9911796707
TMI Blog2022 (12) TMI 534X X X X Extracts X X X X X X X X Extracts X X X X ..... ugned order passed by the learned AO is beyond time limit prescribed in the Act and is therefore bad in law and void-ab-initio. Transfer Pricing 2. The learned AO, learned Transfer Pricing Officer ("learned TPO") and the Hon'ble DRP grossly erred in adjusting the transfer price by INR 271,48,94,872/- with respect to the international transaction rendered by the Appellant under section 92CA of the Income-tax Act, 1961 ("the Act"). 3. The learned AO/ learned TPO/ Hon'ble DRP have erred in not accepting the transfer pricing analysis undertaken by the Appellant in accordance with provisions of the Act read with Income-tax Rules, 1962 ("the Rules"). 4. On facts and in the circumstances of the case and in law, the action of the learned AO of making reference to the learned TPO without giving an opportunity of being heard, is in violation' of the provisions of section 92CA of the Income-tax Act, 1961 and needs to-be quashed. The Appellant submits that the reference made to the TPO is not in accordance with law and hence the Order passed pursuant to the illegal reference is bad in law. 5. The learned TPO erred in law and facts by holding that the payment of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 rejecting the justification of ALP of royalty payment using TNMM as provided in the TP Report. e. Erred in not appreciating the fact that the OECD guidelines and the Tribunal rulings have approved of aggregation of closely linked transactions by applying Transactional Net Margin Method ("TNMM"). f. 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. g. 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 pertaining to payment of royalty. h. Erred in restricting royalty payment of 1% of net sales on ad-hoc basis using Comparable Uncontrolled Price Method ("CUP") despite n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act as not being revenue in nature. 10.2. The learned AO/ Hon'ble DRP erred in not appreciating the fact that the Kelvin loan has been utilized for general corporate purposes which is revenue in nature. 10.3. The learned AO/ Hon'ble DRP erred in concluding that the short term borrowings which, are repaid by Kelvin loan are not utilized for working capital. 10.4. The learned, AO/ Hon'ble DRP failed to appreciate the fact that the foreign exchange gain on the same loan have been offered to tax in earlier year. 10.5. The Hon'ble DRP erred in relying on its own directions for AY 2013-14 without appreciating the arguments of the Appellant. 10.6. Without prejudice to the above, the learned AO himself has indicated that the surplus cash of the Appellant had been utilized for investment in purchase of fixed assets and investments. Hence, even if the loan had been utilized for the purpose of repayment of short term borrowings as alleged by the AO, then such short term borrowings would have been only for working capital purposes, since the investment in assets had been made out of surplus cash as indicated by the learned AO himself. 10.7. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. 11.10. Notwithstanding and without prejudice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of other expenses 13.1. The learned AO erred in disallowing 25% of the expenses under the subhead miscellaneous expenses which is under the broad head miscellaneous expense in the statement of profit and loss amounting to INR 10,02,063 (being 25% of INR 40,08,250) on the basis that Appellant has not provided any ledger extract or proper evidences in this regard. The learned AO erred in not appreciating the fact that the Appellant had provided ledger extract of miscellaneous expenses vide e-mail dated 27 December 2017. 13.2. The learned AO erred in treating miscellaneous expenses amounting to INR 55,25,705 being product purchase expenses as capital in nature and allowed depreciation @ 15% on the same without appreciating that these expenses are revenue in nature. 13.3. The Hon'ble DRP erred in not appreciating the submission made by the Appellant that the Appellant has inadvertently classified the expense of INR 55,25,705 under the sub-head product purchase which is under the broad head miscellaneous expenses 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 assessment years of AY 11-12 to AY 13-14 and erred in not following the principles of Res Judicata 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. 4. The learned TPO/ learned AO/ Hon'ble DRP failed to take cognizance of the fact that the CCDs were repaid in full by the Assessee in the future year and therefore, erred in concluding that the same were to be converted into equity. 5. The learned AO/ learned TPO/ Hon'ble DRP erred in restricting the 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 evide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. The learned AO ought to have observed that applicability of section 14A of the Act is triggered only if there is any expenditure incurred in this regard. 8.2. The learned AO/ Honourable DRP erred in not appreciating that the investments made in JSW Steel Limited of an amount of INR 100,000 and in Jindal Praxair Oxygen Company Private Limited ("JPOCPL") (now known as JSW Industrial Gases Private Limited) of an amount of INR 1,78,31,00,000 are historical in nature and as such no expenditure has been incurred towards the same. 8.3. The learned AO/ Honourable DRP erred in not appreciating the fact that investment in JPOCPL was acquired by way of swap of shares during Financial Year (`FY') 2010-11 and not by way of actual cash outflow. Further, investment in JSW Steel Limited was made in the. previous years, out of the own funds of the Appellant. Additionally, investment in TVH Energy Resources Private Limited of an amount of INR 45,00,000 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 investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions 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 Appellant's own case in AY 2008- 09 which directed the learned AO to delete the disallowance under section 14A of the Act in computation of book profits under section 115JB of the Act on the basis that section 115JB of the Act is a complete code by itself and the importing of such disallowances into the scope of adjustment of book profit is not permissible. 10. Short credit of tax deducted at source The learned AO erred in giving credit of tax deducted at, source of INR 6,27,13,539 instead of INR 6,61,14,300 as claimed by the Appellant in its Return of Income. 11. Penalty proceedings under section 271(1)(c) of the Act The learned AO erred in law and on the facts and circumstance of 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. Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessment years of AY 11-12 to AY 13-14 and erred in not following the principles of Res Judicata 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 nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction by CUP method was held as Nil and adjustment of Rs. 7,68,26,983 was determined u/s 92 CA (3) of Income tax Act, 1961. As grounds No. 1 and 2 are general in nature these do not require adjudication. The relevant grounds of appeal raised by the appellant are "3. That on the facts and in the circumstances of the case, the Learned AO/Learned TPO erred in making adjustment to the transfer price of the Appellant' international transactions with related parties by INR 7,68,26,983 for interest on debentures and considering the same to be nil. 4. That the Learned AO/Learned PO erred in rejection of comparability analysis undertaken in the Transfer Pricing documentation by the Appellant in accordance with the provisions of the Act read with the Income tax Rules, 1962 ((the Rules"). 5. That the Learned AO/Learned 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 classificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 as seen from SBI corporate website varies from 12.25% as on 1.1.2009 to 13.00% as on 10.11.2008. At an average, the same can be taken at 12.6% as against 15% claimed by the appellant. Under such facts, the interest paid of Rs.7,68,26,983/- at @ 15% is certainly not at arm's length and is also evidently in excess of the +/- 5% margin allowable. The AO/TPO is therefore required to rework the ALP taking into account, 12.62% rate of interest as the Arm's Length rate of interest on the borrowing i.e. CCDs and rework the addition made u/s 92CA accordingly. It is held accordingly." 22. As per above para, it is noted that it is noted by CIT (A) that as per the tribunal order of Mumbai Bench rendered in the case of Besix Kier Dabhol, SA vs. DDIT as reported in 131 ITD 299 in which 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax base, several tax jurisdictions enact rules to counter this vulnerability and these rules are termed as 'thin capitalization rules'. 20. It is for this background that many jurisdictions take several legislative anti-abuse measures including limiting deduction on interest when the company is considered to be too highly geared under applicable tax regulations. India has woken up now to neutralize this kind of manoeuvring and the Direct Taxes Code Bill, 2010, does seek to provide a legislative framework for remedial measures to counter erosion of tax base by thin capitalization. Under s. 123(1)(f) of the proposed Direct Taxes Code Bill, 2010 (Bill No. 11 of 2010 as introduced in the Parliament on 30th Aug., 2010) as a part of the general anti-avoidance rule, "any arrangement 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot recharacterize debt into equity (neither for corporate tax, nor for capital duty purposes). In certain circumstances, the Belgian GAAR may have the potential to recharacterize purported debt into equity. In that case, it also belongs to the second set of rules." 22. It is thus only under the Belgian tax laws, which inter alia restrict the interest deductions only to the extent of debt capital ratio of 1.7 in sharp contrast to the debt ratio in the present case which is 1.248, that the mode of borrowings, i.e. via GE or via PE, may have some tax implication even though at somewhat superficial level. That perhaps explains as to why the borrowings are claimed to have been resorted to by the Indian PE and not the Belgian GE directly. If these borrowings were resorted to by the 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to anti-abuse/limitation of benefit may be incorporated in the DTAAs also.' 114. We are afraid that the weighty recommendations of the working group on non-resident taxation are again about what the law ought to be, and a pointer to the Parliament and the executive for incorporating suitable limitation provisions in the treaty itself or by domestic legislation. This per se does not render an attempt by resident of a third party to take advantage of the existing provisions of the DTAC illegal. (Emphasis, by underlining, italicized in print, supplied by us) 25. It is thus clear that merely because a suitable limitation provision in the treaty or the domestic legislation is considered desirable, and attempts are being made to legislate the anti-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 unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basic law, i.e., the IT Act, that will govern the taxation of income. When no such limitations on benefits or anti-abuse provisions are set out in the tax treaty, it cannot be open to the Revenue authorities to apply the anti-abuse provisions based on the Judge made law in India- which is essentially to be treated as a part of the IT Act as it is based on the interpretation of provisions under the IT Act and apply the same. As observed by this Tribunal, in the case of Motorola Inc. vs. Dy. CIT (2005) 96 TTJ (Del)(SB) 1 : (2005) 95 ITD 269 (Del)(SB), a tax treaty is an alternative tax regime. It has to be treated as a complete code in itself, in that sense. There are thus no legally sustainable merits in learned Departmental Representative'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 honestl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdensome, than the taxation and connected requirement to which other similar enterprises of that first-mentioned State are or may be subjected in the same circumstances and under the same conditions". In this view of the matter, it cannot be open to the Revenue authorities to put any limitation on deduction of interest, in respect of funds borrowed by the PE, while computing income in accordance with the provisions of art. 7 of Indo-Belgium tax treaty, when no such limitations are placed on the domestic enterprise. 30. For the reasons set out above, we are of the considered view that the assessee is indeed justified in claiming deduction on account of interest paid on borrowings from its shareholders/joint venture companies. The international 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. Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licy on convertible debentures in which it is stated that fully and mandatorily convertible debentures into equity within a specified time would be reckoned as equity under FDI policy. In view of this RBI Policy, the TPO concluded that these CCDs are equity and not debt and therefore, interest on it is not allowable u/s 36 (1) (iii). This finding of TPO is not by invoking Thin Capitalisation principle and therefore, it has to be decided independently. We find that the decision of TPO is bases on RBI policy of FDI. We all know that RBI policy of FDI is governed by this that what will be future repayment obligation in convertible foreign currency and since, CCDs does not have any repayment obligation, the same was considered by RBI 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned AR relied on the following case laws:- (i) CIT v. Cotton Naturals (I) (P.) Ltd. (2015) 65 taxmann.com 523 (Delhi). (ii) PCIT v. India Debt Management (P.) Ltd. (2019) 106 taxmann.com 55 (Bombay) (iii) Adams India (P.) Ltd. v. DCIT (2017) 78 taxmann.com 75 (Hyderabad-Trib.). 8.4 Therefore, it was submitted that the transaction of payment of interest of CCDs ought to be treated as being at arm's length. 8.5 The learned Departmental Representative supported the findings of the Income Tax Authorities. 8.6 We have heard rival submissions and perused the material on record. The assessee during the financial year 2009-2010, entered into a debenture subscription agreement with its AEs, Praxair International 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y following the Co-ordinate Bench and Hon'ble High Court decisions, we agree with the assessee's contentions that the CCDs cannot be categorised as a loan and LIBOR plus two hundred basis points benchmark cannot be accepted on the facts of the case." 8.6.2 The Hon'ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Pvt. Ltd. (supra) had held that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. The relevant finding of the Hon'ble High Court reads as follows:- "39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Alt. 11 (6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 dispute with reference to the fact that the CCDs were issued in Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to be 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 for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating that the Appellant has not provided any comparable details to demonstrate the arm's length nature of interest payment on CCD and thereby erred in disregarding the independent benchmarking analysis identifying the comparable transactions involving the CCDs which was submitted by the Appellant. 20. The Hon'ble DRP has erred in stating that conversion price has not been fixed upfront either by a fixed method or formula based and thereby erred in concluding that the nature of Appellant's borrowing are closer to ECB. 21. The Hon'ble DRP / learned TPO have erred in not taking cognizance of the fact that a part of the interest 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee during the financial year 2009-2010, entered into a debenture subscription agreement with its AEs, Praxair International 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 Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending 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 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 Voge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 7.1 In view of the above order of the Tribunal, we hold that payment of royalty at 4% on sale is to be treated at Arm's Length as in earlier year. Ordered accordingly. 8. Ground No.6 & 7 in assessment year 2015-16, which reads as follows: AY 2015-16: "6. Without prejudice, the learned AO/ learned TPO/ Hon'ble DRP erred in ignoring the justification of ALP of payment 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 learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestment Co. Ltd. 7,52,349 7 Praxair Surface Technology Inc 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 performs design and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 are rendered by the AEs for which payments were made by the assessee has to be accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 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 technical service. It is ordered accordingly." 9.2 In view of the above order, we allow these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 the material on record. It is a settled law that if the loan borrowed is utilized for revenue purposes, the forex loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the same be allowed. Pursuant to the binding decision of the coordinate bench of the Bangalore Tribunal and based on the facts pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant'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(iii) of the Income-tax Rules, 1962. The DRP rejected the objections of the appellant and affirmed the disallowance. 11.2 At the outset, on identical facts, the Tribunal h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 no such disallowance can be added while computing the book profits under Section 115JB of the Act. Reliance in this regard is placed by him on the decision of the Hon'ble High Court of Karnatak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atisfaction 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing 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 Appellant's own case in AY 2008- 09 which directed the learned AO to delete the disallowance under section 14A of the Act in computation of book profits under section 115JB of the Act on the basis that section 115JB of the Act is a complete code by itself and the importing of such disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce 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 deducted at source of INR 58,175,493 instead of INR 60,847,909 as claimed by the Appellant. 2015-16: 10. Short credit of tax deducted at source The learned AO erred in giving credit of tax deducted at, source of INR 6,27,13,539 instead of INR 6,61,14,300 as claimed by the Appellant in its Return of Income. 18.1 After hearing both ..... X X X X Extracts X X X X X X X X Extracts X X X X
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