Income Tax Appellate Tribunal - Hyderabad
Lanco Infratech Ltd., Hyderabad, ... vs Acit, Circle-16(1), Hyderabad, ... on 30 November, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No. 221/Hyd/2017
Assessment Year: 2012-13
Lanco Infratech Ltd., vs. Asst. Commissioner of
Hyderabad. Income-tax, Circle - 16(1),
Hyderabad.
PAN - AAACL 3449H
(Appellant) (Respondent)
Assessee by : Shri P. Murali Mohan Rao
Revenue by : Smt. Pallavi Agarwa
Date of hearing 17-10-2017
Date of pronouncement -11-2017
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
2. This appeal of the assessee is directed against the order passed u/s 143(3) r.w.s. 92CA and 144C(13) of the Income Tax Act, 1961 (in short 'Act') dated 15/12/2016 relating to AY 2012-13.
3. Brief facts of the case are, assessee company, filed its original return of income for the AY 2012-13 on 26/11/2012 admitting total income at Rs. 26,16,59,530 and book profit u/s 115JB at Rs. 106,26,37,956/-. Thereafter, the assessee company filed revised return of income on 04/11/2013 admitting total income at Rs. 25,73,74,270/- and book profit u/s 115JB at Rs. 105,93,83,227/-. In the scrutiny proceedings, the transactions were referred to the Transfer Pricing Officer (TPO) u/s 92CA(3) of the Act for computation of Arms Length Price, who has proposed adjustments in respect of 2 ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
assessee's international transactions for the year under consideration, as under:
Transaction Adjustment (Rs.)
Interest received on loans 1,29,54,309
Corporate Guarantee 90,03,54,380
Interest on receivables 131,12,22,228
Work Contract Expenses 195,72,44,551
Total 418,17,75,468
2.1 Assesse had filed objections against the TP order before the AO, however, AO finalized the draft order by incorporating the adjustments proposed by TPO. Assessee preferred objections before the DRP and the DRP vide their order dated 23/11/2016 upheld the ALP determined by the TPOI on all the transfer pricing issues.
3. Aggrieved, the assessee is in appeal before us.
TRANSFER PRICING ISSUES
4. Ground No. 7a to 7d is relating to transfer pricing adjustment of Rs. 1,29,54,309/-.
4.1 Before the TPO, the assessee stated that CUP was considered as the most appropriate method for the purpose of determining the arm's length considering the nature of transaction of loans provided to Lanco International Pte Ltd., Singapore, because, the Prime Lending Rate (PLR) of the Singapore commercial bank is a good external comparable for the loans advanced to its AE incorporated and functioning in Singapore. It was further submitted that even as per the RBI guidelines and recommendations, the Singapore PLR is appropriately used as the benchmark rate in this transaction. Further, it was submitted that the assessee had charged interest @ LIBOR + 5.25% from its AE Lanco Resources International Pte Ltd. It was submitted that in the case of interest received on loan provided, Singapore, CUP was considered as the most appropriate method for the purposes of determining the arm's length considering nature of 3 ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
the international transaction and the average Singapore PLR reflected in its analysis is 5.38% whereas Lanco Infratech Ltd. (LITL) is receiving a greater interest rate from its AE, thus, considered to accept it as the ALP of this transaction.
4.2 Rejecting the submissions of the assessee, the TPO asked the assessee as to why interest @ 14.75 should not be charged on the advances paid. There was no reply from the assessee. The TPO, thus, held that under arm's length situation how much interest could be earned is to be seen and as a hypothetical CUP would be where the Indain entity invests in bank deposits, stocks, mutual funds or real estate, the corresponding return would still be the effective Indian interest rate. Thus, the TPO adopted 14.75% PLR which was prevailed during FY 2011-12 in India, as the arm's length interest. Accordingly, he computed the interest as under:
Average loan Rs. 14,62,89,580
Interest @ 14.75% on Rs.146289580 Rs. 2,15,77,713
Less: Interest paid Rs. 86,23,404
Shortfall being the adjustment Rs. 1,29,54,309
===============
4.3 Against the action of the TPO, the assessee raised objections before the DRP that the TPO erred in disregarding the benchmarking analysis conducted by the assessee to substantiate the arm's length nature of loan transactions and in adopting an arbitrary approach to determine the arm's length interest rates. Further, the assessee objected that the TPO erred by considering domestic bank rate in order to determine arm's length interest rate for a foreign currency denominated loans and the approach of the TPO is not in accordance with the established commercial principles.
4.4 The DRP upheld the action of the TPO by observing that in the absence of justification for not responding to the query of the TPO and also not providing the relevant information and facts, we are 4 ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
constrained to uphold the ALP determined on the said transaction by adopting interest rate at 14.75%.
4.5 Before us, the ld. AR of the assessee submitted that assessee has given loan outside India in foreign currency i.e. in Singapore and PLR of Singapore should be charged as CUP instead of Indian market rate. He relied on the following decisions:
1. Lanco Infratech Ltd. Vs. DCIT, AY 2011-12, ITA No. 450/Hyd/2016 (Assessee's own case)
2. CIT Vs. Cotton Naturals India Pvt. Ltd., [2015] 276 CTR 445 (Del.)
3. EKL Appliances, Delhi High court in ITA No. 1068/2011.
4.6 Ld. DR, on the other hand, relied on the order of DRP. 4.7 Considered the rival submissions and perused the material facts on record. In assessee's own case for AY 2011-012 (supra), the coordinate bench of this Tribunal has held as under:
"5. We have considered the rival contentions and perused the details available on record. There is no dispute that assessee has advanced amounts in foreign currency.
Therefore, following principles laid down by the Hon'ble Bombay High Court in the case of CIT Vs. Tata Autocomp Systems Ltd. In ITA No.1320 of 2012, the claim of assessee to adopt Singapore PLR as stated before the TPO and DRP is reasonable and deserves to be accepted. Further, it is also an established law that TPO/DRP cannot adopt the interest rate prevailing in Indian rupees for Indian loans to compare it for the loans advanced in foreign currency. Either LIBOR or EURIBOR or in this case, Singapore PLR are to be considered. Further, the said issue has been specifically considered by the Hon'ble Delhi High Court in the case of Cotton Naturals India Pvt. Ltd with specific reference to the case of Logix Microsystem Private Limited, relied on by DRP in their order. The finding of Hon'ble High Court with respect to the same is summarised as below • Transfer pricing determination is not primarily undertaken to re-write the character and nature of the transaction;
• Chapter X and Transfer Pricing rules do not permit the Revenue authorities to step into the shoes of the assessee and decide whether or not a transaction should have been entered. It is for the assessed to take commercial decisions and decide how to conduct and carryon its business.
• Actual business transactions that are legitimate cannot be restructured.
5ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
• The transaction of lending of money by the respondent assessee to the subsidiary, should not be seen in isolation, but also for the purpose of maximizing returns, propelling growth and expanding market presence. • This ratio and rationale, when applied to the facts of the present case, would mean that the transfer pricing determination would decide what an independent distributor and marketer, on the same contractual terms and having the same relationship, would have earned/paid as interest on the loan in question. What an independent party would have paid under the same or identical circumstances would be the arm's length price or rate of interest. What the assessed would have earned in case he would have entered into or gone ahead with a different transaction, say with a party in India, is not the criteria. What is permitted and made subject matter of the arm's length determination is the question of rate of interest and not re-classification or substitution of the transaction.
5.1. Respectfully following the principles laid down by the Co-ordinate Benches as relied on by the Ld. Counsel and also by various judicial pronouncements of the High Courts relied upon, we are of the opinion that there is no need for any adjustment on this account, as assessee has already received 6.37% interest which is more than the Singapore prime lending rate of 5.38%. In view of that, we delete the addition made by the AO/TPO/ DRP. Assessee's grounds on this are allowed."
As the issue under consideration is materially identical to that of AY 2011-12, following the decision of the coordinate bench in that year, we delete the addition made on this count. At the same time, the DRP has confirmed the addition simply because the assessee has not submitted information before AO. It was represented before DRP, DRP has to find out the real transaction & appropriate ALP adjustment based on the information available at their disposal. In case it is not, then, they can call for remand report from TPO. It is not proper to confirm the ALP adjustment without proper verification. In the same breath, we also condemn the action of the assessee in not properly submitting the required information to lower authorities. In case of inability to submit the information before lower authorities, they could have recorded the same before the authorities instead of maintaining silence. This kind of behavior leads to unnecessary wasting of judicial time at the different appellate authorities. Accordingly, ground No. 7 is allowed.
5. Ground No. 8a to 8j is relating to transfer pricing adjustment of Rs. 90,03,54,380/- towards corporate guarantee.
6ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
5.1 During FY 2010-11, the assessee provided corporate guarantees to independent financial institutions for the loan and hedging facilities provided by the independent financial institutions, to assessee's 100% start-up subsidiaries namely LRIPL, LRAPL and LIPL, the details of which are as under:
Name Name of the Guarantee Effective Nature
of the Financial Value (USD) Guarantee
AE Institution Value (INR)
as on March
31, 2012
LRIPL ICICI Bank USD 137.50 Rs. Loan facility
Ltd., Mn. 63945.63
Singapore lakhs
Branch (Guarantee
value Rs.
70,340.18
lakhs)
LRAPL ICICI Bank USD 742.50 Rs. Loan facility
Ltd., Mn. 3,45,306.38
Singapore lakhs
Branch (Guarantee
Value Rs.
3,79,837.01
lakhs)
LRAPL ICICI Bank USD 55 Mn Rs. Nil Hedge
Ltd.,
Singapore
Branch
LInPL Barclays USD 40 Mn Rs. Nil Hedge
Bank Plc,
London
LInPL DBS Bank USD 15 Mn Rs. Nil Hedge
Ltd.
LInPL Standard USD 35 Mn Rs. Nil Hedge
Chartered
Bank,
London
Assessee submitted that these guarantees were provided to enable their start up subsidiaries, to obtain the requisite hedges and not to obtain any beneficial terms, it provided the corporate guarantees to independent financial institutions, on a free of charge basis to its AEs. According to assessee, as there is no charge 7 ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
received/receivable on these transactions, there is no benchmarking required u/s 92(1) of the IT Act.
5.2 When the TPO asked the assessee as to why corporate guarantee fee should not be charged as per SBI guidelines, the assessee submitted that a Banker cannot be considered for the purpose of CUP since it is a quotation and not an actual uncontrolled 'transaction'. Further, it was submitted that bank guarantees are not comparable with corporate guarantees since such corporate guarantees are issued based upon the business needs and not based on risk assessment or underlying asset which generally the banks ask for. Therefore, corporate guarantee fee cannot be charged as per SBI guidelines.
5.3 Rejecting the submissions of the assessee, the TPO observed that the provision of corporate guarantee is an international transaction for which Arm's length price has to be determined as per the provisions of section 92 of the IT Act and the commercial considerations advanced by the assessee cannot be considered for determining the ALP of the transactions. Accordingly, the TPO had collected information from various websites of the banks regarding how the corporate guarantee fee is computed. The TPO had also referred to the Government Policy of the Ministry of Finance, Govt. of India, September 2010. It was thus gathered that the banks charge corporate guarantee upfront at the time of issue of the guarantee itself. He opined that in case of guarantees covering more than one financial year the fee is charged by the banks at the beginning of the financial year on the outstanding amount. Therefore, the TPO had adopted the same method of computation and accordingly, computed the ALP of corporate guarantee fee as under:
Name of Effective Arm's Arm's Fee Adjustment the AE Guarantee Length length charged Value (INR) Guarantee guarantee fee in % fee LRIPL 7034018000 2% 140680360 0 140680360 LRAPL 37983701000 2% 759674020 0 759674020 8 ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
Total 90,03,54,380 Thus the arm's length price of the corporate guarantee fee was determined at Rs. 90,03,54,380/- and the shortfall of Rs. 90,03,54,380/- was treated as adjustment u/s 92CA of the IT Act, by the TPO.
5.4 Aggrieved, the assessee raised objections before the DRP as under:
• The Ld. TPO erred in not appreciating the fact that corporate guarantee was given by Assessee for its own commercial expediency and for the overall benefit of the Assessee. It was the Assessee's Obligation to take the loan and pay for the acquisition of the asset as the Assessee was the successful bidder instead it chose to incorporate the SPVs (newly created 100% subsidiaries) to avail the loans by providing corporate guarantees to avail the loan for acquisition of the asset. The corporate guarantee was provided because of parental obligation and not for any other reason.
• The Ld. TPO ought to have appreciated that the AE has not derived any benefit by receiving the guarantee given by the Assessee except getting a loan. Hence, no ALP adjustment is warranted in this regard. The only party to derive a quantifiable benefit was the Assessee.
• The Ld. TPO erred in calculating the ALP of the corporate guarantee fee using 'CUP' as the most appropriate method and by applying the rates of SBI without any basis and without complying with the procedure laid down for computation of arm's length price as given in the Provisions of section 92C of the Act.
• Without prejudice to above, the ld. TPO erred in calculating the guarantee fee on the entire amount of the guarantee instead of restricting the amount to the extent of the withdrawal of loan by the AE against guarantee."
5.5 The DRP upheld the action of the TPO.
5.6 The assessee is in appeal before us.
5.7 Ld. AR of the assessee submitted that corporate guarantee do not fall within the scope of the term 'international transaction' even 9 ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
after insertion of Explanation to section. He submitted that corporate guarantee transaction is a shareholder activity and it is outside the purview of international transaction. Without prejudice to the above, the ld. AR submitted that the TPO ought to have charged fees at a reasonable percentage at 0.27% as held in assessee's own case before DRP. He relied on the following cases:
1. Dr. Reddy's Laboratories Vs. ACIT, ITA No. 294/Hyd/2014 & ITA No. 458/Hyd/2015
2. Siro Clinpharm Pvt Ltd. Vs. DCIT, ITA No. 2876/Mum/2014
3. Bharti Airtel Ltd. Vs. Addl. CIT, ITA No. 5816/Del/2012
4. Asian Paints Ltd. Vs. ACIT, ITA No. 7801/Mum/2010/ [2014] 41 Taxmann.com 71 (Mum.
5. Lanco Infratech Ltd. Vs. DCIT, AY 2011-12 in ITA No. 450/Hyd/2016 (assessee's own case) 5.8 Ld. DR, on the other hand, relied on the order of DRP and submitted that in earlier AY, it was adjudicated by this Bench as international transaction.
5.9 Considered the rival submissions and perused the material facts on record. We find that in assessee's own case for AY 2011-12 (supra), while adjudicating similar issue, the coordinate bench has held as under:
"7. We have considered the rival contentions and perused the documents placed on record. There is a difference of opinion as far as in the corporate guarantee fee to be considered as international transaction. However, the Hyderabad Benches of ITAT is consistently following the principle that corporate guarantee is to be considered for the purpose of Transfer Pricing adjustments as the transaction of providing corporate guarantee is considered as 'international transaction'. To be consistent with the opinion already taken in earlier decisions, Ld. Counsel was given an option to press or not to press the issue on this. Ld. Counsel however, submitted that if reasonable rate of 0.27%, confirmed by Asian Paints Ltd. Vs. CIT (ITA No. 7801/Mum/2010) was adopted, assessee has no objection to withdraw the above contention. Considering that the corporate guarantee provided by the company will fall within the scope of the term 'international transaction' after the insertion of Explanation to Section 92B by Finance Act, we reject the contention of assessee on this issue. However, considering the Co- ordinate Bench decision given in the case of Asian Paints Ltd. Vs. CIT (ITA No. 7801/Mum/2010) (supra) we however, direct the AO/TPO to consider only 0.27% as the guarantee commission on the amount involved. The contention that corporate guarantee fee to be considered proportionately with the period it availed, cannot be 10 ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
accepted as guarantee fee is upfront and one time fee paid at the beginning and therefore, on the corporate guarantees provided during the year, the rate is to be applied. However, if any of the corporate guarantees are provided in earlier year, they may not be subjected to transfer pricing during the year under consideration. Assessee has stated that some of the guarantees were withdrawn during the year. If the guarantees are given during the year and also withdrawn during the year, AO is directed to consider accordingly. Subject to quantification of corporate guarantee provided by assessee during the year, we direct the AO/TPO to fix the fees at 0.27% on that amount. With these directions, the grounds are considered partly allowed as far as the appeal of assessee is concerned. Since the issue is considered in the light of the Co-ordinate Bench decisions, we find no merit in Revenue contentions of adopting rate at 2% adopted by the TPO which has no basis. Accordingly, Revenue grounds on this issue are rejected. Cross-Objection is in support of the DRP order which in our view, becomes academic. Accordingly, the Cross-Objection is also considered dismissed for statistical purposes."
As the issue under consideration is materially identical to that of AY 2011-12, following the decision therein, we direct the AO/TPO to fix the fees at 0.27% as guarantee commission on the amount involved. Accordingly, the grounds raised by the assessee are partly allowed.
6. Ground No. 7a to 7d relate to ALP adjustment in respect of international transaction of interest on mobilization advances for an amount of Rs. 131,12,22,228/-.
6.1 The TPO asked the assessee to show cause vide letter dated 14/01/2016 as to why interest should not be charged @ 14.75% on the outstanding receivables. The assessee neither furnished the month-wise break up of receivables nor has objected to charging of interest in its reply dated 22/01/2016. However, in its reply assessee stated that the balances are receivable against the mobilization advances and no further clarification or the details as called for had been submitted, as noted by TPO.
6.2 After considering the submissions of the assessee, the TPO observed that with the retrospective introduction of explanation to section 92B, receivables form a part of international transaction for which ALP needs to be determined. Relying on the decision of Chiel India Pvt. Ltd. (TS-145-ITAT-2014(DEL)-TP), which also took into account the judgment dated 07/10/2010 of ITAT Bangalore Bench in 11 ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
the case of M/s Logix Micro Systems Ltd. Vs. ACIT (ITA No. 524/Bang/2009) and in the absence of details and furnishing of information by the assessee, the TPO computed the interest chargeable as under:
Outstanding receivables from AE Rs. 8889642223 Interest @ 14.75% on Rs. 888964223 Rs. 1311222228 Less: interest charged NIL Adjustment Rs. 131,12,22,228/-
Thus, the ALP of the interest chargeable on receivables was determined at Rs. 131,12,22,228/- and the shortfall of Rs. 131,12,22,228/- was treated as adjustment u/s 92CA of the Act, by the TPO.
6.3 Aggrieved, the assessee raised objections before the DRP, which are as under:
• The Ld. TPO ought to have appreciated the fact that the Assessee company is an established EPC contractor in the country. The Assessee company gets mobilization advance from the awardee companies as per EPC contracts which is interest free. The Assessee company sub-contracts part of the EPC contract to various sub-contractors including AEs and releases part of the mobilization advance received to the sub-contractors as interest free mobilization advance at a certain % of contract value as per the terms of agreements with them.
• The Ld. TPO ought to have appreciated the fact that the mobilization advances are to be adjusted against future supplies or recovered from each bill raised on the contract work completed over the stipulated period and cannot be said to be due and not collected.
• The Ld. TPO ought to have appreciated that the Assessee did not charge any interest on mobilization advances given to its Non - AEs and that not charging any interest to its AEs is consistent with the arm's length principle while applying the CUP method for determining the ALP.
• The Ld. TPO has erred in applying the domestic PLR of 14.75% on the transaction of mobilization advances given to foreign entities by equating it incorrectly with the Indian investment in bank deposit, stocks, mutual funds or real estate.12
ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
• Without prejudice to above grounds; the TPO erred in not understanding the correct nature of services by ignoring the submissions filed by Assessee from to time.
6.4 The DRP observed that no justification was given as to why the assessee chose not to reply the TPO when the opportunity was given and additional information filed before it, which was forwarded to the TPO for their comments. The TPO submitted her report dated 02/11/2016 negating the claims of the assessee as well as relying on the order of the earlier panel of DRP. Considering the same, the DRP held that as the onus of proving the claims made has not been discharged by the assessee, the objections raised were rejected and order of the TPO was upheld.
6.5 Aggrieved, the assessee is in appeal before us.
6.6 Before us, the ld. AR submitted that since assessee company is not paying any interest on the amounts received by it from the contractor, the adjustment is not warranted. He further submitted that change of nature of transaction from mobilization advances to loans and advances is not warranted. He also submitted that as the case of non charging of interest in the controlled transactions is comparable with that of non-charging from uncontrolled transactions, in these international transactions, no transfer pricing adjustment can be made on this count. He relied on the following cases:
1. Lanco Infratech Ltd. Vs. DCIT, AY 2011-12 in ITA No. 450/Hyd/2016 (assessee's own case)
2. EKL Appliances Ltd. Vs. CIT, ITA No. 1068/2011 of Delhi HC
3. CIT Vs. Indo American Jewellery Lt., ITA No. 1053 of 2012. 6.7 The ld. DR, on the other hand, relied on the orders of TPO and DRP.
6.8 Considered the rival submissions and perused the material facts on record. Similar issue arose in assessee's own case for AY 2011-
12, wherein the coordinate bench has held as under:
13ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
"9. We have considered the rival contentions. It is well accepted practice that the construction industry pay advances at a certain percentage of the contract value to mobilise various resources for the execution of contract and these advances are given in the regular course of business. As seen from the facts of assessee's case, assessee is undertaking an EPC contract and has received mobilization advances as part of that. Like-wise, assessee has given some works to other parties on sub-contract basis and necessarily it has to provide mobilization advances to the parties. It is also noticed that assessee has advanced mobilization advances to both AEs and non-AEs and no interest has been charged from either party. Not only that assessee is also not required to pay any interest on the mobilization advances received, which are in fact more than the amounts advanced by assessee. Thus, there is complete uniformity in the act of assessee in not charging interest from both AE and non-AE and also not paying interest/claiming interest for the advances received. Following the principles laid down by the Hon'ble Bombay High Court in the case of Indo American Jewellery Ltd. Vs. CIT, Hon'ble Bombay High Court (ITA No. 1053 of 2012), we are of the view that there is no need for charging any interest on the amounts advanced as receivables. Since this amount is part of contract work, in our view it does not attract any adjustment under TP provisions. Moreover, advances given as part of contract work does not require any special addition, when the TPO was already examined and held that the transaction relating to 'work contract expenses' are within the ALP during the year. Thus, when the whole work contract is considered within the ALP, we are of the opinion that the advances given in the course of contract does not call for special adjustment. Moreover, these business advances cannot be categorized as 'loans and advances' so as to consider them for adjustment. Relying on the various case law relied upon by the Ld. Counsel, we are of the opinion that since assessee-company is not charging any interest from the AEs and non-AEs and also not paying any interest on the amounts received by it from the main contractor, this adjustment is not warranted. Respectfully following the principles laid down in various case law relied upon by assessee above, we have no hesitation in deleting the above adjustment. As seen from the order of the TPO in the next year AY 2013-14, he has considered the same issue and has not made any adjustment by stating as under:
"7.5 Receivables: With regard to receivables it is noticed from the information filed that the company is not exporting and supplying any goods or services to AEs. The balances appearing in the Balance Sheet are mobilization advances which are to be adjusted against future supply bills and hence no adverse inference is drawn. "
Since the TPO order is in tune with the provisions of the Act and the principles laid down on this issue, we are of the opinion that no adjustment is required on the issue of mobilization advances during the impugned year also. Accordingly, grounds raised by assessee including additional grounds are allowed."
As the issue under consideration is materially identical to that of AY 2011-12, following the decision therein, we allow the grounds raised by the assessee on this issue and accordingly interest charged on mobilization advances are deleted.
14ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
7. Ground Nos. 10a to 20g relate to ALP adjustment in respect of international transaction of work contract expenses for an amount of Rs. 195,72,44,551/-.
7.1 The TPO observed that the analysis carried out by the taxpayer under TNMM by taking itself as the tested party is not acceptable. As the amount involved in the transaction with AE when compared to the total volume of transactions being insignificant, the analysis under TNMM by taking the assessee as the tested party is not in line with the TP regulations. The functions performed by the taxpayer being more complex than the AE, taking AE as the tested party and analyzing the transaction is the better approach (he relied on the functional analysis document submitted by assessee in the TP report at page no. 23 to 24, according to him, the Singapore entity is the least risk mitigated entity and hence, should be selected as the tested party for the economic analysis). Similar approach has been followed in the assessee's case in the previous year and it has been concluded that the payments were at arm's length, since, the margins of the Singapore entity as compared with the foreign comparables was within +/- 5%. An economic analysis for the current year is as follows:
7.2 The TPO conducted search for suitable comparable companies in One source database (considering companies in Singapore under the similar industry in which the assessee operates the search process is enclosed in a CD along with this order). Lanco International Pte ltd is taken as the tested party and OP/OR is taken as the PLI. 6 companies have been identified. It is seen that the margin earned by the AE is more than the average margin earned by the comparable companies. Therefore, the TPO concluded that the assessee has paid excess payments over and above the market price and hence, he made the following adjustment:
The financials of the Lanco International Pte Ltd., Singapore are as follows:15
ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
(in US $)
Revenue 793781630
Add: Exchange -410612
difference
Operating Revenue 793371018
Cost of Sales 677847841
Add: Operating 32380775
expenses
Less: Loan interest 0
Operating Cost 710228616
Operating profit 83142402
OP/OC 11.70
OP/OR 10.48
7.3 TPO observed that 'Onesource' database was used to identify the comparable companies in Singapore which are in similar line of business. Turnover fileter of Mil USD to 200 Mil USD was considered as the turnover of the AE is 95 Mil USD. Companies with no financial information, no business description, no data were not considered.
Companies which are functionally different were also not considered. Wherever the financial information for the entire year is not available, pro-rata approach was adopted.
(Mil.USD)
OP/OC OP/OR
CW Group holdings Ltd. 14.02 12.29
Hai Leck Holdings Ltd. 5.57 5.28
Beng Kuang Marine Ltd. 3.39 3.28
JEP Holdings Ltd. -13.24 -15.26
Koyo International Ltd. 13.76 12.10
Tritech Group Ltd. 6.20 5.84
Arithmetic mean 4.95 3.92
16
ITA Nos. 221 /Hyd/2017
Lanco Infratech Ltd., Hyd.
After applying the average margins of the comparables to the financials of the assessee, the results are as under:
Description Amount
Arm's length price 4.95%
Actual works contract expenses paid 29836044988 Arm's Length Margin (%) 3.92% (ALM(OP/OR) Transfer price (Margin of Singapore 10.48% Pte) with higher range +/-5% of 10.19%), hence not within arm's length Excess margin over and above the 6.56% arm's length Adjustment u/s 92CA 195,72,44,551 (29836044988*6.56% 7.4 Aggrieved, the assessee raised following objections before the DRP:
• The ld. TPO erred in not providing an opportunity of being heard to the Assessee company to offer its objections via a show cause notice as per the proviso to section 92C(3) of the Act before making an adjustment of Rs. 195,72,44,551/- on work contract expenses paid.
• The ld. TPO has erred in not accepting the comparability analysis conducted by the Assessee in the Transfer Pricing Documentation ("TP Report").
• The ld. ld. TPO/ AO erred in selecting UPL, Singapore as the tested party since it is more complex than the Assessee. The technical and performance related obligations and risks associated with the BTG supply are solely with the AE, whereas the Assessee is only selling the equipment supplied by AE as it is on high-sea sale to the customer under the supply contract entered with customer. The activity of AE is highly complex and the activity of Assessee is simple in nature. Therefore the Assessee only should have been tested party and not the AE. • The Ld. TPO/ AO used persistent loss making company also as a comparable without which the margins of the comparable companies would be much higher than mean arrived by AO.17
ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
• Without prejudice to the above, the TPO/ AO erred in the selection of functionally dissimilar companies as comparables. All the comparables selected are holding companies, with one of them being a consistently loss making.
• The TPO ought to have appreciated that the entire search process applied by It Is rendered inconsistent for the fact that there exists different year ending for the comparables and the tested party.
• The TPO has erred in not adopting consistent and basic filters in the search process and there by arriving at functionally dissimilar comparable to the AE. The TPO ought to have appreciated the fact that the comparables selected by the TPO are engaged in diversified businesses Whereas the Singapore Entity fetches its revenue only from EPC Business. 7.5 After considering the submissions of the assessee, the DRP upheld the order of TPO rejecting the contentions raised by the assessee, by observing as under:
"Having considered the submissions, the additional information filed in support of its contentions was forwarded to the AO/TPO for their comments in the interests of justice. The TPO sent her report, a copy of which was furnished to the assessee for its comments, which has not been submitted till date. In the absence of the same, directions are issued based on information already available on record.
The assessee has submitted FAR analysis of itself and its AE, in relations to international transactions on account of work contract expenses. It is very interesting to note that similar analysis was done by the TPO for the previous year i.e. 2011- 12 in the same manner, which was not objected to by the assessee. The TPO further points out that even prior to AY 2011-12, similar analysis was carried out but no objection was raised by the assessee even in those years, obviously because no adjustments were proposed and made. In the current year the assessee is objecting the same which clearly shows it is taking contradictory stands year on year on similar analysis i.e. objecting to the adjustment when made and not objecting when no adjustment made on similar facts and circumstances. Hence, we have no hesitation in upholding the order of the TPO and rejecting contentions of the assessee."
7.6 Aggrieved by the order of DRP, the assessee is in appeal before us.
18ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
7.7 Ld. AR of the assessee submitted that the tested party for bench marking a transaction should always be the Indian assessee and not the foreign entity. He submitted that selecting foreign tested party is difficult and each year is independent and to be assessed independently. Without prejudice to the above, ld. AR submitted that a persistent loss making company namely JEP holdings Ltd. has been considered as comparable which is not correct. He relied on the following cases:
1. Aurionpro Solutions Ltd., ITA No. 7872/Mum/2011.
2. M/s Onward Technologies Ltd., ITA No. 7985/Mu/2010
3. GE Money Financial Services Pvt. Ltd., TS-457-ITAT- 2016(Del-TP)
4. M/s Sutherland Healthcare Solutions Ltd., ITA No. 831/Hyd/2009
5. Global Vantedge Pvt. Ltd., ITA Nos. 2763 & 2764/Del/2009.
6. Bobst India Pvt. Ltd., ITA No. 1380/PN/2010.
7.8 Ld. DR, on the other hand, relied on the orders of TPO/DRP.
7.9 Considered the rival submissions and perused the material facts on record. The ld. AR has brought on record the financial results declared by JEP Holdings Ltd., which are reproduced below for the sake of convenience:
Particulars 2014 2013 2012 2011
Operating 39.3 29.5 27.8 19
Revenue
Operating 40.8 30.2 28.6 21.9
Cost
OP -1.5 -0.7 -0.8 -2.9
OP/OC -3.68 -2.32 -.2.80 -13.24
OP/OR -0.04 -0.02 -0.03 -0.15
As this comparable company is consistently making losses over the periods stated above, as held in the case of Bobst India Pvt. Ltd., (supra), the coordinate bench of Pune held that the company making persistent loss for the past three years is not good comparable. So, 19 ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
the same should be excluded for computing operating margin of comparable companies for arriving at ALP in relation to international transaction. Accordingly, we direct the TPO to eliminate this comparable and determine the ALP afresh. The fresh result may be considered for ALP adjustment by removing the above from comparables, in case the final ALP is within the +/- 5% range, claim of the assessee may be accepted.
CORPORATE TAX MATTERS
8. Ground No. 4a to 4i relate to addition of Rs. 88,51,02,720/- on account of sub-contract expenses.
8.1 The AO observed that during the course of hearing, the assessee company had submitted the copies of RA bills, work orders, etc. and on verification of the same, the AO was of the view that the same were not amenable for verification after lapse of over three years and these documents did not establish that the services had been actually rendered. Therefore, the AO held that the expenditure amounting to Rs. 88,51,02,720/- claimed by the assessee for the year under consideration under the head sub-contract expenses in respect of 5 companies was treated as non-genuine and bogus and was not allowed to be claimed as expenditure u/s 37 of the Act and disallowed and added to the income returned.
8.2 When the assessee objected before the DRP, it held that mere certificate without supporting evidence to indicate the expenditure had been incurred would not substantiate the claim of the assessee and the onus of discharging the claims or evidence in support of its contentions had not been met by the assessee and relying on the earlier decision, DRP upheld the action of the AO.
8.3 Aggrieved by the order of the DRP, the assessee is in appeal before us.
20ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
8.4 Ld. AR of the assessee submitted that AO may be directed to accept the sub-contract payments, as assessee received the corresponding amounts from main contractor and offered the same for taxation. He submitted that no corroborative evidence was collected to establish that the sub-contractors were bogus and only profit embedded in the purchase can be added to the income of the assessee. He also submitted that all the payments have been made through banking channels, therefore, no disallowance can be made. He relied on the following case law:
1. Lanco Infratech Ltd. Vs. DCIT for AY 2011-12 in ITA No. 450/Hyd/2016 (assessee's own case)
2. CIT Vs. S. Khader Khan Son, [2012] 25 Taxmnn.com 413 (SC)
3. Gajjam Chinna Yellapa Vs. ITO, [2015] 59 Taxmann.com 69
4. Bholanath Polyfab, 355 ITR 290 (Guj.)
5. Simith P Sheth, 356 ITR 451 (Guj._)
6. ITO Vs. Growel Eneregy Co. Ltd., [2014] 47 Taxmann.com 371 (Mum. Trib.) 8.5 Ld. DR, on the other hand, relied on the orders of AO and DRP.
8.6 Considered the rival submissions and perused the material facts on record. Similar issue arose in assessee's own case for AY 2011-12 (supra) wherein the coordinate bench observed as under:
"14.4. The contention that the assessee billed the main contractor and sub contract expenditure was incurred by those persons/companies has not been examined by AO as he did not give adequate time to furnish evidence and DRP also refused to examine the evidence furnished justifying the sub contracts. Therefore, we are of the opinion that AO can examine this aspect afresh after giving due opportunity to assessee. There is also justification in assessee's claim that AO erred in disallowing the amount of sub- contract expenditure, including service tax which was never claimed as expenditure to an extent of Rs. 11,31,32,746/. This contention is also required to be examined. Question of disallowance of an amount which was not claimed should not arise. Consequently, without relying on the so called statements which has no evidentiary value considering that no action was taken either in those companies or in the companies in whose cases the said enquiries were conducted( L& T, PACL), we direct the AO to independently examine the claim of sub contract expenditure. In case assessee billed and offered the said contract receipts, AO is directed to accept the sub contract payments, as assessee received the corresponding amounts from main 21 ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
contractor and offered the same for taxation. In case there is any failure or the nexus was not fully established, Assessee agrees that being a subcontractor a small percentage of the expenditure can be estimated for disallowance, following the principles laid down by the Coordinate Benches as relied upon above. In that event, AO is directed to disallow only a certain percentage of the above amount, if necessary. The addition made is accordingly deleted and the issue of examination of impugned sub contract payments is restored to AO to consider afresh as directed. Grounds are considered allowed for statistical purposes."
As the issue under consideration is materially identical to that of AY 2011-12, following the decision therein, AO is directed to accept the sub contract payments, as assessee received the corresponding amounts from main contractor and offered the same for taxation. following the principles laid down by the Coordinate benches, AO is directed to disallow only a certain percentage of the above amount, if necessary. The addition made is accordingly deleted and the issue of examination of impugned sub contract payments is restored to AO to consider afresh as directed. Grounds are considered allowed for statistical purposes.
9. Ground No. 5a to 5C relate to disallowance of loss on account of foreign exchange fluctuation of Rs. 1,19,18,79,013/-.
9.1 The AO noticed that the said claim had been made as additional claim during the course of assessment proceedings by the assessee, which was not accepted by the AO and made the addition.
9.2 When the assessee raised objection before the DRP, the DRP upheld the addition by observing as under:
"Having heard the contentions of the appellant, the legislature while introducing sub-section (5) of section 139 were aware of the fact that there may be certain wrong statements or omissions in the return of income and therefore the Provision for filing the revised return was incorporated and accordingly every assessee was allowed a time of one year from the end of the assessment year. When the Law provides that any error or omission can be rectified only by filing the revised return within the prescribed time u/s.139(5), neither the appellant Is entitled to raise such claim after the prescribed time before the Assessing Officer nor the Assessing Officer is empowered to entertain such claim. Reliance is placed on the decision of the 22 ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
Hon'ble Supreme Court in the case of Goetze India Ltd and the latest High Court decision of the Honourable Orissa High Court in the case of Orissa Rural Housing Development Corporation Ltd vs The Asst. Commissioner of Income Tax, in W.P .(C) No.4554 of 2011. The Honourable Supreme Court" in the case of Goetze (India) Ltd (supra), held that the Assessing Officer has no power to entertain fresh claim made by the assessee after filing of the original return other than by filing of a revised return. Accordingly, the Assessing Officer has not committed an error by rejecting the claim of the assessee, accordingly, the objection is not found acceptable, Even otherwise, as per provisions of section 144C, the DRP is empowered to deal with the issues arising out of variation to returned income or loss and therefore the same cannot be considered by the Panel and is rejected."
9.3 Aggrieved by the order of DRP, the assessee is in appeal before us.
9.4 The ld. AR of the assessee requested the bench to allow the claim of foreign excahange loss of Rs. 1,19,18,79,013/- due to the following:
• The Courts have directed tax officers to allow the relief even if it has been claimed for the first time during the assessment proceedings.
• Any difference, loss or gain arising on conversion of the said liability at the closing rate, should be recognized in the profit and loss account for the reporting period as per Accounting Standard 11.
• Foreign currency loss incurred on revenue account shall be allowed as revenue expenditure.
• The assessing officer should assist the tax payer in claiming any relief to which he is entitled to under the law. He further submitted that the assessee has made a claim during the course of assessment proceedings and is entitled to claim the deduction which was not claimed in the original or revised return. He relied on the following case law:
1. Mahindra & Mahindra Ltd., Vs. Addl. CIT [2013] 40 Taxmann.com 522 (Mum. Trib.)
2. Aban Offshore Ltd. Vs. DCIT, ITA No. 450/Mds/2017 23 ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
Ld. AR submitted that foreign currency loss incurred on revenue account shall be allowed as revenue expenditure. For this proposition he relied on the decision in the case of CIT Vs. Woodward Governor India Pvt. Ltd., 312 ITR 254 9.5 Ld. DR relied on the orders of AO and DRP.
9.6 Considered the rival submissions and perused the material facts on record as well as the case law cited by the ld. AR. The coordinate bench of Chennai Bench in the case of Aban Offsore Ltd. (supra) held as under:
18. We have heard both the parties and perused the material on record. The issue raised by the assessee goes to the root of the matter and the assessee has taken a plea before the DRP to consider this issue, but refused to entertain it on the reason that it was not before the TPO/AO. In our opinion, all the facts are available on record and assessee made a claim, it is appropriate to remit the issue to the file of AO for his consideration. In view of the judgment of Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (229 ITR 283), wherein it was held that a legal ground can be raised at any stage of appeal. Further, the Co-ordiante Bench in the case of M/s. Abhiniha Foundation Pvt Ltd., in ITA No.281/Mds.l2016 for the A.Y 2011-12 the Tribunal vide order dated 29.04.2016 wherein admitting the additional ground, though it was not raised before the Assessing Officer and observed that the assessee is entitled to raise not merely by additional legal submissions before the appellate authorities, but is also entitled to raise additional claims before them. The appellate authorities have the discretion whether or not to permit such additional claims to be raised. It cannot, however, be said that they have no jurisdiction to consider the same. That they may choose not to exercise their jurisdiction in a given case is another matter.
The exercise of discretion is entirely different from the existence of jurisdiction. The judgment in the case of Goetz reported 284 ITR 323(SC) was confined to a case Where the claim was made only before the Assessing Officer and not before the appellate authorities. The Court did not lay down that a claim not made before the Assessing Officer cannot be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. In view of the above discussion, this issue is remitted back to the file of AO, if require, the AO should call for remand report from the TPO and decide the issue in accordance with law and on merit, we 24 ITA Nos. 221 /Hyd/2017 Lanco Infratech Ltd., Hyd.
refrain from commenting on merits as the lower authorities to decide it. Hence, this ground is remitted to the file of the AO for fresh consideration."
As the facts in the given case are similar to the above case, considering the above ratio, we remit this issue back to the file of AO to consider the submissions of the assessee and allow the claim on the basis of I.T. provisions.
10. Ground Nos. 1 to 3 and 11 to 13 are general in nature, hence, need no adjudication.
11. Ground No.14 is regarding charging of interest u/s 234B and 234D, which is consequential in nature, therefore, the AO is directed accordingly.
12. Ground No. 15 is regarding initiation of penalty proceedings u/s 271(1)(c) of the Act, which is premature to consider at this stage.
13. In the result, appeal of the assessee is partly allowed for statistical purposes.
Pronounced in the open Court on 30 th November, 2017.
Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 30 th November, 2017
kv
Copy to:-
1) M/s Lanco Infratech Ltd., Plot No. 4, Software Unit Layout, Hitech city, Hyderabad - 500 081
2) ACIT, Circle - 16(1), Hyd.
3) DRP, Bengaluru
4) The Departmental Representative, I.T.A.T., Hyderabad.
5) Guard File