking. 12.2. Before us, the AR contended that by product and scraps were generated in the process of manufacturing, that the receipt from sale of such products was derived from industrial undertaking, that deduction under section 80 IB had to be allowed for the rent received from blow moulding machine, that the rental income was received from the contractor who would fill and packages the products manufactured by the eligible undertaking of the assessee, that it had paid conversions charges to the contractor which had been considered for the purpose of 80 IB deduction, that lease rent should also be considered for the purpose of deduction. With relation to sale of by product, the AR referred to the cases of Meghalaya Steel Ltd.(Civil Appeal No.762 of 2014 of Hon'ble Supreme Court)and Recon Oil Industries Ltd.(2 SOT 732). He relied upon the cases of Biotech Medicals P Limited(119 ITD143), Sadhu Forging (336 ITR 444)Avanti Feeds Ltd.(35 SOT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not disputed that tea was exported and payment was received in foreign currency and it is also admitted that when realisation of the export was made there has been fluctuation of foreign currency, as such, there was a surplus realisation in terms of Indian currency. The question is whether the aforesaid surplus realisation of Rs. 10,61,326 can be treated to be a part of export turnover or not. In our view, going by the definition of the export turnover, the aforesaid amount was realised in connection with the export followed by payment of the price, by the foreign buyer. Unless there has been an export the aforesaid surplus would not have been realised. Hence, this surplus realisation is certainly relatable to the export. Therefore, we hold that this is an export turnover." Considering the above, we are of the opinion that gain on account of fluctuation in foreign exchange rate is entitled for deduction u/s.80IB of the Act. So, confirming the order of the FAA, issue is decided against the AO. 12.3.c. In the matter of Pfizer Ltd.(330ITR62)the issue of insurance claim had been dealt as under: "Submission that the insurance claim has no element of export turnover and that con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 80IB/80IC deduction,we would like to refer to the case of Sadhu Forging (336 ITR444). In that matter the Hon'ble Delhi High Court has dealt with the issue of sale of scrap for claiming deduction u/s.80IB of the Act and has held as under: 13. Keeping in view the activities of the assessee in giving heat treatment for which it had earned labour charges and job work charges, it can thus be said that the appellant had done a process on the raw material which was nothing but a part and parcel of the manufacturing process of the industrial undertaking. These receipts cannot be said to be independent income of the manufacturing activities of the undertakings of the assessee and thus could not be excluded from the profits and gains derived from the industrial undertaking for the purpose of computing deduction under s. 80-IB. These were gains derived from industrial undertakings and so entitled for the purpose of computing deduction under s. 80-IB. There cannot be any two opinions that manufacturing activity of the type of material being undertaken by the assessee would also generate scrap in the process of manufacturing. The receipts of sale of scrap being part and parcel of the acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f employee's salary and in the work in the company there would be costs associated with infrastructure facilities used for investment, that there would be certain direct/indirect expenses relating to the investments, that it could not be set that there were no costs/ expenses attributable to earning of the income, that disallowance had to be worked out in view of the provisions of section 14A. Referring to the judgement of the Hon'ble Bombay High Court delivered in the case of Godrej and Boyce Mfg. Company Ltd., the FAA restricted the disallowance to Rs. 2.10 lakhs. 13.2. Before us, the AR stated that applicability of Rule 8D was prospective, that provisions of the Rule could not be applied in the year under consideration, that the assessee had not incurred any expense in relation to earning of exempt income. Alternatively, it was argued that disallowance should be restricted to 5% of the dividend income. He relied upon the case of Godrej Agrovet Ltd (ITA/94 of 2011 of the Hon'ble Bombay High Court). 13.3. We have heard the rival submissions and perused the material before us. We find that the AO had made a disallowance of Rs. 4.45 lakhs, that the FAA had restricted the disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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