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TMI Blog2023 (6) TMI 915X X X X Extracts X X X X X X X X Extracts X X X X ..... HO - HELD THAT:- DR was unable to controvert the above findings of the Ld. CIT(A) holding that the Reuter/LIBOR rates represented the arithmetical mean of the rates of the interest offered and accepted in transaction between unrelated parties during the day, and therefore the assessee was entitled to benefit of +/-5% in terms of proviso to Section 92C(2) - No reason to interfere with the above order of the Ld. CIT(A). Accordingly, Ground No. 2 of the Revenue stands dismissed. TP Adjustment - arm s length price of the international transaction of Liaison Services rendered to the Head Office and the Overseas Branches - action of the Ld. CIT(A) in rejecting Pioneer Investcorp Ltd as a good comparable - HELD THAT:- As the assessee was providing correspondent banking services to his Head Office and Overseas Branches. These activities consist of marketing Nostro Accounts, Letter of Credit, Cheques for Collection and providing Guarantees. It is noted that the appellant did not bear any risk of loss or deficiency for rendering these services as it was being uniformly compensated for the costs incurred plus mark-up of 8%. CIT(A) however had noted that, Pioneer Investcorp Ltd. was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... everance pay while assessing income of the assessee, no cost on this account could be allocated to the agency business. DR was also unable to controvert the same. We therefore uphold the Ld. CIT(A) s calculation of personnel cost attributable to agency business. Allocation of administrative expenses staff support expenses - As we already upheld the manner of allocation of personnel cost viz., allocation of 75% of salaries of Amit Juneja Tarun Tandon, we see no reason to interfere with their time allocation by the CIT(A) for the purposes of attribution of administrative support costs. Also, having regard to the fact that Mr. Vijay Anand had left the job in the first month of the FY 2001-02 i.e., April 2001 and his severance pay was also disallowed by the AO, we hold that the Ld. CIT(A) had rightly considered his time allocation at NIL. Consequently, the re-working of the allocation of administrative costs and support expenses by the Ld. CIT(A) does not warrant any interference. No infirmity in the order of Ld. CIT(A) determining the arm s length price of the operations of agency business at Rs. 77,39,372/-. Therefore, the Ld. CIT(A) s action of granting relief in relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... draw the same. Accordingly, the Cross Objection is dismissed being barred by limitation. As far as the ground raised by the assessee in relation to addition of interest income through Rule 27 of the ITAT Rules is concerned, it is noted that plea overlaps with Ground No. 1 of the Revenue. Bare reading of Rule 27 manifests that the assessee without having filed any cross appeal or cross objection can support the impugned order on any grounds decided against him. In the present case assessee is noted to have taken this ground before the Ld. CIT(A) and as the assessee had not further challenged the findings on this ground, then as per Rule 27 of the Rules assessee can advance his arguments even though it has not filed cross objection against the finding of the Ld. CIT(A) against it. Our view finds support from the decisions of the Hon ble Allahabad High Court in the case of CIT Vs Jindal Polyster Ltd (82 taxmann.com 302). Accordingly, the plea raised by the assessee under Rule 27 of the ITAT Rules is admitted for adjudication. 5. In view of the above, we now take up the appeal of the Revenue. Ground No. 1 of the revenue and the Ground No. 1 raised by the assessee in Rule 27 of the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act read with section 195 of the Act by both the appellant and the respondents. First of all, a proper meaning has to be ascribed to the expression chargeable under the provisions of this Act. Section 195(1) says that, if any interest is paid by a person to a foreign company, which interest is chargeable under the provisions of this Act tax should be deducted at source. The word chargeable is not to be taken as qualifying only the phrase any other sum only but it qualifies the word interest also. This interpretation is supported by the phrase in parenthesis, namely, not being income chargeable under the head Salaries . Therefore, the meaning of this section is that such interest must be chargeable under the provisions of this Act. To simplify the matter, this interest must be accounted for or credited in the account of some person who is chargeable under the Act. In other words, this remittance of interest must result in an income which is chargeable under the Act. In those circumstances tax may be deducted at source. But where this interest is not so chargeable, no tax is deducted. In this case, by virtue of the above convention, the head office of the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to PE (branch), except in case of banking institution. The relevant extracts of the Protocol reads as under: - (e) No deduction shall be allowed in respect of amounts paid or charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other officers, by way of (i) royalties, fees or other similar payments in return for the use of patents or other rights; (ii) commission for specific services performed or for management; and (iii) interest on moneys lent to the permanent established except in case of a banking institution. (emphasis supplied) 10. We note that the above judgment is squarely applicable in the facts of the case. As held by the Hon ble High Court (supra), the assessee Branch was under no obligation to deduct tax at source u/s 195 of the Act while remitting interest to its Head Office and therefore the Ld. CIT(A) had rightly deleted the disallowance made by the AO u/s 40(a)(i) of the Act. Also, in terms of Article 7 of the DTAA between India and Germany (which is akin to the Article 7 between India Netherlands), the interest income earned by the HO from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tical mean of the rates of the interest offered and accepted in transaction between unrelated parties during the day. Section 92C(2) provides that where more than one price is computed by the appropriate method, taxpayer would be entitled to variation of 5% over the arithmetical mean of such prices determined by the most appropriate method. Reuter/LIBOR rate represent the mean rates of the day as they are computed based on the transaction during the day. I am therefore of the view that the appellant is entitled to variation of 5%, since the proviso to section 92C(2) is applicable to it. In view of this, it is held that the TPO has wrongly refused to allow the benefit of proviso. After applying the proviso no more addition is required to be made. Accordingly, addition of Rs. 3,29,000/- is deleted. 13. Aggrieved, the Revenue is now before us. 14. We have heard both the parties and perused the records. The Ld. DR was unable to controvert the above findings of the Ld. CIT(A) holding that the Reuter/LIBOR rates represented the arithmetical mean of the rates of the interest offered and accepted in transaction between unrelated parties during the day, and therefore the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the TPO, who sent his report of 31.07.2006. Considering the submissions of the assessee, findings report of the TPO, the Ld. CIT(A) only rejected Pioneer Investcorp Ltd as a comparable. The Ld. CIT(A), however, noted that manner computation of profit rates by the TPO was not proper and worked it out at, (a) Centrum Finance Ltd. 8.5% and (b) Integrated Enterprises India Ltd. 19.5%. The Ld. CIT(A) thus held that the appropriate mark-up rate was 15% as opposed to 8% adopted by the assessee. Accordingly, the transfer pricing adjustment worked out to Rs. 9,76,282/- which was confirmed by the Ld. CIT(A) and the remaining addition of Rs. 55,98,853 [65,75,135 9,76,282] was deleted. Aggrieved by this order of the Ld. CIT(A), the Revenue is now in appeal before us. 18. We have heard both the parties and perused the material placed on record. Before us, the Ld. DR appearing on behalf of the Revenue first assailed the action of the Ld. CIT(A) in rejecting Pioneer Investcorp Ltd as a good comparable. In this regard, it is noted from the facts placed before us that, the assesse was providing correspondent banking services to his Head Office and Overseas Branches. These activities co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crease in profit is on account of exclusion of preliminary expenses of Rs. 2,700/- and loss of sale of assets of Rs. 98,151/ The AR has accordingly computed the ratio of PBT to total expenses at 8.5%. On the other hand, the TPO has computed the ratio at 44.38%, Examination of the TPO's working reveals that the TPO has excluded interest and other income of Rs. 47,93,758/- and Rs. 1,47,227/- from the profit and simultaneously has also excluded the interest and financial charges of Rs. 21,643,326/- and preliminary expenses of Rs. 2,700/-. This has resulted in profit of Rs. 2,28,00,591/-. The TPO has taken the total operating cost of Rs. 7,30,14,899/- and has deducted from it the interest and financial charges and preliminary expenses mentioned as above and has computed net cost at Rs. 5,13,68,863/-. Ratio of profit to total operating cost has been computed at 44.38%. The AR has submitted that the Centrum Finance Ltd. is a company engaged in providing primary debt market project finance and debt syndication, etc. It is not correct to exclude the interest income and also to exclude the interest and finance charges. All the expenses are interlinked with the earning of income and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examined the case records. Integrated Enterprises (India) Ltd. has earned income from brokerage, services and partly interest. Expenditure on interest and bank charges is part of the business activity and it cannot be separated. Similarly income from other sources is also interlinked with the business of providing services and therefore cannot be separated. However, profit on share trading and the loss on sale of investment are independent activities and are therefore unconnected with the business activities of providing services. The TPO has accordingly justified in reducing the profit on share trading and adding the loss on sale of investment. With this, the revised operating profit is computed as under: Net profit as computed by AR : Rs. 3,32,53,000/- Add: Loss on sale of investment : Rs. 80,00,000/- Total : Rs. 4,12,53,000/- Less : Profit on share trading : Rs. 16,70,000/- Operating Profit : Rs. 3,95,83,000/- The TPO has computed the operating cost at Rs. 17,00,28,000/-. On th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir agreement or disagreement to the deal/price to Luxembourg branch. Thereafter, the Luxembourg branch independently purchases/sales gold metals with the customer branch. The role of the assessee Branch is restricted to providing agency services to the Luxembourg Branch for which it charges a compensation of 8% markup on the cost incurred. 23. It is noted that although the TPO did not dispute the mark-up of 8% charged by the assessee but objected to the manner of quantification of the cost incurred for rendering the services. According to the assessee, it had incurred direct indirect costs of Rs. 56,77,000/- whereas according to the TPO the total cost attributable to this activity was Rs. 97,62,858/-. Accordingly, after taking mark-up of 8%, the arm s length value was worked out at Rs. 1,05,43,886/- as against the actual consideration of Rs. 60,23,166/-, which led to adjustment of Rs. 45,20,770/-. Aggrieved by the order of the TPO, the assessee carried the matter in appeal who partly allowed the claim of the assessee. 24. The details of cost identified and attributed by the assessee and the TPO are noted to be as follows: Sl No. Expense He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71,66,086 27. After taking into mark-up of 8%, the arm s length value was re-worked by Ld. CIT(A) at Rs. 77,39,372/- as opposed to Rs. 1,05,43,886/- computed by TPO. Accordingly, the Ld. CIT(A) granted partial relief to the assessee to the extent of Rs. 28,04,513/-. Aggrieved by the above re-allocation of expenses undertaken by the Ld. CIT(A), the Revenue is now in appeal before us. 28. Heard both the parties. Having regard to the facts stated above, the limited issue in dispute before us, is the re-working re-allocation of personnel cost, administrative cost and support cost by the Ld. CIT(A). In respect of allocation of personnel cost, it is noted that the assessee had explained that two employees, Shri Amit Juneja Shri Tarun Tandon were employed for this agency bullion division. However, as this business had significantly reduced, these two employees were also utilized for treasury operations. The assessee had accordingly allocated 50% of their salaries towards personnel cost for this agency business. The TPO, on the other hand, had allocated the entire 100% of their salaries. Additionally, the TPO noted, that the assessee had paid severance pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 10,81,447/- (7,01,100/- X 1.5425). 5.7 Support Cost . The AR has further mentioned that the support staff cost, namely, EDP, HRD, legal compliances and service department of Rs. 1,54,89,780/- has also been partly allocated by the TPO. The AR has submitted that while computing the amount of compensation receivable from the Luxembourg Branch, it is only direct cost and the cost which is indirectly related to the agent business are to be taken into account. The AR has submitted that the expenditure on EDP, HRD, legal compliance and service department of Rs. 1,54,89,780/- is the expenditure of the Indian branch, but it is not connected with the bullion business. The bullion business was being taking care of by ZFI division. Expenses of this division were being a separately counted. Expenditure on EDP, HRD, legal compliance and service department are not the cost of the agency business for precious metal. That business was very small and was being taken care of by two employees alongwith their other duties. The AR has accordingly submitted that the allocation of support cost of Rs. 7,98,773/- is not justified. 5.8 The appellant had mentioned before the TPO that the support c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R Vijay Anand 100% - Hemant Ratanjankar 4.25% 4.25% Multiple 3.0425 1.5425 32. As we have already upheld the manner of allocation of personnel cost viz., allocation of 75% of salaries of Amit Juneja Tarun Tandon, we see no reason to interfere with their time allocation by the Ld. CIT(A) for the purposes of attribution of administrative support costs. Also, having regard to the fact that Mr. Vijay Anand had left the job in the first month of the F Y 2001-02 i.e., April 2001 and his severance pay was also disallowed by the AO, we hold that the Ld. CIT(A) had rightly considered his time allocation at NIL. Consequently, the re-working of the allocation of administrative costs and support expenses to Rs. 10,81,447/- and Rs. 4,04,966/- by the Ld. CIT(A) does not warrant any interference. 33. In view of the above, accordingly, we do no find any infirmity in the order of Ld. CIT(A) determining the arm s length price of the operations of agency business at Rs. 77,39,372/-. Therefore, the Ld. CIT(A) s action of gr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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