Dsm Anti - Infectives India Limited, ... vs Assessee

DSM Anti-Infectives India Ltd., v The Addl CIT, Range-1, Toansa, Nawanshahr Chandigarh

PAN No. AABCM4314K

M.A. Nos. 07/Chd/2015 (In ITA No.1290/Chd/2012) Assessment Years: 2008-09

DSM Anti-Sinochemm Pharmaceuticals v The Addl CIT, Range-1, India Private Limited, Chandigarh (Earlier known as DSM Anti-Infectives Inida Limited), Toansa, Nawashahr

PAN No. AABCM4314K

(Appellant) (Respondent)

Appellant By : Shri Pawan Kumar and Shri K.M. Gupta Respondent By : Shri Ajay Sharma

Date of hearing : 13.02.2015 Date of Pronouncement : 19.02.2015

ORDER

PER T.R.SOOD, A.M.

Through these Misc. Applications the assessee has sought rectification of

an error which has crept into the order of Tribunal in ITA Nos. 1139/Chd/2011

and 1290/Chd/2012.

2. The Ld. Counsel for the assessee referred to the application and pointed

out that while adjudicating the issue regarding adjustment made by the

Assessing Officer/TPO with regard to various corporate services provided by the

holding company DSM Netherlands (in short 'holding company') Principal of 2

the assessee, it was held in para 95 that no adjustment can be made and in para

98 of the order, this position was reiterated by making a reference to the

decision of Hon'ble Delhi High Court in the case of C IT(A) v EKL Appliance

(supra). Finall y, it was held in para 102 that the TPO did not have any valid

comparable and action of appl ying the CUP method was potentiall y incorrect

and, therefore, finding of the TPO were reversed. However, later on while

noting the admission of the Ld. Counsel for the assessee that one of the services

provided by the holding company was financial service and there was

international practice of passing on atleast 50% of such benefits to the service

provider, the Tribunal wrongl y concluded that assessee had passed on 100%

benefit to the associate enterprise and 50% of such sum shall be disallowed vide

para 110 of the order. Therefore, the conclusive finding of the Tribunal in para

110 were contrary to the earlier finding in pars 95, 98 and 102 and therefore,

there is an error in the order of the Tribunal.

3. He further submitted that assessee has merel y paid the lump sum charges

in accordance with pre-determined formula of services provided by the Principal

of the assessee. Therefore, it was not fair to conclude that separate charges

should be determined for financial services. He contended that benefit on

account of financial services were Rs. 9.29 croes and if the Tribunal is correct

in holding that the assessee has paid 100%, then that would not be correct

observation because in assessment year 2008-09, the total adjustment made by

the assessee on TPO/Assessing Officer of services was onl y Rs. 6,14,13,983/-.

If 100% financial benefit was transferred by the assessee then this becomes

contradictory. In this background it was prayed that error may be rectified by

holding that no adjustment should be made on account of services obtained by

the assessee from the holding company.

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4. On the other hand Ld. DR submitted that there is no error in the order of

Tribunal. He pointed out that during the hearing it was pointed out on behalf of

the Revenue that the amount paid on account of corporate services is

continuousl y increasing over the period of time and the same therefore, cannot

be related to onl y corporate services. However, the kind of corporate services

which has been received by the assessee company could not justify the increase

in the amounts in the later years. At that juncture, the Bench had posed this

query to the Ld. Counsel for the assessee and in response it was submitted that

in later years the assessee has started receiving financial services in the form of

bank guarantees and sanction of limits at a very competitive interest rates. It

was reiterated on behalf of the assessee that the amounts of corporate services

have increased because of these financial services through which assessee has

received enormous benefits. At that stage the Bench had asked the assessee to

atleast quantit y the benefit received on account of financial services and

assessee furnished those figures before the Bench. During the course of hearing

it was admitted that there is an international practice that whatever benefits are

received on account of financial services, at best 50% can be passed on to the

service provider by the recipeint company and 50% should be retained by the

recipeint company i.e. assessee. On these facts, the Bench had clearl y indicated

during the course of hearing that no inference would be made in over all

corporate service amount paid by the assessee subject to the rider that the same

would be restricted in respect of financial services to the extent of 50% and this

decision is finall y been clarified by the Tribunal in para 110. Therefore, now

the assessee cannot go back on its own admission now in the misc. application.

When this fact was confronted to Shri K.M. Gupta, Ld. Counsel for the assessee

who was present at the time of hearing of the appeal is also present today

admitted that assessee had made these submissions and had also furnished the

amounts of financial benefits as well as agreed that at best only 50% of the such 4

financial benefits can be shared with the holding company and 50% benefit can

be retained by the assessee company.

5. We have considered the rival submissions carefull y. We find that during

assessment year 2007-08 the assessee has paid corporate service fee of Rs.

3,30,72,526/- which included some direct services and some services on account

of sharing of I.T. Platform like SAP Etc. The nature of services was explained

to be the "Corporate Service Charge: The AE provides the corporate services in

the area of Production and Sales, Market Information, Business Intelligence,

Safety, Health and Environment and Finance related strategic planning support

to the assessee. For which it charges as per the allocation of total expense of

DSM Corporate and Business Group Units." Some of these amounts particularl y

on account of I.T. Services were held to be payable by the TPO. However, since

no break-up was given for other services, therefore, the same was held to be of

no benefit to the assessee and the whole of the amounts was added by way of

adjustment by the TPO and tbhis action was challenged before the Tribunal.

When it was pointed out by the Revenue that in later years, the amount paid on

account of Corporate Services is increasing from year to year substantiall y then

a query was raised to determine the reason for such a big jump in the corporate

service charges. At this stage, the Ld. Counsel has pointed out that the main

reason for substantial increase in the amount of Corporate Services amount paid

was on account of financial services. The assessee has started receiving

financial services in the form of corporate guarantee as well as sanctions of the

limit by banks on the recommendation of holding company because of which the

assessee got the limits sanctioned from the bank at much lower rates than the

market rates. At the instance of Bench the Ld. Counsel has also quantified the

amounts of benefits received by the assessee company during these two years.

The amounts of corporate service charges in various assessment years are as

under:-

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Assessment year Amount (in Rs. )

2007-08 22,700,000

2008-09 63,970,136

2009-10 79,931,741

2010-11 89,829,606

6. From the above figures the Bench agreed with the contention of the

Revenue that service charges paid on account of corporate services had

increased manifold in the later years. Therefore, assessee was asked why there

is such a huge increase in the total corporate service charges. The assessee in

repl y had explained that in later years the assessee had started receiving

financial services also and because of which the total corporate service charges

had increased. In this regard detailed written submissions were filed which are

placed on record. We would like to give the following extracts from such

written submissions:-

"It is respectfully submitted that under the corporate services entered into by the appellant, the associated enterprise inter alia provides guarantee to banks for the benefit of the appellant. It is submitted the guarantee issued by the associated enterprise enabled the appellant to obtain borrowings at cheaper rate of interest and led to significant savings of finance cost of the appellant.

During financial year 2006-07 and 2007-08 the appellant had availed term loan from Deutsche Bank amounting to INR 52.63 crores. Such loan was granted by Deutsche Bank based upon a risk assumption agreement entered into by the associated enterprise with Deutsche Bank, Amsterdam. In this regard the following documents are attached for consideration by the Hon'ble Tribunal:

(i) Loan agreement entered into by the appellant with Deutsche Bank (Annexure 1)

(ii) Letter issued by Deutsche Bank, Amsterdam to the associated enterprise confirming assumption of risk on behalf of the appellant (Annexure 2)

(iii) Deed of pledge of deposit entered into by the associated enterprise with Deutsche Bank, Amsterdam pledging an amount of EUR 10 million as guarantee against providing loan to the appellant (Annexure 3) 6

As per the benchmarking analysis conducted by the appellant, the arm's length price of the guarantee issued by the associated enterprise in support of the appellant is 2.65% for financial year 2006-07 and 4.65% for financial year 2007-08 which translates into benefit of Rs. 39 crore and 2.45 crore respectively.

The detailed benchmarking report along with credit rating analysis is provided as Annexure4. It is respectfully submitted that as per the analysis conducted by the appellant, the credit rating was calculated in a scientific manner and the same was determined at B2. Considering the credit rating of the appellant, it would be appreciated that without the support of guarantee form it associated enterprise, the appellant could have borrowed money at a significant premium to the Prime Lending Rate (PLR) prevailing during the relevant financial year.

However, on a conservative basis, the interest savings availed by the appellant, due to guarantee provided by the associated enterprise has been computed on the basis of prevailing PLR. The PLR prevailing during financial year 2006-07 was 10.75% whereas the PLR during financial year 2007-08 was the relevant period was 12.75% whereas the appellant had borrowed money at 8.10%. Considering the above factors, the interest cost savings enjoyed by the appellant due to guarantee provided by the associated enterprise for financial year 2006-07 and 2007-08 is as under:

Financial Amount of Interest PLR Savings % Savings Year loan (INR rate (INRE in in Cr) Cr) 2006-07 52.63 8.10% 10.75% 2.65% 1.39

2007-08 52.63 8.10% 12.75% 4.65% 2.45

Further, the associated enterprise has also provided guarantee to enable the appellant to avail Letter of Credit ('LC') facility from Royal Bank of Scotland ('RBS') without providing any security.

During financial year 2007-08 the appellant availed letter of Credit ('LC') facility from Royal Bank of Scotland ('RBS'). The said facility was issued by the bank on the basis of a corporate guarantee amounting to EUR30 million issued by the associated enterprise.

As per general banking norms, for obtaining a LC facility, a fixed deposit is required to be pledged by the customer as a security against the facility allowed by the bank. However, in the case of appellant, since the guarantee was provided by the associated enterprise, the facility was allowed by the bank without obtaining any security from the appellant. It is respectfully submitted that in the absence of guarantee provided by the associated enterprises, the appellant would have borrowed money to obtain a fixed deposit for pledging the same with the bank for availing the LC facility.

In view of the aforesaid, it is respectfully submitted that the appellant enjoyed significant savings interest cost due to the guarantee provided by the associated enterprise against the LC facility availed by the appellant. The detailed economic analysis undertaken by the appellant for benchmarking the guarantee provided by the associated enterprise is provided as Annexure 4. The results of the analysis are summarized as under:

7 Particulars Amount (INR) Amount of facility (EUR 30,000,000 @ 1,710,000,000 Rs. 57 (A) Prime Lending Rate of SBI(B) 12.75% Interest payable by DSM India (C= 218,025,000 A*B) Interest Rate available on FD (1 to 3 8.75% years ) (D) Interest receivable by DSM India (E= 149,625,000 A*D) Interest savings by the appellant (F= 68,400,000 C-E) Guarantee fee (F/A%) 4%

From the above analysis, it can thus be concluded that a guarantee fee charged by DSM Netherlands to DSM India at 4% for the overall arrangement, shall be considered to be at arm's length as required under Indian Regulations.

In view of the aforesaid, it is respectfully submitted that the above documents now placed on record by the appellant pursuant to the query raised by the Hon'ble Tribunal may kindly be taken into consideration while adjudicating the appeal of the assessee.

b. Issue of guarantee by DSM Finance B.V. The Ld DR contended that the appellant has entered into contract service agreement with DSM N.V. whereas the guarantee was been issued by another associated enterprise, DSM Finance B.V.

In this regard it is respectfully submitted that DSM Finance B.V. is a part of corporate treasury division of the DSM group and has a mandate from DSM N.V. (now Royal DSM NV or Koninklijke DSM N.V) to manage/arrange/support the funding of DSM group companies. A power of attorney executed by DSM NV authorizing DSM Finance BV to sign any obligation / arrangement in the field of cash management is attached as Annexure 5. It is further submitted that the name of DSM NV was changed to Royal DSM NV on completion of 100 years of its existence in 2004. An extract from the Chamber of Commerce for Limburg, Netherland is attached as Annexure 6.

In view of the aforesaid, it is respectfully submitted that the guarantee was issued by DSM Finance B.V. at the directions/instruction of DSM N.V. and accordingly, an arm's length guarantee fee was payable by the appellant to DSM N.V. in consideration for issuance of such guarantee."

7. From the above it become clear that assessee had started receiving some

financial services also from the holding company which explained the increase

in total payments on account of corporate services. The assessee had tried to

justify the payment on account of such financial services but when again it was

confronted that if assessee had saved Rs. 100/- and if he pays the entire amount 8

of Rs. 100/- to the holding company and in that case there would be no savings

to the assessee. In response to this query, the Ld. Counsel on behalf of the

assessee had admitted that there is international practice to pass on 50% of the

amount of such financial savings on account of financial services and balance

50% was to be retained by the recipients of the services. This was found to be

logical because benefit was being shared on 50 - 50 basis. Therefore, assessee

was asked to give amount of total benefit on account of financial services. The

details of such benefit as admitted by the Ld. Counsel for the assessee at the

time of original hearing was stated to be as under:-

Assessment year Amount of benefit or Services obtained by the assessee.

2007-08 Rs. 1.40 crores

2008-09 Rs. 9.29 crores

8. On the basis of above admission the Bench held that fee paid for other

corporate services could not have increased so much and therefore, it was fair

and just that that normal fee paid for corporate services should not be

disallowed but in view of the increase in the amount the benefits obtained by the

assessee on account of financial services have to be shared on the basis of

50-50. This positon has been clearl y indicated in para 110 of the order of

Tribunal.

9. In view of this discussion we find no error in the order of Tribunal and

therefore, no rectification can be made.

10. In the result, Misc. Application is dismissed.

Order pronounced in the Open Court on 19.02.2015.

Sd/- Sd/- (BHAVNESH SAINI) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 19 t h February,2015 rkk

Copy to: The Appellant, The Respondent, The C IT, The CIT(A), The DR 9