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TMI Blog2017 (12) TMI 259X X X X Extracts X X X X X X X X Extracts X X X X ..... orities instead of maintaining silence. Transfer pricing adjustment towards corporate guarantee - Held that:- As the issue under consideration is materially identical to that of AY 2011-12, following the decision therein, we direct the AO/TPO to fix the fees at 0.27% as guarantee commission on the amount involved. Accordingly, the grounds raised by the assessee are partly allowed. Adjustment in respect of international transaction of interest on mobilization advances - Held that:- As the issue under consideration is materially identical to that of AY 2011-12, following the decision therein, we allow the grounds raised by the assessee on this issue and accordingly interest charged on mobilization advances are deleted. As in previous year held that when the whole work contract is considered within the ALP, we are of the opinion that the advances given in the course of contract does not call for special adjustment. Moreover, these business advances cannot be categorized as ‘loans and advances’ so as to consider them for adjustment. Relying on the various case law relied upon by the Ld. Counsel, we are of the opinion that since assessee-company is not charging any interest from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit u/s 115JB at ₹ 106,26,37,956/-. Thereafter, the assessee company filed revised return of income on 04/11/2013 admitting total income at ₹ 25,73,74,270/- and book profit u/s 115JB at ₹ 105,93,83,227/-. In the scrutiny proceedings, the transactions were referred to the Transfer Pricing Officer (TPO) u/s 92CA(3) of the Act for computation of Arms Length Price, who has proposed adjustments in respect of assessee s international transactions for the year under consideration, as under: Transaction Adjustment (Rs.) Interest received on loans 1,29,54,309 Corporate Guarantee 90,03,54,380 Interest on receivables 131,12,22,228 Work Contract Expenses 195,72,44,551 Total 418,17,75,468 2.1 Assesse had filed objections against the TP order before the AO, however, AO finalized the draft order by incorporating the adjustments proposed by TPO. Assessee preferred objections before the DRP and the DRP vide their order dated 23/11/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 4.3 Against the action of the TPO, the assessee raised objections before the DRP that the TPO erred in disregarding the benchmarking analysis conducted by the assessee to substantiate the arm s length nature of loan transactions and in adopting an arbitrary approach to determine the arm s length interest rates. Further, the assessee objected that the TPO erred by considering domestic bank rate in order to determine arm s length interest rate for a foreign currency denominated loans and the approach of the TPO is not in accordance with the established commercial principles. 4.4 The DRP upheld the action of the TPO by observing that in the absence of justification for not responding to the query of the TPO and also not providing the relevant information and facts, we are constrained to uphold the ALP determined on the said transaction by adopting interest rate at 14.75%. 4.5 Before us, the ld. AR of the assessee submitted that assessee has given loan outside India in foreign currency i.e. in Singapore and PLR of Singapore should be charged as CUP instead of Indian market rate. He relied on the following decisions: 1. Lanco Infratech Ltd. Vs. DCIT, AY 2011- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms and having the same relationship, would have earned/paid as interest on the loan in question. What an independent party would have paid under the same or identical circumstances would be the arm's length price or rate of interest. What the assessed would have earned in case he would have entered into or gone ahead with a different transaction, say with a party in India, is not the criteria. What is permitted and made subject matter of the arm's length determination is the question of rate of interest and not re-classification or substitution of the transaction. 5.1. Respectfully following the principles laid down by the Co-ordinate Benches as relied on by the Ld. Counsel and also by various judicial pronouncements of the High Courts relied upon, we are of the opinion that there is no need for any adjustment on this account, as assessee has already received 6.37% interest which is more than the Singapore prime lending rate of 5.38%. In view of that, we delete the addition made by the AO/TPO/ DRP. Assessee s grounds on this are allowed. As the issue under consideration is materially identical to that of AY 2011-12, following the decision of the coordinate ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Nil Hedge LInPL Standard Chartered Bank, London USD 35 Mn Rs. Nil Hedge Assessee submitted that these guarantees were provided to enable their start up subsidiaries, to obtain the requisite hedges and not to obtain any beneficial terms, it provided the corporate guarantees to independent financial institutions, on a free of charge basis to its AEs. According to assessee, as there is no charge received/receivable on these transactions, there is no benchmarking required u/s 92(1) of the IT Act. 5.2 When the TPO asked the assessee as to why corporate guarantee fee should not be charged as per SBI guidelines, the assessee submitted that a Banker cannot be considered for the purpose of CUP since it is a quotation and not an actual uncontrolled transaction . Further, it was submitted that bank guarantees are not comparable with corporate guarantees since such corporate guarantees are issued based upon the business needs and not based on risk assessment or underlying asset which generally the banks ask for. Therefore, corporate guarantee fee cannot be charged as per SB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e loans by providing corporate guarantees to avail the loan for acquisition of the asset. The corporate guarantee was provided because of parental obligation and not for any other reason. The Ld. TPO ought to have appreciated that the AE has not derived any benefit by receiving the guarantee given by the Assessee except getting a loan. Hence, no ALP adjustment is warranted in this regard. The only party to derive a quantifiable benefit was the Assessee. The Ld. TPO erred in calculating the ALP of the corporate guarantee fee using 'CUP' as the most appropriate method and by applying the rates of SBI without any basis and without complying with the procedure laid down for computation of arm's length price as given in the Provisions of section 92C of the Act. Without prejudice to above, the ld. TPO erred in calculating the guarantee fee on the entire amount of the guarantee instead of restricting the amount to the extent of the withdrawal of loan by the AE against guarantee. 5.5 The DRP upheld the action of the TPO. 5.6 The assessee is in appeal before us. 5.7 Ld. AR of the assessee submitted that corporate guarantee do not fall wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7801/Mum/2010) (supra) we however, direct the AO/TPO to consider only 0.27% as the guarantee commission on the amount involved. The contention that corporate guarantee fee to be considered proportionately with the period it availed, cannot be accepted as guarantee fee is upfront and one time fee paid at the beginning and therefore, on the corporate guarantees provided during the year, the rate is to be applied. However, if any of the corporate guarantees are provided in earlier year, they may not be subjected to transfer pricing during the year under consideration. Assessee has stated that some of the guarantees were withdrawn during the year. If the guarantees are given during the year and also withdrawn during the year, AO is directed to consider accordingly. Subject to quantification of corporate guarantee provided by assessee during the year, we direct the AO/TPO to fix the fees at 0.27% on that amount. With these directions, the grounds are considered partly allowed as far as the appeal of assessee is concerned. Since the issue is considered in the light of the Co-ordinate Bench decisions, we find no merit in Revenue contentions of adopting rate at 2% adopted by the TPO which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are as under: The Ld. TPO ought to have appreciated the fact that the Assessee company is an established EPC contractor in the country. The Assessee company gets mobilization advance from the awardee companies as per EPC contracts which is interest free. The Assessee company sub-contracts part of the EPC contract to various sub-contractors including AEs and releases part of the mobilization advance received to the sub-contractors as interest free mobilization advance at a certain % of contract value as per the terms of agreements with them. The Ld. TPO ought to have appreciated the fact that the mobilization advances are to be adjusted against future supplies or recovered from each bill raised on the contract work completed over the stipulated period and cannot be said to be due and not collected. The Ld. TPO ought to have appreciated that the Assessee did not charge any interest on mobilization advances given to its Non - AEs and that not charging any interest to its AEs is consistent with the arm's length principle while applying the CUP method for determining the ALP. The Ld. TPO has erred in applying the domestic PLR of 14.75% on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is undertaking an EPC contract and has received mobilization advances as part of that. Like-wise, assessee has given some works to other parties on sub-contract basis and necessarily it has to provide mobilization advances to the parties. It is also noticed that assessee has advanced mobilization advances to both AEs and non-AEs and no interest has been charged from either party. Not only that assessee is also not required to pay any interest on the mobilization advances received, which are in fact more than the amounts advanced by assessee. Thus, there is complete uniformity in the act of assessee in not charging interest from both AE and non-AE and also not paying interest/claiming interest for the advances received. Following the principles laid down by the Hon'ble Bombay High Court in the case of Indo American Jewellery Ltd. Vs. CIT, Hon'ble Bombay High Court (ITA No. 1053 of 2012), we are of the view that there is no need for charging any interest on the amounts advanced as receivables. Since this amount is part of contract work, in our view it does not attract any adjustment under TP provisions. Moreover, advances given as part of contract work does not require any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee as the tested party is not in line with the TP regulations. The functions performed by the taxpayer being more complex than the AE, taking AE as the tested party and analyzing the transaction is the better approach (he relied on the functional analysis document submitted by assessee in the TP report at page no. 23 to 24, according to him, the Singapore entity is the least risk mitigated entity and hence, should be selected as the tested party for the economic analysis). Similar approach has been followed in the assessee's case in the previous year and it has been concluded that the payments were at arm's length, since, the margins of the Singapore entity as compared with the foreign comparables was within +/- 5%. An economic analysis for the current year is as follows: 7.2 The TPO conducted search for suitable comparable companies in One source database (considering companies in Singapore under the similar industry in which the assessee operates the search process is enclosed in a CD along with this order). Lanco International Pte ltd is taken as the tested party and OP/OR is taken as the PLI. 6 companies have been identified. It is seen that the margin earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arithmetic mean 4.95 3.92 After applying the average margins of the comparables to the financials of the assessee, the results are as under: Description Amount Arm s length price 4.95% Actual works contract expenses paid 29836044988 Arm s Length Margin (%) (ALM(OP/OR) 3.92% Transfer price (Margin of Singapore Pte) with higher range +/-5% of 10.19%), hence not within arm s length 10.48% Excess margin over and above the arm s length 6.56% Adjustment u/s 92CA (29836044988*6.56% 195,72,44,551 7.4 Aggrieved, the assessee raised following objections before the DRP: The ld. TPO erred in not providing an opportunity of being heard to the Assessee company to offer its objections via a show cause notice as per the proviso to section 92C(3) of the Act before making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself and its AE, in relations to international transactions on account of work contract expenses. It is very interesting to note that similar analysis was done by the TPO for the previous year i.e. 2011- 12 in the same manner, which was not objected to by the assessee. The TPO further points out that even prior to AY 2011-12, similar analysis was carried out but no objection was raised by the assessee even in those years, obviously because no adjustments were proposed and made. In the current year the assessee is objecting the same which clearly shows it is taking contradictory stands year on year on similar analysis i.e. objecting to the adjustment when made and not objecting when no adjustment made on similar facts and circumstances. Hence, we have no hesitation in upholding the order of the TPO and rejecting contentions of the assessee. 7.6 Aggrieved by the order of DRP, the assessee is in appeal before us. 7.7 Ld. AR of the assessee submitted that the tested party for bench marking a transaction should always be the Indian assessee and not the foreign entity. He submitted that selecting foreign tested party is difficult and each year is independent and to be assessed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Ground No. 4a to 4i relate to addition of ₹ 88,51,02,720/- on account of sub-contract expenses. 8.1 The AO observed that during the course of hearing, the assessee company had submitted the copies of RA bills, work orders, etc. and on verification of the same, the AO was of the view that the same were not amenable for verification after lapse of over three years and these documents did not establish that the services had been actually rendered. Therefore, the AO held that the expenditure amounting to ₹ 88,51,02,720/- claimed by the assessee for the year under consideration under the head sub-contract expenses in respect of 5 companies was treated as non-genuine and bogus and was not allowed to be claimed as expenditure u/s 37 of the Act and disallowed and added to the income returned. 8.2 When the assessee objected before the DRP, it held that mere certificate without supporting evidence to indicate the expenditure had been incurred would not substantiate the claim of the assessee and the onus of discharging the claims or evidence in support of its contentions had not been met by the assessee and relying on the earlier decision, DRP upheld the action of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offered the said contract receipts, AO is directed to accept the sub contract payments, as assessee received the corresponding amounts from main contractor and offered the same for taxation. In case there is any failure or the nexus was not fully established, Assessee agrees that being a subcontractor a small percentage of the expenditure can be estimated for disallowance, following the principles laid down by the Coordinate Benches as relied upon above. In that event, AO is directed to disallow only a certain percentage of the above amount, if necessary. The addition made is accordingly deleted and the issue of examination of impugned sub contract payments is restored to AO to consider afresh as directed. Grounds are considered allowed for statistical purposes. As the issue under consideration is materially identical to that of AY 2011-12, following the decision therein, AO is directed to accept the sub contract payments, as assessee received the corresponding amounts from main contractor and offered the same for taxation. following the principles laid down by the Coordinate benches, AO is directed to disallow only a certain percentage of the above amount, if necessary. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to allow the claim of foreign excahange loss of ₹ 1,19,18,79,013/- due to the following: The Courts have directed tax officers to allow the relief even if it has been claimed for the first time during the assessment proceedings. Any difference, loss or gain arising on conversion of the said liability at the closing rate, should be recognized in the profit and loss account for the reporting period as per Accounting Standard 11. Foreign currency loss incurred on revenue account shall be allowed as revenue expenditure. The assessing officer should assist the tax payer in claiming any relief to which he is entitled to under the law. He further submitted that the assessee has made a claim during the course of assessment proceedings and is entitled to claim the deduction which was not claimed in the original or revised return. He relied on the following case law: 1. Mahindra Mahindra Ltd., Vs. Addl. CIT [2013] 40 Taxmann.com 522 (Mum. Trib.) 2. Aban Offshore Ltd. Vs. DCIT, ITA No. 450/Mds/2017 Ld. AR submitted that foreign currency loss incurred on revenue account shall be allowed as revenue expenditure. For this proposition he ..... X X X X Extracts X X X X X X X X Extracts X X X X
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