9911796707
TMI Blog2023 (3) TMI 1298X X X X Extracts X X X X X X X X Extracts X X X X ..... g to Rs. 5,57,22,444; (iii) passing the orders without demonstrating that the appellant had motive of tax evasion; (iv) not appreciating that no addition can be made under Chapter X as Transfer pricing adjustment under Chapter X is not included in the definition of 'income' u/s 2(24) or under Chapter IV of the IT Act, 1961; Grounds on Transfer Pricing adjustment in respect of Interest received from Sasken, Inc, USA 3.1 The learned TPO, AO and DRP erred in (i) determining and making adjustment under section 92CA amounting to Rs. 1,96,54,734 in respect of interest earned on loan given to Sasken Inc; (ii) obtaining information from M/s CRISIL Ltd under section 133(6) and using the same against the assessee in making the TP adjustment in the order passed under section 92CA without allowing the Assessee to cross examine the entity / authorized signatory providing the said information; (iii) adopting flawed methodology in the process of computing arm's length price of interest received, determining ALP without considering any comparables; (iv) determining the arm's length interest rate @ 14.47% stating the same as yield from BB grade corporate bond (investment gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t quantifying the financial benefit, if any, derived by the AE's by use of trademark 'SASKEN'; 5.8 Determining, without basis, ALP of royalty 2% of the external turnover of the AEs without appreciating the facts and circumstances of the case; and 5.9 computing the ALP without adopting any method or uncontrolled comparable data. 5.10 Making the rate of adjustment which is arbitrary, without any basis and computing the royalty rate excessively. 5.2 On facts and circumstances of the case and law applicable, the impugned TP adjustment of Rs. 1,90,75,332 should be deleted fully. Grounds on Transfer Pricing adjustment in respect of Software Development Services 6.1 The lower income tax authorities have erred in: a. Rejecting Comparable Uncontrolled Price Method adopted by the Appellant as the most appropriate method; b. Rejecting the transfer pricing analysis undertaken by the Appellant under the CUP Method without giving any cogent reasons and on unjustifiable grounds; c. Rejecting the CUP Method without appreciating that the Assessee had rendered/received similar services to/from unrelated parties outside India, on terms and conditions similar to that of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n: i. Calculating deduction section 10AA on combined basis for all the eligible units rather than each undertaking wise. ii. Excluding Rs. 13,08,04,000 being communication expenses, travelling & conveyance and insurance from export turnover of the eligible units without appreciating that the Assessee had already reduced the communication expense related to the eligible unit attributable to delivery of software outside India and expenses incurred in foreign currency from export turnover. iii. Not appreciating that his action of reducing the above has resulted double reduction. iv. Excluding insurance charges of Rs. 1,23,10,000/- and communication charges of Rs. 2,72,97,000/- from export turnover of SEZ units without appreciating the fact that the aforesaid expenditure were not incurred for the purpose of export / delivery of computer software outside India. v. Excluding communication expenses of Rs. 2,72,97,000 from export turnover of eligible units without appreciating that the Assessee had already reduced the communication expense related to the eligible unit attributable to delivery of software outside India. vi. Not appreciating that the insurance expenses of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 08.08.2013 was issued. A revised return of income was filed on 26.3.2014 declaring total income of Rs. 43,57,97,090/- and long term capital loss of Rs. 87,49,969/-. Various details called for during the assessment were filed by the assessee from time to time. 2.2 A reference under section 92CA of the Act was made to the TPO after getting the approval of the Commissioner of Incometax, Bangalore - III. This was made for examining the reported Arm's Length Price (ALP) in respect of the international transactions entered into by the assessee. The Ld.TPO called for various details and the same were filed from time to time. The TPO passed the order under section 92CA(3) on 24.1.2016. Since there were mistakes apparent on record in the TP Order, the assessee filed an application for rectification of the order u/s 154 on 05.02.2016. The Ld.TPO passed the order under section 154 on 22.02.2016. 2.3 The TPO made the following adjustments in the TP order read with the rectification order: Particulars Amount (Rs.) Interest on loan to subsidiaries 1,96,54,734 Corporate Guarantee 2,75,238 Royalty from AEs for using trademark 1,90,75,332 Shortfall in receipts from AEs for software d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erquartile range of 3.02% to 3.80% with a median for 3.16% for the facility arrangement. The assessee thus concluded that the interest rate of 3.24% charged by the assessee was at arm's length. 4.2 The Ld.TPO rejected the analysis carried by assessee. In the TPO order, the annual average yield for BB rated bond for 5 year or more terms was taken at 14.47% by increasing the rate of BBB rated bond at 12.06% by 20% (120% of 12.06% = 14.47%). The above rates were taken from CRISIL rating for the FY 2011-12. The rate of 14.47% was applied by the Ld.TPO on the loan receivable amounting to Rs. 16,92,15,000/- and ALP of interest received was computed at Rs. 2,44,85,411/-. After reducing the interest already received amounting to Rs. 48,30,677/-, the ALP adjustment was proposed at Rs. 1,96,54,734/- 4.3 The DRP followed its own directions given for AY 2011-12 and held that the approach of the Ld.TPO does not call for any interference. 5. Before us, the Ld.AR submitted that the Coordinate Bench of this Tribunal in assessee's own case for the AY 2011-12 in IT(TP)A Nos. 550 & 627/Bang/2016 dated 16.11.2018 remanded the issue of TP addition on interest received from AE to the TPO. The TPO was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y cannot be applied. The Hon'ble High Court further held that financial position and credit rating of subsidiary will be broadly same as that of holding company. It further ruled that domestic prime rate lending or yield rate on corporate bonds in India have no applicability and LABOR rate should be taken as bench mark for international transactions. The Hon'ble Bombay High Court in the case of CIT vs. Tata Auto Comp. System Ltd. (374 ITR 316) rules that ALP in case of loans advanced to AE would be determined on the basis of rate of interest being charged in the country where loan is received and consumed. In the light of this position of law, we are required to adjudicate the issue of rate of interest to be charged by the assessee from its AE. In the present case, we find from the perusal of TP study report filed before us at pages 179 to 182, we find that assessee as well as TPO had not undertaken the exercise of analyzing the transaction. No material was brought on record indicating the terms of loan i.e. tenure of loan, security offered, terms of repayment of loan, currency in which loan is to be repaid etc. and RBI policy governing advancing of loans by Indian holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d TPO issued letter dated 5.11.2015 asking the assessee to submit its analysis of arms length margin of corporate guarantee given on behalf of its AE - Sasken OY. The assessee filed the written submissions on 23.12.2015 and submitted that it had given a Corporate Guarantee (CG) to Nordea Bank on behalf of Sasken Communication Technologies Oy ("Sasken Finland" or 'AE'), its wholly owned subsidiary in Finland amounting to Euro 17 Million, equivalent to INR 98.43Cr during the financial year (FY) 2006-07 as a part of the shareholder activity. During the FY 2011-12, Sasken Finland repaid the outstanding loan of Euro 1,625,000. Copy of letter issued by Nordea Bank Finland Plc, confirming that the loan has been repaid in full and therefore it has ended the guarantee given by the Company w.e.f. 9.9.2011 was submitted to Ld.TPO during the hearing. It was submitted that since the loan was repaid during the year, the CG also ceased to exist. The Ld.TPO however while passing the transfer pricing order u/s. 92CA, held that, corporate guarantee if is charged as a risk premium by the corporate guarantor being the assessee. The Ld.TPO also held that the credit rating of the subsidiary is equivalen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of ACIT v Tejas Networks Ltd. [2022] 139 Taxmann.com 430 (Bangalore Trib.), wherein it was directed to AO/TPO to make TP adjustments in respect of corporate guarantee at 0.50% for the assessment years under consideration. With respect to the balance on which the TP adjustment needs to be made, we see merit in the contention of the ld AR that the TPO himself has applied the rate on the closing balance of the outstanding guarantee in Appellant's own case for AY 2012-13 and we therefore direct the AO to apply the rate @ 0.50% on the closing balance the of the corporate guarantee as of 31.03.2011 for the purpose of TP adjustment. It is ordered accordingly." 6.6 The issue as to whether LIBOR is to be taken as the basis of interest benchmarking for foreign currency denominated loans or whether Indian PLR will be relevant for the same, is no longer res integra. 6.7 In the case of CIT Vs Tata Autocomp Systems Ltd., reported in (2015) 56 taxmann.com 206 , Hon'ble Court observed as follows: "7. We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. v. Dy. CIT [IT Appeal No. 673 (Mum.) of 2006] and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom international transaction as per section 92B of the Act. The corporate guarantee provided by the assessee company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. In our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the Bank or financial institution." 6.2 It has also been submitted by the assessee that the transaction arising on account of ownership linkage and which derives large from the reputation of the group necessarily implies that there can be no guarantee acceptable to the banker which can be provided by the independent third party. The guarantee provided by financial institutions are characteristically different compared to the guarantee provided by the parent. The advantages arising to the parent itself from providing guarantee in lieu of equity support or financial support is also not capable of being evalu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the parent company and it does not involve any cost or risk to the shareholders. It was submitted that since the corporate guarantee was given keeping in view paramount business interest of the parent company it has to be allowed as business expenditure. It is the further submissions of the learned AR that the retrospective amendment effected to section 92B of the Act, by Finance Act, 2 012 by insertion of Explanation (i)(c) to section 92B also has not enlarged the scope of the 'international trans action' to include the corporate guarantee in the nature provided by the assessee. The learned AR further contended that the issue is covered in favour of the assessee b y virtue of the order passed by the Tribunal in assessee's own case for AY 2006-07 (supra). 25. 1 The learned DR, on the other hand, submitted that by virtue of the amendment made to section 92B of the Act with retrospective effect from 01/04/2002, the corporate guarantee provided by the assessee is to be considered as an international transaction, and, therefore, the Assessing Officer was justified in determining arm 's length price of such transaction. 25. 2 Having considered the submissions of the parties, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rate of 3.75 %, which is applicable to bank guarantee issued by the bank. As the corporate guarantee is not in the nature of bank guarantee, the rate applicable to bank guarantee provided by the bank cannot be applied to corporate guarantee which is provided by a group company. In case of Glenmark Pharmaceuticals V s. ACIT in ITA No. 5031/Mum / 2012, dated 13/11/2013, the Mumbai Bench of the Tribunal after analysing the facts in that case had held that 0.53 % corporate guarantee rate in that case was appropriate. The ITAT Hyderabad Bench in case of Infotech Enterprises Ltd. in ITA No.115/Hyd/ 2011 and in ITA No. 2184/Hyd/ 2011, dated 16/01/2014 while considering identical issue of determining ALP of corporate guarantee provided by the assessee to its AE followed the ratio laid down in case of Glenmark Pharmaceuticals Vs. ACIT (supra) and remitted the issue back to the TPO to decide the quantum of corporate guarantee rate by following the method adopted in case of Glenmark Pharmaceuticals (supra). 26. Since the issue in the present case is identical to the issue decided by the ITAT, Hyderabad Bench in case of Infotech Enterprises (supra), following the same, we also remit this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the Tribunal vide its order dated 12-06-2013 passed in ITA No. 3664 & 2359/Mum/2010 has already decided the same vide para No. 9 & 10 which read as under:- "9. We have considered the rival submissions and also perused the relevant material available on record. For the guarantee given to the bank against the financial assistance given to its AEs, no commission was charged by the assessee company on the ground that the said AEs were not benefited by the guarantee so given and it was the assessee who benefited as a result of commercial benefits secured for future. In support of this stand of the assessee, the ld. counsel for the assessee has contended that business strategy should be taken into consideration while making any TP adjustments in respect of such transactions and has relied on the OECD Transfer Pricing Guidelines issued in 2010. As stated in para 1.59 of the said guidelines, the business strategies should also be examined in determining comparability for transfer pricing purposes and certain illustrations of such business strategies are also given therein. As stated in para 1.60 of the said guidelines which has been relied upon by the ld. Counsel for the assessee, bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of giving guarantee and such transactions have to be considered and examined independently in order to determine the arm's length price. 10. As regards the rate of guarantee commission, it is noted that the arm's length price of guarantee commission was determined by the TPO by applying CUP method and the arithmetic mean of 1.5% of the guarantee commission charged by the HSBC Bank in the range of 0.15 to 3% was taken as arm's length price. The ld. CIT(A) upheld the CUP method applied by the TPO but adopted the rate of 0.25% of guarantee fee as arm's length price relying on the decision of French Court in the case of Societe Carrefour. The ld. D.R., at the time of hearing before us has relied on the decision of the coordinate Bench of this Tribunal in the case of M/s Everest Kanto Cylinder Ltd. (supra) wherein while accepting the CUP method as the most appropriate method for benchmarking the guarantee fee, the Tribunal accepted 0.5% guarantee fee/commission to be at arm's length after taking into consideration the rates of guarantee commission charged by various banks including the guarantee commission charged by the HSBC Bank in the range of 0.15% to 3%. Sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outside India. In response, the assessee made submissions on 23.12.2015, in which the Assessee explained that the AEs (subsidiaries) which are a part of Sasken group, though using the name 'SASKEN', were not financially benefitted from such use. Therefore, the Assessee contended that question of AE's paying royalty does not arise. 7.2 It is submitted by the Ld.AR that the Ld.TPO opined the computation of royalty for use of the name "Sasken" as, it is a recognised brand. For this, the Ld.TPO relied on the decision of Hon'ble Delhi High Court in case of Sasken Communication Technologies Ltd. vs. Mr. Anupam Aggarwal & Ors. C.S(OS) No. 1119/2007 and L.A. No. 6970/2007, wherein it was held that, the third party had infringed the assessee's brand name by using the name 'SASKEN'. The Ld.TPO concluded that, the subsidiaries (AEs) of the Assessee in different countries have piggy backed on the trademark 'SASKEN' and achieved sales. Accordingly, the TPO has made an addition of Rs. 1,90,75,332/- towards royalty computed at 2% on the external total turnover of the AEs. On objection being filed before the DRP, the view taken by the Ld.TPO was upheld. 7.3 Before us, the Ld.AR submitted that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oodwill on account of infringement of the assessee's rights was directed to be payable by one Mr. Anupama Agarwal. We note that the respondent before Hon'ble Delhi High Court was owning a company independently without having any connection with that of assessee based on which, Hon'ble Delhi High Court held that "Sasken" is an inalienable brand of assessee and cannot be used by Anupam Agarwal's company. The Ld. TPO went on a footing that assessee claimed damages and file suit on multiple issues from third-party for using the same brand name but allowed its own sister concern to use the brand name without paying a penny. He thus computed 2% of the turnover of AEs being royalty payable to the assessee. 4.19 We note that apart from the observations of Hon'ble Delhi High Court in case of a third-party, Ld.TPO do not have any other evidence material on record to establish that assessee transferred any of the assets like technical knowhow and R&D owned by it, to the subsidiaries, based on which royalty could be attributed. On one hand the Ld. TPO observes that the subsidiaries are full-fledged entrepreneurs whereas on the other hand he proposes an adjustment for use of trade name and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh that there is transfer of asset or technology by assessee. Provisions of Section 9 reads as under: ........... 4.23 Explanation 4 and 5 inserted by the Finance Act, 2012 w.e.f. 1.6.1976 were introduced to the definition of royalty u/s.9(1)(vi) of the Act. ........... 4.24 Therefore, as per the aforesaid provisions, consideration for transfer of rights (including granting of a licence) in respect of a trade mark or similar property or for use of a trademark or transfer of rights (including granting of a licence) in respect of any copyright, literary, artistic or scientific work, falls under the definition of 'Royalty' under the IT Act. 4.25 The revenue has not been able to produce any agreement to establish the payment of royalty by the associated enterprises to assessee. It is also not been established that by the use of brand "Sasken" the subsidiary associated enterprises were able to get premium price which could be ultimately translate into profits to pay royalty. 4.26 Admittedly, in the present facts of the case, Appellant has registered the trademark at all the jurisdiction where the subsidiaries are located. It is also not brought on record that Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances." 4.29 The Ld.TPO shall carry out necessary verification based on the which it must first be determined whether there is any Royalty that could be attributed. In the event Royalty is to be attributed, proper benchmarking needs to carried out the accordance with section 92CA of the Act, by selecting an authorised method and comparables. We place reliance on para 6.83-6.85 of BEPS action plan reproduced herein above. Needless to say that proper opportunity of being heard must be granted to Appellant. Accordingly these grounds raised by Appellant stands allowed for statistical purposes. 7.6 There is no factual distinguishing features submitted by the Ld.DR. We accordingly direct the Ld.AO/TPO to carry out necessary verification based on the directions given by this Tribunal for A.Y. 2013-14 reproduced hereinabove. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 8. Ground no. 6 filed by assessee is in respect of adjustment proposed on software development segment. 8.1 It is submitted that most of its customers are OEM's in the telecom space. The Assessee's operations support its customers in their backend operations. It is subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of laptops and hence considered as at arm's length Sasken Finland & Sasken Inc Cross Charge of SAP License Cost Cost Allocated on basis of number of licenses used. Hence considered as at arm's length. Sasken Finland & Sasken Inc Reimbursement of expenses (Net) Paid/Payable Reimbursement of actual expenses and hence considered as at arm's length Sasken Network Solutions Inc Reimbursement of expenses (Net) Received/ Receivable Reimbursement of actual expenses and hence considered as at arm's length 8.5 For these international transactions, the Assessee performed the transfer pricing analysis by adopting the CUP Method. Towards this, the Assessee adopted the billing rates charged to unrelated parties as the comparable uncontrolled rate for the transaction with AE's. Such Comparable Uncontrolled rate was taken as the starting point in the comparability study. Similarly for services received, the Assessee adopted the rate charged by AE to third parties as basis of comparison. 8.6 The Ld.TPO rejected the TP analysis of the assessee in respect of the software services rendered and received by assessee which was done based on internal comparables. The Ld.TPO instead car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing effect to the directions of the DRP, the margin of assessee would be +5% range of the margin computed by the Ld.TPO post the working capital adjustment. He also submitted that, the Ld.TPO considered the entity level margin instead of segmental margins. It is the submissions of the Ld.AR that the segmental margins details are submitted before the authorities below which forms part of the paper book at page 852 which has been accepted by the Ld.TPO himself. It is submitted that the Ld.TPO while passing 92CA order for A.Y. 2013-14 had considered the segmental results for computing the margins of the assessee. On the contrary, the Ld.DR relied on the orders passed by the authorities below. 8.9 We note that in the order giving effect to the DRP direction, the Ld.TPO computed the assessee's margin at 17.7% and the comparables margin was computed at 20.5%. Admittedly this is within +5% as per proviso to section 92CA(2). 8.10 Further we note that the Ld.TPO has not considered the entity level margins even though the segmental details were provided to him. The said details are filed vide letter dated 04/06/2018 which is placed at page 852 of the paper book as per which the computation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment u/s. 14A r.w.Rule 8D(2)(iii). The Ld.AR submitted that the Ld.AO included the investment made in shares of Indian subsidiaries, joint ventures, foreign subsidiaries and mutual funds which did not yield any dividend income during the year. The DRP further confirmed the order of the Ld.AO. 10.2 Before us, the Ld.AR submitted that the assessment order does not contain any satisfaction as to why the disallowance made by assessee voluntarily is not correct. He relied on the decision of Hon'ble Supreme Court in case of Maxopp Investment Ltd. vs. CIT reported in [2018] 91 taxmann.com 154. He also relied on Coordinate Bench of this Tribunal in case of Infosys BPM Ltd. vs. DCIT in ITA Nos. 492 & 493/Bang/2018 for A.Y. 2013-14 by order dated 23/08/2021. 10.3 The Ld.AR without prejudice submitted that if at all any disallowance is to be made over and above the voluntary disallowance made by assessee, only such investment which have yielded exempt income should be considered for computing the average value of investment under Rule 8D(2)(iii). On the contrary, the Ld.DR submitted that the moment assessing officer goes into the accounts of the assessee, there is a verification that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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