Income Tax Appellate Tribunal - Hyderabad
M/S. Rain Commodities Ltd,, Hyderabad vs Department Of Income Tax on 28 September, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A" : HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
ITA.No.83/Hyd/2014
Assessment Year 2009-2010
The DCIT, Circle-3(1), M/s. Rain Commodities Ltd.,
Hyderabad. vs. Hyderabad - 500 073.
PAN AABCP2276K
(Appellant) (Respondent)
ITA.No.158/Hyd/2014
Assessment Year 2009-2010
M/s. Rain Commodities Ltd.,
(Presently known as Rain vs. The Addl.CIT, Range-3,
Industries Ltd.,) Hyderabad.
Hyderabad - 500 073.
PAN AABCP2276K
(Appellant) (Respondent)
For Revenue : Mr. P. Chandrasekhar
For Assessee : Mr. Deepak Chopra &
MS. Manasvini Bajpai
Date of Hearing : 30.08.2016
Date of Pronouncement : 28.09.2016
ORDER
PER SMT. P. MADHAVI DEVI, J.M.
Both are cross-appeals for the A.Y. 2009-2010. These appeals are against the assessment order dated 31.12.2013 passed under section 143(3) read with section 144C of the I.T. Act, 1961.
2ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
2. Brief facts of the case are that the assessee-company which is engaged in manufacture and trading of cement, filed its return of income for the A.Y. 2009-2010 on 13.09.2009 declaring total income of Rs.52,40,57,941. The return was initially processed under section 143(1) of the Act and thereafter, the assessment was taken-up for scrutiny by issuance of a notice under section 143(2) of the Act. Since the assessee had entered into international transactions with it's A.E., the determination of the ALP of the international transaction was referred to the TPO. The TPO has passed the order under section 92CA of the Act on 31.10.2012 proposing adjustments to the returned income of the assessee. Accordingly, a draft assessment order was passed on 28.02.2013 by the Assessing Officer determining the income at Rs.97,92,70,466 by proposing the following two additions i.e., (1) TP adjustment of Rs.43,17,62,526 and (2) Disallowance of SAP expenses of Rs.2,34,50,000.
3. Aggrieved by the proposed additions, the assessee preferred its objections before the DRP which granted partial relief to the assessee and in accordance with the directions of the DRP the final assessment order was passed. Against the relief granted by the DRP, the Revenue is in appeal before us, while the assessee is in appeal against the confirmation of the adjustments proposed by the Assessing Officer. In the assessee's appeal, the assessee has raised as many as 27 grounds of appeal. At the time of hearing, the Learned Counsel for the assessee submitted that ground of appeal No.1 is general in nature and needs no specific adjudication and ground Nos. 24 to 26 are against the levy of interest under section 234B and 234C of the Act and being consequential in nature, may be remanded to the Assessing 3 ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
Officer for giving consequential effect. Assessing Officer is directed accordingly. Ground No.27, being against the initiation of penalty proceedings under section 271(1)(c) of the Act, is a premature ground and is accordingly rejected.
4. As regards grounds No.2 to 8, the brief facts of the case are that assessee had purchased Green Petroleum Coke ("GPC") for a sum of Rs.125,41,03,518 from it's A.E. The assessee benchmarked the international transactions using internal CUP method i.e., it has compared its purchase price of GPC from it's A.E. with its purchases of GPC from its non-A.Es. The TPO however, observed that on examination of the comparative analysis done by the assessee, it is found that some transactions were not within the arms length range. He has presented the same in the table which is reproduced hereunder for ready reference.
Import Purchases of Green Petroleum Coke from A.E. and non-A.E. for the A.Y. 2009-10 Diff. Diff as % between of A.E. A.E. Purchases Non-A.E. Purchases the FOB purchase price per unit prices Invoice Inv. Total Net FOB Invoice Inv. Total Net FOB No. Date Invoice Qty. per No. Date invoice Qty. per Value (MT) Unit Value (MT) Unit (USD) (USD) (USD) (USD) 107944/ 19.08.08 501032811 10253 436.8 008-08 12.08.08 1396823 7940 176 260.75 59.70 100871 Same item sold by A.E. to a Grp Co., Diff. Diff as % between of A.E. (Rain CII Carbon) purchase the FOB price per unit prices Invoice Inv. Total FOB No. Date invoice per Value Unit (USD) (USD) 08220 22.08.0 139519 5847 238 198.8 45.51 8T 8 2 .9 08220 22.08.0 330700 5010 66 370.8 84.89 8M 8 .6 10790 15.08.0 424499 1473 288 148.8 34.07 9 8 0 9.6 4 ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
A.E. Purchases Same item sold by A.E. to a Grp Co. Diff. Diff as %
between of A.E.
(Rain CII Carbon) purchase
the FOB
price
per unit
prices
Invoice No. Inv. Total Net FOB Invoice Inv. Total Net FOB
Date Invoice Qty. per No. Date invoice Qty. per
Value (MT) Unit Value (MT) Unit
(USD) (USD) (USD) (USD)
108108/
28.09.08 8442222 19778 320 108095 26.09.08 2651945 13120 202 118 36.88
108110
4.1. The TPO therefore, brought these discrepancies to the notice of the assessee and asked the assessee to explain the said discrepancies. The assessee, vide its reply dated 17.10.2012 submitted that the A.E has sold the GPC to the assessee at its purchase price and there is no mark-up on the same and hence, there is no arms length adjustment to be made. However, the Assessing Officer did not accept the assessee's explanation holding that, under the CUP method, the controlled transaction has to be compared with an uncontrolled transaction and not with any other controlled transaction. He held that in the case of the assessee, A.E's purchase of GPC from the ultimate suppliers is also a controlled transaction and therefore, it cannot be compared with the assessee's purchase of GPC from the A.E. He, therefore, did not accept the assessee's contentions that since it has purchased the GPC from the A.E. at the same price at which A.E. has purchased it, to be at arms length. He held that the assessee has failed to establish that GPC supplied by the A.E. was of better quality than that supplied by non-A.Es and further that it has also failed to show that the terms of payment in the A.E. purchase were not in any way beneficial to it than those in the non-A.E. purchases. He therefore, held that the assessee's contention that the purchase of GPC from the A.E. is at arms length is not acceptable. Thereafter, he proceeded to compute the 5 ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
ALP and arrived at a short-fall of Rs.20,53,36,947 and proposed the additions. The Assessing Officer, in the draft assessment order, proposed the addition against which the assessee raised its objections before the DRP. However, the DRP rejected the assessee's objections and therefore, the assessee is in appeal before us.
5. The Learned Counsel for the assessee, while reiterating assessee's submissions before the TPO and DRP, has drawn our attention to the order of the TPO under section 92CA of the Act to demonstrate that the TPO, instead of comparing the A.E. transactions with non-A.E. transactions, has compared the non-A.E. transactions with other controlled transactions, which according to him, is against the principles of T.P. adjustments. Further, he also submitted that under CUP method, strict comparison has to be made as to the nature and quality of the product. He has drawn our attention to pages 2 and 3 of the paper book wherein the transactions picked-up by the TPO to be not at arms length price have been analysed. The assessee has produced the comparative chart of transactions considered by the TPO to be not at arm's length and pointed out that the other product in terms of quality and composition with the type of Coke purchased by the assessee from each vendor is at variance. He submitted that out of 07 transactions picked-up by the TPO, one of the transaction is for purchase of 'shot coke' while, the other transactions were for the purchase of 'sponge coke'. He submitted that the quality of the product also differs as is evident from the difference in the 'Sulpher Content' of the product. He submitted that Sulpher content determines the impurity of the product purchased. He has also drawn our attention to the difference in 6 ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
locations from which the product has been purchased. He submitted that depending on the product source, the quality of the product differs and the price also varies. Therefore, according to him, the price of GPC is inversely related to the content of the Sulpher and also the location of the source and hence, the transactions cannot be compared with each other. Therefore, according to him, the TPO has erred in comparing the A.E. transactions with other controlled transactions and also in picking-up only some transactions. He submitted that if the transactions in entirety are considered, then the margin of the assessee is very much at arms length price with the other non- A.E. transactions. Further, according to him, the TPO has also erred in not taking into consideration the difference in the product and quality. He therefore, prayed that the issue may be remanded to the file of the TPO for fresh analysis.
6. The Ld. D.R. however, supported the orders of the authorities below and submitted that there is huge difference in the price charged between the assessee and A.E. and related parties. As regards the assessee's contention that it is a back-to- back transaction i.e., A.E. of the assessee has supplied the material to the assessee at its purchase price, the D.R. submitted that the same is not relevant as there may be different criteria at which the A.E. has purchased the product as compared to the circumstances under which the assessee has purchased the material from it's A.E. As regards the difference in the products and their quality, he submitted that the same is not sustainable as there is not much of variation in the price even though the assessee has pointed out the variations in the Sulpher content.
7ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
Therefore, according to the Ld. D.R. the TP adjustment confirmed by the DRP should be upheld.
7. Having regard to the rival contentions and the material on record, we find that both the assessee as well as the Assessing Officer have adopted the CUP method for the T.P. study and the determination of the arms length price of the transactions. It is also seen that the assessee has entered into various international transactions with various parties both A.E. and non-A.E. for purchase of Green Petroleum Coke ("GPC"). The Assessing Officer has picked-up only a few transactions to hold that they are not at arms length. We are convinced by the submissions of the assessee that the transactions with the A.E. should be compared with the transactions with non-A.Es and cannot be compared to any other controlled transactions. The TPO has compared the transaction of the assessee with it's A.E. with other controlled transactions which is not permissible under the T.P. regulations and guidelines. Further, the differences between the products and their quality also have not been taken into consideration by the TPO. The CUP method requires the most direct comparison between the products and in case of any variation between the products, adjustments have to be carried out for such variations before comparing the prices. It requires close similarity in products, property or services that are involved and where the prices of the product fluctuates regularly, timing of the transaction is also relevant, i.e., the market conditions, and the terms and conditions of the transactions would also make material difference. Thus, the similarity of products and their quality and terms and conditions such as scope and terms of warrantees provided, volume of sales or purchases, credit terms, 8 ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
etc., level of the market such as wholesale or retail etc., and the Geographic market i.e., the place in which the transaction takes place (like a country), the foreign currency risks, the alternatives realistically available to the buyer and seller and the intangible property attached to the sale etc., are all the factors to be considered while comparing a transaction under the CUP method.
7.1. From the chart produced by the assessee referred to in the above paras, it is noticed that the assessee had purchased the GPC from various countries and therefore, the geographical source, influents the quality and composition of the product and proportionately the price also. Therefore, in our opinion, the T.P. analysis made by the TPO needs re-consideration. In view of the same, grounds of appeal No. 2 to 8 are remitted to the file of the Assessing Officer/TPO for fresh analysis in accordance with Rule 10B(1)(a) of the I.T. Rules.
8. As regards Grounds No. 9 to 21 against the direction of the DRP to calculate the guarantee fee at 1.25% on the guarantee amount as against the TPO's direction to compute it at 2% on the guarantee amount of Rs.300 crores in favour of the lenders to the A.E., the Rain Commodities USA Inc., the Learned Counsel for the assessee submitted that this issue had arisen in assessee's own case in the earlier years and the Tribunal had directed the Assessing Officer to adopt the LIBOR+ 0.50% as guarantee fee. He placed reliance upon the decision of Mumbai Tribunal in the case of Glenn Mark Pharmaceuticals which has been followed by this Tribunal in assessee 's own case for the A.Y. 2008-09.
9ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
9. The Ld. D.R. however, supported the orders of the TPO and submitted that where the borrowed funds are advanced by the assessee in India to the A.E. in USA, then the LIBOR rate cannot be adopted. He submitted that the rates prevailing in India should be adopted as rightly done by the TPO. He also further distinguished the interest rate on long term loans and short term loans and submitted that the LIBOR rate is applicable only on short term loans.
10. Having regard to the rival contentions and the material on record, we find that in assessee's own case for the A.Y. 2008-09, 'B' Bench of this Tribunal, (to which one of us i.e., J.M. is the signatory), has considered the issue at length and at paras 10 to 14 by taking note of the decision in the case of M/s. Everest Kanto Cylinder Ltd., vs. DCIT, the ITAT has upheld the corporate guarantee fee at LIBOR + 0.50%. The relevant paragraphs are reproduced hereunder for ready reference.
"10. We have considered the submissions of both the parties and perused the material facts on record as well as the orders of the revenue authorities. The assessee facilitated the acquisition of CII Carbon LLC by RCUSA by lending loan to its wholly owned enterprises. The assessee has taken the decision to make investment in its AE either on share capital or lending loan using its business expediency. Since, it had made the decision to make loan to its AE. By virtue of amendment to section 92B, it is international transaction. Once it is considered as international transaction, it is prudent to make bench marking also in the international arena. Similar views were expressed by the coordinate bench of this Tribunal in the cases of Four Soft Pvt. Ltd. (supra), Siva Industries & Holdings Ltd. (supra) and Vijay Elecricals Ltd., (ITA No. 1159/Hyd/2013. It was held in the case of Siva Industries as below :10
ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
" Once the transaction between the assessee and the AE is in foreign currency and the transaction is an international transaction, then, the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it is LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the AE's."
Considering the above view, we are inclined to accept the decision of the CIT(A) and accordingly we dismiss the grounds of assessee as well as ground 2 of the revenue.
11. ALP adjustment on corporate guarantee Assessee's grounds of appeal:
The ld. CIT(A) has erred in
7. Making adjustment while determination of ALP on the shareholders corporate guarantee provided to bank on behalf of WOS.
8. Determining the ALP on the shareholder corporate guarantee provided by the Appellant @ 1.25% on the guarantee amount.
9. Not appreciating the fact that WOS was set up as a SPY for acquisition of business in USA.
10. Not appreciating that the shareholder corporate guarantee is not covered under the definition of international transaction u/s 92B of the Act.
11. Not appreciating that the amendment to section 92B would not apply to the facts of the case.
12. Not undertaking an objective analysis for determining the ALP on the shareholder corporate guarantee.
13. Not making adjustments for the differences in the comparable transactions selected vis-a-vis 11 ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
shareholder corporate guarantee provided by the Appellant.
14. Discriminating the US WOS by determining the ALP for shareholder-corporate guarantee vis-a-vis similar shareholder corporate guarantee provided by parent companies to Indian subsidiaries in violation of Article 26 of India - US Double Taxation Avoidance Agreement. ('DTAA').
Revenue's ground
3. The learned CIT (A) ought to have appreciated the fact that ALP is calculated by the TPO af ter considering the guarantee fee and by depending on the credit rating of the AE and once the ALP is approved, the percentage on guarantee fee cannot be revised.
Ld. AR submitted that assessee, through a common facilities agreement in connection with overseas acquisition of subsidiary companies, had provided corporate guarantee in favour of RCUSA. The TPO had noted that assessee had guaranteed a consortium of banks, which provided loans to RCUSA, to indemnify the defaults, if any, on account of loan repayment by RCUSA. Ld. AR submitted that a corporate guarantee did not fall within the meaning of international transaction as def ined in section 92B, that it was in the nature of shareholder activity in the business interest of parent, that the assessee was restricted by law from charging fee for a corporate guarantee provided by it in terms of para 2.2.9 of the RBI Master Circular on guarantees and Co- acceptance dated 02/07/2012, that a corporate guarantee is secondary with no cost or risk to shareholders and that it was in the business interest of the assessee. Ld. AR submitted that without prejudice to the claim that corporate guarantees are not to be charged, the method of computation of the guarantee fee was erroneous. Ld. AR also submitted that there is no cost to the assessee as it was given on the basis of Holding company and there is no profit involved in this year. Ld. AR submitted that the transaction was not relating to this year. (Refer pages 56 to 59 of paper book - relates to PY 2005-06.). Ld. AR relied on the following decisions:
1. Four Soft Pvt. Ltd., (supra)
2. Bharti Airtel Ltd. Vs. ACIT (ITA No. 5816/Del/2012 12 ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
3.Redington (India) Ltd., Vs. JCIT, (ITA No.613/Mds/2014).
12. Ld. DR submitted that the assessee had not reported this transaction as international transaction. He submitted that the case Glenmark Pharmaceuticals Vs. ACIT (ITAT-
Mumbai) had made after considering some calculation to arrive the figure 0.53% whereas the CIT(A) in the present case had adopted 1.25% without any basis. He also submitted that the TPO had analysed the risk factor in this transaction since the guarantee was given without any security. He also submitted that even though there is no cost to the assessee but there is intrinsic benefit to the AE. He submitted that he relies on the order of AO/TPO and justif ied the action of the AO.
13. After taking into consideration the above decision of the tribunal and the ratio of the four soft pvt. Ltd. (supra), we hold that the corporate guarantee is an international transaction. For the sake of clarity and ready reference, we reproduce the relevant paras below:
25.4. In the aforesaid view of the matter, we agree with the TPO that ALP of the corporate guarantee has to be determined as it falls within the scope and ambit of an international transaction after the retrospective amendment to section 92B. However, it appears that the TPO has applied the 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 Vs. 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).13
ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
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 issue to the file of the TPO to decide the quantum of corporate guarantee rates accordingly. If the assessee is able to bring on record any comparables with regard to corporate guarantee, the TPO may also consider the same while determining ALP of corporate guarantee. The TPO must provide a reasonable opportunity of being heard to the assessee before deciding the issue. This ground is allowed for statistical purposes."
Thus, the grounds 7 to 11 are rejected.
14. As regards grounds 12 to 14 are concerned, we find that they are relating to computation of ALP. The average margin of the comparables in similar transactions has to be arrived at before determining ALP. This issue of the percentage at which the corporate guarantee can be benchmarked has come up before various benches of the Tribunal. We find that in the case of Glenmark Pharmaceuticals Vs. ACIT in ITA No. 5031/Mum/2012, dated 13/11/2013, the Tribunal has examined the approach of the assessee therein in determining the percentage of corporate guarantee to be methodical and found it to be appropriate. Thus, the tribunal has laid down guidelines for determination of rate of corporate guarantee. In the case before us, the AO adopted 2% of the loan guaranteed and the same was reduced to 1.25% by the ld. CIT(A) without any basis or study in this matter. We find that in the decision of the coordinate bench of this Tribunal in Four Soft Pvt. Ltd. (supra), and also the decision of the Hon'ble Mumbai High Court in the case of M/s Everest Kanto Cylinder Ltd. Vs. DCIT, it was held that commercial banks guarantees are easily encashable in the event of default hence higher commission is justif ied for them, whereas in case of corporate guarantee the parent company would repay loan in case its AE defaults. Further, it was held that the conditions for issuance of corporate guarantees are distinct and separate from bank guarantee. Accordingly, the Hon'ble High Court upheld ITAT decision of guarantee commission @ 0.50%. The relevant portion of ITAT, Mumbai decision is reproduced for convenience:
21. So far as the learned Senior counsel's contention that guarantee commission is not an international 14 ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
transaction and there could not be any method for evaluating the ALP for the guarantee commission, we do not find any merit in the said contention in view of the amendment brought by the Finance Act, 2012 with retrospective effect from 1-4- 2002 by way of Explanation added in Section 92B.
Payment of guarantee fee is included in the expression 'international transaction' in view of the Explanation i(c) of Section 92B. Once the guarantee fee falls within the meaning of 'international transaction', then the methodology provided in the rules also becomes applicable. Here in this case, it is undisputed that the assessee in its T.P. Study Report and also the TPO, have accepted that it is an international transaction and CUP is the most appropriate method for benchmarking the charging of guarantee fee. We also do not agree with the contention of the learned counsel that there could not be any cost or charge of guarantee fee by providing corporate guarantee to its subsidiary because there is an always element of benefit or cost while providing such kind of guarantee to AE. However, in this case, the assessee has itself charged 0.5% guarantee commission from its AE, therefore, it is not a case of not charging of any kind of commission from its AE. The only point which has to be seen in this case is whether the same is at ALP or not. We have already come to a conclusion in the foregoing paras that the rate of 3% by taking external comparable by the TPO, cannot be sustained in facts of the present case. We also find that in an independent transaction, the assessee has paid 0.6% guarantee commission to ICICI Bank India for its credit arrangement. This could be a very good parameter and a comparable for taking it as internal CUP and comparing the same with the transaction with the AE. The charging of 0.5% guarantee commission from the AE is quite near to 0.6%, where the assessee has paid independently to the ICICI Bank and charging of guarantee commission at the rate of 0.5% from its AE can be said to be at arms length. The difference of 0.1% can be ignored as the rate of interest on which ICICI Bank, Bahrain Branch has given loan to AE (i.e. subsidiary 15 ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
company) is at 5.5%, whereas the assessee is paying interest rate of more than 10% on its loan taken with ICICI Bank in India. Thus, such a minor difference can be on account of differential rate of interest. Thus, on these facts, we do not find any reason to uphold any kind of upward adjustment in ALP in relation to charging of guarantee commission. Hence, the addition of Rs.28,50,353/
- on account of TP adjustment on guarantee commission is hereby deleted and the order of the CIT(A) is set aside. Accordingly, ground NO.2 is treated to be allowed."
Following the above decision of the Mumbai Bench, which has been upheld by the Hon'ble High Court, we find that in the circumstances of the said case, it was held appropriate to charge the corporate guarantee at 0.50% from its AE and that it can be said to be at arm's length. However, in the case before us, we find that there is no corporate guarantee commission charged by the assessee. Therefore, we remit this issue to the file of the AO/TPO to determine the ALP of the corporate guarantee by following the judicial precedents, more particularly, the case of Glenmark Pharmaceuticals Vs. ACIT (supra). In the result both the assessee's as well as revenue's appeal are treated as allowed for statistical purposes.
14. The ground 15 of the Assessee relating to TDS & TCS credit, is also remitted back to the f ile of AO."
10.1. Respectfully following the same, we direct the Assessing Officer to adopt the same for the relevant assessment year also. The Revenue is also aggrieved by the directions of the DRP to adopt LIBOR rate by raising grounds of appeal No. 2 and
3. In view of the above decision, the Revenue's grounds of appeal No.2 and 3 are rejected and Assessee's grounds of appeal No. 9 to 21 are treated as allowed.
16ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
11. As regards ground No.22 which is against disallowing the SAP implementation expenses of Rs.2,34,50,000 and treating the same as capital expenditure, the Learned Counsel for the assessee submitted that assessee had claimed Rs.5,10,25,000 under the sub-head "SAP Installation Expenses" under the head "Miscellaneous Expenses". When asked to file details, assessee company filed break-up of the same which includes Rs.1,75,25,000 towards SAP Software License Fee and Rs.3,35,000 towards SAP implementation charges. The Assessing Officer observed that the 'Expenses of SAP Implementation' is capital in nature and therefore, the same cannot be allowed as revenue expenditure. The Assessing Officer, thereafter, allowed the depreciation on the capital expenditure and brought the balance of Rs.2,34,50,000 to tax. Aggrieved, the assessee is in appeal before us. Learned Counsel for the assessee submitted that the SAP implementation charges are revenue in nature and for this purpose, he placed reliance upon the decision of the Hon'ble Delhi High Court in the case of CIT vs. Asahi India Safety Class Ltd., reported in (2012) 346 ITR 329.
12. The Ld. D.R. on the other hand, supported the orders of the Assessing Officer and placed reliance upon the decision of the Coordinate Bench of this Tribunal in the case of Srinivasa Resources vs. ACIT reported in (2014) 41 taxmann.com 350 (Hyd.) (Trib.).
13. Having regard to the rival contentions and the material on record, we find that the Hon'ble Delhi High Court, was dealing with the case of an assessee which has installed software which was an application of software i.e., Oracle in the 17 ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
relevant assessment year. The assessee therein had claimed the entire amount as expenses on revenue account. The Hon'ble Delhi High Court after considering various decisions on the issue has considered the difference between the system software and application software and observed that the application software would have to be abated from time to time based on the requirement of the assessee in the context of the advancement of its business and/or its diversification, if any, and the changes brought about due to statutory amendments by law or by professional bodies like ICAI etc., Thereafter, the Hon'ble High Court has concluded that the expenditure incurred by the assessee on software is allowable as revenue expenditure, more so as the software acquired by the assessee was an application software which enables it to execute tasks in the field of accounting purchase and inventory margins. In the case of Srinivasa Resources, the Coordinate Bench of this Tribunal was also dealing with the nature of the expenditure on purchase of application software and has held it to be capital expenditure. The decision of the Tribunal is dated October 11, 2013 whereas, the decision of the Hon'ble High Court is dated 04th November, 2011. Thus, it can be seen that the decision of the Hon'ble Delhi High Court has not been considered by the Coordinate Bench of this Tribunal in the case of Srinivasa Resources. Further the judicial discipline requires that the decision of the Higher Court be followed over the decision of the Lower Court/Tribunal. Since the decision of the Hon'ble High Court is on the very same issue, we are inclined to follow the decision of the Hon'ble High Court of Delhi and accordingly, we direct the Assessing Officer to allow the expenditure incurred on implementation of the application 18 ITA.No.83/Hyd/2014 & ITA.No.158/Hyd/2014 Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Hyderabad.
software of SAP as revenue expenditure. Accordingly, ground of appeal No.22 is allowed.
14. As regards the ground of appeal No.23, it is the grievance of the assessee that the Assessing Officer has not allowed the credit of TDS and TCS at Rs.25,32,285. We remit this issue to the file of the Assessing Officer for verification and consideration in accordance with law. Ground of appeal No.23 is treated as allowed for statistical purposes.
15. In the result, Assessee's appeal is treated as partly allowed for statistical purposes and Revenue's appeal is dismissed.
Order pronounced in the open Court on 28.09.2016.
Sd/- Sd/-
(B. RAMAKOTAIAH) (SMT. P. MADHAVI DEVI)
ACOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated 28 September, 2016
th
VBP/-
Copy to :
1. The DCIT, Circle-3(1), 7th Floor, 'B'-Block, I.T. Towers, Hyderabad.
2. The Addl. CIT, Range-3, 7th Floor, I.T. Towers, Hyderabad.
3. Rain Commodities Ltd., (Presently known as Rain Industries Ltd.,), Rain Center, Plot No.3A, Srinagar Colony, Hyderabad - 500 073.
4. The Disputes Resolution Panel, 2nd Floor, I.T. Towers, 10-2-3, A.C. Guards, Hyderabad - 500 004.
5. The Director of Income Tax, International Taxation, I.T. Towers, 10-2-3, A.C. Guards, Hyderabad - 004.
6. The CIT-III, Hyderabad - 500 004.
7. The Addl. CIT (Transfer Pricing), Hyderabad.
8. D.R. ITAT "A" Bench, Hyderabad.
9. Guard File.