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TMI Blog2022 (8) TMI 1272X X X X Extracts X X X X X X X X Extracts X X X X ..... PO. Having found that payment for fees for technical service is not duplication of payment of Royalty and the factum of assessee having received the services from the AEs for which the payments were made, the AO / TPO is directed to revisit the TP analysis of the assessee and determine whether payments are at ALP. TPO shall follow one of the prescribed methods to arrive at ALP of payments towards fees for technical service. TP Adjustment on payments of interest on Compulsory Convertible Debentures (CCDS) - HELD THAT:- Tribunal, in assessee s own case [ 2022 (2) TMI 1279 - ITAT BANGALORE] the issue raised with regard to payment of interest on CCDs is decided in favour of the assessee. Disallowance u/s 14A in computation of total income under regular provisions and book profits - HELD THAT:- In the present case, the AO has recorded vague, stereotyped reasons de hors the accounts of the assessee for making the disallowance under section 14A. There is no satisfaction of the AO having regard to the accounts of the assessee - in the case of CIT v. Gokaldas Images P Ltd. [ 2020 (11) TMI 345 - KARNATAKA HIGH COURT] has held that disallowance u/s 14A cannot be added to book profits of asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to be at arm's length. 3. The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) to determine the ALP of the said international transactions. The TPO vide order dated 25.10.2016 determined the TP adjustment in respect of international transaction of payment of royalty, payment towards technical and support services and payment of interest on CCDs aggregating to Rs.121,49,28,777. Pursuant to the TPO's order, draft assessment order dated 16.12.2016 was passed by the A.O. incorporating the aforesaid TP adjustments and making certain additions / disallowances on corporate tax front. 4. Aggrieved, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 18.09.2017, largely confirmed the draft assessment order. Pursuant to the DRP's directions, the final assessment order was passed on 31.10.2017. 5. Aggrieved by the final assessment order, the assessee has filed the present appeal before the Tribunal. The issues raised before the Tribunal are as follows:- (i) Transfer Pricing adjustment of Rs.27,17,30,661 in respect of the international transaction of payment of royalty by the assessee to its AEs by rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n international transaction under CUP. 6. The Hon'ble DRP / learned TPO have erred in not appreciating the evidences submitted in respect of the payment of royalty by the Appellant to prove that the Appellant has derived economic benefit from licensing of intangibles and services from AEs and thereby erred in concluding that the Appellant has not derived any benefits. 7. The Hon'ble DRP / learned TPO have erred in not giving cognizance to the supplementary analysis submitted by the Appellant to demonstrate the arm's length nature of the international transaction pertaining to payment of royalty. While doing so, the learned TPO / Hon'ble DRP have erred in: (i) Not appreciating the external comparable uncontrolled transaction ("CUT") analysis identifying comparable licensing arrangements between third parties which is provided by the Appellant as a supplementary analysis to demonstrate the arm's length nature of the international transaction pertaining to payment of royalty. (ii) Not appreciating the internal CUT analysis identifying comparable licensing arrangements between AEs and third parties which is provided as a supplementary analysis by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntical facts, the Tribunal in assessee's own case for assessment year 2012- 2013 in IT(TP)A No.2209/Bang/2016 (supra) decided the issue in favour of the assessee. The relevant finding of the Tribunal reads as follows:- "9. The first issue we will take up the transfer pricing adjustment made by the TPO with respect to payment of royalty @ 1%. 10. The ld.AR submitted that this issue is covered in assessee's own case in ITA No.506/Bang/2016 vide order dated 6/12/2021 for the asst. year 2011-12 wherein the coordinate bench of this Tribunal has allowed the appeal in favour of the assessee. 11. The ld.DR relied on the written submissions. 12. We have heard the rival submissions and perused the materials on record. We notice that the coordinate bench of the Tribunal in assessee's own case (Supra) has held that - "7.4 We have heard rival submissions and perused the material on record. The Tribunal in assessee's own case for assessment year 2009-2010 in IT(TP)A No.315/Bang/2014 (order dated 31.03.2017) and for assessment year 2010-2011 in IT(TP)A No.361/Bang/2015 (order dated 04.06.2018) had restored the issue of determination of ALP for payment of royalty to the files of the TPO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench in assessee's own case (supra) we allow this ground in favour of the assessee and hold that payment of royalty @ 4% is at arm's length." 11. In view of the above order of the Tribunal, in assessee's own case (supra), we hold that payment of royalty at 4% on sale is to be treated at arm's length. It is ordered accordingly. Ground 10 to 15 (TP adjustment of Rs.27,23,55,735, being payments made towards fees for technical services) 12. Grounds 10 to 15 in respect of payment towards technical services fees, reads as follow:- "10 The Hon'ble DRP has erred in not giving any cogent reason while adjudicating on the Appellant's arguments on restricting the payment of technical service fees at I % of net sales. 11. The Hon'ble DRP has erred in upholding the contention of the learned TPO that the ALP for the payment of technical service fees should be restricted to 1% of net sales and thereby erred in: (i) Upholding that the international transaction pertaining to payment of royalty cannot be aggregated under the manufacturing operations of the Appellant with the application of TNMM for the transfer pricing analysis without appreciating the fact that the principle of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, etc.; and (iii) Large onsite plants, that supply gases via pipeline to the customers. Where the customers require a large quantity of gases on a continuous basis, the assessee constructs / builds a plant either in the premises of the customer or adjacent to it and supplies the gases through pipelines. The plant is operated by the assessee on Build Own Operate (BOO) basis, predominantly by obtaining technical assistance from its AEs, for which it makes the payments under question. 14. The assessee submits that the plant constructed and operated by the assessee under BOO basis predominantly has involvement of the team of AE to provide technical assistance. The technical services provided by the AE for the construction and operation of such plants are primarily in the nature of process design, mechanical design and engineering, control system design and engineering, advanced computerized control system, safety engineering, project management and start up. It was further submitted that the assessee also made payment for related services pertaining to the container cooldown charges, repair and maintenance charges, container rental charges etc. to its AE. The entire amount of techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of computation of ALP, the assessee was of the view that the above transactions are closely linked to the manufacturing operations of the company accordingly, benchmarked using aggregation approach with the application of TNMM. The entire level margin of the assessee was computed at 13.38% and arithmetic mean of margins of the comparables was computed at 11.03%. As the assessee's margin was higher than the average margin of comparables, the assessee projected that the aforesaid payments of technical service fees to AEs are at arms length. The TPO held that the technical service payments are essentially duplication of royalty payments. However, taking into consideration the assessee's business model, 1% of sales amounting to Rs.9,07,85,245 was treated as ALP of the technical service fee payments and balance of Rs.27,23,55,735 (36,31,40,980 - 9,07,85,245) was treated as TP adjustment. The view taken by the TPO was affirmed by the DRP. 17.2 The undisputed facts on record are that the global supply systems (GSS) team of the assessee company performs design and engineering function with respect to construction of manufacturing facility to supply industrial gases at the client ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment, the assessee vide letter dated 8.10.2016 [page 212 of the paper book] submitted the break-up of technical services fees payment and explained the nature of services provided by the AEs. In order to demonstrate the factum of services rendered by the AEs and tangible benefit received by the assessee for a particular project (Indian Oil Corporation Ltd), 'the assessee submitted (a) sample agreement copies entered between the assessee and Praxair Asia Inc, (b) copies of engineering design memorandum, (c) sample technical design and drawings for construction of plant (d) drawing issue bulletins (e) email communications along with project related technical documents in support of receipt of services from AEs. The assessee also submitted invoices issued by the AEs for which technical service fees was paid. The TPO has not brought contrary evidence on record in order to disregard the factum of technical services rendered by the AEs. Thus, the fact that the technical services are rendered by the AEs for which payments were made by the assessee has to be accepted. 17.4 The entire basis of the TPO in making the TP adjustment is that the payment made for technical services is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO. 17.6 In view of the above, there is no merit in the finding of the TPO that the payment of technical services fees is already covered by the royalty payment. Similarly, the TPO has not explained on what basis and under which method of computation of ALP (CUP, TNMM etc) 1 % is to be determined as the ALP for the payment of engineering and technical services fees. The aggregation of these transactions with other transactions on account of close linkage to the manufacturing operations, thereby warranting the application of TNMM has not been found fault or disputed by the TPO. Having found that payment for fees for technical service is not duplication of payment of Royalty and the factum of assessee having received the services from the AEs for which the payments were made, the AO / TPO is directed to revisit the TP analysis of the assessee and determine whether payments are at ALP. The TPO shall follow one of the prescribed methods to arrive at ALP of payments towards fees for technical service. It is ordered accordingly. Grounds 16 to 21 [TP adjustment of Rs.67,08,42,381 on payments of interest on Compulsory Convertible Debentures (CCDS)] 18. Grounds 16 to 21 in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourg S.A.R.L. with effect from March 2013, the assessee, in its TP study, benchmarked the transactions of payment of interest by applying CUP method. Using a CCD benchmarking study, the assessee selected certain companies as comparables, and since the arithmetic mean of the interest rate paid by the companies stood at 9.5% and 12.25%, the assessee concluded the international transaction of payment of interest at 9% and 12% to be at arm's length. The TPO treated the CCDs as ECB and bench marked the interest rate paid against LlBOR rate of 6.37% (pages 21-27 of the TP Order). The DRP rejected the Appellant's objections and upheld the TPO's order (pages 4 and 5 of the DRP's directions). 20. Aggrieved, the assessee has raised this issue before the ITAT. The learned AR submitted that the TPO and DRP grossly erred in treating the CCDs as ECBs and benchmarking the interest rate against LlBOR rate. It was submitted that CCDs being a hybrid instrument, cannot be treated as a ECB/loan. In this context, the learned AR relied on the decision of the Hyderabad Bench of the Tribunal in the case of ADAMA India (P.) Ltd. v. DCIT ([2017] 78 taxmann.com 7 (Hyderabad- Trib.). It is su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zed as a loan. The relevant finding of the Tribunal reads as follows:- "8. We have considered the issue and examined the rival contentions. There is no dispute with reference to the fact that the CCDs were issued in Indian Rupees. Accordingly, following the principles laid down by the Coordinate Benches and the Hon 'ble High Court as relied on by the assessee in the submissions, we have to hold that TPO has wrongly treated the issuance of CCDs as a loan, by treating it as an external commercial borrowing, ignoring the fact that loan is a debt, whereas CCD is hybrid instrument in nature basically, categorised as equity in nature. It was accepted by the Hon'ble Supreme Court in the case of Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited & Ors. Vs. Securities and Exchange Board of India & Anr. in Civil Appeal No. 9813 of 2011 dt. 31-08-2012 (supra) while assigning the jurisdiction to SEBI as an 'equity instrument'. Further, the policy of Govt. of India and also RBI effective from 01- 04-2010 also indicate that issuance of CCD is part of FDI being quasi-equity in nature and considering the same as a loan would be com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- "The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lenders State or that in the borrowers is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B 1. II 725 (1994), re 1 § AStG). A differentiation between debt- claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debtclaim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply." 8.6.3 In the instant case, admittedly, the CCDs are issued in JNR, interest is paid in INR and CCD's are repaid also in INR. Therefore, placing reliance on the judgment of the Hon'ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Pvt. Ltd. (supra), we hold that the TP study of the assessee to justify the interest rate by arriving at average rupee cost and comparing the same with SBI prime lending rate is correct. It is ordered accordingly. 18. Respectfully following the decision of the coordinate bench of the Bangalore Tribunal we uphold the TP study done by the assessee to arrive at the interest rate of 9% and 12% calculated based on the average rupee cost comparing the same with SBI prime lending rate. The assessee's claim in this ground is allowed." In view of the above order of the Tribunal, in assessee's own case, the issue raised in grounds 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any such statement. Moreover, the Honourable DRP ought to have appreciated that the Appellant has not incurred any expenditure during the year towards the investment. Further, the Appellant has not made any investment during the year. Accordingly, there is no question of having a common pool of expenditure for investments. Notwithstanding and without prejudice ground 22.8. Notwithstanding and without prejudice to the above, the learned has AO erred in invoking the provisions of Rule 8D(2)(ii) and disallowing the interest expense, when such interest is attributable to a taxable business activity, without appreciating the fact that the assessee has not utilized any borrowed funds for investment purpose. 23. Addition of Rs.5,99,10,687 as per clause (f) of section 115JB of the Act for computing book profits: 23.1 The learned AO has erred in adding Rs.5,99,10,687 as per clause (f) of section 115JB for computing the book profit without appreciating the fact that - (i) The computation provisions of section 14A(2)/(3) read with Rule 8D cannot be applied to the book profit computation and only the amount of actual expenditure incurred (being an amount debited to the Profit and Los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of cash, but was made by way of share swap arrangement, wherein the assessee issued shares to Praxair Pacific Ltd., in exchange for the shares in Jindal Praxair Oxygen Company Ltd. Moreover, during the financial year 2012-2013 under consideration, the said company bought back its shares from the assessee and the gains arising from which were offered to tax by the assessee. Therefore, it was contended that in view of the assessee having obtained the shares in a share swap arrangement, no disallowance is warranted. Reliance in this regard is placed on the decision of the Mumbai Bench of this Hon'ble Tribunal in the case of DCIT v. Trigyn Technologies Ltd. (reported in [2013] 37 taxmann.com 454 (Mumbai - Trib.)). Further, it was argued that the disallowance made by the Assessing Officer is in excess of the dividend income earned by the assessee, and therefore, is wholly unsustainable. Reliance in this regard was placed on the judgment of the Hon'ble High Court of Delhi in the case of PCIT v. Caraf Builders & Constructions P.Ltd. reported in (2019) 101 taxmann.com 167 (Delhi). Without prejudice to the above contentions, it was it is submitted that no such disallowance can be made w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 ill the best judgment of tile Assessing Officer, what tile law postulates is the requirement of satisfaction ill the Assessing Officer that having regard to the accounts of the assessee, as placed before him; it is not possible to generate tile requisite satisfaction with regard to the correctness of tile 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. 38. In the present case, we do not find all)' mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002-2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. Gokaldas Images P Ltd. reported in (2020) 122 taxmann.com 160) has held that disallowance u/s 14A of the I.T.Act cannot be added to book profits of assessee under section 115JB. Thus, we delete the disallowance made under section 14A amounting to Rs. 5,99,10,687 in computing the total income under regular provisions and book profits under section l15JB of the I.T.Act. Ground 24 (Disallowance of Rs.13,96,49,400 u/s 37 of the I.T.Act, being foreign exchange fluctuation loss incurred in respect of loans availed) 29. The above ground is in respect of disallowance of loss incurred on fluctuation of foreign currency. The grounds relating to the above issue read as follows:- "24.1 The learned AO/ Honourable DRP erred in disallowing the foreign exchange loss amounting to Rs.139,649,900 under section 37 of the Act as not being revenue in nature. 24.2. The learned AO failed to give an opportunity to the Appellant to substantiate that forex loss on kelvin loan is revenue in nature. 24.3. The learned AO/ Honourable DRP erred in not appreciating the fact that the Kelvin loan has been utilized for general corporate purposes which is revenue in nature. 24.4 The learned AO erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09/Bang/2016). 33. The learned Departmental Representative supported the orders of the TPO and the DRP. 34. We have heard rival submissions and perused the material on record. We find that on identical facts, the Tribunal in assessee's own case for assessment year 2012- 2013 in IT(TP)A No.2209/Bang/2016 (supra) decided the issue in favour of the assessee. The relevant finding of the Tribunal reads as follows:- "28. We have heard both the parties and perused the material on record. It is a settled law that if the loan borrowed is utilized for revenue purposes, the forex loss arising against the loan should be allowed as a deduction. The Apex court in the case of CIT vs Woodward Governor (supra) has settled the issue and the coordinate bench of the Bangalore Tribunal has been consistently following the same view. The coordinate bench of the Bangalore Tribunal in the case of ITO vs Levi Strauss (India) Pvt Ltd (ITA Nos. 2547& 2548 / Bang / 2018) has held that 9. We have given careful consideration to the rival submissions. We find that the foreign exchange loss claimed by the assessee was on account of reinstatement of the liability of the assessee as on the last date of the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he considered view that the cash flow statement does not provide any basis to the finding that the amount is used for the repayment of short term loans unless there is a thorough examination is done on the inflows and outflows in the cash flow statement. We also take into consideration the fact that the assessee has offered the forex gain in respect of the same loan in the previous year and in the interest of justice it is only correct when the loss arises out of forex movement the same be allowed. Pursuant to the binding decision of the coordinate bench of the Bangalore Tribunal and based on the facts placed before us we hold that the loss claimed by the assessee due to the forex fluctuation of the loan is to be allowed. This ground is allowed in favour of the assessee." 35. In view of the above order of the Tribunal, in assessee's own case, the issue raised in ground 24 with regard to disallowance of loss incurred on fluctuation of foreign currency is decided in favour of the assessee. It is ordered accordingly. 36. The other grounds, namely, 1 to 4, 25, 26, 27 and 29 were not pressed. In ground 28, the assessee claims that it was not given due credit of taxes collected at sour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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