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TMI Blog2025 (4) TMI 1256X X X X Extracts X X X X X X X X Extracts X X X X ..... as 'TPO') are bad both in the eye of law and on facts. 2. Erred in making adjustment of Arm's Length Price for Rs. 24,40,926/-towards international transaction of Interest on ECB given to AE's:- 2.1. The Ld. TPO/ AO erred in not following the procedure laid down under the provisions of Section 92C of the Act relating to the 'Computation of Arm's Length Price. 2.2. The Ld. TPO/AO ought to have appreciated the fact that the assessee has received the funds in India from outside India for the expansion and increasing the capacity of manufacturing and acquiring the machinery in the normal course of business. 2.3. The Ld. TPO/AO ought to have appreciated the facts of case that the amount of loan has been received and used in India and same should be compared with the bank interest rates in India and not with the international rate. 2.4. The Ld. TPO/AO ought to have appreciated the fact that the rate of interest paid by assessee to its AE is lesser than the rate of interest that would have been charged by the banks i.e., base rate of SBI under uncontrolled transactions. 2.5. The Ld. TPO/AO ought to have appreciated the facts that the assessee company paid interest rate LIBOR + ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of case that the assessee company has been using the trade mark, know-How, technology and man power of the Hormann KG Verkaufsgessellschaftfor making the highspeed doors and selling in local/ international market as per agreement. 3.6. The Ld.TPO/AO ought to have appreciated the fact that the assessee has provided all the necessary supporting evidence like Agreement and Invoices of payment of royalty and supporting explanation in support of the payment of Royalty paid to licensor company. 3.7. The Ld. TPO ought to have appreciated the fact the assessee company is selling the same high-speed doors in the market at the price of approx. Rs. 2 lakh per door and on the same door approx. Rs. 8,000/- has been paid as royalty to the licensor. 3.8. The Ld. TPO/AO ought to have appreciated the fact that the said issue under consideration was covered in the previous year where Ld. TPO has accepted the interest payment is at arm's length transaction and no adjustment has been proposed. 4. Erred in upholding the addition of Rs. 12,63,972/- towards Interest on receivables: 4.1. The AO/TPO erred in not following the procedure laid down under the provisions of Section 92C of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.10. The AO/TPO ought to have appreciated that the assessee did not charge any interest on advances given to its Non-AE's and AE. 4.11. The AO/TPO ought to have appreciated the fact that no ALP adjustment is required to be made in a case where after reducing the amount of notional interest charged on outstanding receivables from operating profit, the margin of comparable is less than the margin of the assessee. 4.12. The AO/TPO ought to have appreciated the fact that the assessee is not paying any interest on trade payables or advance from customers and it is not justified to charge interest on trade Receivables, where assessee itself not paying interest to other on trade payables 4.13. The AO/TPO ought to have appreciated the fact that allowing of extended credit period to the associated enterprises is closely linked to the determination of sale price, which is in-turn a base to arrive at the margins of the assessee. 4.14. Without appropriating the fact that the outstanding receivables are foreign currency receivable and same has to be benchmarked with the LIBOR rate and not SBI rate. 5. The appellant may add, alter or modify any other point to the Grounds of appeal at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee from its AE for more than 5 years, then the ceiling of interest payment as prescribed by the RBI as LIBOR+500 basis is ALP. The assessee has paid and agreed to pay interest at the same rate of LIBOR+500 basis points and therefore, the same is at arms length and no adjustment is called for or warranted. In support of his contentions, he has relied upon the decision of this Tribunal in the case of DCIT Vs. Devgen Seeds & Crop Technology (P.) Ltd. in ITA No.399/Hyd/2016 dated 24.03.2017. He has also relied upon the judgement of Hon'ble High Court of Karnataka in the case of CIT Vs. GE India Technology Centre (P.) Ltd. Bangalore [2021] 125 Taxmann.com 168. Thus, the learned AR has submitted that even otherwise, the interest paid by the assessee on ECB is at arms length, in pursuance with Safe Harbour Rules provided under Income Tax Rules. The TPO has applied the case law, involving the issue of loan given by the assessee for an AE, which is not applicable in case of ECB loan taken by the assessee from AE. Thus, he has contended that when the transaction of payment of loan on ECB was already accepted by the TPO in the preceding years and there is no change in respect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international loans irrespective of their terms, risk etc." In view of the above going by the RBI guidelines the rate should be below 300 bps. Therefore, the TPO is directed to adopt the Six month average LIBOR plus 250 basis points." 9. Once the tenure of the loan as per the agreement between the assessee and the AE is more than 5 years, then this view of the DRP, considering the tenure of the loan from the effective date of agreement till the assessment year under consideration is highly arbitrary and unjustified. The tenure of the loan as agreed between the parties is clearly manifested from the agreement itself and therefore, there is no reason to alter the tenure of the loan, when there is no payment or foreclosure of the loan during the year under consideration. We further note that for the assessment year 2014-15, the TPO vide order dated 31.10.2017 passed u/s 92CA(3) of the Act has accepted the interest paid on ECB at arms length in para 11 as under : "11. With regard to interest on External Commercial Borrowings the tax payer has paid interest @LIBOR +5% half yearly. As per RBI Master Circular No.12/2013-14 (Updated till June 16, 2014) dated July 01, 2013, the existing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for international loan is LIBOR based. Hence, the DRP rightly directed the assessing officer to adopt the LIBOR rates. We confirm the directions of the DRP." 9.2 Aurobindo Pharma Ltd. Vs. ACIT, [2014] 42 Taxmann.com 556 (Hyd. In this case, the coordinate bench has held as under: 4.3 We have considered the issue and examined the facts. With reference to principle that LIBOR + specific percentage points is to be considered as ALP, there is no dispute as this issue was decided by various coordinate benches of Tribunal in various cases. Few of them are as under: 4.4 In the case of Siva Industries & Holdings Ltd. 46 SOT 112 (Chennai) held that "A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0 per cent optional convertible preferential shares. Thus it is noticed that the funds raised by the assessee company for giving the loan to India Telecom Holdings Ltd., Mauritius, which is its Associated Enterprises and which is the subsidiary company, is out of the funds of the assessee company. It is not borrowed funds. The assessee has given the loan to the Associated Enterprises in US dollars. The assessee is also receiving int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lower than the interest rate of 10 per cent taken as ALP by the TPO, or, for that purpose, rate of interest on any other currency loans." 4.6 In the case of M/s Four Soft Ltd Vs DCIT Circlel( 3), Hyderabad, ITA No. 1495/Hyd/2010 tribunal held that "We have considered the rival submissions and perused the materials available on record. We do not find any merit in the arguments of the learned departmental representative as we find that the ALP is to be determined for the international transaction, that is, on international loan and not for the domestic loan. Hence, the comparable, in respect of foreign currency loan in the international market, is to be LIBOR based which is internationally recognized and adopted. In our considered view, the DRP rightly directed the assessing officer to adopt the LIB OR plus for the purpose of TP adjustment. Our view is fortified by the decision of the Madras Bench in the case of Siva Industries". 4.7. Similar view has been taken in the case of Tata Auto comp Systems Limited vs. ACIT, ITAT Mumbai, ITA NO. 7354/MUM/11(A. Y. 2007-08). 4.8. On the legal principles there is no dispute that LIBOR specific percentage points has to be considered as ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal in this regard. Accordingly, this contention of the assessee is rejected." 9.4. From the above judicial pronouncements, the coordinate bench has adjudicated that in respect of foreign currency loan in the international market, the LIBOR based interest has to be adopted. In the case of Four Soft and Aurobindo (supra), the coordinate bench has only adjudicated that LIBOR based interest alone are to be considered for "ALP adjustment not the domestic PLR. In the case of Dr. Reddy Labs (supra), the coordinate bench has only confirmed the interest rate already accepted by the assessee at 7%, which was considered to be reasonable. Nowhere, it was adjudicated that the bench marking of interest at LIBOR + 200 bps. Moreover, all the interest rates were received by the assessee for making investment in AEs, in the given case, assessee had borrowed the loan and paid the interest. The bench marking has to be done keeping in mind the internal as well as external "CUP". 9.5. After careful analysis of the judicial pronouncements and RBI guidelines, we are of the view that the assessee has borrowed the loan from its AEs in terms of FCD and ECB. For the purpose of "FCD", the bench marking h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the DRP and dismiss the grounds raised by the revenue. 11. Thus, it is apparent from various decisions relied upon by the coordinate bench of this Tribunal that this Tribunal has taken a consistent view on this issue. Accordingly, in the facts and circumstances of the case and by following the earlier decisions of this Tribunal in the case of DCIT Vs. Devgen Seeds & Crop Technology (P) Ltd. (supra), we hold that the interest payment of ECB @ LIBOR+500 basis is at arms length and consequently no adjustment is warranted. Hence, the TP adjustment made and confirmed by the DRP on this account is deleted. 12. Ground No.3 is regarding TP adjustment on account of royalty payment. The AE of the assessee owned and developed engineering and technical know-how and information, experience and expertise in respect of manufacture, marketing and sale of different kinds of high speed doors. This technology and know-how is provided to the assessee against payment of royalty as per the agreement entered into between the parties. For the year under consideration the TPO has determined the ALP of transactions of payment of royalty at Nil, on the ground that the assessee failed to prove that any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 14,34,364/- was paid towards royalty for Technology & know-how and Trademark for the manufacturing to M/s Hormann KG Venkaufsgesellschaft. The taxpayer furnished a copy of Technology & Know-how and Trademark & Name License Agreement basis which it was stated that the amount was calculated at EUR 100 for each high-speed door sold. It was further stated that the licensor company provides all the technical know-how and expertise for manufacturing and marketing of these high-speed doors, therefore, the payment made is within arms' length. However, the taxpayer failed to show any tangible and direct benefit derived by it for such payment. Further, the taxpayer failed to establish that the payment made is commensurate with the benefit that is derived or expected to be derived when parties deal with each other at arm's length under controlled and un-controlled circumstances." 16. Thus the only reason given by the TPO for determining the ALP at Nil is that the assessee failed to substantiate with any documentary evidence, the benefit derived by it in quantifiable terms. The TPO held that the services claimed by the assessee failed the benefit test. It is pertinent to note that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent is not genuine. 6.1 Further, the Tribunal in the case of Cadbury India Ltd. V.ADCIT in ITA No.7408/Mum/2010 dated 13.11.2013 held in paragraph 39 that if the assessee has paid the payments in relation to royalty to its parent AE for use of technical know-how and trademark after getting due approval from RBI and SIA, the disallowance cannot be made. Further, if the amount paid by assessee was lesser than similar payments made by other group entities to parent AE, then, TPO should not make the TP adjustment in respect of the royalty payment to its parent AE. 6.2. It is pertinent to note that the Tribunal, Hyderabad Bench in the case of Air Liquid Engineering India P. Ltd. In ITA Nos.1040 & 1159/Hyd/2011 and 1408/Hyd/2010, vide order dated 13.2.2014 held that in transfer pricing proceedings TPO could not sit in judgment on business and commercial expediency of assessee company so as to conclude that payment of royalty made by assessee to its AE was unreasonable and thus ALP of said payment was to be taken as nil. 6.3. It is to be noted that in the case of DCIT v. Sona Okegawa Precision Forgings Ltd. in ITA No. 5386/Del/2010 dated 16.12.2011, the Tribunal held that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as outstanding receivables from AE at Rs. 1,42,64,000/- and outstanding payables to the AE at Rs. 4,72,66,000/-. The assessee has neither paid any interest on the payables nor received any interest on the outstanding receivables. The Ld.AR thus contended that when the payables are almost 4 times more than the receivables and the assessee is not paying any interest on the payables to the AE, then adjustment made by the TPO on account of trade receivables without considering the trade payables is not justified. He has thus contended that the adjustment on this account can be considered only on the net receivables. He has further submitted that the assessee is purchasing raw materials from the related parties and also selling the finished goods to the related parties and therefore, there is a direct inter connection between the purchase and sale from the AEs and to the AEs. He has relied upon the decision of this Tribunal dated 07.05.2021 in assessee's own case in ITA 1954/Hyd/2018 for the A.Y.2014-15 and submitted that the Tribunal has considered an identical issue and directed the TPO to compute the ALP on notional interest towards receivables only on the net receivables, after cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 6 as under : "6. We have heard the rival submissions and carefully perused the materials on record, and we find merit in the arguments advanced by the Ld. AR. Since, the transactions are cross-border, it would be appropriate to adopt LIBOR rate of interest while computing the notional interest on receivables from the AEs. This Bench of the Tribunal has held so on various earlier occasions with respect to the same issue. Further, it will also be appropriate for netting off the notional interest with respect to the debit and credit transaction with the assessee's AEs because when notional interest is charged on receivables the same should also be charged on payables. Therefore, in the case of the assessee we hereby hold that LIBOR rate of interest shall be adopted while computing the notional interest on receivables and payables for the transaction with AEs. Further, on considering the nature of trade of the assessee, we find it appropriate to fix the grace period of 30 days while computing the notional interest towards the debit and credit transaction with the AEs. It is ordered accordingly." 22. Thus, it is clear that the Tribunal has held that it will be appropriate for nett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est rate comes out to be around 15% p.a. as against the rate of interest paid by the assessee on the ECB of LIBOR+5% half yearly paid by assessee. 2.6. The Ld. TPO ought to appreciate the fact that case laws referred by the TPO are relating to amount of loan or advances given outside India on which Hon'ble court charged interest at international rates. However, in case under consideration the assessee has received and utilized the funds in India and not paid or receivables in India. Hence the international interest rate not applicable. 2.7. The Ld. TPO/AO ought to appreciate the fact that the said issue under consideration has covered in the previous year where Ld. TPO has accepted the interest payment is at arm's length transaction and no adjustment has been proposed. 2.8. The TPO ought to have appreciated the fact that no transfer pricing adjustment can be made on hypothetical and notional basis without there being any material on record justifying the fact that there had been under charging of such interest on real income. 2.9. Erred in directing TPO to adopt the six month average LIBOR plus 250 basis points. 3. Erred in upholding the upward adjustment of Arm's Len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndment in the 2012 Finance Act does not cover outstanding receivables arising out of a assessee's sale transaction as the word 'capital financing' used there is particularly refers to loans or advances during the normal course of business, whereas in Assessee's case, these are outstanding receivables arising out of services rendered but not capital financing. 4.3. The Ld. AO/TPO ought to have appreciated the fact that the outstanding receivables relate to sale of services and not in the nature of any advance/loans and therefore it cannot come under the purview of 'International Transaction' as defined u/s 92B of the Act. 4.4. The Ld.AO/TPO ought to have appreciated the fact that the principal amount of outstanding receivables is at Arm's Length Price and the assessee has adopted TNMM method for determining the ALP of its transactions and the operating margin of the assessee is much higher than its comparables, hence any adjustment with regard to ALP affecting the operating margin would be unjustifiable and against the provisions of Section 92C of the Act. 4.5. The AO/TPO erred in re-characterizing the nature of transaction from 'Receivable' to 'loan' which is not permissible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections of the Disputed Resolution Panel ('DRP') while passing the final assessment order; is a clear violation of provisions of section 144C(10) and (13) of the Income Tax Act, 1961('Act'). 5.2. The Ld. AO ought to have appreciated the fact that the directions issued by the DRP are binding on AO, irrespective of fact whether the same are acceptable or not to the Department. 5.3. The Ld. A.O erred in Disallowing amount of Rs. 6,10,401/- towards Income credited to Profit and Loss account which is exempt. Without appreciating the fact the assessee has shown correctly the total exempt income in the respective Schedule in the return of income filed the Ld. CPC, Bangalore has made addition. 5.4. The Ld. A.O ought to have appreciated the fact that the amount of Rs. 6,10,401/- is an exempt income of deferred government grant which is already mentioned in the respective schedule in Return of Income filed by the assessee and adding the same leads to double taxation. 6. Erred in upheld the addition of relating to variance of Rs. 80,64,589/- towards total amount of disallowance u/s 37: 6.1. The Ld. AO has erred in not following the directions of the Disputed Resolution Panel ('DRP') ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. 8.3. The Ld. A.O erred in considering amount only to the extent of Rs. 53,49,466/- and not the whole amount of Rs. 87,79,789/- which is incorrect and bad in law. 8.4. The Ld. A.O ought to have appreciated the fact that the amount disallowed by the assessee can be seen from point 9 and point 6 of Part - A of other information of the return of Income. 9. Erred in upheld the addition of relating to variance of Rs. 57,600/- towards Amount disallowable under section 40(a)(ia) on account of non-compliance with the provisions of Chapter XVII-B 9.1. The Ld. AO has erred in not following the directions of the Disputed Resolution Panel ('(DRP') while passing the final assessment order; is a clear violation of provisions of section 144C(10) and (13) of the Income Tax Act,1961('Act'). 9.2. The Ld. AO ought to have appreciated the fact that the directions issued by the DRP are binding on AO, irrespective of fact whether the same are acceptable or not to the Department. 9.3. The Ld. A.O erred in adding the variance of Rs. 57,600/- towards Amount disallowable under section 40(a)(ia) on account of noncompliance with the provisions of Chapter XVII-B and the assessee company has itse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tands adjudicated on the same terms / reasoning and the addition made by the TPO/AO on this account is deleted. 27. Ground No.4 is regarding TP adjustment on account of trade receivables for the year under consideration. The assessee has reported trade receivables and payable as under : Particulars Receivable Hormann Middle East FEZ 1,07,44,000 Total 1,07,44,000 Particulars Payable Hormann Beijing Trading Co Ltd 1,13,718 Hormann KG Verkaufsgesellschaft 7,77,11,505 Total 7,78,25,223 28. Thus, it is clear that the trade payable in the year under consideration is 7 times more than the trade receivables from the AEs. This issue is common as raised the for the A.Y.2017-18 and in view of our finding on this issue for A.Y.2017-18, the addition made by the TPO/AO on this account is deleted. 29. Ground No.5 to 10 are regarding various additions / disallowances made by the AO/CPC. The brief details of the same are as under : Particulars Amount in Rs. (ROI) Amount in Rs. (3CD) Amount in Rs. Computed 143(1) Proposed adjustment 1. Income credited to Profit and Loss account which is exempt 6,10,401 6,10,401 6,10,401 2. Variance in disallowance u/s 37 28,85,629 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, once the assessment proceedings were already pending, the assessee was not supposed to challenge the intimation u/s 143(1) separately. Even otherwise, processing of return merges with the assessment proceedings and therefore, once the assessee has objected to the adjustments made by the CPC, the AO ought to have examined and verified the same from the relevant record. It is the duty of the AO to ensure that there should not be any double addition, even on account of adjustment made by the CPC. Therefore, in the facts and circumstances of the case and in the interest of justice, we set aside these non TP issues, where the CPC has made adjustment, to the record of the AO to verify about suo-moto disallowance made by the assessee and determine the correct amount of disallowance if any. As regards, the disallowance made on account of belated payment towards employees contribution, though this issue is decided by the DRP in favour of the assessee, however, the AO has not given effect to the directions of the DRP. Now this issue is covered by the judgement of Hon'ble Supreme Court in the case of Checkmate Services Pvt. Ltd. Vs. CIT [2022] 143 taxmann.com 278 (SC) and therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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