9911796707
TMI Blog2018 (11) TMI 1250X X X X Extracts X X X X X X X X Extracts X X X X ..... blank coils, ferrochrome etc. It is a leading manufacturer of stainless steel in India and has substantial expertise, technical know-how, brand equity, and marketing network for manufacture of stainless steel products. 3. In ITA number 4249/Del/2013 for A.Y. 2007 - 08, The assessee, has filed the appeal against the order passed by the learned commissioner of income tax (appeals) - XX , New Delhi (the learned CIT - A) dated 30/4/2013. The assessee has raised the following grounds of appeal:- "1. That the Commissioner of Income Tax (Appeals) erred on facts and in law in sustaining the transfer pricing adjustment made by the TPO in respect of the international transactions of (i) export of steel products aggregating to Rs. 2,47,83,673 (ii) interest on loan of Rs. 70,95,787 and (iii) commission on corporate guarantee of Rs. Rs. 2,29,74,981 on the basis of the order passed under section 92CA(3) of the Act. 2. That the Commissioner of Income Tax (Appeals) erred on facts and in law in sustaining adjustment of Rs. 2,47,83,673 in respect of the international transaction of export of goods made by the TPO by comparing the price charged from export of identical products to the associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, as against the rate of LIBOR +200 bps charged by the appellant. 3.1 That the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that the appellant has availed loan from financial institutions, viz., SBI, at the rate of 3 months LIBOR + 170 basis points and from ICICI at 3 months LIBOR + 140 basis points and accordingly, since the rate of interest charged from the associated enterprise at LIBOR+200 is higher, the international transaction of receipt of interest shall be considered to be at arm's length price. 3.2 That the Commissioner of Income tax (Appeals) erred on facts and in law in disregarding, the internal comparable uncontrolled transactions of the interest paid by the associated enterprise in respect of loan of USD 10 million from Standard Chartered Bank at the same rate of LIBOR+ 200 basis points. 3.3 That the Commissioner of Income-tax (Appeals) erred on facts and in law in rejecting the internal CUP, allegedly holding that the associated enterprise at Indonesia is differently placed and apart from being in a different geographical location, it is also situated differently financially. 3.4 That the Commissioner of Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on facts and in law in upholding the finding of the assessing officer that the "appellant was using common infrastructure and personnel and the appellant has not maintained separate books of accounts makes the nexus clear that the appellant was using the same for earning exempt as well as taxable income", and accordingly, Rule 8D shall be applied to determine the expense to be disallowed under section 14A. 5.2 That the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that only expenses having direct nexus with earning of exempt income could only be disallowed under section 14A of the Act. 5.3 That the Commissioner of Income Tax (Appeals) erred on facts and in law in sustaining applicability of Rule 8D of the Income Tax Rules 1962 for computing disallowance under section 14A of the Act, not appreciating that the said rule cannot have retrospective operation." 4. For AY 2007-08, The learned Deputy Commissioner of Income Tax, Central Circle 4 (1), New Delhi [ The ld AO ] is also aggrieved by the order of the learned Commissioner Of Income Tax Appeals [ The Ld CIT- A] and therefore has raised the following substantive grounds of appeal in ITA No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational transaction of export with prices in the domestic transaction and (iii) Making Transfer pricing adjustment of Rs. 34,94,445 by comparing prices of international transaction of export with prices of export of steel product to unrelated party after making adjustment for variation in composition of Nickel. 3.1 That the assessing officer / TPO erred on facts and in law in not appreciating that the prices of international transaction of export of steel product when compared with prices of export' to unrelated party after appropriate adjustment being difference in composition of Nickel, etc., no adjustment allegedly on account of difference in the arm's length price, was warranted. 3.2 That the assessing officer/TPO erred on facts and in law in disregarding comparable uncontrolled prices of similar steel product in the international market in the form of Chinese market quotations as the most appropriate benchmark of the international transaction of export of steel products. 3.3 That the assessing officer/TPO erred on fats and in law in holding that comparable data for the purposes of benchmarking should be actual transactions and hence, market quotations cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, the rate of interest charged by the appellant is at arm's length applying CUP method on the following grounds: (i) The AE of appellant had also paid interest at the rate of LIBOR + 200 bps on its borrowings. (ii) The appellant has availed loan from financial institutions, viz., State Bank of India, at the rate of 3 months LIBOR + 170 bps and from ICICI at 3 months LIBOR +140 bps. 4.2 That the assessing officer/TPO erred on facts and in law in making an adjustment on account of interest on foreign currency loan on the basis of interest rates charged by Indian banks on foreign currency loan without providing details of interest charged by such banks and heard, hence, violating the principle of natural justice. 4.3 That the assessing officer/TPO erred in law in not confronting the appellant with all information obtained under section 133(6) of the Act prior to using such information for determination of arm's length price. 4.4 That the assessing officer/TPO erred on facts and in law in further adding a markup of 3.95% on account of the forward premium and ad-hoc markup of 3.43% on account of adjustment for security and single customer risk, without providing any cogent re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee company filed its return of income [ROI] on 27/10/2007 declaring total income of Rs. 2610690840/- . This return was revised on 20/3/2008 declaring that income of Rs. 2630499040/-. During the year, assessee has entered into four international transactions with its associated enterprise as under:- i. import of stainless steel scrap Rs. 129150028/- ii. export of Cold rolled product Rs. 4 765543264/- iii. corporate guarantee Rs. 1082750,000/- iv. receipt of interest on loan to associated enterprises Rs. 7 989214 7. with respect to export of stainless steel to its associated enterprise of Rs. 4 765543264, it was noted by the learned assessing officer that assessee has a wholly owned 100 % subsidiary in Indonesia, namely PT Jindal stainless (Indonesia) Ltd [The Associated Enterprise or AE] and assessee has exported various hot rolled coils of the value of Rs. 4765543264/- to its associated enterprise which has sold it further after processing into cold rolled coils. The assessee has benchmarked this transaction using CUP [Comparable Uncontrolled Prices] method. Assessee has supplied cold rolled stainless steel coils to its associated enterprise of three grades, na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ckel and due to market conditions. Therefore, assessee contended that it is logical that comparisons should only be made on a periodic basis. The assessee also submitted a chart to indicate that if the rates are compared on a periodic basis they are well within 5%. It was further contended by the assessee that the difference between grade J1 and grade J4 is mainly on account of nickel content. It was further stated that the rates of nickel have been very volatile in the year under consideration. Assessee also submitted that the rate of nickel has varied from US dollar 14,800 per metric ton to US dollar 40,355 per metric ton. Therefore, the assessee contended that only average rate should be adopted to even out the wide price fluctuations. 10. The learned, TPO considered the explanation of the assessee and stated that when the assessee has itself used the third-party sales comparable uncontrolled prices and there are variation in prices between sales made to associated enterprise and third-party of identical product sold on the same date. Therefore, he held that explanation of the assessee does not satisfy the difference in prices on the daily bases. The learned Transfer Pricing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce internal CUP is available, no other data could be used for benchmarking to arrive at arm's length price of interest income. The learned assessing officer rejected the contention of the assessee and concluded that basic interest rate for the credit rating of the associated enterprise should be LIBOR +400 basis points and 300 basis points is the added transaction cost thereof resulting into CUP rate of LIBOR +700 basis points. According to the learned TPO as the currency in which the loan is extended is US dollar he considered 6 months US dollar LIBOR and arrived at interest rate of 5.4% per annum and therefore he computed the CUP interest rate of 12.4%. He further stated that AE has no security offered by the subsidiary company and taxpayer is also not into lending and borrowing of the money, 14% rate of interest would be just. Accordingly, on the total loan amount, he applied interest at the rate of 14% amounting to US$ 350,000 wherein the interest already charged is US dollar 185364.58 and computed the balance interest to be charged of 16463 US$ 5.42. He applied the conversion rate of Rs. to dollar at the rate of 43.10 and proposed an adjustment of Rs. 7095787/-. 12. During th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 217439000/- was made on account of the decapitalisation of interest. Accordingly the total income of the assessee was assessed at Rs. 2983394884/-. The learned assessing officer also withdrawn the credit of tax deduction at source amounting to Rs. 1458402/-. For some apparent mistakes in the assessment order ,subsequently, the order under section 154 of the Income Tax Act was also passed on 17/12/ 2012 where the profit on sale of investment which was originally not reduced from the total income was reduced of Rs. 135547000/-. Consequent to that total income originally assessed under section 143 (3) vide order dated 31/1/2011 of Rs. 2983394884/- was reduced by the above amount and assessed at Rs. 28 4784 7884/-. 15. Assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned Commissioner of Income Tax (Appeals) -XX, New Delhi who disposed off the appeal vide order dated 30/4/2013. 16. With respect to the corporate tax disallowance under section 14 A the learned CIT - A held that the learned AO has correctly applied the provisions of section 14 A, however he directed the learned AO to take the average value of the total asset as define ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces and the learned TPO is right in not accepting such adjustments holding them illogical and inconsistent with the business practices. Accordingly, he upheld the adjustment proposed by the learned Transfer Pricing Officer to the International transaction on account of sale of finished goods to associated enterprise. On the aspect of interest on loan given to the associated enterprise, he also upheld the order of the learned TPO benchmarking the rate of interest at LIBOR + 700 basis points and further addition on account of risk factor thereby determining the interest rate at the rate of 14%. He held that entity at Indonesia is placed differently apart from being in a different geography location; it is also situated different financially. He also upheld the risk adjustment. Accordingly he upheld the interest adjustment made by the learned TPO on loan given by the assessee of US dollars 25, 00,000 to Indonesian entity and interest income thereon. The 3rd adjustment is on account of the issue of corporate guarantee given by the assessee to the associated enterprise. He upheld the addition proposed by the learned TPO. Reason being that appellant itself has charged the guarantee fee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was also exported to third parties. These grades are J4 plate and JSL tube HRAP. Therefore, the third-party export rates were available only with respect to these two grades. For determination of the arm's-length price of the export of these two grades, assessee adopted the rates at which the sales are made to the third parties as CUP data. However, for the purpose of the comparison, assessee has aggregated the transactions for the entire month and computed average rate of the sales made to associated enterprises, similarly computed average rate for the entire month of third-party sales, and compared these average rates. With respect to the other grades of steel, for which no actual CUP data is available, the assessee adopted Chinese market quotations downloaded from the Internet and used them for benchmarking the transactions of export made to associated enterprises. Even the Chinese quotations were available only in respect of two grades i.e. J4 HRAP and 304 HRAP. For the other grades, the assessee adjusted even this quotation data on account of difference in the nickel content and the conversion cost of black oil to pick the Nickled coil HRAP. With respect to the nickel prices, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod stating that assessee is paying interest on the same rate of interest to other lenders. The method adopted by the assessee was not disputed by the learned Transfer Pricing Officer however; the manner in which the CUP method was used was rejected by him. He stated that the interest received from associated enterprise cannot be benchmarked with the interest that assessee is paying to other lenders. Further, the loan given to an associated enterprise cannot be benchmarked with the rate that the assessee would have got if invested in fixed deposits, current deposits, or commercial papers when assessee has already borrowed loan from the banks. Therefore, he proceeded to determine the CUP rates. After detailed analysis and dealing with the objection raised by the assessee and quotes called for under section 133 (6) of the act, he held that that the basic interest rate for the credit rating of the associated enterprise shall be 9.88% and transaction cost thereto should be added of 395 basis points resulting into the CUP rate of 13.83%. He further made a risk adjustment for single customer to that rate as no securities offered by the subsidiary company. Further the assessee is also not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment of Rs. 47862360/-. 24. Further on aspect of the corporate tax adjustment the learned AO disallowed Rs. 44808080/- on account of disallowance under section 14 A of the Income Tax Act read with rule 8D of the income tax rules 1962. He further disallowed depreciation on the computer peripherals holding that they are not entitled to the depreciation at the rate of 60% but that at the rate of normal depreciation rate applicable to a plant and machinery. Therefore the adjustment on account of excess depreciation claimed by the assessee was disallowed to the extent of Rs. 192197/-. The learned assessing officer further disallowed a sum of Rs. 125330/- being the depreciation on cars under section 32 of the act. Certain other adjustments were also made. Consequently the draft assessment order under section 144C (1) of the Income Tax Act 1961 was passed by the learned assessing officer and forwarded to the assessee on 28/12/2011. 25. Assessee aggrieved with the above order preferred objection before the Dispute Resolution Panel - 1, New Delhi who passed the direction under section 144C (5) of the Income Tax Act 1961 on 3/9/2012. The learned Dispute Resolution Panel with respect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of 60%, the learned Dispute Resolution Panel accepted the argument of the assessee and directed the learned assessing officer to allow depreciation at the rate of 60% on computer peripherals relying on the decision of the jurisdictional High Court of BSES Yamuna powers Ltd. With respect to the disallowance of depreciation of Rs. 1 25330 with respect to the purchase of 3 ready built flats purchased by the assessee where the learned assessing officer disallowed this the appreciation is holding that 5% of the total cost of Rs. 25066109/- is related to the land the learned Dispute Resolution Panel directed the learned AO to delete the disallowance of depreciation of Rs. 1 25330/-. With respect to the depreciation disallowed on cars sold to the employees, the learned Dispute Resolution Panel agreed with the opinion of the learned assessing officer and rejected the argument of the assessee. The learned Dispute Resolution Panel was of the opinion that assessee has devised a scheme to claim more depreciation than what is justifiably entitled to where purchase cost of Rs. 3 527637/- and written down value is Rs. 2206227 which has been sold at a ridiculously low price of Rs. hundred each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the provisions of section 115 JB of the Income Tax Act. 27. Consequent to the direction of the learned Dispute Resolution Panel the learned Assessing Officer passed an assessment order under section 143 (3) read with section 144C of the Income Tax Act, 1961 on 18/10/2012 and determined the total income of the assessee at Rs. 8 70418751. 28. The assessee aggrieved with the order of the learned Assessing Officer passed under section 143 (3) read with section 144C of the act has preferred an appeal before us. 29. Therefore, now it is apparent that following issues are under dispute in these two appeals filed by the assessee and one appeal filed by the revenue for two assessment years. i. Transfer pricing adjustment made by the learned assessing officer with respect to the arm's-length price of export of goods made by the assessee to its associated enterprise of stainless steel [ Ground no 3 for AY 2008-09 and Ground No 2 for AY 2007-08 in appeal of assessee] ii. Transfer pricing adjustment made by the learned TPO with respect to the computation of interest received by the assessee on loan given by the assessee to its associated enterprise[ Ground no 4 for AY 2008-09 and G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he aforesaid transaction, the appellant has applied CUP method as the most appropriate method. For application of CUP method the prices of international transactions of export of the various grades of stainless steel products was compared with prices of export of the same grades of stainless steel products to unrelated party on the same or the nearest possible date. Wherever such comparison was not available, market quotation published in International Weekly Stainless Steel Review was considered as the benchmark for applying CUP method, as under: Product Quantity Exported Average Rate Value INR Rate as per Arm's length Value as per Arm's length HR SS Coils Grade J4/J8 56442.295 60.840 3,433,951.939 60.094 3,391,843.276 HR SS Coils Grade 304 4228.855 129.645 548,249.906 133.338 563,867,068 HR SS Coils Grade J1 6530.400 107.694 703,284,898 105.361 688,049,474 Grade JSJ Tube 733.000 56,244 40,494,111 54,672 40,074,576 Grade J4 HRAP 543,110 70,492 38,284,910 71,263 35,703,648 Store Items 1,277,500 1,277,500 68477.860 4,765,543,264 4,723,815,542 During the course of assessment proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,51,735 6,74,82,617 HR SS Coils Grade J4 HRAP 2,202.630 66,605 14,67,07,249 HR SS Plate Grade J4 382.805 68,362 2,61,69,462 HR SS Coils JSL Tube HRAP 734.765 56,902 4,18,09,522 The remaining grades of Stainless Steel products were not exported to unrelated parties during the same month in all transactions. Wherever such comparable uncontrolled transactions of export to unrelated parties in the same month was not available, comparison was made with reference to prices of export during the same month by unrelated party manufacturers of Stainless Steel products in China, viz., LISCO and BAO Steel. For the purpose of comparison of prices of international transactions of export of Stainless Steel products to the associated enterprise, viz., Pt Jindal Stainless, Indonesia, the following adjustments were made: (i) Comparison of prices of international transactions of export has been made with reference to the date of order accepted with the price of export to unrelated parties on the nearest possible uncontrolled transactions of export during the same month. (ii) Comparison in prices has been made for export on CIF basis and in US Dollars. (iii) Adjustment has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Plant) 200803 1397.13 7.71% Jindal Stainless Ltd. 200803 5707.06 9.85% Since the operating profit ratio (OP/OI %) of JSL @ 9.85% is higher than the operating profit margin (OP/OI %) of 7.71% of Salem Steel Plant of Steel Authority of India, the comparable enterprise, the international transactions entered into by JSL were considered as having been entered at arm's length price, applying TNMM on an entity-vide basis. The TPO, however, during the assessment proceedings has disregarded the benchmarking analysis undertaken by the appellant for comparing the export of goods made to associated enterprises with Chinese market quotations on the following grounds, as under: i. Price charged in Chinese market quotations are not comparable to price charged by the appellant due to different in geography, product, quality etc. ii. As per rule 10B(1)(a), only actually transacted data can be used as comparable price. iii. The quality of goods manufactured by the appellant are different from goods sold by Chinese manufacturers and therefore, cannot be compared applying CUP. Accordingly, during the course of assessment proceedings, the TPO required the appellant to compare export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RAP Coil (Second) 99,194 Total (INR) 12,35,70,462 III 304 HRAP Coil Nickel price adjusted export Prices 31,818 304 Black Coil 2,850 JSL Tube Black coil 50,562 Total (INR) 34,94,445 Total 12,78,29,707 35. The ld CIT (A) and Ld DRP for respective years confirmed the adjustments proposed by the ld TPO and Therefore assessee is agitated and appealed before us. 36. The ld AR submitted a written note which also covers his oral arguments made before us as under :- "The adjustment made by the TPO in the arm's length price of the international transaction of export of goods is unjustifiable and bad in law, for the following reasons as under: 1. Rejection of Chinese market quotations as CUP data: The TPO rejected the use of Chinese market quotations for the purpose of benchmarking the international transaction of export of steel products to associated enterprises, holding that as per rule 10B(1)(a) of the Income Tax Rules, 1962, the data to be used is "transacted" data and thus use of quotations as done by the appellant is not as per intent of law. In this regard, it is respectfully submitted that: Clause (a) of Rule 10B(1) of the Income-tax Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of sub-rule (3) of rule 10D reads as follows: "10D. Information and documents to be kept and maintained under section 92D. (1) .............................. (2) .............................. (3) The information specified in sub-rule (1) shall be supported by authentic documents, which may include the following: (a) official publications, reports, studies, and data bases from the Government of the country of residence of the associated enterprise, or of any other country; (b) reports of market research studies carried out and technical publications brought out by institutions of national or international repute; (c) price publications including stock exchange and commodity market quotations;" The appellant for the purpose of applying CUP method compared the prices of international transactions of export of the various grades of stainless steel products with prices of export of the same grades of stainless steel products to unrelated party on the same or the nearest possible date. Wherever such comparison was not available, market quotation of Chinese manufactures, i.e., BAO Steel and LISCO, was considered as the benchmark for applying CUP method. It is further r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the relevant portion of the order of Special Bench of Tribunal in the case of Aztec Software and Technology Ltd. v. ACIT: 107 ITD 141, where the Tribunal while discussing the applicability of various methods of determining arm's length price, provided under the Act, duly considered that the public data available at exchanges, quotation media etc., on the basis of which actual transaction take place in the market, even amongst unrelated parties can be used/ relied upon, while applying CUP method. The relevant observations of the Tribunal are as under: "119. .........XX........... XX......... XX......... However, where CUP method is to be applied on the basis of public data, it is provided in Regulation 1.482-3(b)(5) that following requirements must be met: - The data is widely and routinely used in ordinary course of business in the industry to negotiate prices for uncontrolled sales. - The data is used to set prices in the controlled transaction in the same way that it is used by uncontrolled taxpayers in the industry; and - The amount charged in the controlled transaction is adjusted to reflect product and service variations. The US regulations further warn that da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all that the Transfer Pricing Officer is to see is whether the variation in such prices vis-a-vis the prices at which the appellant has entered into transactions with the AE is reasonably explained. As a matter of fact, Rule 10B(1)(a)(ii) categorically provides that price charged for the property transferred in comparable uncontrolled transaction, which London Metal Exchange price inherently is, to be 'adjusted on account of differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market". What is translates into, on the facts of the present case, is that the adjustment on account of services rendered by the AE and the insurance and freight costs are required to be made to the LME prices. An adjustment of 2% to 6%, for such factors, cannot be said to be unjustified........ xxx xxx xxx xxx xxx The test in selecting the most appropriate method of ALP determination does not have 'complexity of the method' as one of the factors. All that is to be taken into account for the said purpose is the nature and class of internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng are carried out by parties based on the prices prevailing/quoted on the respective stock or commodity exchanges. Therefore, such published data available from stock or commodity exchanges is available to set prices in the uncontrolled and controlled transactions both. At this stage, we may also refer to the judgment of Hon'ble High Court of Gujarat in Tax Appeal No.240 of 2014 in the case of CIT Vs. Adani Wilmar Limited, dated 07.04.2014 which was relied upon by the appellant before us. In the case before the Hon'ble High Court of Gujarat, the TPO adopted CUP method to benchmark an international transaction. The appellant presented two sets of prices claiming them to be comparable to his transactions with the associated enterprises. One set of prices relied upon by the appellant was supplied by the Malaysian Palm Oil Board and the second set of prices was the quotations published by Oil World, an independent organization. The TPO took into account the rates mentioned by Malaysian Palm Oil Board and disregarded the rates published by Oil World. According to the TPO, the Malaysia Palm Oil Board was a statutory body of Malaysia whereas the quotations published by Oil World did no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom any legal infirmity. No substantial question of law arises for determination. Reliance in this regard is also placed on the recent decision of Mumbai Bench of Tribunal in the case of Reliance Industries Limited vs. ACIT (ITA No. 3082/Mum/2006), wherein the Hon'ble Tribunal for the purpose of benchmarking international transaction applying CUP method has directed the assessing officer to consider data available in public domain in the form of publication of shipping Intelligence weekly and Drewry Monthly, as under: "12.10 Both the parties agreed before us that the "CUP" method should be followed. As there is no comparable transactions, in view of the fact that "Reichem Isha", is a Unique Vessel, with no comparable ship available, as suggested by both the parties, we set aside the issue to the file of the Assessing Officer for the limited purpose of recomputing the arm's length price by taking the date available in the public domain in the form of publication of Shipping Intelligence Weekly and Drewry Monthly as a "comparable price", and thereafter to make various adjustments towards weight, capital cost, risk, etc., and then arrive at the arm's length price. The appellant ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Guidelines relating to commodity transactions [Extracted from OECD publication Aligning Transfer pricing Outcomes with value creation OECD 2015] as under..... XXX Therefore respectfully following the decision of Hon‟ble Gujarat High Court and drawing support from OECD BEPS Action Plan , we are of the view that even the „quoted prices‟ which is authentic may be acceptable as per Rule 10D(3) of the Income Tax Rules for comparability analysis" It is also submitted that the appellant is selling its steel products in global market and the Chinese manufactures, with whom the comparison has been made by the appellant sells its products globally. Since, the market for both appellant and Chinese manufacturers are same, the market quotation provided by the Chinese manufacturers provides better comparable uncontrolled transactions. Reliance in this regard is placed on the decision of M/s Clear Plus India Pvt Ltd vs. DCIT (ITA No.3944/D/2010), wherein the Hon'ble Tribunal held that: "7. We have examined the ratio of these cases in the context of the facts of the case. At the cost of repetition, it may be mentioned that goods were sold by the Chinese manufacturers in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d (v) size of the order, etc. In fact, in the year under consideration, the price charged by Chinese manufacturers in the open market were lower than the price charged by the appellant from its associated enterprises, due to huge production of steel in their country. Despite slowdown in the steel industry, China has produced 36% more steel than the preceding year which is much higher than the growth in production reported by entire Asia region at 6.3% (refer page 35 of the paper book). Therefore, considering the economic scenario prevalent in the international market, the price charged by the appellant in sales made to associated enterprise cannot be compared with domestic sales and the right comparable ought to be the price at which goods were available to the associated enterprise in the open market, i.e. price charged by Chinese Manufacturers. It is respectfully submitted that comparison of prices of international transactions of export of various grades of stainless steel products with the prices in domestic market would not satisfy the test of comparability, in as much as, the two transactions have been undertaken in different economic and geographical scenario. Such compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies provided, sale or purchase volumes, credit terms, transportation terms, etc) (iii) Level of market i.e. wholesale, retail, etc. (iv) Geographical market in which the transaction takes place. (v) Date of transaction (vi) Intangible property associated with the sale (vii) Foreign currency receipt (viii) Alternatives realistically available with the buyer and the seller. 81. In OECD Transfer Pricing guidelines at II-3 paragraphs 2.8 and 2.9 it is states as follows: "2.8 It may be difficult to find a transaction between independent enterprises that is similar enough to a controlled transacting such that no differences have a material effect on price. For example, a minor difference in the property transferred in the controlled and uncontrolled transactions could materially affect the price even though the nature of the business activities undertaken may be sufficiently similar to generate the same overall profit margin. When this is the case, some adjustments will be appropriate. As discussed below in paragraph 2.9, the extent and reliability of such adjustments will affect the relative reliability of the analysis under the CUP method. 2.9 In considering whether c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The said regulations clearly provide for adjustments in margins of the enterprise entering into international transactions for any differences between such international transactions and the transaction of the comparables or between the enterprise entering into international transactions and comparable companies. Reliance is also placed on the following decisions, wherein undertaking economic adjustment for improved comparability of the entities being compared for benchmarking experience has been emphasized. - Sony Ericsson Mobile Communications India Pvt. Ltd. vs CIT III (374 ITR 118) - Transwitch India Pvt Ltd vs DCIT (ITA No 6083/Del/2010) - Hon'ble Delhi High Court, in the appeal preferred by the revenue, vide order dated 17.07.2013 upheld the adjustment claimed by the appellant on account of capacity utilization. - Mentor Graphics (Noida) : Private Limited : 109 ITD 101 (Del), - Sony India (P) Limited : 106 ITD 175 (Del). - Skoda Auto India (P) Ltd. vs. ACIT : 122 TTJ 699 (Pune) - Schefenacker Motherson Ltd. vs. ITO (in ITA Nos. 4459 & 4469/Del/07), - Honeywell Automation India Pvt. Ltd. vs. DCIT (ITA No. 4/PN/08), - Egain Communication Pvt. Ltd. vs. ITO : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;858.935 8 JSL AUS Black Coil 46 5,581.245 121 23 330.510 14 JSL AUS HRAP Coil 18 803.585 45 53 441.518 8 JSL Tube Black Coil 68 6,612.860 97 285 5,233.315 18 JSL Tube HRAP Coil 5 734.765 147 368 2,414.421 7 In fact in the case of J4 Black coil, it would be noted that the appellant has sold 45205.790 MT to the associated enterprise, whereas, the total quantity of J4 Black Coil sold to unrelated third parties is merely 2234.400 MT, constituting only 4.7% of the total sales. Accordingly, in a situation where the manufacturing facility of the appellant established for J4 Black Coil is substantially dependent on the purchase orders received from associated enterprise, it is natural commerce that the price ought to be comparatively discounted from the price charged in sales made to unrelated third parties. Accordingly, while undertaking the benchmarking analysis with unrelated third parties, applying CUP, in order to make comparison of like to like, the appellant has made adjustment of bulk discount of 5% given on export sales made to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the year under consideration as the appellant will be entitled to get benefit of the stand taken by the revenue in immediate preceding year. There is insignificant difference in the rates of the commodity and the volume of transactions. The difference, if any, favours the appellant as the volume of related party transaction is much more this year as it has gone upto 29,400 kgs against last years sales of 23,500 kgs. The TPO, while comparing the international transaction of exports of goods with domestic sales has disregarded the claim of quantity discount holding it to be a contagious issue. It is pertinent to note that the fact that average sales made to associated enterprises per invoice is invariably higher than the average sales made to unrelated third parties, is in itself an evidence to corroborate that the associated enterprises were offered discounted price on account of bulk purchases, for which comparability adjustment ought to be made in the price of goods sold to unrelated third parties. It shall also be noted that had the appellant charged a price higher than the international market price to the associated enterprise, it would have purchased similar goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods sold on one specific date cannot be compared with the prices of goods sold on any preceding or subsequent date. Accordingly, in view of the volatility in the prices of metal components on day to day basis and consequential change in the final products sold by the appellant, it is submitted that the benchmarking of price ought to be made on the basis of average price charged in uncontrolled transactions for the same period, for each of the grade of stainless steel products. It shall further be appreciated that the export of goods made by the appellant to its associated enterprise on several dates are one class of transaction, i.e. export of goods, the same can be benchmarked together applying CUP method. Rule 10A(d) provides that closely linked transaction can be considered together. Further, para 3.9 of the revised OECD guidelines on transfer pricing states that: "3.9 Ideally, in order to arrive at the most precise approximation of fair market value, the arm's length principle should be applied on a transaction by- transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adeq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation or segregation of transactions would be appropriate and proper while applying the particular Method, is necessary. 139. The majority judgment in the case of L.G. Electronics India Pvt. Ltd. (supra) opines that the Act, i.e. Chapter X of the Act, prohibits and does not permit set off or adjustment. Reference stands made to sub-section (3) to Section 92 of the Act. We would like to reproduce the said Section and understand the object and purpose behind the said provision. (3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or sub-section (2A) or the determination of the allowance for any expense or interest under sub-section (1) or sub-section (2A), or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2) or sub-section (2A), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction or specified domestic transaction was entered into. 140. Sub-section (3), we do not thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act, 1961 or the Rules do not devise or enact a contrary provision, we should not discard or ignore, without adequate justification, the OECD Transfer Pricing Guidelines or the U.N. Transfer Pricing Manual. Otherwise we deny ourselves benefit and advantage of the study and the dexterous and deliberated elucidations made in the extant OECD Transfer Pricing Guidelines or the U.N. Transfer Pricing Manual, as if they are redundant and superfluous. The Act, i.e. the Income Tax Act, 1961 and the Rules are supreme, but the OECD Transfer Pricing Guidelines or the U.N. Transfer Pricing Manual can be supplement and constitute a valuable and convenient commentary on the subject. They are not binding but surely their rational and articulacy requires cogitation, if not acceptance, when warranted. 144. Question of set off would only arise in case two transactions are separate and arm's length price should be computed separately. It would not arise for consideration in cases where there are closely linked or continuous international transactions. Yet, there may be a third category of cases, where the appellant perceives and files his report in form 92E treating the international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... single 'transaction' for the purposes of determining the ALP, provided of course that such transactions are 'closely linked'. Ostensibly the rationale of aggregating 'closely linked' transactions to facilitate determination of ALP envisaged a situation where it would be inappropriate to analyse the transactions individually. The proposition that a number of individual transactions can be aggregated and construed as a composite transaction in order to compute ALP also finds an echo in the OECD guidelines under Chapter III........................ XX XX 31. In this background, considering the legislative intent manifested by way of Rule 10A(d) read with Rule 10B of the Rules, it clearly emerges that in appropriate circumstances where closely linked transactions exist, the same should be treated as one composite transaction and a common transfer pricing analysis be performed for such transactions by adopting the most appropriate method. In 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 transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal are as under: "82. Not only does the Tribunal consider the R&D payments to be necessary for the creation of the footwear, it also considers that a sufficient link can be established between the R&D payments and the goods in issue by examining the way in which the owed amounts are determined. To paraphrase previous Tribunal jurisprudence on the scope of "in respect of" the evidence shows that the R&D payments are not general payments unaffected by the imported goods. XXX 88. For these reasons, the Tribunal finds that the evidence establishes that the R&D payments in their entirety are "in respect of" the goods in issue. XXX 108. Given the Tribunal's conclusion that the full amount of the R&D payments must be included in the price paid or payable, there is agreement between the parties that the conditions for applying the transaction value of the goods method of section 48 are met. Indeed, the CBSA argued that some of the conditions for applying that method could not be met only in the case that the R&D payments were not included in the price paid or payable in their entirety. Skechers Canada's position throughout was that the transaction value of the goods method c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant to its AE. Furthermore, the detailed finding recorded by the CIT (A) at para 3.4 to 3.8 has not been controverted by learned DR by bringing any cogent material on record. Accordingly, we do not find any reason to interfere in the order of CIT(A) for deleting the addition in respect of adjustment made of Rs. 5,82,41,193." In view of the above, it would be appreciated that the benchmarking ought to be undertaken on the basis of average price charged by the appellant from sales made to associated enterprise vis-à-vis average price charged from sales made to unrelated third parties in the same period, for each grade of stainless steel products. Without prejudice, it is submitted that even after considering the average sales price in domestic sales made to unrelated third parties and without allowing adjustment on account of bulk discount, i.e. after considering the average of daily price considered by the TPO for the purpose of applying CUP method, the adjustment made by the TPO works out to Rs. 99,04,929 as against original adjustment of Rs. 12,78,29,707 made by the TPO. The detailed working of the average prices is enclosed as Annexure 4. 4. Alternative benchmarki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ariation in prices of nickel on day to day variation in prices of nickel as per price quoted in London Metal Exchange (LME). It may be noted that variation in stainless steel prices had happened primarily on account of variation in nickel prices in open market. In any case, the aforesaid comparison made by the appellant on the conservative basis, since the prices of stainless steel products were higher in earlier month and have gradually declined in the later month during the relevant financial year. The aforesaid comparison would clearly establish that the prices of international transactions of export of 304 Black Coil grade of stainless steel product are at arm's length applying CUP method. (iii) JSL AUS HRAP Coil: CUP method was applied in respect of international transactions of export of JSL AUS HRAP Coil grades of stainless steel products with reference to the unrelated party price of market quotation of the above manufacturers of stainless steel products in China. The appellant has also compared the prices of such international transactions of export of JSL AUS HRAP Coil grades of stainless steel products with the prices of export of highest rate of J-4 Stainless Steel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition on account of nickel content. The workings of the aforesaid comparison of international transactions of export of various grades of stainless steel products (for which the appellant has earlier applied CUP method with reference to the price of market quotations of stainless steel manufacturers in China) with prices of export to unrelated party made on a rational and scientific basis, was filed before the TPO vide reply dated 29.09.2012 (enclosed at pages 271-323 of the paper book). Under this analysis also, it would be appreciated that prices of international transactions of export to associated enterprise is higher than the comparable uncontrolled prices in all grades of stainless steel products. In view of the aforesaid, too, the international transactions of export of stainless steel products is to be regarded as having been undertaken as at arm's length applying CUP method. 5. Alternative benchmarking applying TNMM as the most appropriate method It would be appreciated that economic scenario, geographical market comparability, contractual term influencing comparability are important factors which are required to be compared while applying CUP method. In case of diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price method) in respect of even one of these areas, the application of TNMM or other indirect method (i.e. profit split method) is inevitable and it cannot be rejected. Reliance is also placed on the following decisions wherein it has been held that when CUP cannot be applied due to non-availability of data, TNMM can be applied for the purpose of benchmarking analysis: - Toyota Kirloskar Auto Parts vs ACIT (ITA No 1642/Bang/2012) - ACIT vs Super Diamonds (6399/Mum/2007 - AWB India Pvt Ltd vs DCIT (ITA No 6480/Del/2012) - M/s Garware Polyster Ltd vs. DCIT (ITA 6169/Mum/2011 In the present case, the appellant had also undertaken benchmarking analysis applying Transactional Net Margin Method ("TNMM") with operating profit to operating income (OP/OI) as the PLI. After considering various selection criteria, one comparable company vis. Salem Steel Plant of Steel Authority of India was identified as functionally comparable to the operations of JSL (refer reply dated 29.09.2007 placed at pages 271-323 of the paper book for complete search process). The results of the Transfer Pricing analysis applying TNMM are summarized herein below: Company Name Finance year Sales OP/OI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean." 9. On going through sub-section (2) in juxtaposition to the above extracted proviso, it transpires that the most appropriate method referred in sub-section (1) [any one of the six methods] shall be applied for the determination of ALP. The manner of computation of ALP under the CUP method has been prescribed under rule 10B(1)(a) as under : - "(a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified ; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market ; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has actually been undertaken shall be deemed to be the arm's length price. Main sub-section (2) provides that the most appropriate method as per sub-section (1) shall be applied for the determination of ALP. As per the first proviso where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices. Per contra, if there is only one price which is determined by the most appropriate method, then as per the main sub-section (2) without the aid of proviso, that price shall constitute the ALP. The second proviso comes into play to deem the actual transacted price as the ALP. It provides that where the variation between the ALP 'so determined' does not exceed the specified percentage, the price at which the international transaction has actually been undertaken 'shall be deemed to be the arm's length price'. The words 'so determined' as employed in the second proviso assume significance. As these have been used in the second proviso distinct from the subject matter of the first proviso, naturally these will apply to the ALP determined under sub-section (2) consisting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the price charged from sales made to unrelated third party in Indonesia at USD 1834 PMT, the adjustment of Rs. 5,23,160 made by the TPO will be deleted. Even otherwise, after considering the average of uncontrolled price at USD 1869 PMT [(1834+1904)/2], the adjustment will reduce to Rs. 10,216. It would be appreciated that the aforesaid errors noted in the comparison of price for applying CUP method in respect of international transaction of export of stainless steel product are not sustainable and, therefore, liable to be deleted." 37. The Ld DR vehemently supported the orders of the learned Commissioner Of Income Tax (Appeals), the learned Dispute Resolution Panel and the learned TPO for respective years. He submitted that a. There are three categories of benchmarking done for the transaction of export of goods as classified by the learned TPO. He submitted that the learned Transfer Pricing Officer has compared export to associated enterprises with the export to unrelated party of the similar products, export of associated enterprises with price in domestic transaction, and export to associated enterprises with export to unrelated parties after adjusting for variation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct method for applying the CUP. b. He further stated that for the benchmarking of the transactions were no actual CUP was present since the product developed by the assessee is of high grade and renowned, for benchmarking purposes, the assessee has used the Chinese market quotations. The approach adopted by the assessee is not correct, as the product manufactured by the company is indigenous and driven by Indian market forces, and as already pointed out; the grade of the material is also very superior. Thus to apply the CUP method the first requirement is that the quality of the product needs to be matched. If the approach of the assessee had to be followed, then the basic requirement of the CUP method fails as the quality of the product whose quotation it has used is not comparable to that of the products manufactured by the assessee. Further, the prices shown from the Chinese market cannot be checked for its authenticity and reliability also. Furthermore the rule 10 B (1) (a) of the income tax rules dictate that the price charged or paid should be used instead of some quoted rates as used by the assessee. In comparison to the assessee's approach, the approach adopted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the learned Transfer Pricing Officer is more suitable as per the requirement of CUP method. For this purpose, the learned Transfer Pricing Officer adopted price for the same quality products sold in the Indian market by the assessee. Further, in order to remove any effect of differences in the transaction of the products sold to the associated enterprises versus known associated enterprises, the learned TPO allowed for material adjustments which are as per the rule 10 B (1) (A). He therefore stated that the learned Transfer Pricing Officer allowed adjustment to the amount of products sold on the same date or nearby date in the domestic market. He further submitted that the Chinese quotation adopted by the assessee is neither authentic, and reliable nor related to a comparable product. Therefore, it cannot be used as comparable prices. He further stated that it is also not known that whether the transaction has happened at that price or not. He further stated that the quotations used by the assessee are not a stock exchange quotation at least and are not authentic. d. With related to the 3rd category of the transactions that is comparison of export to associated enterprises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in domestic parties. The part where it says the product to the domestic parties is the uncontrolled transaction. Any independent entity would want to replicate the margin on in the uncontrolled transactions. The same process was done by the learned Transfer Pricing Officer also. On the contrary, the assessee has used some random, unverifiable, and unsubstantiated Chinese market quotation rates that are not even the actual transaction rates. Further the assessee applied some adjustment to these Chinese market quotation rates and the same with some exceptions, was also replicated by the learned Transfer Pricing Officer. The learned Transfer Pricing Officer has already allowed the adjustment on the ground of advance license and duty entitlement passbook scheme benefits, basic customs duty, freight, trimming cost et cetera. He therefore stated that the approach of the learned Transfer Pricing Officer is the most reasonable approach and should be upheld. g. He further referred to the claim of the assessee that it has given a bulk discount at the rate of 5% per metric ton to its associated enterprises. He stated that the invoices provided by the assessee do not show any such discou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be the date for comparison. He submitted that in the transfer pricing study report, the assessee has used monthly average rates. However, it is clear from the transfer pricing study that similar transactions have happened at around the same day or in the same week with similar products with both associated enterprise and known associated enterprises. Hence, the approach of the assessee is flawed since it is not judicious to utilize average monthly price while applying CUP method, as the prices through the wall month are likely to fluctuate much more. This may call for suitable adjustment, which are not possible to be quantified accurately. This difficulty can easily be overcome if the same day transaction on the nearby the transactions are used instead. This is precisely what has been done by the learned Transfer Pricing Officer in the present instance and hence the correct method is applied by the learned Transfer Pricing Officer applying the CUP method. i. He further stated that the contention of the assessee is that the learned TPO has erred by comparing sales to associated enterprise on 21/9/2007 to sales made to third-party in Bangladesh on 12/9/2007 instead of transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method and now it is arguing for acceptance of TNMM method only because adjustment has been made by the learned Transfer Pricing Officer as assessee is not selling goods to its associated enterprise at arm's-length price. 38. In view of the above facts, he vehemently submitted that the adjustment proposed by the learned Transfer Pricing Officer, confirmed by the learned Commissioner Appeals for assessment year 2007 - 08, and approved by the learned Dispute Resolution Panel for assessment year 2008 - 09 deserves to be upheld. 39. We have carefully considered the rival contentions. There are seven different types of arguments of the assessee against the transfer pricing adjustment made by the learned Transfer Pricing Officer. We deal each of them. 40. The 1st grievances is the rejection of the Chinese market quotation adopted by the assessee applying CUP method for comparability analysis of the export made to the foreign associated Enterprises. The claim of the assessee is that according to rule 10 B of The Income Tax Rules , prices are required to be adjusted to account for the differences if any between the international transaction and the comparable uncontrolled transactions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and providing primary information and professional analysis. It also compiled information of various countries in the oil sector. It publishes the daily monthly and yearly journals in oil sector compiling information of various countries and has a broad base database. In the quotation adopted by the assessee from oil word was for Malaysia and not for Germany. Therefore, it was held that it is an authentic independent trade quotation. Further honourable Delhi High Court has on occasion to consider in CIT versus Cargill food India Ltd in [ITA number 157/2016 dated 19/2/2016] where the basis of a broker quote adopted in CUP method was accepted as it was based on the prices prevailing in the market. The honourable High Court held that published data are available from stock or commodity exchanges could form the basis of the price in both controlled and uncontrolled transactions. In that particular case the price quote given by the broker was based on the prices prevalent in the commodity exchanges and other market including Chicago Board of trade. Further in the case of the ACIT versus MSS India private limited (2009) 32 SOT 132 (Pune) the rates adopted were based on rates prevailing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and how they are authentic and reliable is not proved, then the whole purpose of finding the uncontrolled comparable prices would be defeated. In all the decisions which are pushed forward before us were speaking about authentic and reliable price quote. In almost all the decisions, the prices are backed by some exchanges or some reputable agencies, which are in the business of providing price-based data. No such evidences were led by the assessee in case of these Chinese quotations, which are downloaded from the Internet without any Comparability analysis, cannot be accepted. Before the learned Transfer Pricing Officer the assessee also did not substantiate that how the Chinese market quotations support the rule 10 B and D of the income tax rules. Further according to the OECD Transfer Pricing Guidelines For Multinational Enterprises And Tax Administration (July 2017) in Para number 2.18 has stated that the term quoted price refers to the price of the commodity in the relevant period obtained in an international or domestic commodity exchange market. The quoted price also include prices obtained from recognized and transparent price reporting or statistical agencies or from gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orting evidence the basis of applying 2% adjustment and in some cases it was found to be 5% adjustment. In natural question has also come up that whether such discount in sale price had also been granted by the assessee to non-associated enterprise on bulk purchases. However, we are of the view that the TPO was not justified in rejecting that claim which is otherwise prevalent in the market and can be said to be a common market practice. However, before claiming this adjustment the assessee must be fair in not claiming this adjustment on such sale transactions to associated enterprise, which are apparently lower than the sales to non-associated enterprise. Rather bulk purchases by the AES are only required to be taken into account for this adjustment" Further, we have also perused the decision of the Mumbai ITAT in case of Clariant chemicals Ltd (supra) in that particular decision the 20% volume discount was given to the assessee only because of the reason that in the earlier years the same was given by the learned Transfer Pricing Officer. In the OECD transfer pricing guidelines for MNE and tax administration (July 2017) in para number 2.26 and example is given where the quanti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Communications India private limited versus CIT 374 ITR 118. The assessee has also relied upon several other decisions, which are already reproduced by us earlier. The learned AR vehemently relied upon the decision of the coordinate bench in case of ACIT versus Essar Steel Limited in ITA number 3727/ MUM/ 2011 where the assessee has compared the average price of eight transactions of export of goods made to associated enterprise applying CUP method was upheld. We have carefully considered the argument of the learned authorised representative and the decision of the coordinate bench in CIT versus Essar Steels Ltd (Supra). The facts in that particular cases were that the appellant had considered all the transaction with its associated enterprise in totality by aggregating the same. The Transfer Pricing Officer picked up only two transactions where the price charged was less than the average market price and also beyond 5% permissible band width to make the addition ignoring other transactions where the average price charged was more. On careful consideration of the above decision, it is apparent that if the transactions are the interlinked transactions then the ALP should be consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f rule 10 B (1) (a) of the IT rules 1962 and it is a simplistic view of the price change happening over a period. He also stated that the price of stainless steel product is not only dependent upon the in nickel prices, it has other material also such as steel, chromium et cetera. The learned Transfer Pricing Officer in the end, stated that there are also some dates and some transactions for which neither the third-party export data is available nor the domestic sale data is available, and in such cases there is no option but to adopt this data and use it as a fill gap Type of arrangement where no other option is available. We fully appreciate the contention of the assessee that if nickel prices are adjusted between the export of similar products on two different dates to AE and non-AE for comparability analysis provided there is no other recourse available and further there is no similar fluctuation in the price of other material component. The learned Transfer Pricing Officer has also agreed that in the rare cases where the export data is not available to the third party on the date of export made to the associated Enterprises and further the domestic sales of the similar product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utedly the data availability in both the methods is scarce. Further, the decisions relied on Mumbai bench of the tribunal in case of ACIT vs Tara ultimate private limited in ITA number 5098/UM/2010, the finding was that where arm's-length price cannot be reasonably determined by CUP method or any other direct method in respect of even one of the areas, the application of TNMM or other direct method is inevitable and it cannot be rejected. Here the assessee has given multiple data to justify the benchmarking methodology with respect to sale of export of steel material to its Associated Enterprises; therefore, such are not the facts before us as are decided by the coordinate bench. Further the other decisions relied upon are also related to the non-availability of the data. Therefore, unless the assessee says that there are no data available for benchmarking under the CUP method, the TNMM should be the alternative method could not be accepted. Therefore, this argument of the learned authorised representative is rejected. 45. The sixth argument of the assessee is with respect to, without prejudice, that the difference in the arm's-length price of goods exported by the appellant to it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The contention of the assessee is that domestic market price would be higher at least to the extent of the customs duty imposed on import by the government. Therefore, according to assessee the prices determined in the domestic market for the comparability by the learned Transfer Pricing Officer would be required to be adjusted to the extent of the rate of the customs duty imposed by the government of India for comparing the price in the international market. Accordingly, the assessee stated that for the purpose of the comparison of the price of international transaction of export of various grades of stainless steel products with the price of domestic market an adjustment for basic rate of customs duty to the extent of 5% of the basic price is required to be made. The main claim of the assessee is with respect to the export of J1 black coil for assessment year 2008-09. On careful analysis of page number 168 of the order of the learned Transfer Pricing Officer in category II of the benchmarking, the basic customs duty has been considered by the learned Transfer Pricing Officer therefore this argument has already been addressed by the learned Transfer Pricing Officer by granting ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the rate of LIBOR plus 200 basis point on loan amounting to USD 25,00,000 issued to PT Jindal Stainless, Indonesia. In case of JSL, comparable transaction is available where JSL has availed loan from financial institutions, viz., State Bank of India, at the rate of 3 months LIBOR + 170 basis point. Considering that, the international transaction of receipt of interest by JSL at LIBOR + 200 basis points was higher or comparable to comparable uncontrolled prices for similar uncontrolled transactions, the 'international transaction of interest received is considered as being at arm's length applying Comparable Uncontrolled Price method. The TPO, however, has disregarded the benchmarking analysis undertaken by the appellant for determining the arm's length price of interest on loan applying CUP method and instead imputed a rate of interest of 17.26% on the basis of information sought under section 133(6) of the Act. The TPO further added a markup of 3.95% because of forward premium and ad-hoc markup of 3.43% on account of adjustment for security and single customer risk, on the rate of interest charged by various banks in India, without providing any cogent reasons and on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties engaged in the controlled transaction than details regarding external comparables. In light of above, External CUP should be used with utmost caution, and if internal CUP is available, it is preferred over external CUP. In fact, internal comparables available in case of an appellant are to be preferred for the purpose of benchmarking of international transactions even in the case where any of the prescribed method is applied, instead of relying on external comparables, as provided in Paragraph 3.26 of the OECD Guidelines, 2009. It is respectfully submitted that the OECD Guidelines on Transfer Pricing recognizes the fact that internal comparables, if available, are to be adopted in the first instance, as the preferred benchmark. Only where such internal comparables are not available, resort can be had to external comparables, which may even otherwise be difficult to obtain and information in respect of which may be incomplete and difficult to interpret. The revised OECD Transfer Pricing Guidelines issued on 22 July 2010, too, recommended the use of internal comparable data for benchmarking analysis. Further, it is a settled law that internal comparables available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logy Heat Transfer BV vs. DCIT (ITA No. 6227/Del/2012) Reliance in this regard is also placed on the decision of Chennai Bench of Tribunal in the case of VVF LTD Vs DCIT [ITA No. 673/Mum/06], wherein, in a similar case involving transaction of loan advanced to the associated enterprise, the Hon'ble Tribunal held as under: "We have noted that as was also noted by the Transfer Pricing Officer himself at page 3 of his order the appellant has borrowed foreign currency loans in US Dollars and for the purposes of investing in subsidiaries abroad, from ICICI Bank at the rate of LIBOR + 3% The appellant has also filed a letter from Bank of India stating that "during March 2002, we had been charging spreads of 150 bps to 300 bps over LIBOR in respect of foreign currency loans based on financial position and credit rating of the borrower". As for the LIBOR rate, as per the information provided by appellant, it ranged from 1.85000 (2 weeks) to 3.00250 (1 year). On the given facts, in our considered view, it would be appropriate to accept internal CUP, i.e. the rate at which the appellant has resorted to foreign exchange borrowings from the ICICI, as arms length price under CUP method. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice, Interest rate applicable to appellant is available for "AA" category companies It is submitted that Credit Analysis and Research Limited, a third party credit rating agency in India, vide report dated 23.02.2008 has rated the appellant as AA [Care Double AA] category company. The credit rating of the parent company shall also apply commercial practice to its wholly owned subsidiary. Reliance in this regard is also placed on the recent decision of Chennai Bench of Tribunal in the case of V.V.F. LTD Vs DCIT [ITA No. 673/Mum/06], wherein, the Hon'ble Tribunal held that: "The financial position and credit rating of the subsidiaries will be broadly the same as the holding company, and, therefore, the precise rate at which the ICICI Bank has advanced the foreign currency loans to the appellant company can be adopted at arm's length price of interest free loans advanced by the appellant company to its foreign subsidiaries." In view of the aforesaid, the arm's length rate of interest to be charged from the associated enterprise should be equivalent to the rate of interest chargeable on category AA companies and therefore, without prejudice, the adjustment made by the TPO ought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan provided to the associated enterprise should not be benchmarked at 13.25% as against the rate of LIBOR + 200 basis points charged by the assessee, as assessee itself has obtained loan from banking institutions at the rate of 3 months LIBOR + 170 bps and 140 bps, he submitted that the purpose of benchmarking the interest on loan, the credit rating in the necessary to reduce the interest rates. He submitted that the assessee has failed to submit the credit rating of the associated enterprise is the Transfer Pricing Officer was left with no other option but to consider the rating at a minimal. He submitted that assessee has provided the internal CUP data in form of loans, which were acquired by the assessee itself from banking institutions in India. Here the internal CUP applied by the assessee does not hold good as the geographical conditions, economic conditions, market forces of the countries involved are different. Therefore, the assessee has wrongly applied the internal CUP, which is not appropriate. He further submitted that the risk factor being adjusted by comparing the bonds as per any rating agency was the only option left before the learned Transfer Pricing Officer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age the assessee could not show that how assessee is aggrieved by the action of the learned TPO in obtaining information under that section when the assessee has not provided adequate information to the learned TPO for benchmarking the interest income. He submitted that it is not the case of the assessee that it has provided the complete information on the learned TPO has rejected it and obtain information under section 133 (6) of the act and assessee has not been confronted. He further submitted that the contention of the assessee that the learned TPO has erroneously charged markup of 3.95% on account of the forward premium and ad hoc markup of 3.43% on account of adjustment for security and single customer risk without giving any cogent reason. He submitted that while deciding the markup the learned TPO has considered the transaction cost which the assessee has to bear on account of the associated enterprise as explained in detail on page number 32 of the transfer pricing order dated 24/10/2011. He further stated that further adjustments were made by the learned TPO because of adjustment between a banker and non-bank and further men adjustment on account of security and single cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rve Bank of India. Therefore, both the benchmarking for both the years by the LD TPO confirmed by LD CIT A and Ld DRP deserves to be rejected. 57. Further the Honorable Delhi High court in case of CIT V Cotton Naturals ITA 233 of 2014 dated 27/3/2015 [2015] 55 taxmann.com 523 (Delhi) [2015-TII-09-HC-DEL-TP ] and held as under :- 15. The case of the appellant-Revenue finds lucid exposition in the following table quoted by the Transfer Pricing Officer, pointing out the difference between lending and borrowing: "The difference between lending and borrowing when dealing at arm's length is given in the below table (Assuming X is in India and Y is outside India). Sl. No. Aspect Lending money b X to Y Borrowing Money b X from Y 1 Primary Consideration The primary consideration for X is to maximize its return in terms of interest keeping in view the risk involved. The primary consideration for X is to minimize its rate of interest keeping in view the risk involved. 2 Interest Rate Interest rate depends on the tenure, credit rating of Y, and security offered. Interest rate depends on the tenure, credit rating of X, and security offered. 3 Benchmarking X would see wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to enter into distribution and marketing agreements with third parties or incorporate subsidiaries in different countries for undertaking marketing and distribution of the products. The Delhi High Court in Commissioner of Income Tax versus EKL Appliances Limited, (2012) 345 ITR 241 (Delhi) = 2012-TII-01-HC-DEL-TP referred to the Paragraphs 1.36 to 1.38 of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2010 published by the Organization for Economic Cooperation and Development (OECD, for short) and held as under:- "17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ality, differ from those which would have been adopted by an independent enterprise behaving in a commercially rational manner. The aforesaid observations were recorded in the light of the fact in the case of L.G. Electronics (supra). Commenting on the factual matrix of L.G. Electronics case (supra) would be beyond our domain; however, we do not find any factual finding to this effect by the TPO or the Tribunal in any of the present cases. However, in L.G. Electronics decision (supra), it is observed that if the AMP expenses and when such expenses are beyond the bright line, the transaction viewed in their totality would differ from one which would have been adopted by an independent enterprise behaving in a commercially rational manner. No reason or ground for holding or the ratio, is indicated or stated. There is no material or justification to hold that no independent party would incur the AMP expenses beyond the bright line AMP expenses. Free market conditions would indicate and suggest that an independent third party would be willing to incur heavy and substantial AMP expenses, if he presumes this is beneficial, and he is adequately compensated. The compensation or the rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be classified for the purposes of applying the provisions of the tax laws of the States concerned and the provisions of the Convention. This paragraph permits only the adjustment of the rate at which interest is charged and not the reclassification of the loan in such a way as to give it the character of a contribution to equity capital. For such an adjustment to be possible under paragraph 6 of Article 11 it would be necessary to as a minimum to remove the limiting phrase"having regard to the debt-claim for which it is paid". If greater clarity of intent is felt appropriate, a phrase such as"for whatever reason" might be added after"exceeds". Either of these alternative versions would apply where some or all of an interest payment is excessive because the amount of the loan or the terms relating to it (including the rate of interest) are not what would have been agreed upon in the absence of the special relationship. Nevertheless, this paragraph can affect not only the recipient but also the payer of excessive interest and if the law of the State of source permits, the excess amount can be disallowed as a deduction, due regard being had to other applicable provisions of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th, but it does not ignore that the two entities have a business and a commercial relationship. The terms and conditions of the commercial business relationship as agreed and undertaken are not to be rewritten or obliterated. Transfer pricing is a mechanism to undo an attempt to shift profits and correct any under or over payment in a controlled transaction by ascertaining the fair market price. This is done by computing the arm's length price. The purpose is to ascertain whether the transfer price is the same price which would have been agreed and paid for by unrelated enterprises transacting with each other, if the price is determined by market forces. The first step in this exercise is to ascertain the international transaction, which in the present case is payment of interest on the money lent. The next step is to ascertain the functions performed under the international transaction by the respective AEs. Thereafter, the comparables have to be selected by undertaking a comparability analysis. The comparability analysis should ensure that the functions performed by the comparables match with the functions being performed by the AE to whom payment is made for the services ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction or the specified domestic transaction, as the case may be. (2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:- (a) the nature and class of the international transaction or the specified domestic transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction or the specified domestic transaction and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions carved out in the case of EKL Appliances (supra) were applicable. 24. This is clear and lucid when we examine the methodology prescribed in Rule 10B (1) (a), which prescribes the manner of computing arm's length price under CUP method. Rule 10B (1) (a) reads:- "10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction 55a[or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 28. We do not agree with the finding recorded in paragraph 5 of the TPO's order that the comparable test to be applied is to ascertain what interest would have been earned by the assessed by advancing a loan to an unrelated party in India with a similar financial health as the taxpayer's subsidiary. The aforesaid reasoning is unacceptable and illogical as the loan to the subsidiary AE in the instant case is not granted in India and is not to be repaid in Indian Rupee. It is not a comparable transaction. The finding of the TPO that for this reason the interest rate should be computed at 14% per annum i.e. the average yield on unrated bonds for Financial Years (FY, for short) 2006-07, has to be rejected. 29. The TPO has referred to the decision of the Tribunal in the case of Perot Systems TSI (India) Limited versus DCIT and VVF Limited versus DCIT, 2010-TIOL-55-ITATMUM wherein LIBOR plus 1.64% i.e. 4.03% and LIBOR plus 3% respectively, were accepted as the arm's length rate of interest. But these decisions, he held, were unacceptable for the reasons set out in paragraph 6.1 of the TPO's order (the table has been quoted above). We have rejected the reasoning giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se the borrower wants to cover any loss on account of the depreciation of the Indian Rupee vis- a- vis the foreign currency. The assessee in the present case is not the borrower, but the lender. Transaction cost is not, therefore, applicable in the case in question, as the loan had to be repaid in US Dollars. Mark up towards the transaction cost is exorbitant and even comparison with banks is unsound and unintelligible. Risk factor adjustment is also stretched, for it ignores the close relationship between the two AEs and the funds were the shareholder funds, and not borrowed money. 33. The DRP accepted the addition of 700 basis points on account of credit rating and transaction costs, but the suggested third adjustment of 1.776 basis points was not accepted as loan was given out of the shareholder funds, which flowed from one set of shareholders to another set of shareholders. The security aspect it was held was embedded by default in the transaction. Thus, there was no requirement to make further addition on account of security. 34. In the present case, the loan was granted in the year 2002-2003 and not during the period relevant to the assessment year in question. The agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore us on behalf the Revenue. We, therefore, would not proceed to examine the said aspect and leave the question open. Similarly, we have not expressed any opinion on the issue or question of"thin capitalization" which does not arise for consideration in the present case. 37. We observe that whatever the Revenue argues and submits in the case of outbound loans or for that matter what we have observed would be equally applicable to inbound loans given to Indian subsidiaries of foreign AEs. The parameters cannot be different for outbound and inbound loans. A similar reasoning applies to both inbound and outbound loans. Revenue has erroneously argued that different parameters would apply for inbound and outbound loans, which is not acceptable . 38. The DRP referred to the PLR rates fixed in India. It is evident that the PLR rates were not the basis for fixing the arm's length price. Both TPO and the DRP have referred to the PLR rates only by way of analogy so as to state the prevailing interest rates in India, but while applying CUP method for comparability, they had applied LIBOR rates prevailing and had applied a mark-up of 700 points on account of low credit rating of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : and - Suitable adjustments to enhance comparability. 10.4.10.2. The Indian transfer pricing administration has come across cases of outbound loan transactions where the Indian parent has advanced to its associated entities (AE) in a foreign jurisdiction either interest free loans or loans at LIBOR (London Interbank Offered Rate) or EURIBOR (Euro Interbank Offered Rate). The main issue before the transfer pricing administration is benchmarking of these loan transactions to arrive at the ALP of the rates of interest applicable on these loans. The Indian transfer pricing administration has determined that since the loans are advanced from India and Indian currency has been subsequently converted into the currency of the geographic location of the AE, the Prime Lending Rate (PLR) of the Indian banks should be applied as the external CUP and not the LIBOR or EURIBOR rate. 10.4.10.3. A further issue in financial transactions is credit guarantee fees. With the increase in outbound investments, the Indian transfer pricing administration has come across cases of corporate guarantees extended by Indian parents to its associated entities abroad, where the Indian parent as guarantor agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... practices. The said Chapter sets out an individual country's view point and its experiences for the information of the readers. The said Chapter does not reflect the view of the Manual. Paragraph 10.1 of the United Nations Practical Manual on Transfer Pricing for Developing Countries reads:- "10.1. Preamble by the Subcommittee on Transfer Pricing: Practical Aspects 10.1.1. In the first nine chapters of this Manual, the Subcommittee has sought to provide practical guidance on the application of transfer pricing rules based on Article 9(1) of the UN Model Tax Convention and the arm's length principle embodied in that Article. With regard to chapters one through nine, the Subcommittee has discussed and debated the merits of the guidance that is provided and, while there may be some disagreement on certain points, for the most part the Subcommittee is in agreement that the guidance in those chapters reflects the application of the arm's length principle as embodied in the UN Model Tax Convention. 10.1.2. The Subcommittee recognizes that individual countries, particularly developing and emerging economies, struggle at times with the details of applying these treaty- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction, of course, would have a marginal significance and effect. The lending rates shown by the bankers as adopted by the learned Transfer Pricing Officer will not have any factoring of that consideration. Furthermore, the credit rating would also be an issue when the banks are lending to a foreign party. The learned assessing officer has also stated that adjustment for securities also required to be made and the bankers extending loan in foreign currency would be insisting on sufficient security which looking at the financial health of the subsidiary is not possible and therefore interest rates are required to be imputed which will take care of this aspect also. In the present case, the borrower is the subsidiary of the lender company and therefore we do not find it necessary to include the same in the interest cost. Therefore, the interest rate adopted by the learned Transfer Pricing Officer is further required to be reduced by this factor. In view of these facts, we do not find any reason that interest charged by the assessee at LIBOR +200 is not at arm's-length. 59. Now we come to the other issue where there should be an adjustment of the transaction cost and adjustment for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee to its associated enterprise. For AY 2007-08, the appellant had issued corporate guarantee for a sum of USD 30 million to the lenders of its associated enterprise, PT Jindal Stainless, Indonesia. The appellant has received commission of Rs. 1,49,21,269 computed @ 1.5% on the amount of loan availed by the associated enterprise which is covered by the corporate guarantee. In the transfer-pricing document, the transaction of receipt of guarantee charges was benchmarked considering charges for issuing guarantee charged by State Bank of India from the appellant. Since, the rate of commission charged from the associated enterprise for issue of corporate guarantee at 1.5% was higher than the rate of guarantee charged by State Bank of India at 0.75%, the international transactions of commission received on issue of corporate guarantee was, therefore, considered as being at arm's length applying CUP method. The TPO , however, in the impugned order held the transaction of providing bank guarantee as an independent class of international transaction and accordingly benchmarked the same applying the rate charged by State Bank of India at the rate of 1.5% plus a mark-up 200 bps ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and 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 any one or more of such enterprises. xxx xxx xxx Explanation.-For the removal of doubts, it is hereby clarified that- (i) the expression "international transaction" shall include- (a) ............. (b) .............. xxx xxx xxx (c) 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; (d) ............. (e) .............." Definition o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the parent company including the consolidation of reports; c) Costs of raising funds for the acquisition of its participations." It is respectfully submitted that shareholder activity is an activity, which is performed by an entity solely because of its ownership interest in other company i.e. in the capacity of shareholder. In the present case, the appellant is engaged in manufacture and sales of stainless steel coils of various grades. The associated enterprise of the appellant acts as a distributor of products been manufactured by the appellant in India. It is further submitted that with the sales made to the associated enterprise, the appellant is able to maximize its utilization of installed capacity. In view thereof, it would be appreciated that the corporate guarantee has been given pursuant to an obligation of the appellant as the shareholder. In the present case, the appellant itself was to benefit from supply of stainless steel coils as it will create a larger market for the appellant and the production of additional stainless steel will lower down the fixed cost of production. The apex Court has in the landmark judgment of Morgan Stanley and Co. Inc. : 292 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. The conditions prevailing in the market in which the respective parties to the transactions operate, including the geographical location and the size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition, are all material and relevant aspects. If we keep the aforesaid aspects in mind, it would be delusive not to accept and agree that as per the prevalent practice, subsidiary AEs are often incorporated to carry on distribution and marking function. This is not an unusual but common. Once this is accepted, then we cannot accept the reasoning given by the TPO that the transfer pricing adjustment could restructure the transaction to reflect maximum return that a party could have earned and this would be the yardstick or the benchmark for determining the interest payable by the subsidiary AE. This is not what Chapter X of the Act and Rules mandate and stipulate. The aforesaid provisions neither curtail the commercial freedom, nor do they bar or prohibit a legitimate transaction. They permit transfer pricing adjustment so as to bring to tax what would have been paid for the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tible expense to the company. The relevant findings of the Supreme Court read as under: "20. In Madhav Prasad Jatia v. CIT AIR 1979 SC 1291, this Court held that the expression "for the purpose of business" occurring under the provision is wider in scope than the expression "for the purpose of earning income, profits or gains", and this has been the consistent view of this Court. 21. In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the Income-tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. 22. In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) because in section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 29. It has been repeatedly held by this Court that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits" videCIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 , CIT v. Birla Cotton Spg. &Wvg. Mills Ltd. [1971] 82 ITR 166 etc. 30. The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done." Also, in the case of CIT vs United Breweries Ltd 204 Taxmann 244 (Karnataka) the Hon'ble Karnataka High Court held that corporate guarantee fee paid by a company to its managing director for standing as a guarantor is not lawfully allowable under section 37 of the Act. The relevant extract is as under: "17. In this background, if we look into the facts of this case, though the Chairman has stood as a guarantor in his personal capacity, the Banks have lent money not on the personal guar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e guarantees issued by the assessee were in the nature of quasi capital or shareholder activity and, for this reason alone, the issuance of these guarantees should be excluded from the scope of services and thus from the scope of 'international transactions' under section 92B.Of course, once a transaction is held to be covered by the definition of international transaction, whether in the nature of the shareholder activity or quasi capital or not, ALP determination must depend on what an independent enterprise would have charged for such a transaction. In this light of these discussions, we hold that the issuance of corporate guarantees in question was not in the nature of 'provision for services' and these corporate guarantees were required to be treated as shareholder participation in the subsidiaries. XXX "44..............That is, in our considered view, purely fallacious logic. In our considered view, under Section 92 B, corporate guarantees can be covered only under the residuary head i.e. "any other transaction having a bearing on the profits, income, losses or assets of such enterprise". It is for this reason that Section 92 B, in a way, expands the scope of international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrow scope of shareholder activity, it states that "Stewardship activities covered a range of activities by a shareholder that may include provision for services to other group members, for example services that would be provided by a coordinating centre". It proceeded to add, in the immediately following sentence at page 207 of 2010 Guidelines, that "These latter type of nonshareholder activities could include detailed planning services for particular operations, management or technical advice (trouble shooting) or in some cases assistance in day to day management". The shareholder activities are thus seen as conceptually distinct from the provision of services. The issuance of corporate guarantee, as long as it is in the nature of shareholder activity, cannot, therefore, amount to a "provision for services". XXXX 43. It is thus clear that even if we accept the contention of the learned Departmental Representative that issuance of a corporate guarantee amounts to a 'provision for service', such a service needs to be re-characterized to bring it in tune with commercial reality as "arrangements made in relation to the transaction, viewed in their totality, differ from those which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also placed on the decision of Delhi Bench of the Tribunal in the case of Bharti Airtel Limited vs. ACIT (ITA No. 5816/Del/2012), wherein, the Hon'ble Tribunal held that the guarantees having no impact on income, profits, losses or assets of the assessee cannot be construed as an international transaction. The relevant portion of judgment has been reproduced below for your consideration:- "22. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case in the light of the applicable legal position. 24. In the light of the above discussions, we consider it appropriate to begin by dealing with the fundamental question as to whether issuance of corporate guarantees, which do not involve any costs to the assessee, can indeed be subjected to the arm's length price adjustment. We find that Section 92(1) provides that, "any income arising from an international transaction shall be computed having regard to the arm's length price". In order to attract the arm's length price adjustment, therefore, a transaction has to be an 'international transaction'. Section 92 B, which defines 'international transaction' for the purpose of transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by 2 (a) above which covered transactions 'in the nature of purchase, sale or lease of tangible or intangible property'. The only additional expression in the clarification is 'use' as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the " provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service" which are anyway covered by 2(b) and 3 above in "provision for services" and "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". That leaves us with two clauses in the Explanation to Section 92 B which are not covered by any of the three categories discussed above or by other specific segments covered by Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of advance, payments or deferred payment or receivable or any other debt arising during the course of business". In view of the discussions above, the scope of these transactions, as could be covered under Explanation to Section 92 B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have "a bearing on the profits, income , losses or assets or such enterprise". This pre-condition about impact on profits, income, losses orassets of such enterprises is a pre-condition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. The contents of the Explanation fortifies, rather than mitigates, the significance of expression ' having a bearing on profits, income, losses or assets' appearing in Section 92 B(1). 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. 34. There is one more aspect of the matter. The Explanation to Section 92 B has been brought on the statute by the Finance Act 2012. If one is to proceed on the basis that the provisions of Explanation to Section 92 B enlarge the scope of Section 92B itself, even as it is modestly described as 'clarificatory' in nature, it is an issue to be examined whether an enhancement of scope of this ant avoidance provision can be implemented with retrospective effect. Undoubtedly, the scope of a charging provision can be enlarged with retrospective effect, but an anti-avoidance measure, that the transfer pricing legislation inherently is, not primarily a source of revenue as it mainly seeks compliant behavior from the assessee vis-à-vis certain norms, and these norms cannot be given effect from a date earlier than the date norms are being introduced. However, as we have decided the issue in favour of the assessee on merits and even after taking into account the amendments brought about by Finance Act 2012, we need not deal with this aspect of the matter in greater detail. 36. For the reasons set out above, and as we have held that the issuance of corporate guarantees in quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not have been an occasion to give such hedged advice. This will be stretching the things too far to suggest that just because when guarantees are included in the international transactions, these guarantees are included in service segment in contradistinction with other heads under which international transactions are grouped, the guarantees should be treated as services, and, for that reason, included in the definition of international transactions. That is, in our considered view, purely fallacious logic. In our considered view, under Section 92 B, corporate guarantees can be covered only under the residuary head i.e. "any other transaction having a bearing on the profits, income, losses or assets of such enterprise". It is for this reason that Section 92 B, in a way, expands the scope of international transaction in the sense that even when guarantees are issued as a shareholder activity but costs are incurred for the same or, as a measure of abundant caution, recoveries are made for this non chargeable activity, these guarantees will fall in the residuary clause of definition of international transactions under section 92B. As for the learned Departmental Representative's a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 'international transactions' by the virtue of clause (a) and (b) of Explanation to Section 92 B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by transactions 'in the nature of purchase, sale or lease of tangible or intangible property'. The only additional expression in the clarification is 'use' as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the " provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service" which are anyway covered in "provision for services" and "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 any one or more of such enterprises ". That leaves us with two clauses in the Explanation to Sect ion 92 B which are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions above, the scope of the capital financing transactions, as could be covered under Explanation to Section 92 B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have "a bearing on the profits, income, losses or assets or such enterprise". This pre-condition about impact on profits, income, losses or assets of such enterprises is a pre-condition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. These guarantees 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. When an assessee extends an assistance to the associated enterprise, which does not cost anything to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ential to appreciate, at this stage, the distinction in a service and a benefit. One may be benefited even when no services are rendered, and, therefore, in many a situation it's a 'benefit test' which is crucial for transfer pricing legislation, such as in US Regulations 1.482-9(1)(3)(i) which defines 'benefit', form a US Transfer Pricing perspective, as "an activity is considered to be provided a benefit to the recipient if the activity directly results in a reasonably identifiable increment of economic or commercial value that enhances the recipient's commercial position, or that may be reasonably anticipated to do so". The expression "activity", in turn is defined, as "including the performance of functions; the assumption of risks; the use by a rendered of tangible or intangible property or other resources capabilities or knowledge (including knowledge of and ability to take advantage of a particularly advantageous situation or circumstances); and making available to the recipient any property or other resources of the rendered" [Regulation 1.482-9(1)(2)]. The issuance of guarantees is not within the ambit of transfer pricing in United States because it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the guarantee, the guarantees issued by the corporates for their subsidiaries are rarely, if at all, backed by any underlying security and the risk is entirely entrepreneurial in the sense that it seeks to maximize profitability through and by the subsidiaries. It is inherently impossible to decide arm's length price of a transaction which cannot take place in arm's length situation. The motivation or trigger for issuance of such guarantees is not the kind for consideration for which a banker, for example, issue the guarantees, but it is maximization of gains for the recipient entity and thus the MNE group as a whole. In general, thus, theconsideration for issuance of corporate guarantees are of a different character altogether. XXX 41. As evident from the OECD observation to the effect "In contrast, if for example a parent company raises funds on behalf of another group member which uses them to acquire a new company, the parent company would generally be regarded as providing a service to the group member", it is also to be clear that when the corporate guarantees are issued for the purpose ofsubsidiaries raising funds for acquisitions by such subsidiaries, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92B, in respect of which an arm's length price adjustment can be made. In this view of the matter, and for both these independent reasons, we have to delete the impugned ALP adjustment..... 49. The second issue is this. We must deal with the question whether in this case the matter should have been referred to a larger bench. The parties before us were opposed to the matter being sent for consideration by the special bench, and at least oneof the reasons for which the grievance of the assessee is upheld, i.e. guarantees being in the nature of shareholder activity and excludible from the scope of services for that reason alone, is anarea which had come up for consideration for the first time. In effect, therefore, there was no conflict on this issue of and the other issues, given decision on the said issue, were wholly academic. It cannot be open to refer the academic questions to the special bench. 13. We are in considered agreement with the views so expressed by the coordinate bench. Respectfully following the views so expressed by the coordinate bench, we uphold the relief granted by the CIT(A) and decline to interfere in the matter." 10. Respectfully following the vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal in the case of ACIT v. Nimbus Communications Ltd. [2013] 145 ITD 582 (Mum-Trib.), wherein it was held as under: "For the guarantee given to the bank against the financial assistance given to its AEs, no commission was charged by the assessee company on the ground that the said AEs were not benefited by the guarantee so given and it was the assessee who benefited as a result of commercial benefits secured for future. In support of this stand of the assessee, the assessee has contended that business strategy should be taken into consideration while making any TP adjustments in respect of such transactions and has relied on the OECD Transfer Pricing Guidelines issued in 2010. As stated in para 1.59 of the said guidelines, the business strategies should also be examined in determining comparability 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince the appellant has already charged commission on the guarantee issued on behalf of the aforesaid enterprise, no additional compensation is warranted and the transfer pricing adjustment made by the TPO ought to be deleted. Re: Benchmarking undertaken by the assessee shall be considered: It is respectfully submitted, in this regard that during the relevant financial year the appellant has charged a commission of 1.5% from its associated enterprise, PT Jindal Indonesia on the amount of guarantee. Further, since the rate of commission charged from the associated enterprise for issue of corporate guarantee is higher than the rate of guarantee charges of 0.75% charged by State Bank of India in uncontrolled transactions, the international transactions of commission received on issue of corporate guarantee is, therefore, considered as being at arm's length applying CUP method. The TPO, in the impugned order has disregarded the internal CUP relied upon by the appellant for benchmarking the aforesaid transaction of commission on corporate guarantee and considered data sought under section 133(6). Reliance in this regard is placed on the decision of Mumbai Bench of Tribunal in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther factors. It is respectfully submitted that, in case of credit rating and reputation, the subsidiary company holds the same as of the holding company. Reliance in this is placed on the recent decision of Chennai Bench of Tribunal in the case of VVF LTD Vs DCIT [ITA No. 673/Mum/06], where in the Hon'ble Tribunal, while holding that the rate of interest on loan taken by the appellant from an Indian Bank serves as an internal comparable to the rate of interest of loan extended by the appellant to the associated enterprise for the application of CUP method, has held that the financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In view of the above, it is reiterated that, since the State Bank of India has charged only 0.75% p.a. rate of bank guarantee fees from the appellant, it would have charged the same from the subsidiary of appellant also. Hence, it is respectfully submitted that, since the appellant has charged higher than the rate of commission charged by the State Bank of India, no adjustment can be made on this account. Re: Ad-hoc adjustment of risk upon rate of commission on corporate guarantee: The TPO in the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter obtaining the data under section 133 (6) from various banks. No prejudice is caused to the assessee by obtaining this information as it has also been confronted to the assessee in proper opportunity has been given. Even before the tribunal the assessee did not show that how assessee is aggrieved with that. He further stated that assessee has challenged that the commission charged by the State Bank of India to the assessee is at 0.75% while the learned TPO has applied the rate of 4.68%, the assessee is failing to appreciate the fact that before computing the rate of corporate guarantee the 1st thing to consider is the credit rating of the company to whom corporate guarantee has been extended. Clearly, the assessee was able to receive corporate guarantee at such low rate because of its good credit rating, while the associated enterprise does not enjoy the benefit of such good credit rating, thus, the stand taken by the learned Transfer Pricing Officer is as per the methods of transfer pricing. He therefore submitted that the learned TPO called for the information from different banks under section 133 (6) of the Income Tax Act, 1961 and applied a suitable markup of 200 basis po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chmarking by the assessee should be accepted. The assessee has charged guarantee commission from AE @ 1.5 %. The ld TPO has bench marked it after obtaining the quotation from various banks, which are 2.68 %. He further added 2 % as mark up because of security and margin adjustments. The assessee substantiated the Alp stating that ING Vasya bank has given a quote of 1.5 % further similar is stated to be the quote of Indusind bank. The TPO has also taken the quotes of Axis Bank, Canara Bank, PNB, and ICICI bank, bank of Baroda, HDFC bank, and SBI. He arrived at Arithmetic mean of 2.68 %. In the present case the ld TPO has benchmarked the transaction by obtaining the quote from bankers and Hon Bombay High court in case of [2015-TII-16-HC-MUM-TP] THE COMMISSIONER OF INCOME TAX, MUMBAI Vs M/s EVEREST KENTO CYLINDERS LTD as relied by the ld AR has held as under :- "In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt, these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis. The assessing officer, however, made disallowance of expenses to the tune of Rs. 4,48,08,080 under section 14A of the Act by applying Rule 8D of the Rules on the ground that provisions of that Rule are procedural in nature and have retrospective operation. 70. The ld AR submitted as under :- The disallowance made by the assessing officer is bad in law and is not sustainable for the following reasons submitted as under: At the outset it is submitted that issue of retrospective applicability of Rule 8D is now been settled by the Hon'ble Supreme Court in CIT vs. Essar Teleholdings Limited, reported at 30 CTR (SC) 561, wherein, the Hon'ble Supreme Court has held: There is no indication in Rule 8D to the effect that Rule 8D intended to apply retrospectively. 48. Applying the principles of statutory interpretation for interpreting retrospectivity of a fiscal statute and looking into the nature and purpose of sub-section (2) and subsection (3) of Section 14A as well as purpose and intent of Rule 8D coupled with the explanatory notes in the Finance Bill, 2006 and the departmental understanding as reflected by Circular dated 28.12.2006, we are of the considered opinion that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section empowers/ enables the assessing officer ('AO') to determine such expenditure where the AO is not satisfied with the claim of appellant or the quantum of such expenditure. The provisions of section 14A clearly postulate disallowance of expenditure only in a case where it is proved that the expenses incurred have a real relationship with the income which does not form part of the total income. In the absence of such nexus being established, it is not open to the assessing officer, it is respectfully submitted, to disallow any part of the expenditure on proportionate basis. Reference in this regard is drawn to the decision of Hon'ble Supreme Court in the case of CIT vs Walfort Share & Stock Brokers: 326 ITR 1 (SC),wherein it has been held by the apex Court that there must be a proximate relationship of expenditure with exempt income, for the purposes of making disallowance of same under section 14A of the Act. In that case, the subject matter before the Supreme Court was allowability of loss incurred on sale of mutual funds, pursuant to decline in their value on declaration/ receipt of dividend, being exempt from tax, on such mutual funds. One of the contentions that we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ." The aforesaid decision has also been followed by the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. CIT: 328 ITR 81 which is now been affirmed by the Hon'ble Supreme Court in Civic Appeal No.7020 of 2011 The aforesaid decisions, it is respectfully submitted, fortifies the interpretation of the provisions of section 14A of the Act that only direct expenses, having proximate nexus, with earning of exempt income can be disallowed under section 14A of the Act. Reliance is also placed on the decision of Delhi High Court in the case of Maxopp Investment Ltd:347 ITR 272 (Del) wherein after considering the aforesaid decision of Supreme Court, the High Court has analyzed the scope of provisions of section 14A and the powers vested with the assessing officer before invoking the same. The High Court held, that the expression "expenditure incurred" refers to actual expenditure and not to some imagined expenditure. It was held, that the provisions of sub-section (2)/ (3) of section 14A read with Rule 8D of the Rules can be applied from assessment year 2008-09 and onwards, only if the assessing officer first rejects the claim of the appellant of having not incurred any e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome and no portion of interest expenditure incurred during the year was related to exempt dividend income. The Tribunal deleted the disallowance made by the assessing officer on the ground that facts clearly show that no expenditure was incurred to earn dividend income and disallowance under section 14A cannot be made on the basis of mere presumption. On further appeal before the High Court, it was contended by the Revenue that disallowance under section 14A could be made on the basis of presumption as some expenditure, directly or indirectly, is always incurred, which needs to be disallowed under that section. For the aforesaid proposition, the Revenue relied upon provisions of Rule 8D of the Rules. However, the High Court negated the contentions of the Revenue and held that disallowance under section 14A requires clear finding of incurring of expenditure and the disallowance cannot be made on the basis of presumption. The relevant observations of the High Court are as under: "........ Learned counsel for the appellant relies upon Section 14A(2) and Rule 8D (1) (b) to submit that even where the appellant claimed that no expenditure had been incurred, the correctness of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect to incurrence/ non-incurrence of expenditure for earning exempt income, before invoking the provisions of the said section. Relevant extract of the decision is reproduced hereunder: "9. Having gone through the orders of the authorities below and the decisions relied upon, we find that the assessing officer has not recorded his dissatisfaction as to how the disallowance of Rs. 2,52,252 suo moto made by the appellant under sec 14A on the basis of given working by the appellant was not correct. As per sub-section (2) of sec. 14A of the Act, the assessing officer can determine the amount of expenditure having relation with exempt income in accordance with the method provided in Rule 8D of the Rules, if the assessing officer is not satisfied with the correctness of claim suo moto made by the appellant . The assessing officer has dealt with the issue in para Nos. 3, 3.1 to 3.8 of the assessment order but he has not recorded his dissatisfaction in specific wording as to how the working of disallowance under section 14A of the Act at Rs. 2,55,252 suo moto made by the appellant is erroneous and thus cannot be accepted. The satisfaction of the assessing officer is not an empty/ idle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to such income which does not form part of the total income under the Act in accordance with the prescribed method. The prescribed method is the method stipulated in Rule 8D of the Rules. While rejecting the claim of the appellant with regard to the expenditure or no expenditure, as the case may be, in relation to the exempt income, the assessing officer would have to indicate cogent reasons for the same. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the assessing officer rejects the claim of the appellant in this regard, held the Hon'ble High Court. We thus respectfully following the above ratios laid down by the Hon'ble jurisdictional High Court, set aside the orders of the authorities below with direction to the assessing officer to delete the addition of Rs. 13,29,248. The grounds involving the issue are accordingly allowed." (emphasis supplied) To the same effect are the following decisions: * CIT v. Metalman Auto P. Ltd.: 336 ITR 434 (P&H) * CIT v. Reliance Industries Ltd. : 339 ITR 632 (Bom) * Chemical &Mettallurgical Design Co. Ltd : ITA No. 803/2008 (Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed funds shall be deemed to have been utilized for making such investments and therefore, question of nexus of interest expenditure incurred on such opening balance of borrowed funds with the investment in shares does not arise. Reliance in this regard is placed on the following decisions, wherein, it has been held that where appellant had sufficient funds/ deposits for advancing interest free loans or making investment in shares, etc., and there is nothing on record to show that borrowed funds have been directly utilized for such purpose, a presumption in favour of the appellant can be drawn with respect to utilization of interest free and borrowed funds: * Indian Explosives Ltd. vs CIT: 147 ITR 392 (Cal.) * Woolcombers of India Ltd. v. CIT: 134 ITR 219 (Cal.) - approved by Supreme Court in the case of East India Pharmaceutical Works Ltd. v. CIT: 224 ITR 627 * CIT v. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom.) * CIT vs. M/s. Ashok Commercial Enterprises: ITA No. No.2985 of 2009 (Bom) While following the ratio emanating from the aforesaid decisions, it has been held that interest expenditure cannot be disallowed under section 14A of the Act, where the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 crore u/s. 14A, respectfully following the decision of Bombay High Court, we are of the view that in the facts of the present case, no further disallowance over and above than what has been disallowed by the Appellant is called for.............." 4. In our opinion the Tribunal has committed no error. Basically the entire disallowance has been made on the basis of facts emerging on record. The Tribunal also relied on the decision of the Bombay High Court in case of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135. Additionally, we find that the Assessing Officer had, without giving a finding as to how much administrative expenditure have been incurred to earn the exempt income, had made disallowance. In the earlier years also, similar position obtained. That being the fact, no question of law arises." (emphasis supplied) To the same effect are the following decisions: * Lubi Submersibles Ltd.: ITA No.868 of 2010 (Guj.) * CIT v. K. Raheja Corporation Pvt. Ltd: ITA No.1260 of 2009 (Bom.) * CIT v. Gujarat Power Corporation Ltd.: 352 ITR 583 (Guj) * Gujarat State Fertilizers and Chemicals Ltd : Tax Appeal No. 82 of 2013 (Guj HC) * CIT v. Torrent P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :- A x B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the appellant, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the appellant, on the first day and the last day of the previous year; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the appellant, on the first day and the last day of the previous year. 3. For the purposes of this rule, the 'total assets' shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets." In terms of sub-ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake it clear that common interest expenses which are to be allocated in terms of the formula under rule 8D(2)(ii) will only be such interest expenses as are neither directly attributable to borrowings specifically used for tax exempt incomes or receipts, nor are directly attributable to borrowings specifically used for taxable incomes or receipts." The Hon'ble Delhi High Court in the case of Pr. Commissioner of Income-tax Delhi-2 vs Bharat Overseas Pvt Ltd in ITA 802/2015 vide order dated 17.12.2015, held that disallowance under section 14A read with Rule 8D(2)(ii) cannot be made in absence of common interest expenditure and while computing disallowance, not only interest directly attributable to tax exempt income, but also interest directly relatable to taxable income has to be excluded from variable A of Formula prescribed under Rule 8D(2)(ii). Relevant extracts of the judgment are reproduced as under: "16. The object behind Section 14A (1) is to disallow only such expense which is relatable to tax exempt income and not expenditure in relation to any taxable income. This object behind Section 14A has to be kept in view while examining Rule 8D (2) (ii). In any event a rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in reference to section 14A of the Act. 71. The Ld DR supported the orders of the lower authorities. He submitted that for AY 2007-08, assessee has not disallowed any sum and for AY 2008-09 assessee has disallowed only Rs. 1 lakhs. For both the actions of the assessee, there is no basis. 72. We have carefully considered the rival contention and perused the orders of the lower authorities. For assessment year 2007 - 08 the learned assessing officer has applied rule 8D for making disallowance under section 14 A of the Income Tax Act of Rs. 3 9214001 where the assessee has earned the exempt income of rupees 1162000/-. Now it is a settled judicial precedent that for assessment year 2007 - 08 the rule 8D the does not apply. The assessee has contested that in assessment year 2006 - 07 the assessing officer has made an addition of Rs. 50,000 under section 14 A on the ground that assessee has earned a sum of Rs. 482.26 crores as dividend on investment of Rs. 25209.08 lakhs and no disallowance has been offered by the assessee. For that year vide para no. 9 of the order of the coordinate bench following assessee's own case has restricted the disallowance to the extent of Rs. 25,000 under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08-09. Brief facts shows that the appellant has sold 7 cars to its employees @ Rs. 100 each amounting to a total sales consideration of Rs. 700/-. Details of cars sold and WDV is as under: Detail of Cars sold during the F.Y.2007 -08 Sr. No. Particulars Year of Cap. Vehicle No. Original Cost (Rs.) 1 Lancer 2001-02 DL9CC-8287 826,901 2 Esteem LX 2002-03 HR20H-4527 487,520 3 Santro LP 2002-03 DL9CH-0327 336,557 4 Santro LP 2002-03 DL9CH-0350 336,557 5 Esteem 2002-03 DL8CJ-0300 513,135 6 Esteem 2002-03 DL9CC-9938 510,563 7 Maruti Esteem 2003-04 HR20J-3912 516,404 Total 3,527,637 The difference in WDV and actual sale consideration comes to Rs. 13,21,410. The assessing officer, denied depreciation amounting to Rs. 1,25,330 in the relevant previous year on the WDV value of cars sold. 75. The LD AR submitted that the action of the assessing officer is inconsistent with the scheme of depreciation provided under section 32(1) of the Act. Under the scheme of the Act, depreciation is allowed on the written down value of the block of assets less the sale consideration of the assets sold during the year. Under the sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lacs were related to sales made to India Govt. Mint, a public sector enterprise, against supply of cold rolled stainless steel coils. The details of bad debts are summarized at pages 343-366 of the paper book. The assessee, during the course of assessment, vide reply dated 03.12.2010 submitted before the assessing officer that the bad debts were arise out of the sale of cold rolled stainless steel coils made to India Govt. Mint in the financial year 2004-05. The customer, arbitrarily and without providing any computation, deducted the balance outstanding to the assessee. The details are at pages 345-346 of the paper book accordingly, during the year under consideration, the assessee has written off Rs. 411.57 lacs as irrecoverable bad debts in the books of accounts. The various correspondence entered into with the customer is enclosed as pages 345-366 of the paper book. The assessing officer, however while completing the assessment made disallowance of deduction of bad debts amounting to Rs. 411.57 Lacs, alleging that (i) large part of bad debt is related to Public sector undertaking, which by no stretch of imagination can be construed as bad debt and (ii) the deduction claimed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This ground is raised by the learned assessing officer for assessment year 2007 - 08 vide ground number three of the appeal. 84. Both the parties submitted that The issue is covered by the decision of Hon'ble Delhi Bench of Tribunal in the assessee's own case for the assessment year 2005-06 (ITA No. 2518/Del/2013) and 2006-07 (ITA No. 4111/Del/2013), wherein, the Hon'ble Tribunal upheld the alternative contention of the assessee and allowed deduction of interest expense incurred on earning interest on short term deposits under section 57 (iii) of the Act. further, the assessing officer, vide order dated 17.12.2012 passed under section 154 of the Act (enclosed at pages 48-51 of the appeal memo), rectified the amount of disallowance to Rs. 818.92 lacs after excluding profit on sale of investment of Rs. 1355.47, which has already been offered to tax by the assessee. 85. In view of the order of the learned assessing officer as well as the order of the coordinate bench in assessee's own case for earlier years, we confirm the finding of the learned CIT A in deleting the addition of Rs. 21.74 crores on account of interest capitalization. Consequently, ground number 3 of the appeal of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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