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TMI Blog2019 (7) TMI 1316X X X X Extracts X X X X X X X X Extracts X X X X ..... ied under Royalty or FTS. We noticed that the additional evidences submitted by the assessee in paper book are all relating to assistance to assessee on the regular business and assistance in processing and administration issues. This is in support of overall system introduced in the business i.e. like ERP solutions. TPO should bench mark this transaction separately and we do not agree with TPO that the ALP for this transaction as NIL . Accordingly, this issue is remitted to the file of TPO to bench mark the transaction separately and grounds raised by the assessee are partly allowed. Recharacterization of Compulsory Convertible Debentures interest thereon - TPO noted that the assessee has stated that it paid interest @12% on the debentures allotted to its AE and compared the same with PLR and concluded the transaction is within arm s length as the PLR is more than the interest charged by the assessee company to it s AE - HELD THAT:- As in assessee s own case [ 2017 (1) TMI 893 - ITAT HYDERABAD] coming to the issue of adopting the benchmark rate in Indian context, assessee has justified the ALP not only on the basis of SBI PLR, which was at 12.26% for the year under consideration, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in the business of manufacturing and trading in agricultural crop protection products, filed its return of income for the AY 2014-15 on 29/11/2014 declaring income of ₹ 11,41,63,280/- under normal provisions and book profit of ₹ 6,30,07,146/- under the provisions of section 115JB of the Income-tax Act, 1961 (in short 'the Act'). Subsequently, the case was selected for scrutiny under CASS and issued notice u/s 143(2). In response to the said notices, the AR of the assessee furnished the information called for. 2.1 After verification of the information, the AO referred the matter to TPO u/s 92CA of the Act, with the prior approval of the Pr.CIT-2, Hyderabad for determination of arm's length price in respect of international transaction reported by the assessee for the AY 2014-15. 3. Profile of the taxpayer: Adama India was incorporated on 27 July 1998 as a wholly owned subsidiary of Makhteshim Agan Holdings BV under the provisions of Companies Act, 1956. The company commenced its commercial operation from 13 July 2009. It is engaged in the manufacture and supply of agricultural crop protection products in India. ADAMA India is offering comprehensive solutions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. 1.2. On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO erred in going beyond the scope under section 92CA in questioning the commercial rationale of the legitimate business expenses incurred by the Appellant and further erred in determining the ALP of receipt of management services to be Nil. 1.3. On the facts and in the circumstances of the case and in contrary to law, the Ld. AO / Ld. TPO erred in not appreciating the facts of the case that the receipt of management services is closely linked to the overall business of the Appellant and the same was aggregated under Transactional Net Margin Method ('TNMM'). 1.4. On the facts and in the circumstances of the case and in contrary to law, the Ld. AO / Ld. TPO, having considered the transactions aggregated under manufacturing function to be at ALP, erred in not considering an aggregate benchmarking approach for receipt of management services from AE, being a closed linked transaction, in line with the TP documentation maintained by the Appellant. 1.5. On the facts and in the circumstances of the case and in contrary to law, the Ld. AO/TPO further erred in not appreciatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in [I upholding the action of Ld. TPO / Ld. AO in not following the Hon'ble : Hyderabad Tribunal's decision in Applicant's own case for benchmarking of , interest on CCDs for the A Y 2011-12, when there is no change in the facts for the year under assessment. 3. Interest on Outstanding receivables: 3.1 On the facts and in the circumstances of the case and in contrary to law, the Ld. TPO / Ld. AO erred by considering receivables from AEs as a separate international transaction and further erred in making transfer pricing adjustment by imputing interest amounting to INR 8,812,925 on receivables from AEs by ignoring various rulings as submitted by the Appellant. 3.2 Without prejudice to above ground, the Ld. AO / Ld. TPO erred in bringing notional interest to tax without appreciating the fact that neither the AE nor the Appellant has the practice of charging interest on overdue balances from each other. Without prejudice to the fact that no arm's length determination and consequential TP adjustment is warranted on outstanding receivables, the Appellant would like to raise the following grounds against the computation methodology of the Ld. TPO: 3.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, therefore, requested the assessee to furnish clarification and submission along with proper documents on the following issues: a) The benefit derived from the receipt of services. b) Whether the payment made is commensurate with the benefits received. c) Whether as a result of such payment, the recipient of the services, the taxpayer, resulted in any economic or commercial value to enhance its commercial position. The expected benefit must be sufficiently direct and substantial so that an independent recipient, in similar circumstances, would be prepared to pay for it. If no profit has been provided (or was expected to be provided), the service cannot be charged for. d) Whether the services are actually rendered. If yes please quantify such services in terms of actual expenditure incurred and commensurate benefits derived there from. e) The determination of an arm's length charge must take into consideration the amount that an arm's length entity is prepared to pay for such a service in comparable circumstances. f) The taxpayer's level of documentation and evidence to show that the services are actually rendered by the AEs to the taxpayer. If the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Pvt. Ltd (ITA No.4454/Del/2011) AXA Technologies Shared Services Pvt. Ltd. (IT (TP) No. 659/Bang/2012) 6.3 In view above, the TPO rejected the submission of the Assessee. The benefits derived out of management services normally depend on various factors. In this regard, following points are worth mentioning: "1. Universally, management services are being treated at arm's length only when it- is proved substantially by the taxpayer that such intangibles were actually received and further proving that such services have benefitted it. 2. The application of the arm's length principle would be to see whether the amount paid by the taxpayer for the management services reflect the same charges for the intangible that would have been, or would reasonably be expected to be, levied between independent parties dealing at arm's length for comparable circumstances. 3. How much a comparable independent benefit recipient, under comparable circumstances, would be willing to pay for that service? 4. Whether as a result of such payment, the recipient of the service, the taxpayer, resulted in any economic or commercial value to enhance its commercial position. The exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services are part of overall business. TPO cannot carve out a line of services by its AE and cannot evaluate on benefit test. As per judicial pronouncements, he cannot evaluate benefit test. For this proposition, he relied on the following case laws: 1. ITA N. 1420 & 376/Mds/2017 in the case of Siemens Gamesa Renewable Power Ltd. 2. ITA No. 5871/Del/2011 in the case of McCann Erickson India Pvt. Ltd. Vs. Addl. CIT, order dated 8th June, 2012. 3. ITA No. 350/2014 in the case of Magneti Marelli Powertain India Pvt. Ld., Delhi High Court. 4. ITA No. 2730/Ahd/2017 in the case of Sabic Innovative Plastics India Pvt. Ltd. 6.8 Before us, ld. DR filed written submissions as under: "1. The additions in this case are on account of adjustment to ALP. DRP has considered the objections of the assessee and granted due relief. It is submitted that the assessee aggregated management services with manufacturing function. It is not proper on the part of the assessee to aggregate functions like assistance in accounting matters, assistance in process and quality control matters, support services, assistance in procurement and sales and assistance in HR matters with manufacturing activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es the services and the compensation for the same. Assessee has entered into two service agreements, which is placed on record. We notice from the manufacturing services agreement, the parties have benchmarked the sale considering the ALP range and no such benchmarking was done in management services. 6.10 However, we noticed that TPO has accepted the TP documentation for the international transaction like purchases, sales and manufacturing services as within Arm's Length by considering TNMM as the most appropriate method and singled out the management services. TPO has considered the ALP of management services as 'NIL'. We do not agree with the TPO that ALP is 'NIL' and he analysed the management services on benefit test. There is no such method in the TP study. You cannot adopt a method which is not embedded in the study. It is difficult to prove the services in terms of numbers but it can be seen only in ease of doing business in India and satisfaction of the farmers who are availing the services. Without the integrated services, the assessee would not have achieved the results. In our considered view, when TPO accepts the other international transaction under TNMM and it can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same product and service in uncontrolled conditions. It is on this basis that ALP of the product or service can be ascertained. It cannot be a hypothetical or imaginary value but a real value on which similar transactions have taken place. Coming to the facts of this case, the application of CUP is dependent on the market value of the arrangements under which the present payments have been made. Unless the TPO can identify a comparable uncontrolled case in which such services, howsoever token or irrelevant services as he may consider these services to be, are rendered and find out consideration for the same, the CUP method cannot have any application. His perception that these services are worthless is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble jurisdictional High Court in the case of CIT v. EKL Appliances Limited (345 ITR 241), "Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show that in an arm's length situation these services are rendered without consideration. The worth of services cannot be decided by the TPO, nor is it open to him to question, as such an approach implicitly does, the commercial expediency of these services. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for them to decide what is necessary for an assessee and what is not. It is not for the TPO to question assessee's wisdom in making payment for the services, which, in the opinion of the TPO, are not of "much" use. The TPO has travelled much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of its AEs. The DRP is also in error, in the light of these discussions, evaluating the worth of services on the basis of benefit of these services. The very foundation of the impugned ALP adjustment was thus devoid of any legally sustainable basis. 10. In any case, we have carefully perused the evidence of services rendered and the nature of services in question, on random sample basis. In our considered view, there is reasonable evidence of the rendition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igher. There is nothing produced before us to controvert the said claim. The assessee has applied TNMM which shows that the margin shown by the assessee was higher than the comparable companies. The case of the assessee is also supported by the decision of Tribunal in case of Me Can Erricson India Pvt. Ltd. (Supra) in which the decision of TPO to take the value of certain services at nil has not been upheld. Considering the entirety of facts and circumstances, the adjustment made by TPO which is nothing but disallowance of expenses cannot be upheld. We, therefore, set aside the order of CIT (A) on this point and delete the addition made." 3. In the case of Schneider Electric India Private Limited (ITA No. 2091 Ahd/2015, the ITAT, Ahmedbad Bench observed as under: "'9 ... The TPO has rejected the determination of arm's length price on the basis of TNMM, at entity level, but then he has not adopted any other permissible method for determination of arm's length price. Such a course of action, as noted above, is not permissible in law. Just because these services are worthless in the eyes of the revenue authorities, the arm's length price of these services cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... study citing a reason that intra-group services had to be benchmarked separately by analyzing the actual services received. No doubt there can be no quarrel on the view taken by the ld. TPO that arm's length price should be determined on a transaction by transaction basis. However, where the international transactions are closely linked this approach may not be feasible and a method of aggregation which is more amenable to a TNMM methodology could be better. Ld. TPO ought not have considered the rule regarding transaction to transaction comparison as so rigid that it could not give way to an aggregate method, where the transactions were so interconnected and intertwined, when an independent analysis would not give reasonably fair results" 5. In the case of AWB India Pvt. Ltd (ITA No.4454/DeI/2011), the ITAT, Delhi Bench observed as under: "23. It is also noteworthy in this regard that the TPO has nowhere disputed the Appellant's contention to the effect that it was not possible for the Appellant to document every record of receipt of the services in question, since the services were received by the Appellant in the form of directions and recommendations through e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant has paid the management fees under the agreement wherein the services provided by the AE has been enlisted Therefore, without giving a finding that the Appellant has also incurred expenditure in respect of the same services over and above the management fees paid to the AE it cannot be said that the Appellant has not received the alleged management services. Thus only when it is found that the Appellant has also incurred the expenditure on account of the same services and also paid the management fees to the AE then the TPO/A.O may come to the conclusion that the Appellant has paid the management fees without availing the services from the AE. Even otherwise when the management fees paid under the agreement and there is no finding by the authorities below that the same services also availed by the Appellant separately from 3rd party and booked the expenditure in the profit and loss account then determination of the ALP at NIL is not acceptable." 6.11 Considering the ratios laid down in the above cases, we are inclined to accept the contention of the assessee. However, we also noticed from the records that assessee entered into agreement with other AEs to get the services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bench mark this transaction separately and we do not agree with TPO that the ALP for this transaction as "NIL". Accordingly, this issue is remitted to the file of TPO to bench mark the transaction separately and grounds raised by the assessee are partly allowed. 7. As regards ground No. 2 (2.1 to 2.5) regarding recharacterization of Compulsory Convertible Debentures & interest thereon, the TPO noted that the assessee has stated that it paid interest @12% on the debentures allotted to its AE and compared the same with PLR and concluded the transaction is within arm's length as the PLR is more than the interest charged by the assessee company to it's AE. A show cause notice was issued on dt.13.10.2017 as to why LIBOR should not be applied to its case as LIBOR is usually applied as a bench mark for all the international loans and advances. The assessee was asked to furnish certain information on this. In response to which, the assessee replied that the assessee had allotted 18,56,25,815 CCDs at a face value of INR 10 per CCD to it's AE Celcius Property B.V. at an interest rate of 12% per annum. These funds were obtained from AE for the expansion of the business. At this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal in assessee's own case in ITA No. 497/Hyd/2016 for AY 2011-12 vide order dated 13/01/2017. 7.7 Before us, ld. DR filed written submissions, which are as under: "3. On the argument of the assessee that CCDs should be treated as part of equity and not as loans, it is submitted that the said argument is self-contradictory. If CCDs are part of equity, finance cost could not have been debited to P&L Account. Till the date of conversion, CCDs would be of the character of debt. It is humbly submitted that though the jurisdictional bench have decided in favour of the assessee for AY 2011-12, there are later decisions of Hon'ble ITAT which support that CCDS are in the nature of debt and hence the interest is amenable to TP adjustment. In the case of Granite Gate Properties Pvt Ltd [2029] 101 taxmann.com 38 (Delhi - Trib.), interest on FCCDs was treated as international transaction and the dispute was on the rate adopted for adjustment to ALP. 4. Reliance is also placed on the decision of Hon'ble Delhi High Court in the case of Zaheer Mauritius (230 Taxman 342) where in it was held that "There is no dispute as to the nature of Compulsorily Convertible Debentures. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transactions and not in the nature of any advance / loans. Since these are closely linked with the functions of the tax payer and have been aggregated with the principle transaction of sales for the purpose of economic analysis. 8.1 The TPO submitted that with the retrospective introduction of explanation to section 92B, receivables form a part of international transaction and no further analysis is required. The assessee further submitted that notional interest cannot be charged as primary transactions were considered at ALP. TPO rejected the submissions of the taxpayer as baseless. 8.2 The TPO observed that various judicial forums did not consider the above facts. Hence, once the transaction is an international transaction then the Arm's Length Price has to be determined. It is not the case of aggregation of transactions which the taxpayer is projecting. Reliance is placed on Chiel India Pvt. Ltd [TS145-ITAT-2014(DEL)-TP1, which also took into account judgement dated 07-10-2010 of ITAT Bangalore Bench in the case of M/s Logix Micro Systems Ltd. Vs. ACIT (ITA no. 524/Bang/2009). In view of these observations, the TPO charged interest as per the rate of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s decision of the High Court is also confirmed by the Supreme Court which dismissed the SLP as reported in [2019]102 taxmann.com 439 (SC)" 8.6 Considered the rival submissions and perused the material on record. In the case of Netcracker Technology Solutions (India) Pvt. Ltd., (supra), the coordinate bench held as under: "9. Considered the rival submissions and perused the material on record. We noticed that the TPO has made the independent TP analysis and found that the tax payers margins are within +/- 3% variation of the comparable companies and has not made any working capital adjustment. However, noticed that assessee has huge outstanding in receivables and made adjustment on interest receivable on such outstandings. We noticed that TPO has allowed the credit period at 90 days as per agreement and wherever assessee allowed the credit period beyond 90 days, he made the adjustment. In our view, TPO has made the adjustment wherever assessee has allowed the credit period beyond 90 days and failed to acknowledge that assessee has received certain payment within 90 days also. We are in agreement with ld. AR that we need to consider the overall average credit period for the AY o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of ₹ 55,91,455/- was claimed as exempt u/s 10(35) of the I.T. Act, 1961. It is seen from the Balance Sheet that the assessee company has investments to the tune of ₹ 9,30,00,600/- as on 31/03/2014 in units of various mutual funds, income arising from which being dividend is exempt and as such the same is not includable in the total income. It is further seen from the Profit & Loss account that the assessee company has debited ₹ 37,36,48,729/- to P&L account towards interest expense under the head finance cost. Since the assessee has investments, income arising from which is exempt in nature and also incurred interest expense on the borrowings, disallowance u/s. 14A of the I.T. Act, 1961 is squarely applicable. 10.1 During the course of scrutiny proceedings, the assessee was asked to explain why disallowance U/s. 14A should not be made. In response, the assessee submitted as under: "The company has earned dividend from mutual funds amounting to ₹ 55,91,455/- which is exempt u/s 10(35) of the Act. However, the said investments in mutual funds were made by the company in the earlier years and no fresh investments were made by the company during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the case, no expenditure directly relating to earning of exempt income is found to be incurred in this case. Therefore, disallowance under Rule 8D(2)(i) of Income Tax Rules, 1962, is not warranted. The assessee has debited a sum of ₹ 37,36,48,729/- towards interest on borrowed funds. The assessee could not prove that the interest expenditure is directly attributable to taxable receipt. Therefore, disallowance under Rule 8D(2)(ii) of Income Tax Rules, 1962, is applicable. The assessee also claimed the indirect administrative expenditure of ₹ 43.22 crores towards employee benefit expenses and ₹ 145.00 crores towards other expenses which got direct and proximate nexus with investment activity which yields exempt income. Therefore, disallowance under Rule 8D(2)(iii) of Income Tax Rules, 1962, is warranted in this case. 10.5 In view of the above observations, the AO computed the disallowance u/s 14A as under: 1. The amount of expenditure directly relating to exempted income (interest paid on loan for investment in shares & MF Nil 2. Interest expenditure which is not directly attributable to particular receipt is worked out as per the formula AXB/C, where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur's reference. During the current FY 2013-14, the Company has earned dividend income of INR 5,590,000 on the aforementioned investments in mutual funds. The Ld. Assessing Officer (AO) while passing the final assessment order, has invoked Section 14A of the Act read with Rule 8D of the Rules and disallowed interest expenditure amounting to INR 2,915,240. Our Submission During the captioned FY 2013-14, the Company has debited the following interest costs to the profit and loss account: S.No. Nature of interest Amount (in INR) Sl. No. Nature of interest Amount (Rs.) 1. Interest on Compulsorily Convertible Debentures ('CCDs') 181,493,230 2 Interest on working capital loan 176,001,103 3 Interest on others- Interest on income tax - Interest on indirect taxes 7,077,395 128,776 4 Interest on customer deposits 8,948,225 Total 373,648,729 The Ld. AO after removing the impact of transfer pricing adjustment of INR 14,171,5964 from the total interest cost of INR 373,648,729, has considered the balance interest cost of INR 231,932,765 as interest not directly attributable to any taxable receipt and computed the disallowance as per Rule 8D(ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as per Rule 8D(ii) of the Rules. Further, the Company itself in the computation of income has disallowed the interest on income tax of INR 7,077 ,395, so, considering the said interest again for the purposes of computing the disallowance as per Rule 8D(ii) of the Rules, would lead to a double disallowance. 4. Interest on customer deposits (Refer S.No.4 of above mentioned Table) - The Company sells its products via distributional channels such as dealers. The dealers have a certain credit period within which they have to pay to the Company. The Company collects deposits from these dealers and pays interest to the dealers on such deposits. Hence, the said interest cost not being in the nature of interest on 'borrowings', should not be considered for the purposes of computing disallowance as per Rule 8D(ii) of the Rules. From the above submission, it can be inferred that each of the interest cost debited to the profit and loss account is directly related to a particular receipt! income, which has a specific end-use. The same are not in the nature of any general borrowing and therefore should not be considered for the purposes of computing disallowance as per Rule 8D(ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this case this presumption is established considering the finding of fact both by the CIT (Appeals) and ITAT." (Emphasis supplied) • CIT vs. Tin Box Company [2003] 260 ITR 637 (Delhi High Court) Applying the above proposition in the context of section 14A, the Hon'ble Karnataka High Court in the case of CIT & Anr. vs. Microlabs (2016) 383 ITR 490 (Karnataka High Court) has upheld the view of the Tribunal that when investments are made from common pool and non-interest bearing funds are more than the investment in tax free securities, no disallowance of interest expenditure u/s 14A can be made. Similar view has been upheld in the case of CIT vs. HDFC Bank Ltd. [2014J 366 ITR 505 (Bombay High Court). In view of above, the Appellant Company submits that its internal surplus funds have been used for the purposes of making investments in mutual funds. Without prejudice to above, relying on the above judicial precedents, since the amount of own funds (i.e. INR 62,850,000) is less than the total investments in mutual funds (i.e. INR 93,000,000), then the investment to the extent of INR 62,850,000 may be assumed to be out of owned funds and accordingly, disal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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