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TMI Blog2016 (10) TMI 1211X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal by considering LIBOR rate as the transaction is in foreign currency. Therefore interest rate prevailing in the economic geography of AE shall be taken into consideration. Accordingly, we direct the Assessing Officer / TPO to apply LIBOR + 2% as ALP. TP Adjustment in respect of outstanding receivable from the AE for abnormal period - Held that:- This issue has been considered and decided by this Tribunal in a series of decisions including the decision in the case of M/s. Dell International Services India Pvt. Ltd. Vs. JCIT [2016 (6) TMI 1275 - ITAT, BANGALORE] - we set aside this issue to the record of the A.O./TPO with the direction to redo the determination of ALP in respect of providing software development services by considering the proper working capital adjustment in comparable price. In case after giving the necessary adjustment the international transaction of the assessee is found at arm’s length then there is no question of separate adjustment on account of allowing credit period on receivable from the AE. Exclusion of expenses from export turnover while computing the deduction under Section 10A - Held that:- The Hon’ble Karnataka High Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction - Held that:- Despite the directions of the DRP, the Assessing Officer while passing the final assessment order has not allowed this claim of the assessee which is a gross disrespect and derogation on the part of the Assessing Officer to the binding orders/directions of the DRP. Accordingly, we direct the Assessing Officer to recompute the book profit under Section 115JB as directed by the DRP. We make it clear such a conduct of the Assessing Officer is unwarranted and depreciable and goes even against the interest of revenue being a self inflecting injury. Even if the directions of the DRP are not acceptable to the Assessing Officer, the remedy is to file the appeal after passing the final order in terms of the directions of the DRP - I.T.(T.P) A. Nos.1294/Bang/2012 & 166/Bang/2014 - - - Dated:- 31-10-2016 - SHRI A.K. GARODIA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER For The Appellant : Shri Nageshwar Rao, Advocate. For The Respondent : Shri G.R. Reddy, CIT-I (D.R) ORDER Per Shri Vijay Pal Rao, J.M. : These appeals by the assessee are directed against the assessment order dt.16.8.2012 and 20.1.2014 passed under Section 143(3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the learned AO have erred, in law and on facts, by considering the outstanding dues from AEs a separate international transaction subject to transfer pricing. 9. Without prejudice to Ground No. 8 above , the learned TPO and the learned AO have erred, in law and on facts, by not considering the impact of working capital adjustment and making an addition in this regard. 10. Without prejudice to Ground No. 1 , the learned TPO and the learned AO have erred, in law and on facts, in not objectively selecting the arm s length rate of fee/commission applicable for corporate guarantees issued to AEs. 11. Without prejudice to Ground No. 6 , the learned TPO and the learned AO have erred, in law and on facts, in not objectively selecting the arm s length rate of interest applicable for loans issued to AEs. 12. The learned AO has erred in law and on facts, in not considering the revised Book profit under Section 115JB of the Act, as computed by the Company under the Revised Return of Income filed by it without assigning any reasons thereof. 13. The learned AO has erred in law and on facts, by failing to adjust the amalgamation loss (arising on amalgamation of MatrixOne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounds and submitted that the assessee has raised these grounds without raising before the authorities below. Therefore if the additional grounds raised by the assessee are admitted at this stage it will cause a prejudice to the interest of revenue as the Assessing Officer as well as DRP did not have the opportunity to deal with these grounds and examine the relevant record. 7. We have considered the rival submissions and relevant material on record. At the outset, we note that the additional ground Nos.9 to 11 are not the fresh plea raised by the assessee but these are additional/alternative pleas raised by the assessee in respect of the issue already raised in Ground Nos.1, 6 8 of the main grounds. Further these additional ground Nos.9 to 11 pertains to the issue arising from the final order passed in pursuant to the directions of the DRP. Accordingly, in the facts and circumstances of the case as well as in view of the various precedents as relied upon by the assessee and specifically the judgment of Hon'ble Supreme Court in the case of NTPC Ltd. Vs. CIT (supra), we admit the ground Nos.9 to 11 for adjudication on merits. 8. As regards the Ground Nos.12 13, we find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management services 569,187,095 Project work 686,582,831 Recovery of expenses 34,249,252 Reimbursement of expenses 2,303,783 Unsecured loan 598,329,762 Apart from the international transactions as reported by the assessee during the year under consideration the assessee has also provided a corporate guarantee to bank on behalf of AE without charging any fees. In the TP Study, the assessee claimed that this transaction was at arm s length which was not accepted by the TPO. The TPO made an adjustment on account of guarantee fees on the guarantee provided to the subsidiary of ₹ 3,89,88,802. The assessee challenged the action of the Assessing Officer/TPO before the DRP but could not succeed. 12. Before us, the ld. AR of the assessee has submitted that this transaction arising on account of ownership linkage which is based on the reputation of the group as there could be no warranty acceptable to bankers whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of corporate guarantee received by the assessee is required to be given while determining the ALP and TP Adjustment on this issue. In support of his contention he has relied upon the decision of Hyderabad Bench dt.28.3.2014 in the case of Four Soft Pvt. Ltd. Vs. DCIT in ITA No.1903/Hyd/2011 . The ld. AR has pointed out that for the Assessment Year 2011-12, the DRP has accepted the claim of assessee regarding the adjustment for the value of corporate guarantee received by the assessee from its AE. He has relied upon the para 2.9 of the directions of DRP dt.30.11.2015. 14. On the other hand, the learned Departmental Representative has submitted that the corporate guarantee provided by the assessee on behalf of its AE is having bearing on the profit, income as well as assets of the assessee. He has submitted that the assessee did not raise any objection or ground before the DRP that this transaction is not an international transactions but the assessee had claimed that this transaction is at arm s length when the other transactions are accepted by the TPO at arm s length and further the assessee has received corporate guarantee from its AE without paying any guarantee fees. Henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istically different compared to the guarantee provided by the parent. The advantages arising to the parent itself from providing guarantee in lieu of equity support or financial support is also not capable of being evaluated satisfactorily. These differences between the alleged controlled transaction and the guarantee provided by independent parties in the uncontrolled transaction are not capable of being evaluated so as to arrive at determination of the fair uncontrolled price. In the circumstances, computation methodology of TP exercise may fail. It is undisputed that failure of computation mechanism results in failure of the charge. Thus it is clear that grievance of the assessee against the order of the TPO on the issue of ALP in respect of guarantee fees is limited only regarding the correct ALP. We further note that prior to the decisions of Mumbai Bench in the case of Siro Clinpharm Pvt. Ltd. Vs. DCIT (supra) there are series of decisions of this Tribunal including the decision in cases of Four Soft Pvt. Ltd. Vs,. DCIT (supra) and Nimbus Communication Ltd. Vs. ACIT (supra) wherein the Tribunal has taken a consistent view that providing corporate guarantee to AE is an inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is to be considered as an international t ransact ion, and, therefore, the Assessing Officer was justified in determining arm s length price of such transaction. 25.2 Having considered the submissions of the parties, we are unable to accept the contention of the learned AR that corporate guarantee of the nature provided by the assessee wi ll not come within the meaning of international transaction in terms with section 92B of the Act. It is not disputed that section 92B of the Act has been amended by the Finance Act, 2012 with the insertion of Explanation I (c) wi th retrospective effect f rom 01/04/2002. Explanation (i)(c) to section 92B, reads as under: capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business. 25.3 A reading of the aforesaid clause from the Explanation would make it clear that the corporate guarantee provided by the assessee comes within the scope and ambit of international transaction as per the aforesaid clause. Therefore, the contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enmark Pharmaceuticals (supra). 26. Since the issue in the present case is identical to the issue decided by the ITAT, Hyderabad Bench in case of Infotech Enterprises (supra), following the same, we also remit this issue to the file of the TPO to decide the quantum of corporate guarantee rates accordingly. If the assessee is able to bring on record any comparables with regard to corporate guarantee, the TPO may also consider the same while determining ALP of corporate guarantee. The TPO must provide a reasonable opportunity of being heard to the assessee before deciding the issue. This ground is allowed for statistical purposes. It is pertinent to note that in case of corporate guarantee provided to a bank or financial institution on behalf of the AE, the assessee creates a charge on its assets in favour of the bank/financial institution and to that extent the transaction of providing corporate guarantee is having bearing on the assets of the assessee and in turn the assessee cannot use those assets under charge for the purpose of availing further financial credit/loans from the bank/financial institution. Thus this Tribunal held that by providing corporate guarantee falls i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity for transfer pricing purposes and certain illustrations of such business strategies are also given therein. As stated in para 1.60 of the said guidelines which has been relied upon by the ld. Counsel for the assessee, business strategies also could include market penetration schemes and taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower than the price charged for otherwise comparable products in the same market. As explained further, a tax payer seeking to enter a new market or expand (or defend) its market share might temporarily incur higher costs and hence achieve lower profit levels than other taxpayers operating in the same market. In our opinion, the relevant facts of the present case do not indicate that there was any such business strategy adopted by the assessee in not charging commission in respect of guarantees issued for its Associated Enterprises. As a matter of fact, there is nothing to suggest that any such business strategy was adopted by the assessee with specific intention or motive and the case has been sought to be made out merely on the basis of commercial expediency by clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntee fee/commission to be at arm's length after taking into consideration the rates of guarantee commission charged by various banks including the guarantee commission charged by the HSBC Bank in the range of 0.15% to 3%. Since the facts involved in the present case are materially similar to the facts involved in the case of Everest Kanto Cylinder Ltd. (supra), we prefer to follow the decision rendered by the co-ordinate Bench of this Tribunal in the said case over the decision of French Court in the case of Societe Carrefour (supra). We, accordingly modify the impugned order of the ld. CIT(A) on this issue and direct the A.O. to recompute the commission for guarantee given by the assessee to its Associated Enterprises @ 0.5% being the arm's length price. Ground No. 1 of Revenue's appeal is thus partly allowed whereas ground No. 2 of assessee's appeal is dismissed . 5. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to A.Y. 2005-06, we respectfully follow the order of the co-ordinate Bench of this Tribunal for A.Y. 2005-06 and direct the A.O. to restrict the TP adjustment by recomputing the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length interest rate should be the rate prevailing in the country of AE and therefore instead of adopting PLR the Arm s Length Price Interest rate should be LIBOR. 19. On the other hand, the ld. DR has relied upon the orders of the authorities below. 20. At the outset, we note that the transaction of loan/advance is clearly defined in Section 92B(1) as international transaction being lending or borrowing money or any other transaction having bearing on the profits, income, loses or assets of enterprises. We find that the Tribunal has been taking a consistent view on this issue as far as the transaction of lending money to the AE being international transaction however, the arm s length rate has been accepted by the Tribunal by considering LIBOR rate as the transaction is in foreign currency. Therefore interest rate prevailing in the economic geography of AE shall be taken into consideration. Accordingly, we direct the Assessing Officer / TPO to apply LIBOR + 2% as ALP. We find that the Tribunal in the case of Four Soft Pvt. Ltd. Vs. DCIT (supra) has held in para 17 as under : 17. We have heard the parties. This issue was considered by this Tribunal in assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted the transaction of providing software development services to AE at arm s length however proceeded to determine the ALP in respect of interest on outstanding receivable from AE. Accordingly, the TPO made an adjustment of ₹ 14,77,227 on account of interest on receivable from AE. The TPO applied 10.5% as arm s length interest rate. 23. We have heard the learned Counsel for the assessee as well as learned Departmental Representative and considered the relevant material on record. At the outset we note that this issue has been considered and decided by this Tribunal in a series of decisions including the decision in the case of M/s. Dell International Services India Pvt. Ltd. Vs. JCIT in ITA No.308/Bang/2015 Dt.17.6.2016 wherein the Tribunal has considered this issue in para 7 as under : 7. We have considered the rival submissions and relevant material on record. At the outset, we note that allowing a credit period on receivable from AE is not an independent international transaction however, it is part of the main international transaction of providing software development services by the assessee to its AEs. There are series of decisions wherein the Tribunal has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee to AE for realization of dues. The TPO applied 18.816% per annum as arm s length on the over due amounts of AE and proposed adjustment of ₹ 2,49,95,139/-. The DRP though concurred with the view of the Assessing Officer/TPO on the issue of international transaction, however, the adjustment was reduced by applying the interest rate of 7% instead of 18.816% applied by the TPO. The first issue raised by the assessee is whether the aggregate period extended by the assessee to the AE which is more than the average credit period extended to the non- AE would constitute international transaction. We are of the view that after the insertion of explanation to section 92B(1), the payment or deferred payment or receivable or any debt arising during the course of business fall under the expression international transaction as per explanation. Therefore, in view of the expanded meaning of the international transaction as contemplated under clause (i) (e) of explanation to section 92B(1), the delay in realization of dues from the AE in comparison to non-AE would certainly falls in the ambit of international transaction. However, this transaction of allowing the credit period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are closely linked as they are inter linked and the terms and conditions of sale as well as the price are determined based on the totality of the transaction and not on individual and separate transaction. The approach of the TPO and DRP in analyzing the credit period allowed by the assessee to the AE without considering the main international transaction being sale to the AE will give distorted result by disregarding the price charged by the assessee from AE. Though extra period allowed for realization of sale proceeds from the AE is an international transaction, however, for the purpose of determining the ALP, the same has to be clubbed or aggregated with the sale transactions with the AE. Even by considering it as an independent transaction the same has to be compared with the internal CUP available in the shape of the credit allowed by the assessee to non AE. When the assessee is not making any difference for not charging the interest from AE as well as nonAE then the only difference between the two can be considered is the average period allowed along with outstanding amount. If the average period multiplied by the outstanding amount of the AE is at arm s length in comparison ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the comparables rather than looking at the receivable independently. Such working capital adjustment takes into account the impact of outstanding receivables on the profitability. In this regard, the reliance is placed on the following rulings wherein the need to undertake working capital adjustment has been appreciated by the Hon ble Tribunals : Mercer Consulting India Pvt. Ltd. [TS-170-ITAT-2014(DEL)] Mentor Graphics (Noida) Private Limited [109 ITD 101] Egain communication (P) Ltd. [ITA No. 1685/PN/2007] Sony India (Pvt.) ltd. [2011-TII-43-ITAT-DEL-TP] Capgemini India Private Limited [TS-45-ITAT-2013(Mum)-TP] 8. In view of the above, a working adjustment appropriately takes into account the outstanding receivable. Therefore, the assessee has undertaken a working capital adjustment to reflect these differences by adjusting for differences in working capital and thereby, profitability of each comparable company. Accordingly, while calculating the working capital adjusted, operating margin on costs of the comparable companies, the impact of outstanding receivables on the profitability has been taken into account. If the pricing/ pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the earlier decisions as well as relied upon by the ld. AR of the assessee. Accordingly, taking a consistent view we set aside this issue to the record of the A.O./TPO with the direction to redo the determination of ALP in respect of providing software development services by considering the proper working capital adjustment in comparable price. In case after giving the necessary adjustment the international transaction of the assessee is found at arm s length then there is no question of separate adjustment on account of allowing credit period on receivable from the AE. IT(TP)A No.166/Bang/2014 for the A.Y. 2009-10 24. The assessee has raised the following grounds : 1. The learned TPO and the learned AO have erred, in law and in fact, by failing to take cognizance of the valid business/commercial reasons put forth by the Appellant for not charging a guarantee fee to its Associated Enterprises. 2. The learned TPO and the learned AO have erred, in law and in fact, by ignoring the corporate guarantees obtained from overseas subsidiaries/ parent company for which no guarantee fee has been paid by the Appellant. 3. The learned TPO and the learned AO have erred, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw and on facts, by not considering the profit as per Profit and Loss account as per Schedule VI read with provisions of Section 211 of the Companies Act, 1956 for computation of Book profits on the pretext that the profit reflected on the face of the Profit and Loss account are only relevant and by disregarding the adjustment made to the Profit and Loss balance through Schedule to the financial statements of the Company during the subject AY. Based on this, the learned AO has considered ₹ 20,44,39,258 as the profits as against ₹ 10,16,53,062. 12. The learned AO has erred in law and on facts, by not considering the fact that as per provisions of sub-section (6) of Section 211 of the Companies Act, any reference to a Balance Sheet or Profit and Loss account shall include any notes to accounts thereon or documents annexed thereto and consequently failed to adjust the amalgamation loss to the book profits. 13. The learned AO has erred, in law and on facts, by adding back the provision for onerous leases amounting to ₹ 6,41,61,438 (that was debited to profit and loss account of the Company on the basis of contractual obligations) on the pretext that the same c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE. This issue is also common as for the Assessment Year 2008-09 and in view of our finding for the Assessment Year 2008-09, these grounds of the assessee's appeal stand disposed of in the same terms. 29. The Ground Nos.6 7 are regarding T.P. Adjustment in respect of loan/advance given to AE. This issue is also common as for the Assessment Year 2008-09 and in view of our finding for the Assessment Year 2008-09, these grounds of the assessee's appeal stand disposed of in the same terms. 30. Ground No.8 is regarding exclusion of expenses from export turnover while computing the deduction under Section 10A of the Act. 31. We have heard the rival submission and perused the material on record. The Hon ble Karnataka High Court in the case of CIT v M/s Tata Elxsi Ltd. Others 349 ITR 98 (Kar) had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. The relevant finding of the Hon ble jurisdictional High Court reads as follows:- ..Section 10A is enacted as an incentive to exporters to enable their p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term total turnover in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, export turnover is defined, and when the total turnover includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same . In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bed depreciation should be adjusted against the income of the export oriented business undertaking and the total income of the assessee should accordingly be recomputed afresh. The assessee therein had appealed to the Tribunal which allowed the same against which the Revenue preferred an appeal before the Hon ble High Court. The Hon ble High Court held that sec.10B cannot be read in isolation of other provisions as it is only an exemption provision and exemption provision cannot be fanciful and it has some rationale with other provisions of the Act and therefore after a combined reading of the definition of exemption, total income-tax liability, deductibility etc., one has to come to a conclusion that calculation as far as possible is to be in terms of the Act. To arrive at a profit and gain, one has to necessarily take into consideration total income in terms of the Act and to arrive at the income, one has to take into consideration various additions and deletions in terms of the Act, such as allowability of depreciation for the purpose of calculation of total income. The Hon ble Supreme Court has dismissed the SLP filed by the assessee against the order of the Hon ble High Court. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Bhika Ram and others vs. UOI reported in 238 ITR 113. The decision of the High Court in the case of Himatsingike Siede (supra) is dated 4th August 2006 whereas the decision of the Hon ble High Court in the case of Yokogawa India Ltd.(supra) is dated 9th August, 2011. As regards the dismissal of the SLP by the Hon ble Supreme Court against the decision of the Hon ble Karnataka High Court in the case of Himatsingike Siede (supra) is concerned, we find that the Hon ble Supreme Court has dismissed the appeal in limine without laying down any ratio decidendi therein and, therefore, as held by the Hon ble Apex Court in the case of Indian Oil Corporation Ltd. vs. State of Bihar others, reported in 167 ITR 897, the decision of the Hon ble Karnataka High Court in the case of Yokogawa India Ltd.(supra) holds the field. Further, the Hon ble Apex Court in the case of Vegetable Products Ltd., reported in 88 ITR 192 (SC) has held that where two reasonable constructions are possible, then the construction in favour of the assessee must be adopted. Respectfully following the said decision, we allow the ground of appeal No.2. . Following the latest judgment of the Hon b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the Accounting Standard 29, the assessee has to take into consideration all probable outflow of sources and applications on the basis of a reliable estimate. The ld. AR has submitted that when there is a lock in period in the lease agreement then the assessee is bound to pay the rent atleast for the lock in period and therefore the provision is based on prudent accounting principle. He has further contended that when the accounts of the assessee are maintained as per Schedule VI of the Companies Act then except the adjustment provided under Explanation to Section 115JB, the Assessing Officer is not empowered to tinker with the profits of the assessee. 38. On the other hand, the ld. DR has submitted that there is no basis of making the provision of uncertain liability in respect of future rent which does not pertain to the year under consideration. The ld. DR has pointed out that the lock in period had already expired and therefore there was no liability in existence as on 31.3.2009. He has relied upon the orders of the authorities below. 39. We have considered the rival submissions as well as the relevant material on record. The assessee has made a provision in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit and loss account and accordingly the disclosure made in notes to accounts would not change the nature of provision as accrued expenditure. In view of the facts and circumstances as discussed above, we do not find any error or illegality in the orders of the authorities below on this issue. 40. Ground No.15 is regarding brought forward losses or unabsorbed depreciation whichever is lessor has to be allowed as deduction. 41. We have heard the learned Counsel as well as learned Departmental Representative and considered the relevant material on record. At the outset, we note that the DRP has allowed the objections of the assessee on this issue in para 16.2 as under : 16.2 The draft assessment order and the submissions made by the assessee ;have been perused. The dispute arises on a computational issue i.e. what should be the amount of brought forward loss to be reduced from the book profit in terms of Clause III of Explanation 1 to Sec. 115JB. The Assessing Officer adopted the figure of loss as on 1.4.2007 whereas the assessee claims that the figure should be the loss brought forward for the financial year relevant to the Assessment Year 09-10 i.e. as on 1.4.2008. We ..... X X X X Extracts X X X X X X X X Extracts X X X X
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