2016-TII-INSTANT-ALL-356
10 August 2016   

PR CIT Vs ADANI ENTERPRISES LTD: GUJARAT HIGH COURT (Dated: August 3, 2016)

Income tax - Sections 14A & 92C.

Keywords - approval of RBI - guarentee fees - international transaction - pledging of shareholder - term loan & upward adjustment.

Whether when it is clearly established by the ITAT that the transaction of the assessee pledging its shares for providing bank guarentee to its AE, fell through for want of RBI's permission', no question of law arises warranting interference by the jurisdictional High Court on the issue of international transaction - YES: HC

The AO during the subject year had made addition of Rs. 3.65 crores on account of TP upward adjustment, upon noticing that the assessee's AE i.e. M/s. Adani Global Pvtl Ltd., Singapore had raised a term loan of Rs. 731.92 crores from ICICI Bank Ltd., for which, the assessee had provided guarantee. Such guarantee came in form of pledging shareholding of Mundra Port and SEZ Limited owned by the assessee. It was noticed that this guarantee was provided for charging any guarantee fees. The assessee was, therefore, put to notice why arm's length guarantee fees should not be computed in relation to this transaction. In response, the assessee contended that it did intend to provide a guarantee by pledging its shares. However, before the same could be done, permission of RBI was required to be obtained. RBI did not grant such approval and that therefore, the assessee never gave such guarantee. The TPO, however, discarded such version of the assessee observing that low rate of interest was negotiated on the premise of such guarantee. May be that the RBI may have turned down the request for approval for pledging of shares but "AE and the bank may have proceeded further on the basis of above pledge of shares." The other ground pressed by the TPO was that the letter of RBI, on which, the assessee had relied, was regarding pledging of shares in favour of M/s. IDBI Trusteeship Services Limited and not concerning ICICI Bank Limited. On appeal, the CIT(A) observed that IDBI Trusteeship Ltd was security trustee of ICICI Bank Limited, Singapore and thus, RBI's letter refusing permission for pledge of the shares refers to the same transaction. Since the assessee did not provide guarantee service by pledging the shares, upward adjustment of guarantee commission could not be made. On further appeal, the ITAT held that since assessee not having furnished the guarantee to the AE, there was no international transaction within the meaning of Section 92(C), the adjustment could not have been made.

Having heard the parties, the High Court held that,

+ it is found that the CIT(A) as well as the Tribunal held from materials on record that the assessee was correct in pointing out that though at one stage, the assessee had intended to pledge its shares for guarantee in favour of an AE, however, such transaction did not go through since the RBI permission, which was needed, was not granted. The TPO ventured in the realm of conjectures when he recorded that despite this refusal, the assessee may have gone through with the pledging of shares, but there is nothing on the record to suggest that despite refusal from RBI, assessee pledged the shares. The CIT(A) as well as the Tribunal found that the RBI's letter, placed on record, concerns the same transaction. On both counts thus, there was evidence suggesting that the transaction of assessee pledging its shares fell through for want of RBI permission, no question of law arises.

Revenue's appeal dismissed

2016-TII-51-HC-ALL-TP

HONDA MOTOR INDIA PVT LTD Vs ACIT: ALLAHABAD HIGH COURT (Dated: July 20, 2016)

Income tax - factual issues - observation by higher authority - remand order & scope of enquiry

Whether the parties to litigation are at liberty to raise entire factual issues before AO/TPO in respect of grounds on which ITAT has remanded the matter and any observation made on these factual aspects either by ITAT or DRP will not be binding upon the AO/TPO - YES: HC

The assessee had preferred the present appeal challenging the order, whereby the ITAT had framed only four questions, out of the nine grounds raised by assessee. The Tribunal having opted so, came to the conclusion that the matter had not been properly examined by AO/TPO and it had to be examined afresh to arrive at correct ALP.

Having heard the parties, the High Court held that,

+ the substantial questions of law sought to be raised in this appeal is "when a remand order is passed to examine substantial factual issues, AO/TPO should be allowed to consider the matter/issues on which remand is made by taking into account entire relating aspects or scope of enquiry should be restricted by the observations already made by higher authorities i.e. DRP/Tribunal." The counsel for Revenue did not dispute that Tribunal has found certain factual aspects relating to functions of Assessee not properly examined, appreciated and adjudicated by AO/TPO. When in respect to factual aspects, matter is remanded, authority who has to consider the matter on remand, obviously must be free to look into the entire matter without being influenced by any observations made by higher authorities in proceedings which were taken against assessee by AO/TPO which have now been set aside and the matter has been remanded. In that view of matter, we answer the aforesaid questions in favour of Assessee and direct that the parties shall be at liberty to raise entire factual issues before AO/TPO in respect of grounds on which Tribunal has remanded the matter and any observation otherwise made on these factual aspects either by Tribunal or DRP shall not be treated to be binding upon AO/TPO.

Assessee's appeal allowed

2016-TII-50-HC-AHM-TP

PR CIT Vs ALLSCRIPTS INDIA PVT LTD: GUJARAT HIGH COURT (Dated: August 2, 2016)

Income Tax - Sections 92C & 133(6) - Rule 10B.

Keywords: TNMM - determination of ALP - recording of reasons - segmental information - exclusion from comparables.

Whether at the time of ALP determination, the Tribunal without overruling the findings of the TPO or without giving any specific findings, can proceed to hold that in the absence of segmental information, a company can be excluded from the list of comparables - NO: HC

The assessee is a company. Against the total of 12 companies, who were taken into account by DRP for carrying out the exercise of ascertaining arms length price through Transactional Net Margin Method, the Tribunal provided that the results of two companies, viz., Bodhtree Consulting Ltd. And E-Infochip Bangalore Ltd. would be kept out of consideration. The Tribunal thereupon directed the AO to re-work the additions in case of the assessee on the basis of TP mechanism after excluding the aforesaid two companies. Revenue adopted the results of various companies including above two companies, despite strong opposition from the assessee. The final working out by the AO was done in tune with the report of the TPO. The Tribunal with respect to Bodhtree Consulting Ltd. referred to orders passed by other Tribunals in similar background and noted that the financial results of this company were highly fluctuating from year to year. On such basis, Tribunal called for exclusion of such company.

With respect to E-Infochip Bangalore Ltd., the Tribunal noted that the company was engaged in software development and IT enabled services. The assessee was involved only in software development. The Tribunal accepted assessee's contention that since the financial information with respect to these two segments was not separately available, the profit margin of this company also must be kept out of consideration. With respect to Bodhtree Consulting Ltd., the Tribunal in case of another assessee had noted the company's financial results for financial year 2005-06 to financial year 2012-13, where it had noticed that this ratio had fluctuated widely from -11.53% to 80.15% in a span of about 7 years. From year to year also, this ratio had fluctuated between 13.87% to 80.15%, back to 19.89% up again to 62.27% and so on. Therefore, on account of such widely fluctuating and erratic results of the company, Tribunal found that it would be unsafe to assess ALP based on TNMM taking into account the results of this company.

On appeal, the HC held that,

+ the Tribunal did not take into account the findings of the TPO that E-Infochip Bangalore Ltd. was engaged in software development services alone and that the assessee's contention to the contrary was not borne out from the record. If the Tribunal had perused the material on record and come to a conclusion different from that of the TPO by giving reasons, the situation would stand on a different footing. In the present case, the Tribunal merely considered whether in absence of segmental information available with respect to E-Infochip Bangalore Ltd., the margin of such company could have been considered by the TPO. This issue completely ignores the fundamental question whether E-Infochip Bangalore Ltd. was engaged in any services other than software development services. Only if answer to the question was in the affirmative, the question of availability or non-availability of segmental information would arise;

+ the Tribunal thus without overruling the finding of the TPO, without giving any specific finding of its own much less recording the reasons, proceeded to hold that in absence of segmental information E-Infochip Bangalore Ltd. must be excluded from consideration, directed exclusion of E-Infochip Bangalore Ltd. We find that the Tribunal has committed a serious error. Under the circumstances, to the limited extent of the Tribunal's directions to exclude E-Infochip Bangalore Ltd. from working out the transfer pricing, the judgment is reversed. The issue is placed back to the Tribunal for reconsideration of the question within the parameters of observations made above. Tax Appeal disposed of accordingly.

Revenue's appeal allowed

 

Thanking you for your support and cooperation.

Regards,
Customercare Executive,

Taxindiainternational.com Pvt. Ltd.

TIOL HOUSE, 490, Udyog Vihar, Phase - V
Gurgaon, Haryana - 122001, INDIA
Board : +91 124-2879600 Fax: +91 124-2879610
Web: http: //www.taxindiainternational.com
Email: tiiinstant@taxindiainternational.com
____________________________
CONFIDENTIALITY/PROPRIETARY NOTE.
The Document accompanying this electronic transmission contains information from Taxindiainternational.com ,which is confidential, proprietary or copyrighted and is intended solely for the use of the individual or entity named on this transmission. If you are not the intended recipient, you are notified that disclosing, copying, distributing or taking any action in reliance on the contents of this information is strictly prohibited. This prohibition includes, without limitation, displaying this transmission or any portion thereof, on any public bulletin board. If you are not the intended recipient of this document, please return this document to Taxindiainternational.com immediately.