M/s. Bacardi India Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 1197/DEL/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6534 (ITAT-DELHI)
• Duration Of Justice: 9 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-12-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 05-12-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 04-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Keywords: Business income; Transfer pricing; Principle of natural justice; International transaction
• Section: 92C; 92B; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I, NEW DELHI BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER I.T.A. NO. 1197/DEL/2016 ( ASSESSMENT YEAR 2011-12 ) BACARDI INDIA PVT. LTD. 805-808, TIME TOWER, M. G. ROAD, GURGAON. GIR / PAN : AAACB3944R (APPELLANT) VERSUS DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-4(1), NEW DELHI. . (RESPONDENT) APPELLANT BY : MR. NAGESWAR RAO, ADV. MR. SHATANIK CHAKROBORTY, ADV. RESPONDENT BY : MR. AMRENDRA KUMAR, CIT, DR DATE OF HEARING : 06.12.2016 DATE OF PRONOUNCEMENT: 09.12.2016 ORDER PER BEENA A. PILLAI, JM: 1. THE PRESENT APPEAL HAS BEEN FILED AGAINST ORDER DA TED 29.01.2016, PASSED BY DCIT CIRCLE 4 (1), NEW DELHI FOR ASSESSMENT YEAR 2011-12, ON FOLLOWING GROUNDS OF AP PEAL: 1.1 GROUND 1 : ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DISPUTE RESOLUTION PANEL ( DRP) AND THE LEARNED AO/TPO HAVE ERRED IN WRONGLY 2 I.T.A. NO. 1197/DEL/16 APPLYING THE PROVISIONS OF SECTION 92 OF THE ACT WH ILE HOLDING THAT ADVERTISING, MARKETING AND PROMOTION EXPENSES INCURRED BY THE APPELLANT IS AN INTERNATIO NAL TRANSACTION COVERED UNDER THE PURVIEW OF SECTION 92 OF THE ACT, WITHOUT APPRECIATING THAT NO REAL INCOME H AS ARISEN FOR THE AES ON ACCOUNT SUCH EXPENSES INCURRE D IN INDIA. 1.2 GROUND 2: ON THE FACT AND CIRCUMSTANCES OF THE INSTANT CASE, THE HON'BLE DRP AND LEARNED AO/TPO HAVE GROSSLY ERRED IN NOT APPRECIATING THE FUNCTIONAL AN D RISK PROFILE OF THE APPELLANT (I.E. A FULL-FLEDGED RISK BEARING MANUFACTURER) WHICH IS SOLELY RESPONSIBLE FOR ALL K EY DECISIONS (INCLUDING INCURRENCE OF EXPENDITURE ON ADVERTISING, MARKETING, SELLING AND DISTRIBUTION ET C.) TAKEN TO FURTHER ITS OWN BUSINESS INTERESTS, AND TH AT IT IS THE PRIMARY BENEFACTOR OF ALL EXPENSES (INCLUDING A MP EXPENSES) INCURRED BY IT, WHEREAS ANY BENEFIT DERIV ED BY THE ASSOCIATED ENTERPRISES THEREOF IS PURELY INCIDE NTAL. 1.3 GROUND 3: WITHOUT PREJUDICE, THE HON'BLE DRP AND LEARNED AO/TPO HAS GROSSLY ERRED IN TREATING THE APPELLANT AS 'DISTRIBUTOR' AND COMPLETELY IGNORING THE FACTS THAT IT (I.E. THE APPELLANT) IS IN FACT A FUL L-RISK BEARING LICENSED MANUFACTURER ENGAGED IN MANUFACTUR E AND SALE OF ALCOHOLIC BEVERAGES UNDER THE TRADE NAM ES LICENSED BY ITS AES. 1.4 GROUND 4: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP AND LEARNED AO/TPO HAVE GROSSLY ERRED IN COMPUTING ARM'S LENGTH PRICE OF TH E ADVERTISEMENT, MARKETING AND PROMOTION EXPENSE INCURRED BY THE APPELLANT IN INDIA, WITHOUT APPRECI ATING THAT THE METHODOLOGY ADOPTED BY THE HON'BLE DRP AND THE LEARNED AO/TPO DOES NOT ENTAIL PROPER AND CORRE CT 3 I.T.A. NO. 1197/DEL/16 ''APPLICATION' OF ANY CONCLUSIVE METHOD AS PRESCRIB ED UNDER RULE 10B OF THE RULES. 1.5 GROUND 5: WITHOUT PREJUDICE, THE HON'BLE DRP AND LEARNED AO/TPO HAVE ERRED IN NOT GIVING DUE COGNIZANCE TO THE VARIOUS DECISION OF HIGHER COURTS (ON THE ISSUE INVOLVING CREATING OF MARKETING INTANGIBL ES) WHICH CLEARLY REQUIRES EXCLUSION OF ALL NON-BRAND R ELATED EXPENSES (I.E. POINT OF SALES EXPENSES, WHICH ARE I N THE NATURE OF REBATES AND DISCOUNTS, SELLING EXPENSES, SALES COMMISSION, ETC.) FOR THE PURPOSE OF COMPUTING AMP EXPENSES. 1.6 GROUND 6: WITHOUT PREJUDICE, THE LEARNED AO/TPO HAS ERRED IN NOT GIVING APPROPRIATE RELIEF AS PER THE D IRECTIONS ISSUED BY THE HON'BLE DRP AND HAVE SUBJECTIVELY PROCEEDED TO DETERMINE TAXABLE INCOME OF THE APPELL ANT BASED ON TRANSFER PRICING ADDITION ORIGINALLY CALCU LATED USING THE BRIGHT LINE TEST. 1.7 GROUND 7: ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP AND LEARNED AO/TPO HAVE ERRED IN MISINTERPRETING THE INTERNATIONAL GUIDANCE, VARIOUS TAX COURT RULINGS & JUDICIAL PRONOUNCEMENTS ON THE SUBJ ECT. THE LEARNED TPO/HON'BLE DRP HAS TAKEN AN EXTREMELY PREJUDICIAL STAND WITHOUT APPRECIATING THE FACTS & CIRCUMSTANCES APPLICABLE TO THE APPELLANT'S INSTANT CASE. 1.8 GROUND 8: WITHOUT PREJUDICE, THE LEARNED TPO/HON'BLE RP HAS ERRED IN NOT GIVING DUE COGNIZANCE TO THE FA CT THAT THE APPELLANT HAS NOT PAID 'ANY' ROYALTY TO ITS AE FOR USE OF BACARDI BRAND DURING THE YEAR. THE LEARNED TPO/HON'BLE DRP HAS ERRED IN NOT GIVING ANY CREDENC E TO THE GUIDANCE PROVIDED ON THIS ASPECT BY THE HON' BLE SPECIAL BENCH IN CASE OF M/S L.G. ELECTRONICS INDIA PRIVATE LIMITED AND THEREBY FAILED TO ALLOW AN ADJUSTMENT ON THIS ACCORD. 4 I.T.A. NO. 1197/DEL/16 1.9 GROUND 9: WITHOUT PREJUDICE, THE HON'BLE DRP AND LEARNED AO/TPO HAVE ERRED IN SUBJECTIVELY CONCLUDIN G THAT THE APPELLANT HAS EFFECTIVELY PROVIDED BRAND BUILDING SERVICES TO ITS AES (WHICH ARE IN THE NATU RE OF INTRA-GROUP SERVICES) AND THEREFORE ALL COSTS INCUR RED ON ACCOUNT OF ADVERTISEMENT, MARKETING AND PROMOTION SHOULD BE RECOVERED ALONG WITH GROSS MARGIN EARNED BY THE APPELLANT IN RESPECT OF ITS DISTRIBUTION BUSINE SS. 1.10 GROUND 10: ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP AND THE LEARNED TPO HAS ERRED IN REJECTING THE ECONOMIC ANALYSIS CARRIED BY THE APPE LLANT FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANSACTION INVOLVING 'PAYMENT OF INTEREST' ON FULL Y CONVERTIBLE DEBENTURES ISSUED TO ITS AE, AND THEREB Y ERRED IN APPLYING LIBOR BASED INTEREST RATE WITHOUT APPRECIATING THAT DEBENTURES ISSUED BY AN INDIAN COMPANY REPRESENTS DEBT IN INDIAN CURRENCY. 1.11 GROUND 11: THE LEARNED AO HAS ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(L)(C) OF THE ACT AGAI NST THE APPELLANT, WHICH IS BAD IN LAW. 2. THE BRIEF FACTS OF THE CASE AS OBSERVED BY THE AUTHORITIES BELOW ARE AS UNDER: 2.1. ASSESSEE IS A COMPANY AND HAS FILED ITS RETURN OF INCOME ON 29.11.2011 DECLARING LOSS OF RS. 23,90,87 ,502/-. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143 (2) OF THE ACT, WAS ISSUED ON 09.08.2012. SUBSE QUENTLY A QUESTIONNAIRE WAS ISSUED WHEREIN CERTAIN DETAILS WERE CALLED FOR. IT HAS BEEN OBSERVED BY THE LD.AO THAT ASSESSEE WAS INCORPORATED ON 12.11.1996 IN INDIA, AND IS ENG AGED IN 5 I.T.A. NO. 1197/DEL/16 THE BUSINESS OF MANUFACTURING, DISTRIBUTION, SELLIN G AND MARKETING OF ALCOHOLIC BEVERAGES IN INDIA. LD.AO DU RING THE ASSESSMENT PROCEEDINGS OBSERVED THAT ASSESSEE HAD E NTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AE), WITHIN THE MEANING OF SECTION 92B OF THE ACT. THE CASE WAS THEREFORE REFERRED TO THE TRANSFE R PRICING OFFICER (TPO), AS PER THE PROVISIONS OF SECTION 92C A (1) OF THE ACT. THE LD. TPO, THEREAFTER, ISSUED NOTICE TO THE ASSESSEE. DURING THE COURSE OF THE PROCEEDINGS BEFORE THE LD. TPO, VARIOUS SUBMISSIONS WERE MADE BY THE AUTHORIZED REPRESENTATIVES REGARDING THE INTERNATIONAL TRANSAC TIONS ENTERED INTO BY ASSESSEE WITH ITS AE. 3. LD. TPO OBSERVED THAT, ASSESSEE IS A 74: 26 JV, BETWEEN BACARDI INTERNATIONAL LTD AND GEMINI DISTIL LERIES LTD. RESPECTIVELY, AND IS ENGAGED IN THE BUSINESS O F MANUFACTURE AND DISTRIBUTION OF ALCHOL BEARING BRAN D NAME, BACARDI. IT WAS OBSERVED THAT ASSESSEE MANUFACTUR ES PRODUCTS UNDER THE BRAND NAME BACARDI, AT NANJNGU D IN KARNATAKA, INDIA. IN ADDITION TO THIS ASSESSEE ALSO CARRIES OUT MANUFACTURING OF ITS PRODUCTS USING A LICENSED FACTORY LOCATED IN GOA. 4. LD.TPO OBSERVED THAT ASSESSEE HAS REPORTED THE FOLLOWING INTERNATIONAL TRANSACTION IN FORM 3 CEB. S. NO. DESCRIPTION OF THE TRANSACTION AMOUNT ( RS.) 6 I.T.A. NO. 1197/DEL/16 1. EXPORT OF FINISHED GOODS 39,298,257 2. IMPORT OF RAW MATERIAL FOR CONSUMPTION 8,497,163 3. IMPORT OF LIQUOR FOR RESALE 160,322,418 4 . INTEREST PAID ON ECB 1,815,001 5 . INTEREST PAID ON FCD 55,763,889 6 REIMBURSEMENT OF EXPE NSES BY AES 462,488,096 7 . REIMBURSEMENT OF EXPENSES TO AES 17,534,304 5. LD.TPO ACCEPTED THE ALP ARRIVED BY ASSESSEE IN RES PECT OF EXPORT OF FINISHED GOODS, IMPORT OF RAW MATERIAL S FOR CONSUMPTION, IMPORT OF FINISHED GOODS FOR RESALE, P AYMENT OF INTEREST ON ECB, AND REIMBURSEMENT OF EXPENSES TO E ASE. LD. TPO HAS NOT OBJECTED FOR THE MOST APPROPRIATE M ETHOD ADOPTED BY ASSESSEE IN THESE INTERNATIONAL TRANSACT IONS. HOWEVER HE PROPOSED TO MAKE ADDITION ON ACCOUNT OF ADVERTISEMENT, MARKETING AND PROMOTION (AMP) EXPENS ES INCURRED BY ASSESSEE AND INTEREST PAID ON FULLY CON VERTIBLE DEBENTURES (FCD) DURING THE YEAR UNDER CONSIDERATIO N. 6. DURING THE PROCEEDINGS LD. TPO OBSERVED THAT ASSES SEE HAS INCURRED HUGE EXPENSES TOWARDS ADVERTISEMENT, MARKETING AND PROMOTION AS UNDER: 7 I.T.A. NO. 1197/DEL/16 PARTICULARS FY 2006-07 FY2007-08 FY 2008-09 FY 2009-10 FY 2010-11 SALES (RS) 665,423,736 747,903,719 1,133,195,580 1,908,503,809 2,474,328,712 AMP EXPENDITURE 263,708,991 396,262,556 469,067,671 440,960,491 588,207,298 AMP TO TOTAL SALES (%) 39.63 52.98 41.39 23.10 23.77 7. LD.TPO WAS OF THE OPINION THAT BY INCURRING SUCH H UGE EXPENSES, HAS CREATED MARKETING INTANGIBLES FOR ITS AE WHICH HAS NOT BEEN COMPENSATED FOR. HE THUS CONCLUDED TH AT THE EXPENDITURE INCURRED BY THE ASSESSEE IS AN INTERNAT IONAL TRANSACTION AND BENCHMARKED IT FOR PURPOSES OF DETE RMINING ARMS LENGTH PRICE(ALP). THE LD.TPO COMPUTED ALP BY ADDING MARKUP OF 38% ON THE GROSS EXPENDITURE INCURRED BY THE ASSESSEE TOWARDS ADVERTISEMENT, MARKETING AND PROMO TION. 8. AGGRIEVED BY THE ADDITION MADE BY LD.TPO, ASSESSEE PRIMARILY OBJECTED BEFORE DRP THAT, THE EXPENSES IN CURRED BY ASSESSEE TOWARDS ADVERTISEMENT, MARKETING AND PROMO TION, DO NOT AMOUNT TO INTERNATIONAL TRANSACTION, AS THES E HAVE BEEN INCURRED BY ASSESSEE FOR PURPOSES OF ITS OWN B USINESS. IT ALSO RAISED OBJECTIONS ON THE ADJUSTMENT MADE BY LD.TPO IN RESPECT OF AMP EXPENSE AMOUNTING TO RS.58,41,85, 371/-. ASSESSEE RAISED OBJECTIONS AGAINST ADDITION MADE BY LD.TPO ON ACCOUNT OF INTEREST PAID ON FULLY CONVERTIBLE DE BENTURES DURING THE YEAR UNDER CONSIDERATION AMOUNTING TO RS.3,64,69,583/-. 8 I.T.A. NO. 1197/DEL/16 9. DRP REJECTED THE CONTENTIONS OF ASSESSEE AND HELD IN PARAGRAPH 5.11 THAT ASSESSEE IS CARRYING OUT INTENS E AMP ACTIVITY, WHICH IS PART OF ITS DISTRIBUTION FUNCTIO N AND FOR WHICH HAS NOT BEEN COMPENSATED EITHER THROUGH THE P RICING POLICY OR THROUGH FUTURE ECONOMIC OWNERSHIP OF THE BRAND. AS REGARDING THE INTERESTS DISALLOWED ON FULLY CONV ERTIBLE DEBENTURES THE DRP HELD THAT THE INTEREST PAID BY T HE ASSESSEE IS NOT AT ARMS LENGTH AND APPLIED INTEREST RATE AT 3.46% BEING LIBOR RATE. 10. PURSUANT TO DRP DIRECTION, GROSS PROFIT RATE EARNE D BY ASSESSEE IN ITS MANUFACTURING AND DISTRIBUTION BUSI NESS WAS ARRIVED AT 38%. LD. DCIT MADE ADDITION OF EXCESS A MP EXPENDITURE, DETERMINED BY TPO, BY APPLYING BLT. LD . DCIT PASSED THE FINAL ASSESSMENT ORDER MAKING FOLLOWING ADDITIONS: S . N NATURE OF TRANSACTION ALP DETERMINED BY TAXPAYER (RS.) ALP DETERMINED BY THIS OFFICE (RS.) ADJUSTMENT U/S 92CA (RS.) 1 AMP 1050695394 113,571,688 83,07,42,618 2 INTEREST PAID ON FCDS 55763889 22082500 33681389 TOTAL 86,44,24,007 AGGRIEVED BY THE ADDITION MADE THE ASSESSEE IS IN A PPEAL BEFORE US NOW. 11. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT GROUND NO. 1 TO 9 ARE IN RESPECT OF THE ADJUSTMENT MADE BY LD. TPO IN 9 I.T.A. NO. 1197/DEL/16 RESPECT OF ALLEGED AMP EXPENSES AND GROUND NO. 10 I S IN RESPECT OF THE INTEREST BEING DISALLOWED BY APPLYIN G LIBOR BASED INTEREST RATE. GROUND NO. 1 TO 9 12. THESE GROUNDS ARE CONSIDERED TOGETHER AS IT RELATE S TO THE ISSUE OF AMP EXPENSES. 13. LD. COUNSEL FOR THE ASSESSEE HAS CONTESTED THE FIN DINGS OF THE AUTHORITIES REGARDING THE AMP EXPENSES BEING HELD TO BE INTERNATIONAL TRANSACTION, IN THE PRESENT CASE. HE SUBMITS THAT THE AUTHORITIES HAVE PROCEEDED ON AN ASSUMPTIO N THAT EXPENSES INCURRED BY ASSESSEE FOR ADVERTISEMENT, MA RKETING AND PROMOTION, ARE TOWARDS BRAND BUILDING OF THE BR AND BACARDI, WHICH IN TURN HAS BROUGHT BENEFIT TO THE AE. HE SUBMITS THAT BEFORE ARRIVING AT SUCH A CONCLUSION T HE REVENUE HAS TO SHOW THE EXISTENCE OF AN AGREEMENT O R AN ARRANGEMENT AND UNDERSTANDING BETWEEN THE ASSESSEE AND ITS AE AS HAS BEEN DECIDED BY VARIOUS DECISIONS OF COORDINATE BENCHES OF THIS TRIBUNAL. HE SUBMITS TH AT SUCH FINDINGS NEEDS TO BE ESTABLISHED BY WAY OF EVIDENCE S THAT PRIOR TO THE INCURRING OF SUCH EXPENDITURE THERE EX ISTED AN AGREEMENT, IN TERMS OF WHICH THE ASSESSEE WOULD HAV E INCURRED AMP EXPENDITURE IN EXCESS OF THE BONA FIDE REQUIREMENTS OF ITS BUSINESS IN INDIA, WHICH HAS AD DED TO THE VALUE OF BRAND OF THE FOREIGN AE. HE EMPHASIZED THAT UNLESS SUCH A FINDING IS ARRIVED AT BASED ON THE MA TERIALS ON 10 I.T.A. NO. 1197/DEL/16 RECORD, NO ADJUSTMENT COULD BE MADE. TO ADVOCATE TH E ABOVE PROPOSITION LD. COUNSEL FOR THE ASSESSEE REFERRED T O AND RELIED UPON VARIOUS DECISIONS OF HONBLE DELHI HIGH COURT WHICH ARE AS UNDER: MARUTI SUZUKI INDIA LTD VERSUS CIT REPORTED IN (201 5) 64 TAXMANN.COM 150 (DELHI); CIT-LTU VS. WHIRLPOOL INDIA LTD REPORTED IN (2015) 64 TAXMANN.COM 324 (DELHI); CONSOLIDATED ORDER IN CASE OF, SONY ERICSON MOBILE COMMUNICATIONS INDIA PVT. LTD., VS. DCIT ALONG WITH PCIT-8 VS. SONY MOBILE COMMUNICATIONS INDIA PVT. LT D., IN ITA NO. 638/2015 AND 648/2015 RESPECTIVELY, PASSED BY HONBLE DELHI HIGH COURT ON 28/01/2016; DECISION OF HONBLE DELHI HIGH COURT DIKIN AIR CONDITIONING INDIA PVT. LTD., VS. ACIT IN ITA NO. 269/2016 VIDE ORDER DATED 27/07/2016; CONSOLIDATED ORDER PASSED BY THIS TRIBUNAL, MUMBAI BENCHES, IN THE CASE OF LOREAL INDIAPVT.LTD., VS D CIT 6 (3) IN ITA NO. 7714/MUM/2012 WIDE ORDER DATED FOR MAY 2016, AND DECISION OF COORDINATE BENCH OF THIS TRIBUNAL IN GO ODYEAR INDIA PVT.LTD. VS. DCIT, CIRCLE 12 (1) IN ITA NO. 5 650 VIDE ORDER DATED 29/04/2016. 14. LD. COUNSEL FOR ASSESSEE FURTHER HIGHLIGHTED A SIGNIFICANT CONCLUSION IN THE CASE OF SONY ERICSON MOBILE 11 I.T.A. NO. 1197/DEL/16 COMMUNICATIONS INDIA PRIVATE LIMITED VERSUS CIT REP ORTED IN (2015) 374 ITR 118 THAT, BRIGHT LINE TEST(BLT), COU LD NOT BE APPLIED FOR EITHER DETERMINING THE EXISTENCE OF INT ERNATIONAL TRANSACTION INVOLVING AMP EXPENSES, OR FOR DETERMIN ING ALP OF SUCH TRANSACTIONS. 15. LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT TH E AMP EXPENSES INCURRED BY ASSESSEE AMOUNTING TO RS.46,24,88,096/-, WAS A FUNCTION PERFORMED BY IT B EING A PART OF ITS ROLE AND RESPONSIBILITY AS PER THE DIST RIBUTION AGREEMENT, WHICH WAS COMPENSATED BY AE, AND THE SAM E HAS BEEN CONSIDERED TO BE AN INTERNATIONAL TRANSACT ION IN THE TP DOCUMENTATION. HE SUBMITTED THAT THIS AMOUNT HAS NOT BEEN ROUTED THROUGH THE P&L ACCOUNT AS IT HAS B EEN CONSIDERED AS INTERNATIONAL TRANSACTION WITH ITS AE . HE SUBMITTED THAT LD.TPO HAS NOT DISPUTED THE ALP OF T HE REIMBURSEMENT OF SUCH EXPENSES INCURRED BY ASSESSEE . IN FURTHERANCE LD. COUNSEL HAS SUBMITTED THAT EXPENSES AMOUNTING TO RS.58,82,07,298/-HAS BEEN INCURRED TOW ARDS ADVERTISEMENT MARKETING AND PROMOTION OF THE PRODUC TS MANUFACTURED BY ASSESSEE FOR HIS BUSINESS IN INDIA , AND HAS BEEN ROOTED THROUGH THE P&L ACCOUNT, AND THUS C ANNOT BE BROUGHT INTO THE AMBIT OF INTERNATIONAL TRANSACT ION. 16. THE LD. COUNSEL FOR ASSESSEE SUBMITTED THAT LD.TPO HAS CONSIDERED THE EXPENDITURE ON AMP EXPENSES INCU RRED BY ASSESSEE TO BE RS.62,48,21,343/-, WHICH COMPRISE S OF 12 I.T.A. NO. 1197/DEL/16 EXPENSES INCURRED BY THE ASSESSEE FOR ITS OWN BUSIN ESS PURPOSES AMOUNTING TO RS.58,82,07,298/- AND THE COMMISSION PAID BY THE ASSESSEE TO OTHER SELLING AG ENTS AMOUNTING TO RS.3,66,14,045/-. HE REFERRED TO AND R ELIED UPON THE COMPUTATION BY LD.TPO, AT PAGE 289 OF THE PAPER BOOK WHICH IS AS UNDER: PARTICULARS AMOUNTS (INR) PROMOTIONAL EXPENSES 357,207,072 SELLING EXPENSES 99,764,616 REBATES AND DISCOUNTS 99,236,071 MARKET RE SEARCH / CONSUMER INSIGHTS 23,181,037 SALES COMMISSION 8,818,502 COMMISSION PAID TO OTHER SELLING AGENT 36614045 TOTAL 624,821,343 17. LD. COUNSEL EMPHASIZED THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AS WELL AS DISTRIBUTI ON OF LIQUOR, BEARING BRAND BACARDI. HE SUBMITTED THAT 90% OF ITS REVENUE IS FROM MANUFACTURING WITHIN INDIA AND ONLY 10% OF ITS REVENUE IS FROM TRADING ACTIVITY. HE THU S SUBMITTED THAT THE EXPENSES INCURRED BY THE ASSESSE E FOR THE PURPOSES OF ITS MANUFACTURING BUSINESS WITHIN INDIA CANNOT BE CONSIDERED AS INTERNATIONAL TRANSACTION; AS SUCH PAYMENTS ARE MADE FOR THE BENEFIT OF ASSESSEE, BUSI NESS. 13 I.T.A. NO. 1197/DEL/16 18. ON THE CONTRARY LD. DR HAS SUBMITTED THAT THERE EX IST INTERNATIONAL TRANSACTION BETWEEN ASSESSEE AND ITS AE, WHICH IS SUPPORTED BY THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSON MOBILE COMMUNICAT IONS INDIA PRIVATE LIMITED VS. CIT REPORTED IN (2015) 37 4 ITR 118 (DEL) LD. DR HAS SOUGHT TO TAKING US THROUGH THE AGREEMENTS ENTERED INTO BY ASSESSEE WITH ITS AE, FO R DISTRIBUTION OF THE PRODUCT IN INDIA. HE REFERRED T O THE DISTRIBUTION AND SUPPLY AGREEMENT, PLACED AT PAGE 8 2 TO 97 OF THE PAPER BOOK WHICH. THE CLAUSES REFERRED TO AN D RELIED UPON BY LD. DR ARE REPRODUCED HEREIN BELOW: DISTRIBUTOR APPOINTMENT AND SUPPLY AGREEMENT INDIA (DOMESTIC DUTY PAID MARKET) WHEREAS, TRADALL DESIRES TO APPOINT AND AUTHORIZE THE DISTRIBUTOR TO IMPORT, PROMOTE, DISTRIBUTE AND SELL THE PRODUCTS IN AND THROUGHOUT THE DESIGNATED TERRITORY ; WHEREAS, THE DISTRIBUTOR REPRESENTS THAT IT IS IN THE BUSINESS OF PROMOTING; DISTRIBUTING AND SELLING ALC OHOLIC BEVERAGE PRODUCTS AND DESIRES TO BE AUTHORIZED BY T RADALL TO IMPORT, PROMOTE, DISTRIBUTE AND SELL THE PRODUCT S IN AND THROUGHOUT THE DESIGNATED TERRITORY: . APPOINTMENT AS DISTRIBUTO] (A) TRADALL HEREBY GRANTS DISTRIBUTOR THE EXCLUSIVE RIGHT PRIVILEGE AND RESPONSIBILITY OF PURCHASING, IMPORTI NG PROMOTING DISTRIBUTING AND SELLING THE PRODUCTS IN AND 14 I.T.A. NO. 1197/DEL/16 THROUGHOUT THE DESIGNATED TERRITORY, ON THE TERMS A ND SUBJECT TO THE CONDITIONS SET FORTH IN THIS AGREEME NT, AND DISTRIBUTOR HEREBY ACCEPTS SUCH APPOINTMENT. (C) TRADALL MAY REQUEST DISTRIBUTOR TO PROVIDE REAS ONABLE ASSISTANCE IN RESPECT OF THE ADVERTISING PROMOTION AND MERCHANDISING PROGRAMS FOR THE PRODUCTS (A&P), DI RECTLY OR INDIRECTLY FUNDED BY TRADALL OR ITS DESIGNEE WIT HIN A&P PLANS AND BUDGETS NEGOTIATED AND AGREED ANNUALLY AN D REVIEWED QUARTERLY. IN SUCH EVENT, DISTRIBUTORS AS SISTANCE SHALL BE IN ACCORDANCE WITH THE WRITTEN GUIDELINES, RULES, INSTRUCTIONS RECEIVED FROM TRADALL OR ITS DESIGNEE. DISTRIBUTOR SHALL FURTHER KEEP ITS SALES FORCE FULL Y AND PROPERLY INFORMED AS TO ALL SALES POLICIES APPLICAB LE TO THE PRODUCTS AS INDICATED IN WRITING BY TRADALL OR ITS DESIGNEE AND SHALL, AT ITS OWN EXPENSE, TRAIN ITS SALESMEN T O MERCHANDISE AND SELL THE PRODUCTS IN A MANNER WHICH SHALL BE A CREDIT TO DISTRIBUTOR AND TO TRADALL. PROMPTLY UPON THE REQUEST OF TRADALL OR ITS DESIGNEE, DISTRIBUTOR SHA LL ALSO SUBMIT REPORTS DETAILING THE ASSISTANCE PROVIDED WI TH RESPECT TO THE ABOVE SAID A&P ACTIVITIES IN THE PRE CEDING MONTHS. THE DISBURSEMENTS CONNECTED WITH THE ABOVE MENTIONED A&P ACTIVITIES SHALL BE FUNDED IN ADVANCE BY TRADALL OR ITS DESIGNEE, IN ACCORDANCE WITH THE PRE -AGREED A&P PLANS AND BUDGETS, WHILE DISTRIBUTOR MAY BE REQUESTED TO ACT AS FACILITATOR OF THE RELEVANT PAY MENTS TO THE RESPECTIVE PROVIDERS; IN SUCH EVENT, DISTRIBUTO R SHALL BE REQUIRED TO PROVIDE TRADALL OR ITS DESIGNEE WITH TH E RELEVANT DOCUMENTARY EVIDENCE ON A MONTHLY BASIS OR AS FREQU ENTLY AS AGREED WITH TRADALL. 19. HE FURTHER REFERRED TO PAGE 92 WHERE THE PRICE FOR FISICAL YEAR 2008/2009 HAVE BEEN REPRODUCED, BEING SCHEDULE D 1 TO THE DISTRIBUTION AND SUPPLY AGREEMENT. LD. DR SU BMITTED THAT THIS LIST ENUNCIATES ITEMS THAT HAVE BEEN EXPO RTED BY 15 I.T.A. NO. 1197/DEL/16 ASSESSEE, WHICH INCLUDES CERTAIN PRODUCTS THAT ARE MANUFACTURED BY ASSESSEE WITHIN THE INDIA. LD.DR RE FERRED TO PAGE 95, WHICH DETAILS THE SALES TARGET TO BE AC HIEVED BY ASSESSEE IN RESPECT OF VARIOUS PRODUCTS, AND THE LI ST OF PRODUCTS THAT ARE MANUFACTURED BY ASSESSEE IN INDIA . 20. LD. DR REFERRED TO LICENSE AGREEMENT BETWEEN ASSES SEE AND ITS AE, WHICH WAS ENTERED INTO BETWEEN THE PART IES TO SHARE WITH THE ASSESSEE CERTAIN SECRET PROSSES, FOR MULA AND INFORMATION RELATING TO OPERATIONS NECESSARY FOR MA NUFACTURE OF THE PRODUCT. THE LICENSE AGREEMENT IS PLACED AT PAGE 98 TO 112 OF PAPER BOOK. LD. DR REFERRED TO RECITAL (D) A T PAGE 99, CLAUSE 4.2 AT PAGE 101, 4.5 AT PAGE 102 CLAUSES 6 A T PAGE 103 WHICH ARE REPRODUCED HEREIN BELOW FOR SAKE OF CONVENIENCE: .. (D) THE LICENSOR HAS AGREED TO PERMIT SUCH MANUFACT URE OF THE PRODUCTS BY THE LICENSEE AND HAS FURTHER AGREED TO DISCLOSE TO THE LICENSEE RELEVANT SECRET PROCESS, F ORMULAE AND INFORMATION ON THE TERMS AND CONDITIONS SET FOR TH IN THIS AGREEMENT; . 4.2. THE LICENSEE SHALL USE THE TRADE MARKS IN THE FORM STIPULATED BY THE LICENSOR ONLY IN RELATION TO THE PRODUCTS AND WITHOUT ALTERATION OR MODIFICATION AND SHALL OB SERVE ALL DIRECTIONS GIVEN BY THE LICENSOR FROM TIME TO TIME AS TO COLORS AND SIZES OF THE REPRESENTATIONS OF THE TRAC K MARKS AND THEIR MANNER AND DISPOSITIONS ON THE PRODUCTS A ND THEIR 16 I.T.A. NO. 1197/DEL/16 CONTAINERS AND PARKING AND ADVERTISING OR OTHER PRO MOTIONAL OR PUBLICITY MATERIAL. .. 4.5. THE LICENSEE SHALL NOT USE ANY LANGUAGE OR DIS PLAY THE TRADE MARKS IN SUCH A WAY AS TO CREATE THE IMPRESSI ON THAT THE TRADE MARKS BELONG TO THE LICENSEE. .. 6. ROYALTIES 6.1 IN CONSIDERATION OF THE LICENSE GRANTED BY TH E LICENSOR TO THE LICENSEE UNDER CLAUSE 2 HEREOF, THE LICENSEE SHALL PAY ROYALTY, NET OF TAXES, TO THE LICENSOR IN ACCOR DANCE WITH THE FOLLOWING CALCULATIONS ('ROYALTY'}: ' (I) 5% OF THE NET SALES (AS DEFINED BELOW) VALU E OF DIE PRODUCTS SOLD WITHIN THE WITHIN THE DOMESTIC DUTY MARKET OF INDIA; AND (II) 8% OF THE NET SALES (AS DEFINED BELOW) VALU E OF THE PRODUCTS SOLD IN SUCH OTHER TERRITORIES OUTSIDE THE DOMESTIC DUTY PAID MARKET OF INDIA AS THE PARTIES M AY HAVE PREVIOUSLY AGREED IN WRITING. 6.2 THE TERM 'NET SALES' SHALL MEAN INVOICE PRIC E FOR THE PRODUCTS LESS THE DISCOUNT OR REBATE GIVEN BY THE L ICENSEE ON SUCH AN INVOICE PRICE. 6.3 THE ROYALTY SHALL BE PAID HALF YEARLY BY THE LICENSEE TO THE LICENSOR WITHIN SIXTY (60) DAYS FROM THE EXP IRY OF EACH HALF YEARLY PERIOD (NAMELY, FROM SEPTEMBER 30 AND MARCH 31 OF ANY CONTRACT YEAR) AND PAYMENT TO BE ACCOMPANIED BY A CONFIRMATION OF SALES VOLUME AND V ALUE OF NET SALES OF THE PRODUCTS BY THE LICENSOR CERTIFIED BY A 17 I.T.A. NO. 1197/DEL/16 CHARTERED ACCOUNTANT. THE LICENSOR RESERVES THE RIG HT TO AUDIT SALES FIGURES OF THE LICENSEE AFTER PROVIDING ADEQUATE NOTICE TO THE LICENSEE. 6.4 THE LICENSEE SHALL PROVIDE TO THE LICENSOR W ITH TRUE AND COMPLETE COPIES OF THE LICENSEE ANNUAL AUDITED AND HALL YEARLY UN-AUDITED FINANCIALS FROM TIME TO TIME AS REQUESTED BY THE LICENSOR. DURING, THE TERM OF AGR EEMENT AND FOR A PERIOD OF TWO (2) YEARS AFTER TERMINATION THEREOF (THE RECORD PERIOD), THE LICENSEE SHALL KEEP AND RETAIN DETAILED FINANCIAL ACCOUNTING AND SALES RECORDS TO DOCUMENT IT COMPLIANCE WITH THIS AGREEMENT. DURING, THE RECORD PERIOD THE LICENSEE TO ENSURE COMPLIANCE WITH THE TERMS OF THI S AGREEMENT. ANY SUCH AUDIT SHALL BE CONDUCTED BY A C ERTIFIED PUBLIC ACCOUNTANT WHOSE FEE IS PAID BY THE LICENSEE S OFFICES AND SHALL NOT UNREASONABLY INTERFERE WITH T HE LICENSEES BUSINESS ACTIVITIES. 6.5 THE LICENSEE HAS REQUESTED THE LICENSOR TO WAIV E THE ROYALTY PAYMENTS FOR AN INITIAL PERIOD OF TWO ( 2) YEARS OWING TO SIGNIFICANT LOSSES THE LICENSEE HAS ACCUMU LATED. THE LICENSOR, AT ITS SOLE DISCRETION, HAS WAIVED IT S RIGHT TO RECEIVE ROYALTY FOR AN INITIAL PERIOD OF TWO (2) YE ARS COMMENCING, FROM APRIL 1, 2004 TO MARCH 31, 2006. 21. LD. DR SUBMITTED THE ASSESSEE IS MAKING PAYMENT TOWARDS ROYALTY FOR EXCLUSIVE AND NONTRANSFERABLE R IGHTS AND LICENSE TO USE THE TRADEMARK IN THE TERRITORY. IT H AS BEEN SUBMITTED BY LD. DR THAT ASSESSEE HAS USED THE INFO RMATION RECEIVED FROM THE AE FOR MANUFACTURING THE PRODUCTS IN INDIA, A LIST OF WHICH HAS BEEN ANNEXED TO THE LICE NSE AGREEMENT AS ANNEXURE A-1 AT PAGE 112 OF THE PAPER BOOK. 18 I.T.A. NO. 1197/DEL/16 HE ALSO REFERRED TO THE EXPLANATION TO SECTION 92B WHICH HAS BEEN INSERTED BY FINANCE ACT, 2012 WITH RETROSPECTI VE EFFECT FROM 01/04/2002, WHICH READS AS UNDER: EXPLANATION- FOR THE REMOVAL OF THE DOUBTS, IT IS HEREBY CLARIFIED THAT- (I) THE EXPRESSION INTERNATIONAL TRANSACTION SHALL IN CLUDE- (A) THE PURCHASE, SALE, TRANSFER, LEASE OR USE OF TANGI BLE PROPERTY INCLUDING BUILDING, TRANSPORTATION VEHICLE , MACHINERY, EQUIPMENT, TOOLS, PLANT, FURNITURE, COMMODITY OR ANY OTHER ARTICLE, PRODUCT OR THING; (B) . (II) THE EXPRESSION INTANGIBLE PROPERTY SHALL INCLUDE- (A) MARKETING RELATED INTANGIBLE ASSETS, SUCH AS, TRADEMARKS, TRADE NAMES, BRAND NAMES, LOGOS; (B) TECHNOLOGY RELATED INTANGIBLE ASSETS, SUCH AS, PROCESS SPEED TENTS, PATENTS APPLICATIONS, TECHNICA L DOCUMENTATION SUCH AS LABORATORY NOTEBOOKS, TECHNICAL KNOW HOW; (C) . 22. LD. DR BESIDES THE APPROVAL OF AMP EXPENSES AS AN INTERNATIONAL TRANSACTION URGED THAT DUE TO CERTAIN LATER DEVELOPMENTS OF LAW ON THIS ISSUE, THIS TRIBUNAL BE PLEASED TO REMAND BACK THE MATTER TO THE ASSESSING OFFICER, FOR EXAMINING THE EXISTENCE OF AN INTERNATIONAL TRANSAC TION IN THE ALLEGED AMP EXPENSES. THE LD. DR RELIED UPON TH E 19 I.T.A. NO. 1197/DEL/16 JUDGMENT OF ACCOUNTABLE DELHI HIGH COURT IN THE CAS E OF SONY ERICSON MOBILE COMMUNICATIONS (INDIA) PVT. LTD . VS. CIT REPORTED IN (2015) 374 ITR 118, IN WHICH AMP EX PENSES HAVE BEEN HELD TO BE AN INTERNATIONAL TRANSACTION A ND THE MATTER OF DETERMINATION OF ITS AGP HAS BEEN RESTORE D. IT HAS BEEN SUBMITTED BY HIM THAT THERE IS NO BLANKET RULE OF THE AMP EXPENSES AS A NON-INTERNATIONAL TRANSACTION. HE FURTHER SUBMITTED THAT IN THE DECISION BY HONBLE HIGH COUR T IN CASE OF CIT VERSUS WHIRLPOOL INDIA LTD REPORTED IN (2015 ) 94 CCH 156 DEL-HC, CERTAIN OBSERVATIONS HAVE BEEN MADE, WH ICH SHOULD BE PROPERLY WEIGHED FOR ASCERTAINING IF AN INTERNATIONAL TRANSACTION OF AMP EXPENSES EXISTS. H E SUBMITTED THAT THIS TRIBUNAL IN SEVERAL CASES HAS R ESTORED THIS ISSUE TO THE FILE OF LEARN IT TPO FOR DECIDING IT AFRESH IN THE LIGHT OF THE DECISION OF HONBLE DELHI HIGH COU RT IN THE CASE OF SONY ERICSON MOBILE COMMUNICATIONS (INDIA) PVT. LTD. VS. CIT. HE ALSO PLACES RELIANCE UPON THE DECI SIONS OF UNDER THE DELHI HIGH COURT IN THE CASE OF RAY BAN S UN OPTICS INDIA LTD. VS. CIT (ORDER DATED 14/09/2016), PR.CIT VS. TOSHIBA INDIA PVT. LTD. (ORDER DATED 16/08/2016 ), AND PR.CIT VS BOSE CORPORATION INDIA PVT. LTD., (ORDER DATED 23/08/2016) IN WHICH THE ISSUE OF AMP EXPENSES HAS BEEN RESTORED FOR FRESH DETERMINATION IN THE LIGHT OF TH E EARLIER JUDGMENT IN SONY MOBILE COMMUNICATIONS INDIA PVT. L TD (SUPRA). HE SUBMITTED THAT HONBLE DELHI HIGH COURT VIDE 20 I.T.A. NO. 1197/DEL/16 ORDER DATED 25/10/2016 IN THE CASE OF HAIER APPLIAN CES INDIA LTD. VS. ACIT IN ITA NO. 711/2016, 712/2016 A ND 713/2016 HAS UPHELD THE REMAND OF THE IMPUGNED ISSU E TO LD. TPO, UNDER SIMILAR CIRCUMSTANCES. HE SUBMITTED THAT IT WOULD BE JUST AND FAIR FOR THE ISSUE TO BE RE-EXAMI NED BY LD.TPO, IN THE LIGHT OF THE ABOVE ARGUMENTS ADVANCE D BY LD. DR. 23. IN REJOINDER LD. COUNSEL FOR ASSESSEE HAS SUBMITTE D THAT AS FAR AS THE PAYMENT OF ROYALTY TO THE AE IS CONCERNED AS PER THE TERMS OF THE LICENSE AGREEMENT, IT HAS B EEN WAIVED DUE TO THE CONTINUOUS LOSSES INCURRED BY ASSESSEE. THE LD. COUNSEL FOR ASSESSEE PLACED HIS RELIANCE ON PAGE 59 OF THE PAPER BOOK WHEREIN THE WAIVER HAS BEEN GRANTED FOR THE PERIOD OF 01/04/2008 TO 31/03/2011. HE HAS FURTHER ARGUED THAT ALL THE MATERIALS RELEVANT FOR DETERMIN ING THE NATURE OF EXPENDITURE IS AVAILABLE ON RECORD AND NO PURPOSE WOULD BE SERVED BY REMANDING THE ISSUE TO LD.TPO. 24. WE HAVE PERUSED THE ARGUMENTS ADVANCED BY BOTH THE PARTIES IN THE LIGHT OF THE WRITTEN SUBMISSIONS AND RECORDS PLACED BEFORE US. LD. COUNSEL FOR THE ASSESSEE HAS TRIED TO FORTIFY HIS ARGUMENT THAT THERE WAS NO INTERNATIONA L TRANSACTION ON ACCOUNT OF AMP EXPENSES BY RELYING O N THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKI (SUPRA) AND THE OTHER JUDGMENTS REPRODUCED HEREINABOVE. ON PERUSAL OF THE ORDER PASSED BY LD. TPO, IT IS 21 I.T.A. NO. 1197/DEL/16 OBSERVED THAT HE DID NOT HAVE BENEFIT OF JUDICIAL P RECEDENTS NOW AVAILABLE, WHILE DEALING WITH THE ISSUE OF AMP EXPENSES. IN SOME OF THESE DECISIONS AMP EXPENSES HAS BEEN HE LD TO BE AN INTERNATIONAL TRANSACTION AND IN SOME OTHERS AS NOT, WHILE IN SOME OTHERS THE MATTER HAS BEEN RESTORED F OR FRESH CONSIDERATION TO BE DECIDED IN THE LIGHT OF THE DEC ISION OF SONY ERICSON (SUPRA) WHERE THERE IS AN ACCEPTANCE O N BEHALF OF THE ASSESSEE REGARDING THE AMP EXPENSES BEING AN INTERNATIONAL TRANSACTION. UNDER SUCH CIRCUMSTANCES IT WOULD BE IN THE INTEREST OF NATURAL JUSTICE JUST AN D PROPER, IF THE IMPUGNED ISSUE IS SET ASIDE TO LD.TPO, FOR FRES H CONSIDERATION OF THE QUESTION, AS TO WHETHER THERE EXISTS AN INTERNATIONAL TRANSACTION OF AMP EXPENSES. 25. IF THE EXISTENCE OF INTERNATIONAL TRANSACTION IS N OT PROVED THE MATTER WOULD END THEIR AND NO TRANSFER PRICING ADDITION WOULD BE CALLED FOR. ON THE OTHER HAND IF THE INTER NATIONAL TRANSACTION IS FOUND TO BE EXISTING, THEN THE LD.TP O DETERMINED THE ALP OF SUCH INTERNATIONAL TRANSACTIO N AS PER LAW IN THE LIGHT OF THE RELEVANT DECISIONS OF ORDER ABLE HIGH COURT BY ALLOWING REASONABLE OPPORTUNITY OF BEING H EARD TO THE ASSESSEE. IN DOING SO, CARE SHOULD BE TAKEN TO CORRECTLY CLASSIFY THE NATURE OF EXPENDITURE AND EXCLUDE SELL ING EXPENSES DIRECTLY INCURRED IN CONNECTION WITH SALES , NOT LEADING TO BRAND PROMOTION, WITHIN THE AMBIT OF AMP EXPENSES. AT THIS POINT WE MAKE IT CLEAR THAT BLT HAVE BEEN 22 I.T.A. NO. 1197/DEL/16 REJECTED BY HONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSON (SUPRA) FOR DETERMINING IF THERE EXIST INTE RNATIONAL TRANSACTION FOR AMP EXPENSES. 26. WE WANT TO MAKE IT CLEAR THAT ALL THE ASPECTS QUA THIS ISSUE ARE LEFT OPEN AND ASSESSEE IS AT LIBERTY TO T AKE ANY APPEAL OR, FILE ANY RELEVANT EVIDENCE/SUBMISSIONS/DOCUMENTATION IN PROCEEDINGS. ACCORDINGLY THESE GROUNDS RAISED BY THE ASSESSEE ST ANDS ALLOWED FOR STATISTICAL PURPOSES. GROUND NO. 10: ASSESSEE HAS RAISED THIS ISSUE AGAINST THE DETERMIN ATION OF ALP OF INTEREST PAID TO AE. 27. DURING THE YEAR UNDER CONSIDERATION ASSESSEE HAD ISSUED FCD TO AE, ON WHICH AN AMOUNT OF RS.55,76,38 9/- WAS PAID AS INTEREST. ASSESSEE BENCHMARKED THE PAYM ENT OF INTEREST ON FCD BY USING CUP AT 10%, AND WORKED OUT THE MARGIN OF THE COMPARABLES SELECTED BY ASSESSEE AT 1 2%. AS RATE OF INTEREST PAID BY THE ASSESSEE WAS LOWER THA N THE ARMS LENGTH RATE OF INTEREST, IT WAS ASCERTAINED B Y THE ASSESSEE THAT INTERNATIONAL TRANSACTION RELATING TO PAYMENT OF INTEREST ON FCD WAS AT ARMS LENGTH. DURING THE ASSESSMENT PROCEEDINGS, LD.TPO ISSUED SHOW CAUSE NO TICE ASKING THE ASSESSEE TO JUSTIFY THE PAYMENT ON FCDS . THE LD. TPO REJECTED THE CONTENTIONS OF THE ASSESSEE BY HOL DING THAT ASSESSEE HAS FAILED TO ESTABLISH THE HIGH DEGREE OF 23 I.T.A. NO. 1197/DEL/16 COMPATIBILITY FOR BENCHMARKING THE LOAN RATES ON TH E BASIS OF INTERNAL CUP. HE COMPUTED THE ALP BY USING CUP A T LIBOR RATE TO WHICH 300 BASIS POINT WAS ADDED, TO T AKE INTO ACCOUNT VARIOUS FACTORS/RISKS. 28. AGGRIEVED BY THE ADJUSTMENT MADE BY LD.TPO, ASSESS EE FILED OBJECTIONS BEFORE DRP, AGAINST ADOPTION OF RA TE AS SUGGESTED BY TPO. DRP REJECTED ASSESSEES CONTENTIO N AS THE FCDS HAD AN EARLY OPTION OF CONVERSION INTO EQUITY SHARES AFTER AN EXPIRY OF 5 YEARS. 29. LD. DCIT MADE ADDITION OF RS.3,64,69,583/- AS PER THE DIRECTIONS OF DRP. AGGRIEVED BY SUCH ADDITION ASSESSEE IS IN APPEAL BE FORE US NOW. 30. LD. COUNSEL FOR ASSESSEE SUBMITS THAT FCDS HAVE B EEN ISSUED TO AE IN INDIAN CURRENCY. HE SUBMITTED THAT THE LIBOR RATE CANNOT BE ADOPTED, AS THE INTEREST RATE SHOULD BE THE MARKET DETERMINED INTEREST RATE APPLICABLE TO T HE CURRENCY CONCERNED IN WHICH THE LOAN HAS TO BE REPA ID. HE PLACED HIS RELIANCE UPON THE DECISION OF HONBLE DE LHI HIGH COURT IN THE CASE OF CIT-1 VS. COTTON NATURALS INDI A PVT. LTD., REPORTED IN (2015) 55 TAXMANN.COM 523. 31. AT THIS JUNCTURE THE LD. COUNSEL FOR ASSESSEE SUBM ITTED THAT SBI BASE RATES/PRIME LENDING RATE DURING THE Y EAR WAS BLESSED 3% WHICH IS ALMOST EQUAL TO 11.69%. HE SUBM ITTED THAT IN THE SHOW CAUSE NOTICE ISSUED TO ASSESSEE, L D.TPO 24 I.T.A. NO. 1197/DEL/16 HAS REFERRED TO ADOPTION OF PRIME LENDING RATE. HE SUBMITTED THAT THE INTEREST PAID BY THE ASSESSEE IS AT ARMS L ENGTH, AS IT IS WITHIN THE RANGE OF THE PRIME LENDING RATE. 32. ON THE CONTRARY THE LD. DR RELIED UPON THE ORDERS PASSED BY THE AUTHORITIES BELOW. 33. WE HAVE PERUSED THE SUBMISSIONS ADVANCED BY BOTH THE PARTIES IN THE LIGHT OF THE RECORDS PLACED BEFO RE US. 34. IT IS OBSERVED THAT HONBLE DELHI HIGH COURT IN TH E CASE OF COTTON NATURALS INDIA PVT. LTD (SUPRA) HAS HELD THAT INTEREST ON RATE HAS TO BE IN THE SAME CURRENCY IN WHICH IT IS REPAID AS UNDER: 39 . THE QUESTION WHETHER THE INTEREST RATE PREVAILING IN INDIA SHOULD BE APPLIED, FOR THE LENDER WAS AN INDIAN COMPANY/ASSESSEE, OR THE LENDING RATE PREVALENT IN THE UNITED STATES SHOULD BE APPLIED, FOR THE BORROWER W AS A RESIDENT AND AN ASSESSEE OF THE SAID COUNTRY, IN OU R CONSIDERED OPINION, MUST BE ANSWERED BY ADOPTING AN D APPLYING A COMMONSENSICAL AND PRAGMATIC REASONING. WE HAVE NO HESITATION IN HOLDING THAT THE INTEREST RAT E SHOULD BE THE MARKET DETERMINED INTEREST RATE APPLICABLE TO T HE CURRENCY CONCERNED IN WHICH THE LOAN HAS TO BE REPAID. INTER EST RATES SHOULD NOT BE COMPUTED ON THE BASIS OF INTEREST PAY ABLE ON THE CURRENCY OR LEGAL TENDER OF THE PLACE OR THE CO UNTRY OF RESIDENCE OF EITHER PARTY. INTEREST RATES APPLICABL E TO LOANS AND DEPOSITS IN THE NATIONAL CURRENCY OF THE BORROW ER OR THE LENDER WOULD VARY AND ARE DEPENDENT UPON THE FISCAL POLICY OF THE CENTRAL BANK, MANDATE OF THE GOVERNMENT AND SEV ERAL OTHER PARAMETERS. INTEREST RATES PAYABLE ON CURRENC Y SPECIFIC LOANS/ DEPOSITS ARE SIGNIFICANTLY UNIVERSAL AND GLO BALLY APPLICABLE. THE CURRENCY IN WHICH THE LOAN IS TO BE RE-PAID 25 I.T.A. NO. 1197/DEL/16 NORMALLY DETERMINES THE RATE OF RETURN ON THE MONEY LENT, I.E. THE RATE OF INTEREST. ASSESSEE HAS ADOPTED RUPEE AS CURRENCY IN WHICH I NTEREST IS REPAID. AS HONBLE COURT HAS ALREADY HELD THAT P RIME LENDING RATE AS APPLICABLE IN INDIA NEEDS TO BE APP LIED AS THE CURRENCY IN WHICH THE LOAN HAS TO BE REPAID IS INDI AN CURRENCY. WE AGREE WITH THE SUBMISSION ADVANCED BY LD. COUNSEL FOR ASSESSEE THAT ASSESSEE IS WITHIN THE RA NGE OF THE PRIME LENDING RATE CONSIDERED BY LD.TPO IN THE SHOW CAUSE NOTICE. RESPECTFULLY FOLLOWING THE DECISION OF HON BLE DELHI HIGH COURT IN THE CASE OF COTTON NATURALS INDIA PVT . LTD (SUPRA), WE DO NOT FIND ANY NEED OF ADJUSTMENT IN R ESPECT OF THE INTEREST PAID ON FCDS. ACCORDINGLY THIS GROUND RAISED BY THE ASSESSEE STAN DS ALLOWED. 35. GROUND NO. 11 THIS GROUND RAISED BY THE ASSESSEE IS PREMATURE IN NATURE THAT DOES THUS DOES NOT CALL FOR ANY ADJUDICATION W E ACCORDINGLY DISMISS THIS GROUND UNANSWERED. IN THE RESULT APPEAL FILED BY THE ASSESSEE STANDS D ISPOSED OF. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH DECEMBER 2016. SD/- SD/- (R. S. SYAL) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE: 09.12.2016 @M!T