9911796707
TMI Blog2022 (12) TMI 534X X X X Extracts X X X X X X X X Extracts X X X X ..... e date of conversion, for allowability of interest u/s 36 (1) (iii) of Income tax Act also, such CCDs are to be considered as Debt only and interest thereon has to be allowed and it cannot be disallowed by saying that CCDs are equity and not debt. We hold accordingly. This issue is decided. ALP of the interest paid - Interest on Compulsory Convertible Debentures - As in assessee s own case in assessment year 2011-12 [ 2021 (12) TMI 1167 - ITAT BANGALORE] admittedly, the CCDs are issued in INR, interest is paid in INR and CCD s are repaid also in INR. Therefore, placing reliance on the judgment of Cotton Naturals (I) Pvt. Ltd. [ 2015 (3) TMI 1031 - DELHI HIGH COURT] . 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. As held in assessment year 2012-13 [ 2022 (2) TMI 1279 - ITAT BANGALORE] 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. Thus taking a consistent view, we remit this issue to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the accounts of the assessee. Addition u/s 14A as per clause (f) of Explanation 1 to section 115JB of the Act for computing book profits - The case of CIT v. Gokaldas Images P Ltd. [ 2020 (11) TMI 345 - KARNATAKA HIGH COURT] 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 in computing the total income under regular provisions and book profits under section 115JB. Disallowance of other expenses - HELD THAT:- The assessee herein filed the additional evidence before us along with petition and prayed that these additional evidences are to be admitted in the interest of justice. Accordingly, these additional evidences are admitted for consideration and after admitting the same, we remit the entire issue in dispute to the file of AO for fresh consideration. The assessee has to make available all the additional evidences filed before us to the AO for consideration. After considering the same, the AO has to decide the issue afresh. Accordingly, the issue is set aside to the file of AO for fresh consideration. Short credit of TDS - HELD THAT:- We di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prise ( AE:) on Compulsory Convertible Debentures (-CCD-) is not at arm's length and thereby erred in making an addition of INR 224,03,97,687/- thereby: a. Erred in transgressing their jurisdiction by questioning a genuine transaction and referring to irrelevant arguments and BEPS action plans, and thereby, concluding that CCDs are colorable instrument used to erode the base and shift profits. b. Erred in determining the ALP for payment of interest on CCDs as 'Nil' as against the interest payment made at 9% and 12%. c. Erred in not appreciating the fundamental difference between a CCD and an Equity while determining the ALP for payment of interest on CCD. d. Erred in not appreciating that CCDs are nothing but debt till the date of conversion. e. Erred in placing reliance in FEMA/FDI Regulations to re-characterize the CCDs to Equity thereby failed to appreciate that the treatment of CCDs under FEMA/FDI Regulations cannot determine/change the character of the instrument when it comes to other regulations including the Act. f. Failed to appreciate that the CCD were already accepted as debt in the scrutiny assessment proceedings for the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice Method ( CUP ) despite not following the provisions prescribed in clause (a) of the sub-rule (1) of Rule 10B of the rules for determination of ALP in relation to an international transaction under CUP. i. Erred in not appreciating the similar licensing arrangement entered among group companies as these agreements provide persuasive value and support that the licensing of intangibles and services has been compensated as per the group policy. 8. The learned AO/ learned TPO/ Hon'ble DRP erred in determining the arm's length price of payment towards technical service fees to its AE at 1% of net sales arbitrarily and thereby: a. Erred in making an addition of INR 13,36,41,756/- to the total income of the Appellant b. Erred in not appreciating the evidences furnished by the Appellant to justify the payment of technical services fees to its AE with commensurate benefits, c. Failed to appreciate the difference between the services for which technical service fee is being paid and the technology for which royalty payment is being made and thereby erred in concluding it to be a duplicate payment. d. Erred in ignoring the justification of ALP of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of surplus cash as indicated by the learned AO himself. 10.7. The learned AO further erred in not appreciating the principle that normally long term borrowings are utilized for the purposes of long term investments (assets and investments), whereas short term borrowings are utilized for general corporate borrowing purposes / working capital. 10.8. Without prejudice to the claim of the Appellant that foreign exchange loss is revenue in nature, in the event if it is held that foreign exchange loss is incurred on account of purchase of fixed asset and it is capital is nature, appropriate depreciation on the same should be granted. 11 . Disallowance of expenditure under section 14A of the Act by applying the provisions of Rule 8D of the Income-tax Rules, 1962 ( the Rules ) 11.1. The learned AO erred in disallowing expenditure amounting to INR 98,98,250 under section 14A of the Act read with Rule 8D of the Rules, despite the fact that no expenditure has been actually incurred/ debited to the profit and loss account on this account. The learned AO ought to have observed that applicability of section 14A of the Act is triggered only if there is any expenditure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t incurred any expenditure during the year towards the investments. 11.10. Notwithstanding and without prejudice to the above, the learned AO and the Hon'ble DRP erred in considering all the investments for computing average value of investments which yielded exempt income during the year. 12. Addition of INR 56,98,912 as per clause (f) of Explanation 1 to section 115JB of the Act for computing book profits 12.1. The learned AO/ Hon'ble DRP has erred in adding INR 56,98,912 as per clause (f) of Explanation 1 to section 115JB of the Act for computing book profits without appreciating the fact that - i. The computation provisions of section 14A(2)/(3) of the Act 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 loss account) which is relatable to the exempt income should be added to the book profits. ii. Section 115JB is a complete code by itself and no adjustments other than those which are prescribed in section 115JB of the Act itself can be made to the book profits. 12.2. The learned AO/ Hon'ble DRP erred in not placing re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es amount, inter-alia, includes electrical goods, hardware tools, dry ice, IT Pro expense, gases etc. being revenue in nature. 14. Short credit of tax deducted at source The learned AO erred in giving credit of tax deducted at source of INR 58,175,493 instead of INR 60,847,909 as claimed by the Appellant. 15. Short credit of advance tax The learned AO erred in giving credit of advance tax of INR 9,50,00,000 instead of INR 9,85,00,000 as claimed by the Appellant. 16. Penalty proceedings under section 271(1)(c) of the Act The learned AO erred in law and on the facts and circumstances of the case by initiating penalty proceedings under section 271(1)( c ) of the Act for furnishing inaccurate particulars of income. 3. Now we reproduce the grounds of appeal in IT(TP)A No.199/Bang/2021 as under: Ay 2015-16: The grounds hereinafter taken by the Appellant are without prejudice to one another. I. Transfer Pricing 1. The learned Assessing Office (-AO ), learned Transfer Pricing Officer ( learned TPO ) and the Honourable Dispute Resolution Panel( DRP )grossly erred in adjusting the transfer price by INR 307,31,86,126/- with respect to the intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty payment to 1% of net sales to its AE and thereby: a. Erred in making an addition of INR 51,55,15,606/- to the total income of the Appellant b. Erred in stating that no direct/primary evidences was furnished to justify the payment of royalty to its Associated Enterprise. c. Failed to appreciate that the transfer of technology is a continuous process and thereby erred in stating that technology was transferred only during the initial year of operation and the Assessee has not received any new technology which necessitates the payment of royalty. d. Erred in disregarding the external CUT search performed by the Appellant which is provided as a supplementary analysis to' demonstrate the arm's length nature of the international transaction pertaining to payment of royalty. e. Erred in disregarding the internal CUT search performed by the Appellant which is provided as a supplementary analysis to demonstrate the arm's length nature of the international transaction f. pertaining to payment of royalty. g. Erred in restricting royalty payment to 1% of net sales on ad-hoc basis using Comparable Uncontrolled Price Method ( CUP ) de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 was done during the FY 2014-15, out of the cash flow from operating activities generated during the subject AY. 8.4. The learned AO/ Honourable DRP erred in invoking provisions of section 14A of the Act, inspite of the fact that the investments were made for business reasons and not with the objective of earning any dividend/ exempt income. 8.5. The learned AO/ Honourable DRP has erred in not considering the order of the Commissioner of Income-tax (Appeals) in Appellant's own case in AY 2008-09 which directed the learned AO to delete the disallowance under section 14A of the Act on the basis that original investments in the Appellant's case were not geared or intended for earning exempt income such as dividend. Being investments made for business reasons, they are to be treated on a different footing from investments made only for earning exempt income. On Appeal by the Department, the Honourable ITAT has dismissed the grounds, in view of the categorical finding of the CIT(A). 8.6. The Honourable DRP erred in holding that the Appellant has not maintained separate books of account in regard to the investments made that are eligible to earn exempt income. The DRP a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case by initiating penalty proceedings under section 271(1)(c) of the Act for furnishing inaccurate particulars of income. 4. Ground Nos.1 to 4 in the AY 2014-15 and ground Nos.1 2 in the AY 2015-16 are general in nature, which do not require any adjudication. 5. Ground Nos.5(a) to (h) in the AY 2014-15 and ground Nos.3(a) to (g) in the AY 2015-16 are common grounds which reads as follows:- AY 2014-15: 5. The learned TPO erred in law and facts by holding that the payment of interest to Associated Enterprise ( AE:) on Compulsory Convertible Debentures (-CCD-) is not at arm's length and thereby erred in making an addition of INR 224,03,97,687/- thereby: a) Erred in transgressing their jurisdiction by questioning a genuine transaction and referring to irrelevant arguments and BEPS action plans, and thereby, concluding that CCDs are colorable instrument used to erode the base and shift profits. b) Erred in determining the ALP for payment of interest on CCDs as 'Nil' as against the interest payment made at 9% and 12%. c) Erred in not appreciating the fundamental difference between a CCD and an Equity while determining the ALP for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dicata having already accepted the requirement for payment of interest in the same CCDs during the previous assessment years of AY 11-12 to AY 13- 14. g) Erred in disregarding the independent benchmarking analysis undertaken by the Assessee identifying the comparable transactions involving the CCDs to demonstrate the arm's length nature of interest payment on CCDs. 5.1. After hearing both the parties, we are of the opinion that CCDs are nothing but debt till the date of conversion and recharacterization of the same is impermissible and this issue stands covered by the order of the Tribunal in the case of ACIT Vs. CAE Flight Training India Pvt. Ltd. in IT(TP)A No.2060/Bang/2016, IT(TP)A No.84/Bang/2015, IT(TP)A No.599/Bang/2016, IT)(TP) No.2178/Bang/2016 ITA No.2006/Bang/2017 vide Tribunal s consolidated order dated 25.7.2019 wherein held as under:- 21. Now we first decide the First and most important issue i.e. this that CCDs are Debts or equity and interest on it is allowable or not? On this issue, in the order of CIT (A) para 4 in the first year i.e. A. Y. 2009 10 is relevant and therefore, this Para is reproduced for ready reference hereinbelow. 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d TPO erred in reclassifying the debenture issued by the appellant form CCD to equity. The Learned YPO during the course of the hearing had not contended on the nature f the intercompany funding and had queried only on the rate of interest charged. Accordingly, the Learned TPO failed to provide to the appellant adequate opportunity to argue on the proposed classification of CCD as equity. The Learned TPO went beyond the brief of arbitrating only on the arm's Length pricing related to the rate of interest, and proceeded to question the nature of the inter-company funding. 6. That the Learned AO/Learned TPO proceeded to apply the principle of thin capitalisation, as contained in the Legislation from UK and Australia, in contravention to confining the assessment based on the principles provided in the Indian Transfer pricing regulations (as provided in the Act and the Rules). 7. The Learned TPO as part of the TP order did not refer to nor had any dispute on the rate of interest charged, and thereby making the TP order erroneous. These are taken up together in determining whether the TP adjustment made by the TPO is correct. The relevant issues raised in the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue was decided in favour of the assessee on this basis that in the absence of specific Thin capitalization Rules in India, recharacterization of Debt Capital as equity Capital and disregarding of interest is not in order. We reproduce the relevant paras of this tribunal order i.e. para 18 to 30. 18. That takes us to objection of the Revenue authorities to the effect that the borrowings by the assessee, on which interest has been claimed as deduction, are in fact part of the capital of the assessee which is brought in the garb of borrowings purely on tax considerations. Our attention is pointed out to the fact the ratio of debt to the equity is 248 : 1 which is unusually high by any standard and that such a highly geared company only shows that equity is brought in the garb of debt, and it is contended that since what is termed as borrowing by the company is de facto minimum required capital to carry out the business in India, interest cannot be allowed as a deduction on the same. In other words, Revenue s objection is that the assessee company is so thinly capitalized that its debt capital is required to recharacterized as equity capital for the purpose of examining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngement entered into by a person may be declared as an impermissible avoidance arrangement and the consequences, under this Code, of the arrangement may be determined by re-characterising any equity into debt or vice versa . That is the first step taken by the India s tax administration in the direction of having formal thin capitalization rules in India. However, it is not in dispute that as at the material point of time, India did not have any thin capitalization rules, nor does it have any thin capitalization rules even at present. 21. Interestingly, however, thin capitalization rules do exist in Belgium which perhaps explains, for the reasons we shall now set out, the peculiar capital structure may have been adopted by the assessee. As per the Country Survey Report on Belgium, as published by the International Bureau of Fiscal Documentation, Amsterdam (based on information as on 19th Dec., 1995) Belgium applies two sets of thin capitalization rules. Firstly, a 1.1 debt/equity ratio applies to loans granted by individual directors, shareholders and nonresident corporate directors to their company [art. 198(10) IR/WIB]. Interest relating to debt in excess of this ratio is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Belgian GE directly, prima facie the thin capitalization rules would have restricted the interest disallowance in excess of borrowings exceeding seven times the equity capital, whereas in the present case borrowings are two hundred fortyeight times the equity capital. As the capital is structured now, and the borrowings having been resorted by the Indian PE directly, it could possibly be said, or at least argued, that there is no debt capital in the assessee company-i.e. the Belgian entity, and this debt capital is confined to borrowings directly by the PE. Be that as it may, it cannot be open to us to apply these thin capitalization rules in the hands of the assessee company while computing its taxable income in India, because so far as taxability in India is concerned, the limitation to be placed on deduction of expenses has to be limitation under the laws of the State in which PE is situated i.e. India. It may be useful to recall that in terms of the provisions of art. 7(3)(b) of Indo-Belgian tax treaty, In the determination of the profits of a PE, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the PE including executive an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i-abuse provisions subsequently, it would not render the effort to take advantage of existing provisions of the treaty illegal. We are thus unable to accept the plea of the Revenue authorities, and we uphold the claim of deduction of interest in respect of capital borrowed from the shareholders or joint venture partners by the assessee. 26. Even otherwise, it is also important to bear in mind the fact that as the law stands now under s. 90 of the Indian IT Act, the provisions of a tax treaty override the provisions of the Indian IT Act-except to the extent the latter are beneficial to the assessee and this treaty override is unqualified, save and except for clarification that charge of tax in respect of a foreign company at a rate higher than the rate at which domestic company is chargeable, shall not be regarded as less favourable charge or levy in respect of such foreign company. Just in case there were any doubts on this fundamental legal position, the CBDT, vide Circular No. 333, dt. 2nd April, 1982 [(1982) 81 CTR (TLT) 18 . (1982) 137 ITR (St) 1], has set the same at rest. This circular deals with the question as to what the AOs will do when they find that the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s passionate plea for invoking principles laid down by Hon ble Supreme Court in McDowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), which, inter alia, holds that colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by restoring to dubious methods and that it is the obligation of every citizen to pay the taxes honestly without resorting to subterfuge . It is thus not even necessary to examine whether or not the finance structure in question constituted colourable device or sort of subterfuge. As long as finance structure adopted by the assessee was not specifically prohibited by the applicable tax treaty provisions, and as long as there was no specific anti-abuse provision to deal with the same in the tax treaty itself, the effect of the finance structure could not be ignored. 28. It is interesting to take note of the paradigm shift with regard to the treaty override, as introduced in s. 129(9) of the Direct Taxes Code Bill 2010, which provides that notwithstanding the treaty override provisions in s. 129(8) [which are in pari materia with s. 90(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational consensus that the AO has referred to is for the need of thin capitalization rules, but then just because it is desirable to curb thin capitalization, the AO cannot disallow the interest paid on debt capital in the cases of thinly capitalized companies. The AO was clearly ahead of his times in disallowing the expenses based on his notions of thin capitalization rules, when such rules had not even reached the drawing board stage in India. Learned CIT(A) also did not follow the correct legal position by leaning upon restriction placed in Explanation to s. 37 of the Act, which is not applicable in respect of deduction on interest under s. 36(1)(iii) and in leaning upon restriction placed in art. 7(3)(b) on intra-organization notional payment of interest on capital, whereas the interest payment in the present case did not constitute an intra-organization transaction at all. Even if these interest payments were to be treated as intraorganization transactions by treating the same as payments made to the GE, and not to the joint venture partners, these payments cannot be viewed as notional payments because in such a situation the GE will have corresponding liability to pay th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as equity for FDI policy. Now the question is that such treatment given by RBI for FDI policy can be applied in every aspect of CCDs. Whether the holder of CCDs before ins conversion can have voting rights? Whether dividend can be paid on CCDs before its conversion? In our considered opinion, the reply to these questions is a BIG NO. On the same logic, in our considered opinion, till the date of conversion, for allowability of interest u/s 36 (1) (iii) of Income tax Act also, such CCDs are to be considered as Debt only and interest thereon has to be allowed and it cannot be disallowed by saying that CCDs are equity and not debt. We hold accordingly. This issue is decided. 5.2 Further, as regards the ALP of the interest paid, the Tribunal in assessee s own case in assessment year 2011-12 in ITA No.506/Bang/2016 vide order dated 6.12.2021 has held as under: Payment of Interest on Compulsory Convertible Debentures (Ground 4) (Transfer pricing issue) 8. During the financial year 2009-2010, the assessee had entered into a debenture subscription agreement with its AEs, Praxair International Finance. As per the terms of the debenture subscription agreement, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational Finance. In the agreement, the term issue price is defined as CCD will be issued at par at Rs.10 each . Further, the subscription considered shall be converted into INR as per the prescribed exchange rate and the number of CCDs allotted to the holders will be the subscription consideration as converted into INR, divided by face value of the CCD instrument. The debenture certificates issued clearly reflect the face value of debenture at INR at Rs.10 each. The CCDs are recorded in the financial statements in INR. The CCDs were also subsequently repaid in INR. The true copy of the statement setting out the details of payment and demand deposit transaction clearly demonstrate that the remittance is in INR. 8.6.1 The TPO and DRP erred in treating CCDs as ECBs and benchmarked the interest rate against LIBOR rate. The CCDs is a hybrid instrument and cannot be per se treated as ECB / loan. The Hyderabad Bench of the Tribunal in the case of Adama India (P.) Ltd. v. DCIT (supra) had held that CCDs cannot be categorized 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 disput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of return 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money. 40. The aforesaid methodology recommended by Klaus Vogal appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also tobe repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency and different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating CCDs as ECBs and benchmarked the interest rate against LIBOR rate. The CCDs is a hybrid instrument and cannot be per se treated as ECB / loan. The Hyderabad Bench of the Tribunal in the case of Adama India (P.) Ltd. v. DCIT (supra) had held that CCDs cannot be categorized 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specfic loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of return 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 debt-claim in national currency whereas to a Ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency and different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not 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 Honble 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest paid on CCD amounting to INR 118,54,82,351/- formed part of 'capital work in progress' as on 31 5t March, 2013 which was not claimed as a business expenditure during A Y 2013-] 4 and therefore, the same cannot be added to the total income of the Appellant. 19. During the financial year 2012-2013, the assessee paid interest of Rs.166,32,46,020 to Praxair International Finance (PIxF Ireland) at interest rate of 9% and 12% on CCDs which have been transferred to Praxair Luxembourg 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 directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents in INR. The CCDs were also subsequently repaid in INR. The true copy of the statement setting out the details of payment and demand deposit transaction clearly demonstrate that the remittance is in INR. 8.6.1 The TPO and DRP erred in treating CCDs as ECBs and benchmarked the interest rate against LIBOR rate. The CCDs is a hybrid instrument and cannot be per se treated as ECB / loan. The Hyderabad Bench of the Tribunal in the case of Adama India (P.) Ltd. v. DCIT (supra) had held that CCDs cannot be categorized 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specfic loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of return 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also tobe repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency and different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not 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 rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nate 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. The TPO, pursuant to the Tribunal s order, passed orders accepting the payment of royalty at 4% to be at arm s length. The relevant portion of the TPO s order for assessment year 2009-2010 reads as follows:- 3. In view of above direction of the ITAT, the assessee was asked to submit the details with respect of all comparables vide letter dated 19.06.2017. In response of the same the submission was filed by the assessee on 11.06.2017 which have been considered. As per submission, assessee has stated that out of the total 17 comparable agreements, the related party relationship between licensor and licensee existed in 07 comparable agreements and remaining 10 comparables agreements have unrelated party relationship for which the av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment towards royalty using TNMM as provided in the TP Report and erred in not appreciating the fact that OECD guidelines and the Tribunal rulings have approved of aggregation of closely linked transactions by applying TNMM. 7. The learned AO has erred in considering the Transfer pricing adjustment as INR 51,55,15,606, instead of INR42,95,93,838 as per the rectified order passed under section 92CA read with section 154 of the Act. 8.1 These grounds are infructuous and dismissed accordingly. 9. Next ground Nos. 8 9 in AY in 2014-15 are with regard to payment towards technical service fee to it s A.E. which reads as follows: AY 2014-15: 8. The learned AO/ learned TPO/ Hon'ble DRP erred in determining the arm's length price of payment towards technical service fees to its AE at 1% of net sales arbitrarily and thereby: a. Erred in making an addition of INR 13,36,41,756/- to the total income of the Appellant b. Erred in not appreciating the evidences furnished by the Appellant to justify the payment of technical services fees to its AE with commensurate benefits, c. Failed to appreciate the difference between the services for whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41,07,004 Total 36,31,40,980 17.1 For the 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 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of plant operation manual; Review of initial plant evaluation and final plant evaluation; and Continued engineering report for the first year operation. 17.3 During the transfer pricing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e etc of the industrial gas plants based on the customer requirements. The payment of royalty and technical services fees is made for different deliverables and there is no duplication as held by the 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 tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle that normally long term borrowings are utilized for the purposes of long term investments (assets and investments), whereas short term borrowings are utilized for general corporate borrowing purposes / working capital. 10.8. Without prejudice to the claim of the Appellant that foreign exchange loss is revenue in nature, in the event if it is held that foreign exchange loss is incurred on account of purchase of fixed asset and it is capital is nature, appropriate depreciation on the same should be granted. 10.1 We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that this issue is squarely covered by the earlier decision of Tribunal in assessment year 2013-14 in ITA No.2839/Bang/2017 dated 25.8.2022 wherein held as under:- 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 20122013 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of said liability at the closing rate has to be recognized in the P L a/c for the reporting period. 0. In the present case, there is no dispute that the outstanding liability was in respect of trade receivables and payables and therefore loss would be on revenue account. In such circumstances, we are of the view that the CIT(A) was justified in allowing the claim made by the assessee. We find no grounds to interfere in the order of the CIT(A). Accordingly, appeal by the Revenue is dismissed. 29. We have perused the RBI approval letter where it is clearly stated that the loan is required to be used only for the purpose for which it is approved that is the general corporate purposes. We are of the 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resh investments were made during the year in its subsidiary companies. 11.6. The learned AO has erred in invoking the provisions of Rule 8D of the Rules without giving any,show cause notice to the Appellant as to why the expenditure incurred in relation to exempt income should not be disallowed under section 14A of the Act. 11.7. The learned AO erred in stating that no submissions were filed in this respect by the Appellant, considering that no such opportunity was provided. 11.8. The learned AO/ Hon'ble DRP has erred in not considering the order of the Commissioner of Income-tax (Appeals) in Appellant's own case in AY 2008-09 which directed the learned AO to delete the disallowance under section 14A of the Act on the basis that original investments in the Appellant's case were not geared or intended for earning exempt income such as dividend. Being commercial expedient investments they are to be treated on a different footing from investments made only for earning exempt income. 11.9. The Hon'ble DRP erred in holding that the Appellant has not maintained separate books of account in regard to the investments made that are eligible to earn exempt income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s own case in AY 2008-09 which directed the learned AO to delete the disallowance under section 14A of the Act on the basis that original investments in the Appellant's case were not geared or intended for earning exempt income such as dividend. Being investments made for business reasons, they are to be treated on a different footing from investments made only for earning exempt income. On Appeal by the Department, the Honourable ITAT has dismissed the grounds, in view of the categorical finding of the CIT(A). 8.6. The Honourable DRP erred in holding that the Appellant has not maintained separate books of account in regard to the investments made that are eligible to earn exempt income. The DRP also erred in stating that based the books of accounts maintained by the Appellant it is not possible to ascertain expenditure incurred in earning exempt income without appreciating the fact that it has not incurred any expenditure during the year towards the investments. 11.1. Facts of the case are that the Assessing Officer made a disallowance u/s 14A of the Act of Rs.98,98,250/- and Rs.89,27,000/- for AYs 2014-15 and 2015-16 respectively by applying the formula in Rule 8D(i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L, the investment was made during the financial years 1999-00 to 2003-04 and thereafter no investments were made. Pertinently. the assessee did not earn any exempt income during the year under consideration and also with effect from 01.04.2013, the said entity stood merged into the assessee and therefore, there is no scope for earning any dividend income. Therefore, he stated that in absence of earning any exempt income, no disallowance is warranted. 11.7 The ld AR further stated that as regards the investments made in JPOCL, the same was not made out 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 JPOCL. Therefore. in view of the assessee having obtained the shares in a share swap arrangement, no disallowance is warranted. Reliance in this regard is placed by the ld AR on the decision of the Mumbai Bench of this Tribunal in the case of DCIT v. Trigyn Technologies Ltd. (reported in [2013] 37 taxmann.com 454 (Mumbai - Trib.)). In view of the above, he submitted that no disallowance under Section 14A of the Act is warranted. 11.8 Without prejudice, the ld AR further submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observations of the Supreme Court are 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 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 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having regard to the accounts of the assessee. 28.3 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. Further, the Hon ble Karnataka High Court in the case of 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. 13.1 In view of the above, we are inclined to decide the issue in favour of the assessee. Ordered accordingly. 14. Next ground in ground No.12 in assessment year 2014-15 and ground No.9 in AY 2015-16 are with regard to disallowance u/s 14A of the Act to book profit under clause (f) of explanation 1 to section 115JB of the Act., which are reproduced as under: 2014-15: 12 .Addition of INR 56,98,912 as per clause (f) of Explanation 1 to section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 115JB of the Act for computing book profits without appreciating the fact that - i. The computation provisions of section 14A(2)/(3) of the Act 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 loss account) which is relatable to the exempt income should be added to the book profits. ii. Section 115JB is a complete code by itself and no adjustments other than those which are prescribed in section 115JB of the Act itself can be made to the book profits. 9.2. The learned AO/ Honourable DRP erred in not placing reliance on the decision of Special Bench of the Delhi Tribunal in the case of ACIT Vs. Vireet Investment Pvt. Ltd. [2017] 82 taxmann.com 415. 9.3. The learned AO/ Honourable DRP erred in applying the provisions of section 14A to Chapter XII-B of the Act without having regard to the restriction that the provisions of section 14A of the Act is restricted to computing the total income under Chapter IV of the Act. 9.4. The learned AO/ Honourable DRP erred in not considering the order of the Commissioner of Income-tax (Appeals) in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction of additional evidence dated 21.11.2022. In view of the same, the ld AR submitted that the disallowance ought to be deleted. 16. The Ld. D.R. relied on the order of Ld. CIT(A). 17. We have heard the rival submissions and perused the materials available on record. The assessee herein filed the additional evidence before us along with petition and prayed that these additional evidences are to be admitted in the interest of justice. Accordingly, these additional evidences are admitted for consideration and after admitting the same, we remit the entire issue in dispute to the file of AO for fresh consideration. The assessee has to make available all the additional evidences filed before us to the AO for consideration. After considering the same, the AO has to decide the issue afresh. Accordingly, the issue is set aside to the file of AO for fresh consideration. 18. Next ground in ground No.14 in assessment year 2014-15 and ground No.10 in AY 2015-16 are with regard to non-giving of due credit of tax deducted at source, which are reproduced as under: 2014-15: 14. Short credit of tax deducted at source The learned AO erred in giving credit of tax dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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