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TMI Blog2017 (3) TMI 1626X X X X Extracts X X X X X X X X Extracts X X X X ..... ing analysis applying TNNM method has been approved by the Hon ble High Court of Delhi in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015 (3) TMI 580 - DELHI HIGH COURT]. Accordingly, we hold that for benchmarking international transactions, various activities undertaken by the assessee under the head manufacturing activities need to be aggregated. The Assessing Officer / TPO is directed so. Difference in gross profit margins by AO as against difference in net profit margins between sales to associate enterprises and sales in domestic market - Held that:- The Tribunal in view of the detailed reasoning of CIT(A) observed that the addition made by the Assessing Officer on account of division of difference in gross profit margins by the Assessing Officer as against difference in net profit margins between sales to associate enterprises and sales in domestic market, no addition is warranted. The Tribunal decided the issue as per provisions of Rule 10A(d) of the Rules and deleted addition. Applying the said principle, we direct the Assessing Officer / TPO to re-compute the adjustment, if any, in the hands of assessee on account of international transactions. It may be p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffording reasonable opportunity to the assessee. Disallowance of incremental provision for New Engine Performance Inspection Fee (in short NEPI Fee ) - Held that:- the assessee was following a scientific basis for making the aforesaid provision which is not a contingent expenditure as the provision is made in relation to the IC Engines sold by the assessee. The assessee no doubt is making the provision and after the lapse of the period of inspection in case the expenditure has not been necessitated then the same is written back. In the totality of the above said facts and circumstances, we find merit in the plea of the assessee and allow the claim of the provision made for any NEPI fee. It may also be pointed out that the inspection and servicing is different from warranty which is to be taken care of in case of failure of the Engine or its Components during the period of warranty. Accordingly, we allow the claim of the assessee Disallowance of incremental warranty provision - Held that:- We find no merit in the stand of the authorities below in this regard wherein the assessee is following a scientific basis in claiming the said expenditure and as in the case of NEPI fee, the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned DRP in rejecting the "aggregation approach" followed by the Appellant for benchmarking of international transactions in respect of manufacturing function of the Appellant. 2.2 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in accepting the benchmarking done by the Transfer Pricing Officer ["TPO"] and stating that benchmarking done by the Appellant is not reliable. 3. Inappropriate issue of two show cause notices 3.1 The learned DCIT, pursuant to the direction of the learned DRP, erred in law and on the facts and in circumstances of the case in issuing two show cause notices. 4. Inappropriate comparison of profitability of "export to Associated Enterprises (AEs)" and "domestic sales" ignoring differences in Functions, Assets and Risks (FAR) and comparison of controlled transactions with controlled transactions. 4.1 The learned DCIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in rejecting the external comparable companies selected by the Appellant for benchmarking the manufacturing f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering PLI as "net profit to total cost" as against "net profit to sales" as selected by the Appellant without providing cogent reasons. 8. Benefit of the variation / reduction of 5 percent from the arithmetic mean 8.1 The learned DCIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in confirming the computation of arm's length price undertaken by the TPO without considering lower +/- 5 percent range from the price computed based on arithmetic mean as provided in proviso to Section 92C (2) of the Act. C. International Transaction relating to Payment of Royalty 9. Inappropriate approach adopted by the TPO for benchmarking payment of royalty to associated enterprises 9.1 The learned DCIT erred in law and on facts and in circumstances of the case pursuant to the directions of the learned DRP, in rejecting the aggregation approach in respect of manufacturing function followed by the Appellant for benchmarking the international transaction relating to payment of royalty. 9.2 The learned DCIT erred in law and on the facts and circumstances of the case pursuant to the directions of the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upport Services 11. Inappropriate approach adopted by TPO in benchmarking procurement support services provided to associated enterprises 11.1 The learned DCIT erred in law and on facts and in circumstances of the case pursuant to the directions of the learned DRP, in rejecting the aggregation approach in respect of manufacturing function followed by the Appellant for benchmarking the international transaction relating to provision of procurement support services. 11.2 The learned DCIT pursuant to the direction of the learned DRP erred in facts and circumstances of the case in following cherry picking approach in selection of the comparable companies. 11.3 The learned D C IT erred in facts and in circumstances of the case in treating the Appellant as a cost protected entity for rendering procurement support services. F. International Transaction relating to receipt of Commission 12. In appropriate approach followed by the TPO in benchmarking receipt of commission from associated enterprises 12.1 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in rejecting the benchmarking methodology adopte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proportion as compared to the actual requirements of the Appellant Company. 14.4 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in not following the ratio of the following decisions: (i) The order of ITAT Pune Bench in ITA No. 510/PNI1998 in the case of the Appellant Company for Assessment Year 1994-95 (ii) Rotork Controls India P. Ltd. v. CIT (2009) 314 ITR 62 (SC) (iii) CIT v. Ericssion Communications P. Ltd. (2009) 318 ITR 340 (Delhi) 15. Proposed disallowance of expenses u/s 14A of Income Tax Act,1961 15.1 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in disallowing an amount of ₹ 15,94,740/- as incurred in relation to exempt income u/s.14A of the Income Tax Act, 1961. 15.2 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in not appreciating that there was no dominant and immediate connection between the expenditure incurred and exempted income and therefore there cannot be any adhoc disallowance out of general expenses. They ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. v. CIT (2007) 105 ITD 1 (Bang.) 17. Proposed disallowance out of Deduction u/s. 80IB by the DCIT 17.1 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in disallowing the deduction u/s. 80IB by allocating a portion of Head Office Expenses and Director's Expenses to the profits of eligible Daman Unit. 17.2 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in not appreciating that the eligible unit of the Appellant Company at Daman was an independent unit managed independently without any interference by other divisions of the Appellant Company and therefore no part of the common expenses / expenses on directors could be attributed to the said unit of the Appellant Company. 18. Proposed disallowance out of depreciation on intangible by the DCIT 18.1 The learned DCIT erred in law and on the facts and in circumstances of the case pursuant to the directions of the learned DRP in disallowing depreciation on intangibles in respect of Global Sourcing Consideration. 18.2 The learned DCIT erred in law and on the facts and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 210,40,80,385/- on 23.11.2006. The case of the assessee was selected for scrutiny. In view of various international transactions detailed in the audit report in Form 3CEB, reference under section 92CA(1) of the Act was made to the Transfer Pricing Officer (TPO). The TPO noted that the assessee was 51% owned subsidiary of Cummins INC, USA and the balance equity was held by Kirloskar group, the Indian public and various financial institutions. The company was engaged in the manufacture and sale of IC Engines for power generation and industrial application in the domestic market. Further, it manufactures and sold IC Engines and components for exports. The assessee was purchasing spares by way of imports for re-sale in the domestic market. The details of international transactions entered into by the assessee are enlisted under para 5 at page 2 of the TPO's order and the activities were divided into (a) manufacturing activity, (b) activity carried on by the low horsepower division, (c) sourcing activity, (d) business services and (e) financing activity. The TPO show caused the assessee since he was of the view that each of the transactions entered into by the assessee were differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /-, out of which royalty amount paid @ 8% of net sales was at ₹ 17,13,10,967/-. The TPO worked out the said payment of royalty @ 4.56% on total sales of ₹ 375.95 crores. The assessee was asked to give the details in respect of the said payment of royalty, since the royalty was being charged by the associate enterprises for the assessee's export to associate enterprises itself. The TPO noted that group entities were being charged at the rates ranging from 3%-4% and the average rate of royalty worked out to 3.55%. The TPO worked out the excess royalty payment by 1.0566% and suggested an adjustment of ₹ 3,96,23,859/-. In respect of technical know-how also, where the assessee had paid sum at ₹ 51.35 crores to the associate enterprises and the transaction was benchmarked following TNNM method aggregating the transactions under the manufacturing activity, the TPO noted that this amount was merely an advance and was not debited to Profit & Loss Account. Since it was not reflected in the Profit & Loss Account, the TPO queried how the same is being benchmarked after having grouped under manufacturing activity. The TPO was of the view that since the amount paid to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the TPO was of the view that allocation of expenses wherein administrative expenses of ₹ 39.35 crores had been allocated against domestic sales, whereas ₹ 8.49 crores was allocated to exports to associate enterprises and similarly, in respect of selling and distribution expenses, ₹ 19.79 crores was against domestic sales and ₹ 8.90 crores in respect of exports to associate enterprises. After perusing the details, wherein allocation was made in respect of certain expenditure but no allocation was made in respect of depreciation, repairs & maintenance, rent receipts and taxes and other expenses, the TPO observed that the expenses were not allocated in the ratio of sales. The assessee was show caused as to why allocation of expenses should not be on the basis of sales of demostic unit and sales to associate enterprises and was also show caused as to why internal comparability should not be taken following TNNM method and why the net margins over total cost be not taken as PLI for such internal comparability and accordingly, why an adjustment of ₹ 34.35 crores should not be made in benchmarking the international transactions relating to export of manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty paid at 8% was very higher. Another aspect noted by the TPO was that Cummins Inc had incurred expenditure of about 3% of sales during the year and if the expenditure was 3% of sales, then he was of the view that royalty @ 3.5% on gross sales as proposed in the show cause notice was more than justified. In view thereof, adjustment of ₹ 3,97,23,859/- was made to the international transactions relating to payment of royalty to associate enterprises by the TPO. The TPO also made following additions on account of arm's length price of each of the transactions:- (a) Technical Know-how Fees Rs.51.35 lakhs First installment paid towards acquisition of Know-how pertaining to KIT engines which for the year under consideration was an advance. (b) Procurement support services Rs.13.99 lakhs (c) Receipt of commission Rs.43.24 lakhs (d) Financing activity Rs.141.51 lakhs 10. The TPO thus, intimated an adjustment of ₹ 40,64,87,070/- to total value of international transactions relating to export of IC engines, payment of royalty and technical know-how fees to associate enterprises, procurement support services and receipt of commission as well as transactions rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee thereafter, referred to third show cause notice issued by the TPO, wherein he referred to allocation of administrative and selling expenses on sales ratio basis. He pointed out that the assessee has applied SAP System and ERP System for allocating expenses, on the other hand, the TP re-allocates the administrative expenses on adhoc basis. He further found fault with the order of TPO in comparing the exports made to associate enterprises by the assessee with its domestic sales and in not applying the margins of comparable companies selected by the assessee to benchmark its international transactions. The learned Authorized Representative for the assessee pointed out that this issue of aggregation and re-allocation of expenses has arisen only in the instant year, whereas in the preceding year and also in the succeeding year, the method adopted by the assessee has been accepted in toto. The learned Authorized Representative for the assessee pointed out that in the preceding year when the entity Cummins India Ltd. was carrying on of export of components and also IC engines but was not involved in manufacturing, then the Tribunal in Cummins India Ltd. v. Addl. CIT [2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and perused the record. The assessee is engaged in manufacture and sale of IC engines for power generation and industrial applications in the domestic market and it also manufactures and sells IC engines and components for exports. The assessee imports engine parts and components which in turn, were grouped for utilizing in the manufacturing activity undertaken by the assessee both for domestic and for exports. During the year under consideration, the assessee had entered into various international transactions which are as under:- Sr. No. International transaction Amount Rs. Method Adopted A Manufacturing Activity 1 Import of Engine Parts and components 2,34,27,95,061/- TNMM 2 Export of manufactured IC Engines 4,61,15,04,183/- TNMM 3 Export of manufactured and bought out components 21,21,95,671/- 4 Payment of Royalty 20,01,38,867/- TNMM 5 Provisions of Miscellaneous Services (Procurement Support Services) 2,60,98,683/- TNMM 6 Receipt of IT Support Services 5,16,56,441/- TNMM 7 Design services 2,52,66,373/- TNMM 8 Payment of Technical Know-how fees 51,35,000/- TNMM 9 Rendering of Audit Services 1,21,057 10 Rendering of HR Services 5,983/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication of internal TNNM method. The Tribunal vide order dated 312.2014 held as under:- "24. The first issue arising in the present appeal is whether in view of the OECD guidelines and the Indian Transfer Pricing provisions, aggregation of transactions could be made or not. We find that Pune Bench of the Tribunal in Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT (supra) had elaborately considered the OECD guidelines under Chapter - III and also the guidance Notes issued by the Institute of Chartered Accountants of India on transfer pricing in para 13.7 and had held as under:- "30. We have carefully considered the rival submissions. Section 92B of the Act provides the meaning of expression "international transaction" as a transaction between two or more associated enterprises. Rule 10A(d) of the Rules explains the meaning of the expression "transaction" for the purposes of computation of ALP as to include a number of closely linked transactions. Rule 10B of the Rules prescribes the manner in which the ALP in relation to an international transaction is to be determined by following any of the methods prescribed. Shorn of other details, it would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other words, in a given case where a number of closely linked transactions are sought to be aggregated for the purposes of bench marking with comparable uncontrolled transactions, such an approach can be said to be well established in the transfer pricing regulation having regard to Rule 10A(d) of the Rules. Though it is not feasible to define the parameters in a water tight compartment as to what transactions can be considered as 'closely linked', since the same would depend on facts and circumstances of each case. So however, as per an example noted by the Institute of Chartered Accountants of India (in short the 'ICAI') in its Guidance Notes on transfer pricing in para 13.7, it is stated that two or more transactions can be said to be 'closely linked', if they emanate from a common source, being an order or contract or an agreement or an arrangement, and the nature, characteristic and terms of such transactions substantially flow from the said common source. The following extract from the said Guidance Notes is worthy of notice:- "13.7 The factors referred to above are to be applied cumulatively in selecting the most appropriate method. The refere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for supply of equipments and separately for erection and commissioning charges, however, it is evident that the negotiations for the same are carried on at one go. In fact, at the time of hearing, it was specifically queried from the learned counsel as to whether the assessee is undertaking installation/commissioning activities independent of its own-supplied material handling equipments. It was clarified that the servicing and commissioning charges are earned only in relation to services performed for own-supplied manufacture/assembled material handling equipments. The aforesaid factual assertion is not disputed. Factually, it is the activity of manufacturing/assembling of cranes etc. done by the assessee and sales thereof, which brings into play the activities of installation and commissioning of such products. Therefore, it is quite evident that such services are not independent but in-effect are as a result of manufacturing of material handling equipment undertaken by the assessee and as a they arise from a single negotiation with the customers, the source of all such transactions is also to be understood as common. 33. The TPO in this regard has observed that assessee has i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed' within the meaning of Rule 10A(d) of the Rules. Thus, the activity of installation and commissioning/engineering services is 'closely linked' with the manufacturing activity and deserves to be aggregated and construed as a single transaction for the purposes of determining the ALP as per the method adopted. 34. In view of the aforesaid discussion, in our opinion, the approach of the TPO, in out-rightly rejecting the aggregation of all the transactions itemized at 1 to 7 in para 7 is flawed having regard to the facts and circumstances of the case. Further, it is noticed from the tabulation in para 7 of this order, that the assessee is also rendering marketing services, technical know-how and professional services, etc., which have also been aggregated. For such activities no specific point has been made out by the assessee as to why they can be classified as 'closely linked' transactions for the purposes of Rule 10A(d) of the Rules. Considering the entirety of the facts and circumstances, we are of the opinion that the issue be revisited by the AO/TPO in the light of our aforesaid discussion. The AO/TPO shall take into consideration the pleas and the materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principal activity of the assessee. The repair & maintenance and the warranty administration including services of the IC engines requires the support of the spare parts which were sold by the assessee. Where the assessee was engaged in aftermarket support of engines manufactured and sold by Cummins entities, the question arises whether the sale of spare parts could be categorized separately as a trading activity engaged in by the assessee, which in turn is separate from the activity of doing servicing of the IC engines, their repair and maintenance and also warranty administration i.e. support during the warranty period and also annual maintenance contracts and services during post warranty periods. Another activity engaged in by the assessee was payment for customized parts catalogue, which was also aggregated by the assessee company as part of its international transactions, which were claimed to be linked to the sale of spare parts carried on by the assessee. 28. The assessee during the year under consideration had made exports to its associated enterprises on account of the said spare parts totaling ₹ 87,48,479/-. The assessee had also made exports to third parties dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces over total sales in respect of export to associated enterprises works out to 0.2069% and in respect of exports to third parties works out to 0.0098%." 16. The assessee for the year under consideration before us is engaged in the manufacturing activity along with other related activities and had aggregated international transactions as tabulated hereinabove and had benchmarked the international transactions by using TNNM method as most appropriate method by taking external comparables and adopted PLI as operating margins to sales. The TPO on the other hand, had made adjustment after rejecting the claim of aggregation and also while applying the TNNM method had compared the same with internal comparables i.e. domestic sales made by the assessee. Under section 92B of the Act, meaning of expression 'international transaction' is provided i.e. a transaction between two or more associate enterprises. Rule 10A(d) of the Income Tax Rules, 1962 (in short 'the Rules') explains the meaning of expression "transaction" for computing the arm's length price to include number of closely linked transactions. Rule 10B of the Rules prescribed the manner in whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w cause notice, the TPO had proposed CUP method to be applied by taking gross profits as the PLI. In the next show cause notice, the TPO had proposed internal TNNM method to be applied, wherein the benchmarking had to be done by comparing the margins earned by the assessee from exports to associate enterprises in comparison with the margins earned from sales in the domestic market. In the forth show cause notice, certain adjustments were made to the costs i.e. allocation of certain costs to the segmental details of exports division in order to work out the PLI. In this regard, the assessee had elaborately took us through various submissions made before the TPO / DRP and has argued that there is no comparison between IC engines sold in the domestic market and IC engines exported by the assessee. He has also stressed that comparison, if any has to be made with uncontrolled transactions. The assessee pleaded that the two products i.e. manufactured by the assessee are different and are functionally different and also there is difference of risk, hence, they do not fall within FAR analysis. The case of authorities is that the assessee is engaged in manufacture of IC engines which is maj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. However, on the issue of PLI, the CIT(A) held that the TNNM method refers to net margins and not gross margins and comparing of gross margins was not envisaged under the Income Tax Rules. The Tribunal in view of the detailed reasoning of CIT(A) observed that the addition made by the Assessing Officer on account of division of difference in gross profit margins by the Assessing Officer as against difference in net profit margins between sales to associate enterprises and sales in domestic market, no addition is warranted. The Tribunal decided the issue as per provisions of Rule 10A(d) of the Rules and deleted addition. Applying the said principle, we direct the Assessing Officer / TPO to re-compute the adjustment, if any, in the hands of assessee on account of international transactions. It may be pointed out herein itself that the adjustment was made in the hands of assessee in HHP Division only and no adjustment was made in LHP division. 19. Before parting, we may point out that though the assessee had filed Cross Objections against the appeal filed by the Revenue, but no issue has been raised against finding of CIT(A) that all manufactured products of the assessee fell into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the cost. The assessee is aggrieved by such re-working of the cost which are to be considered while determining the operating margins. 21. The perusal of details of administrative expenses reflects that certain expenses i.e. like depreciation, rent, rates, repairs & maintenance, taxes and other expenses have not been allocated at all to the export division, by the assessee. The assessee claims that depreciation and other expenses on plant & machinery were already included in the cost of goods sold and the non- allocation if any, does not affect cost. In the totality of the above said facts and circumstances, we find no merit in re-allocation of administrative expenses and selling & distribution expenses by the Assessing Officer / TPO. 22. The next issue raised by way of ground of appeal No.7 is the methodology adopted by the TPO in application of net profit to cost as PLI. The case of assessee is that where selling price of component manufactured by it derives the profitability and not the cost of components utilized for manufacturing activity, the PLI should be adopted as net profit to sales and not net profit to cost. We find merit in the plea of assessee in this regard that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Assessing Officer / TPO in benchmarking the receipt of commission from associate enterprises. 28. Briefly, the facts relating to the issue are that during the year under consideration, the assessee had received commission of ₹ 55.54 lakhs from CPG, Kent and CPG, Singapore respectively. The assessee pointed out that it had imported DG sets from CPG, Kent company and sold the same to third parties and had received commission of ₹ 14.21 lakhs. As regards the transaction with CPG, Singapore, it was pointed out that the assessee had identified beneficial customers in India and gensets sold directly to third party for which the assessee received commission of ₹ 41.33 lakhs. The said income was shown as other income by the assessee. The explanation of assessee was that the amount of commission was dependent upon actual selling price to third party customer and where the customer negotiates the selling price with associate enterprises, then the commission varies. The TPO was of the view that the selling price to the third party depends on customers negotiations with associate enterprises and as such, selling price changes, but not the transfer price to Cummins India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vis-à-vis margins earned from another associate enterprises and made adjustment of ₹ 43.24 lakhs. The assessee is aggrieved by the same and the issue which arises in the present appeal is whether the rate of commission realized by the assessee from a transaction with one associate enterprise could be the basis for applying internal CUP for computing the arm's length price of other international transaction with another associate enterprise. The said issue stands covered by similar issue being decided in Tecnimont ICB (P.) Ltd. v. Asstt. CIT [2011] 11 taxmann.com 49 (Mum.), Tecnimont ICB (P.) Ltd. v. Addl. CIT [2012] 138 ITD 23/24 taxmann.com 28 (Mum.) (TM), wherein the issue was decided and addition was deleted. Applying the said ratio to the issue before us, we hold that there is no merit in the adjustment made by the Assessing Officer / TPO in respect of international transactions relating to receipt of commission from associate enterprises. Accordingly, we direct the Assessing Officer to delete the same and the ground of appeal No.12 raised by the assessee is thus, allowed. 32. The last issue raised by the assessee under the transfer pricing provisions is the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction involving interest charged by the assessee on outstanding loan from its AEs. 30. Further, Pune Bench of Tribunal in Varroc Engineering (P) Ltd. Vs ACIT (supra) had observed as under:- "15……..while benchmarking the international transactions what has to be seen is the comparison between related transactions i.e. where the assessee has advanced money to its associated enterprises and charged interest then the said transaction is to be compared with a transaction as to what rate the assessee would have charged, if it had extended the loan to the third party in foreign country. Once there is a transaction between the assessee and its associated enterprises in foreign currency, then the transaction would have to be looked upon by applying the commercial principles with regard to the international transactions. In that case, the international rates fixed being LIBOR+ rates would have an application and the domestic prime lending rates would not be applicable. The assessee has further explained that it had raised the loan from Citi Bank on international rates for the purpose of investment in the share application money of its associated enterprises, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was to be upheld. As it was noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee had charged interest at 6 per cent which was higher than the LIBOR rate, no addition on this account was liable to be made in the hands of the assessee. In the circumstances, the addition made by the Assessing Officer on this count was deleted." 17. The Mumbai Bench of the Tribunal in DCIT Vs. Tech Mahindra Ltd. (2011) 12 taxmann.com 132 (Mum.) held that where there is a choice between the interest rate of currency other than the currency in which transaction had taken place and the interest rate in respect of the currency in which transaction has taken place, the latter should be adopted. Where the transaction is between the assessee and its associated enterprises in foreign currency and the transaction is international transaction, then the transaction would have to be looked upon by applying commercial principles in regard to international transactions. 18. Similar principle has been laid down by the Mumbai Bench of the Tribunal in Hinduja Global Solutions Ltd. Vs. ACIT (2013) 35 taxmann.com 348 (Mumbai - Trib.). 19. In the entirety of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to be looked upon by applying the commercial principles with regard to an international transaction. If that is so, then the domestic lending rates cannot be applied in order to benchmark the transaction of the assessee with its AEs and the international rates fixed by LIBOR would come into play. There was substantial delay in receipt of payment from AEs and substantial amount stood unrecovered from the AEs beyond the stipulated periods. The assessee initially did not charge interest from the AEs and subsequently, charged interest from AEs at AFR i.e. American Federal Rate @ 2.98%. The amount is in the character of loan or borrowing after the stipulated credit period and consequently, such recovery of dues in the international transaction with its AEs is to be benchmarked by applying CUP method of international bank rates. Accordingly, we hold that LIBOR plus rates have to be applied to the amounts due from the AEs beyond the period of 25 days, which was the weighted average number of days delay allowed to the third parties. After excluding the period of 25 days, interest is to be charged on the balance number of days of delay by applying LIBOR plus rates. We find that the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid fees should not be disallowed as in the earlier years. The assessee admitted that the facts of the present case were identical to the earlier years and the deduction should be allowed as the IC Engines sold by the assessee include the consideration towards free inspection. The assessee submitted the details of gross provision made, the amounts payable and the reversals done for the preceding three years and for the year under consideration which are tabulated at page 4 of the final assessment order passed under section143(3) read with section 144C(13) of the Act. The Assessing Officer was of the view that the utilization, i.e. actual expenditure of any fee was much lesser than the provision made for the respective years and excess provision was consistently being made over the years, which led to need for reversal in the succeeding years. Following the earlier years decision, the Assessing Officer proposed disallowance of ₹ 1.31 crores against which the assessee filed objections before the Dispute Resolution Panel, which rejected the same. The Assessing Officer thus added the said amount as income of the assessee. 40. The Ld. Authorised Representative for the assessee po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a of the assessee and allow the claim of the provision made for any NEPI fee. It may also be pointed out that the inspection and servicing is different from warranty which is to be taken care of in case of failure of the Engine or its Components during the period of warranty. Accordingly, we allow the claim of the assessee. The Ground of appeal No.14 is thus allowed. 45. The assessee by way of Ground of appeal No.16 is also aggrieved by the disallowance of incremental warranty provision of ₹ 4,41,28,000/-. The assessee as in the case of NEPI fee is also maintaining a scientific basis for making the said provision and its utilization and thereafter its write back. The said expenditure has been disallowed by the authorities below on the ground that the assessee has not utilized the total provision and has written back the amount. 46. We find no merit in the stand of the authorities below in this regard wherein the assessee is following a scientific basis in claiming the said expenditure and as in the case of NEPI fee, the provision made by assessee is to be allowed as the amount is relatable to the IC Engines sold by the assessee. The warranty clause is part of the contractua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the assessee has sufficient income for the year under consideration and also sufficient reserves and surplus to make the investments, income from which is exempt from tax. The assessee has also made investments in sister concerns and other related concerns which are strategic investments made while carrying on its business and 78.51% of the total exempt income is earned from such strategic investments. In the totality of the above said facts and circumstances and following the ratio laid down by the Tribunal in assessee's own case in Assessment Year 2005-06 (order dated 29-01-2016) we hold that no disallowance out of interest expenditure is to be made in the hands of assessee as the assessee has sufficient funds and even otherwise the provisions of Rule 8D are not applicable to the instant assessment year. Now coming to the administrative expenses, following the precedent in assessee's own case, we restrict the disallowance to ₹ 2 lakhs. Accordingly, grounds of appeal No.15 raised by the assessee is partly allowed. 51. The last issue raised by the assessee is against re-working of deduction under section 80IB of the Act vide Ground of appeal No.17. 52. 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