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TMI Blog2021 (10) TMI 453X X X X Extracts X X X X X X X X Extracts X X X X ..... nchmarking of loan transaction - HELD THAT:- The bench in own case [ 2021 (4) TMI 254 - ITAT MUMBAI] has approved the benchmarking of these transactions on the basis of internal CUP. We find the facts to be similar in this year. The assessee has followed same methodology to benchmark the loan transactions. Therefore, the adjustment as confirmed by Ld. DRP would stand deleted. Disallowance u/s 14A - assessee had suo motto offered a disallowance u/s 14A - HELD THAT:- As decided in own case [ 2021 (4) TMI 254 - ITAT MUMBAI] wherein a suo-motto disallowance offered by the assessee was rejected by the A.O, and was thereafter substituted by an enhanced amount of disallowance as per the methodology contemplated in Sec. 14A r.w Rule 8D matter setˇaside the matter to the file of the A.O for the purpose of re-adjudicating the disallowance afresh in light of the law laid down in the case of Maxopp Investment Ltd. Vs. CIT [ 2018 (3) TMI 805 - SUPREME COURT] - the matter of disallowance u/s 14A stand restored back to the file of Ld. AO with similar directions. Taxation of foreign exchange gains on loan transactions - Business income or capital income - AO has held the gain to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that the transaction of giving financial guarantee by the Appellant on behalf of its Associated Enterprises (AEs) was an international transaction under Section 92B of the Act. 4) The AO / TPO / DRP erred in determining the Arm's Length Price of the financial guarantees given by the Appellant on behalf of its AEs @ 1.25% per annum. 5) The AO / TPO / DRP erred in making a transfer pricing adjustment of ₹ 15,45,56,760/- on account of guarantee commission. 6) The AO / TPO / DRP failed to appreciate that giving of financial guarantees by the Appellant on behalf of its subsidiaries was a shareholder activity for which no charge is required. 7) The AO / TPO / DRP erred in law and in facts in rejecting the benchmarking analysis undertaken by the Appellant in respect of guarantee commission in its transfer pricing documentation. 8) Without prejudice to Ground Nos. 1 to 7, the AO / TPO / DRP erred in computing the arm's length price of the financial guarantees given by the Appellant on behalf of its AEs in an arbitrary manner. 9) The AO / TPO / DRP erred in holding that the interest charged by the Appellant at the rate of LIBOR + 2.9% pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing same methodology which has finally been approved by Tribunal in the cited decision. The Ld. AR also assailed the corporate additions as sustained in the final assessment order by placing reliance on various judicial pronouncements. The Ld. DR, on the other hand, supported the assessment framed by Ld. AO. However, the submission that TP issues are covered by the earlier order of the Tribunal could not be controverted. In the above background, our adjudication to the subject-matter of appeal would be as given in succeeding paragraphs. Assessment Proceedings 3.1 The material facts are that the assessee being resident corporate assessee is stated to be engaged in providing offshore oilfield services in India and internationally and also offers offshore logistics and drilling services with a fleet of vessels and rigs owned by it. 3.2 Since the assessee carried out certain international transactions with its Associated Enterprises (AE), the same were referred to Ld. Transfer Pricing Officer-2(2), Mumbai (TPO) u/s 92CA (1) for determination of Arm‟s Length Price (ALP). The subject matter of dispute before us is with respect to guarantee commission charged by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 Lacs as computed on page-13 of Ld. TPO‟s order. However, no adjustment was proposed on loan advanced to GUK and the same was accepted to be at Arm‟s Length price. 3.4 The above-said TP adjustments aggregating to ₹ 3256.65 Lacs as proposed by Ld.TPO were incorporated by Ld. AO in draft assessment order dated 23/12/2016. In the assessment order, Ld. AO also proposed disallowance u/s 14A for ₹ 26.34 Lacs and also made another disallowance of ₹ 4762.45 Lacs on account of exchange gain claimed by the assessee as capital expenditure. The draft assessment order was subjected to assessee‟s objections before Ld. DRP. 3.5 The disallowance u/s 14A stem from the fact that the assessee earned exempt income of ₹ 388.87 Lacs and offered suo-moto disallowance of ₹ 12.18 Lacs in the computation of income. The same was computed by applying proportion of exempt income to total income to cost incurred on treasury functions. However, rejecting assessee‟s methodology, Ld. AO computed disallowance of ₹ 38.52 Lacs u/r 8D(2)(iii) being 0.5% of average investments. The differential of ₹ 26.34 Lacs was added to the income of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dded to the income of the assessee. Proceedings before Ld. DRP 4.1 The Ld. DRP, after due deliberations, directed Ld. TPO to adopt guarantee rate of 1.25% as against rate of 2.07% as proposed by Ld. TPO. Regarding benchmarking of loans, it was held that internal CUP used by the assessee was not appropriate and Ld. TPO correctly used external CUP. Therefore, the benchmarking rate proposed by Ld.TPO was confirmed. Regarding disallowance u/s 14A, it was observed that disallowance made by the assessee was a rough estimate and therefore, the disallowance was rightly computed as per Rule 8D(2). 4.2 Regarding taxability of exchange gains, the assessee submitted that the transactions were loan transactions which would be capital in nature and therefore, any gain or loss arising there-from would be capital in nature. Reliance was placed on the decision of Hon‟ble Supreme Court in CIT V/s Tata Locomotive Engg. Co. Ltd. (60 ITR 405); Sutlej Cotton Mills Ltd. V/s CIT (116 ITR 1); CIT V/s Canara Bank (63 ITR 328); decision of Hon‟ble Bombay High Court in CIT V/s V.S.Dempo Co. Pvt. Ltd. (206 ITR 291) Cadell Weaving Mills Company Private Ltd. V/s CIT (116 Taxm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE, the assessee has been benchmarking its interest at Libor rates which have a disconnect with the Indian inflation and hence such rates do not have Indian inflation rates built into them. However, the inflation is reflected in gradual weakening of the currency and the lender is compensated when he receives the corpus and converts it into Indian currency. This gain, received at the time of conversion, is a part and parcel of the interest component which the lender has received and is required to be treated in a similar fashion. 7.11. We are in agreement with the reliance placed by the AO on the decision in the case of Solid Containers Limited. The income, in the present case, is clearly arising out of the business activity of the assessee company which include investment in foreign subsidiaries for purpose of conduct of its business. The assessee itself, while arguing in respect of earlier grounds, has submitted that these loans represent its investment during the course of its business. There has been a judicial consensus that interest on borrowed funds used for the purpose of investment in subsidiaries is an allowable deduction in the case of investing company irrespective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be called in question. Apart from that, we find that it was also the claim of the assessee before the lower authorities that Kotak Mahindra Bank (as per its sanction letter) had expressed its willingness to give guarantee on behalf of the AEs at a commission rate of 0.40% p.a/0.50% p.a. In the backdrop of the aforesaid fact, we find substantial force in the claim of the ld. A.R that the aforesaid credit sanction letter too would constitute a CUP for benchmarking the transaction of providing of corporate guarantee by the assessee to the banks for facilitating raising of loans by its AEs. Be that as it may, the adequacy of the ALP of corporate guarantee fee at 0.43% can also safely be gathered by drawing support from the following judicial pronouncements as had been relied upon by the assessee before the lower authorities as well as before us: Particulars Guarantee Commission rate 1. Everest Kento Cylinder Ltd. Vs. ACIT (201 2) 34 CCH 0528 (Mum) [Note : Order of Tribunal upheld by the Hon'ble High Court of Bombay : CIT Vs. Everest Kento Cylinder Ltd. Vs. CIT (2015) 378 ITR 57 (B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UP was in order. The assessee has followed similar methodology in this year. Therefore, the adjustment as confirmed by Ld. DRP, in this regard, stand vacated. The Ld. AO is directed to delete the same. Ground No. 4, 5, 7 8 stands allowed which render ground nos. 1 2 infructuous. Ground Nos.3 6 stand dismissed. 6. Similarly the issue of benchmarking of loan transaction is also recurring in nature and covered by the decision for AYs 2012-13 2014-15 (supra) wherein the bench observed as under: - 14. We have in the backdrop of the contentions advanced by the authorised representatives for both the parties and perusing the orders of the lower authorities in context thereto, deliberated at length on the issue pertaining to benchmarking of the interest charged by the assessee on the loan advanced by it to its AE, viz. GGHL, Mauritius. Succinctly stated, the assessee had charged interest of ₹ 8,90,20,949/- from its AE, viz. Greatship Global Holdings Ltd. (for short GGHL ) at the rate of LIBOR plus 2.9% mark-up. As noticed by us hereinabove, the loan to GGHL was sanctioned in the immediately preceding year i.e F.Y 2010-11 and was disbursed in parts in the said prece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore us, it is the contention of the ld. A.R that as the DRP in the assessee‟s own case for the immediately preceding year i.e A.Y 2011-12 had held the interest charged by the assessee at LIBOR + 2.9% p.a on the loan in question as at arm‟s length, therefore, in the absence of any shift in facts during the year in question there was no justification on the part of the TPO/DRP to have held the same as not being at arm‟s length. We have deliberated at length on the issue in question i.e transfer pricing adjustment carried out by the TPO/DRP as regards the interest charged by the assessee on the loan advanced to its AE, viz. GGHL, Mauritius. In our considered view, the benchmarking of the interest charged by the assessee on the loan advanced to its AE, viz. GGHL by applying internal CUP i.e arithmetic mean of the interest rates that were charged by the banks as regards the foreign currency loans availed by the assessee could not have been rejected by the TPO/DRP. Our aforesaid view is fortified by the order passed by the Tribunal while disposing off the cross-appeals in the case of the holding company of the assessee, viz. The Great Eastern Shipping Company Limited, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year and had determined the ALP of the interest charged by the assessee on the said loan at 6.17% p.a. However, the DRP had vide its order for A.Y 2011-12 held that the interest charged by the assessee on the loan advanced to its AE was at arm‟s length. In our considered view, now when DRP in the case of the assessee for A.Y 2011-12 had held that the interest charged by the assessee on the loan advanced to its AE at LIBOR + 2.9% was at arm‟s length, therefore, there would be no justification in holding the same as not being at arm‟s length during the year in question i.e A.Y 2012-13. Also, the DRP in the assessee‟s case for A.Y 2010-11 had held that the interest rate of LIBOR + 300 basis points that was charged by the assessee on a loan of USD 4 million given to its AE, viz. GGES (and repaid) as being at arm‟s length. In the backdrop of the aforesaid facts, we find that the DRP had consistently been holding the interest rate of LIBOR + 2.9% / 3% charged by the assessee on the loans advanced to its AEs as at arm‟s length. On the basis of our aforesaid observations, we uphold the Internal CUP applied by the assessee for benchmarking the interest c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of Sec.14A(2) and (3) r.w. Rule 8D. The Hon‟ble Apex Court in its aforesaid order had observed as under: 37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable. Similar view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expected out of the loan are to compensate for risk of granting of loan, depreciation of money value, cost of funds and some profit element. These four items together would form the total interest which a lender is entitled to receive. What the assessee has received is higher amount on account of depreciation of Indian Rupee. Such depreciation (foreign exchange difference of rate at the time of lending and at the time of return) would represent a component of interest. Further, while receiving interest from the AE, the assessee has been benchmarking its interest at LIBOR which have a disconnect with the Indian inflation and hence such rates do not have Indian inflation rates built into them. However, the inflation is reflected in gradual weakening of the currency and the lender is compensated when he receives the corpus and converts it into Indian currency. This gain, received at the time of conversion, is a part and parcel of the interest component which the lender has received and is required to be treated in a similar fashion. Further, the income was arising out of business activity of the assessee which includes investment in foreign subsidiaries for the purpose of conduct of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness or is incidental to it. (iii) If there is loss in a trading asset, it would be a trading loss, whatever be its cause because it would be a loss in the course of carrying on the business. (iv) Loss in respect of circulating capital is revenue loss whereas loss in respect of fixed capital is not. (iv) Loss resulting from depreciation of the foreign currency which is utilised or intended to be utilised in business and is part of the circulating capital, would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be capital loss. (v) For determining whether devaluation loss is revenue loss or capital loss what is relevant is the utilisation of the amount at the time of devaluation and not the object for which the loan had been obtained. Even if the foreign currency was intended or had originally been utilised, for acquisition of fixed asset, if at the time of devaluation it had changed its character and had assumed the new character of stock-in-trade or circulating capital, the loss that occurred on account of devaluation shall be a revenue loss and not a capital loss. (vii) The way in which the entries are ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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