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Income Tax Appellate Tribunal, ‘K‘ BENCH
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid cross appeals has been filed by the assessee as well as by the department against final assessment order dated 30/12/2013, passed u/s.143(3) r.w.s. 144C(13) in pursuance of directions given by the DRP vide order dated 02/12/2013 for the A.Y.2009-10. 2. In various grounds of appeal
assessee has challenged- Firstly, adjustment of Rs.1,73,28,778/- in respect of extension of performance/ corporate guarantee to Afcons Construction Mideast LLC (Ground No.1.3) Secondly, Adjustment of Rs.55,59,523/- in respect of receipts of interest on loan given to Afcons Construction Mideast LLC and Afcons Infrastructure International Ltd. Mauritius. Thirdly, the ld. AO has erred in not granting credit of tax at Rs.13,419/- being additional income tax of distributed profits u/s.115JB. The last ground has not been argued, therefore, the same is dismissed as not pressed.
3. In so far as the Revenue appeal is concerned, the department has challenged- Firstly, disallowance of interest u/s.36(1)(iii) in respect of loans to Afcons Pauling Joint Ventures.
1357/Mum/2014 M/s. Afcons Infrastructure Limited Secondly, disallowance of depreciation of Rs.75,000/- on the WDV of plant and machinery aggregating to Rs.5.02 lakhs Thirdly, Disallowance of professional fees of Rs.64.33 lakhs paid for arbitration award.
In so far as the first issue raised by the assessee is with regard to adjustment of Rs.1,73,58,778/- in respect of extension of corporate guarantee to Afcons Construction Mideast LLC. The assessee company is engaged in the business of executing large and complex civil engineering projects in the infrastructure sector for construction of roads, bridges, railways, jetties, transport terminals, tunnels, dams etc. in India and abroad. Assessee Company entered into contract with the Nad Al Sheba Race Course Development Project of the Road Transport Authority in Dubai (RTA) for construction of a bridge. However, in view of the legal requirements of the UAE and in order to carry out its business in that country, it formed a limited liability company in Dubai named as Afcons Construction Mideast LLC (Afcons Mideast). UAE regulations provide that it could not hold more than 49% in Afcons Mideast. Hence, 51% shareholding in the said company was held by a local sponsor Despite the shareholding structure, the assessee was wholly responsible to carry out almost the entire contract. It was agreed between the shareholders that the assessee would be entitled to 80% of the profits of Afcons Mideast. The share capital of Afcons Mideast as on 31.03.2009 stood at Rs.42,62,400/- only.
1357/Mum/2014 M/s. Afcons Infrastructure Limited 5. The Road Transport Authority, Dubai awarded contract for construction of the bridge amounting to AED 1.09 billion equivalent to 1546.56 Crores to Afcons Mideast. Since Afcons Mideast did not have the necessary resources by way of man- power, machines, organizational set up etc. to execute the said contract, hence, work amounting to AED 0.148 billion (Rs. 210.28 crores approx.) was sub-contracted by it to the assessee. The balance work though was to be performed by Afcons Midcast, but it was to be performed through the man-power, machines, technology, project management skills and organizational support provided by the assessee company. Thus, in reality Assessee Company alone had to perform the contract. Before us it has been pointed out that it an undisputed fact that, for the year under consideration, the assessee had earned 99.10% of the profits (Rs. 31.19 crore) in respect of the said project as a sub-contractor as well as for providing the aforesaid support services, while Afcons Mideast earned only 0.90% (Rs. 0.30 crore). The entire profit earned by the assessee as a sub- contractor and for providing support services was Rs. 130.05 crore while Afcons Mideast earned was only Rs. 10.86 crore from execution of the said project. Thus, 92.29% of the profits from the said project accrued to the assessee as a sub-contractor and for the support services. In respect of the balance 7.71% of the profits accruing to Afcons Mideast, as mentioned above, 80% of such profits again belonged to the assessee as its share of profit. Effectively, the assessee had earned 99.10% of the profits. It has been stated that, in substance the sole and entire purpose of 1357/Mum/2014 M/s. Afcons Infrastructure Limited incorporating Afcons Mideast was only to comply with the laws of UAE in order to be eligible to secure the said contract. Effectively, the contract has been executed by the assessee company either as a sub-contractor or indirectly by providing the necessary management, technical know-how, organizational and project management skills and support to Afcons Mideast.
Since the share capital of Afcons Mideast was only Rs. 42,62,400/-, therefore, it was required to obtain credit facilities including performance guarantee from First Gulf Bank (FGB) in Dubai for execution of the said contract. During the relevant F.Y. 2008-09, assessee extended a guarantee of Rs.824 Crores (AED 580 million) to FGB for procuring 19 facilities by FGB to Afcons Mideast. The following 4 types of facilities were provided (and the amounts actually utilized) by FGB to Afcons Mideast during the year: Benefit Actually Benefit Benefit Benefit utilised (AED % p.a. AED p.a. INR p.a. in million) Letters of credit 24,730,000 0.5 123,650 1,756,818 Letters of 108,850,000 0.5 544,250 7,732,700 Guarantee Advance payment Letters of 108,850,000 0.5 544,250 7,732,700 Guarantee Performance Bond Labour Guarantee 1,500,000 0.5 7,500 106,560 TOTAL 243,930,000 17,328,778 1357/Mum/2014 M/s. Afcons Infrastructure Limited 7. The assessee did not charge any guarantee fee from Afcons Mideast for giving the guarantee to FGB as it was stated that effectively it was a guarantee given for its own performance of the contract (the performance guarantee) or a guarantee given for repayment of the advance which would also only arise in the case of non-performance of the contract.
The ld. TPO held that guarantee given by the assessee as an international transaction and held that the benefit which arose to Afcons Mideast was 0.50% as the guarantee fee charged by FGB from Afcons Mideast was at the rate of 1% which without such guarantee given by it would have been 1.5%. The ld. TPO concluded that it is in the nature of intra group services rendered by the assessee to its AE and there is always a cost of guarantee given by the assessee to its AE. Finally, he held that as per the standard rate of FGP, the rate would have been 1.50% p.a. However, since, assessee had extended a guarantee on behalf of the AE, the said AE was charged @1.00% p.a. by FGB. The benefit accrued to AE is 0.5% which ought to have been recovered by assessee from its AE. Accordingly, he made the adjustment of arm’s length guarantee fee rate at 0.50% which was calculated at Rs.1,73,28,778. The ld. DRP has upheld the adjustment made by the ld. AO.
Before us, ld. Sr. Counsel Shri J.D. Mistry after narrating the entire facts and background of the case submitted that one has to keep in mind that here in this case the contract work was carried out by the assessee i.e. Afcons Infrastructure Ltd. only.
1357/Mum/2014 M/s. Afcons Infrastructure Limited Though it was in the nature of sub-contract given by Afcons Mideas or by support services, however, the entire contract was executed by the assessee company only. He pointed out that almost entire profit from the said contract i.e. almost 99.10% of the profits were earned by the assessee only and Afcons Mideast have earned only 0.90% during the year. Once, the entire contract has been undertaken by the assessee, then providing performance guarantee to carry out its own work, it cannot be held that any kind of benefit has been given to the AE. He further submitted that the role of the assessee in the performance of the contract has to be seen in a holistic manner because not only the entire contract work has been executed by the assessee but also almost entire profit has also been earned by the assessee. If more than 92% of the profits arising from the execution of the project as accrued to the assessee as a sub-contract and rendering support services and then it cannot be held for any kind of benefit has been given to AE for giving any kind of performance guarantee. Even for the balance contract performed by Afcons Mideast, then also necessary machines management, technical know-how, organizational and project management skills and support was provided by the assessee. Even assuming that a separate fee ought to have been charged for the guarantee it already stands factored in the remuneration received by the assessee from acting as a sub-contractor or for rendering the support services.
1357/Mum/2014 M/s. Afcons Infrastructure Limited 11. On the other hand, ld. CIT DR had given his written submissions which for the sake of ready reference are reproduced hereunder:- I. Factual background- The undisputed facts are as under:- M/s Afcons Mideast, is an AE of the assessee, M/s Afcons Infrastructure Limited (AIL), which was setup in Dubai to bid for projects in that country The majority shares (51%) of M/s Afcons Mideast rest with the local players and balance was with AIL During FY 2018-19 relevant to the AY under consideration, the AE, M/s Afcons Mideast was awarded a contract by the Government of Dubai for construction of a bridge for a total value of AED 1.09 billion (approximately INR 1,546.56 crores) Thereafter, M/s Afcons Mideast, the AE subcontracted a part of this contract to the assessee for a total value of AED 148 million (approximately INR 210 28 crores) for providing design, engineering, supply and erection of scaffolding and formwork (Comment-Kindly note that the sub-contract given to the assessee by the AE was just 13.5% of the total contract value of 1,546.56 crores. Hence, the "performance" of the assessee in the contract can at most be considered the extent of 13.5% only.) In order to execute the said contract and to avail the banking facilities, the assessee AIL extended a guarantee upto INR 824 crores (AED 580 million) to the local bank FGB (Comment-Looking to the fact that the assessee was an internationally renowned player in the infrastructure sector, extending of guarantee to the extent of INR 824 crores, when the sub-contract to the assessee was limited to 210.28 crores only, can only be considered as "Corporate Guarantee" on behalf of the AE for the work undertaken and to be performed by the AE only and not for performance of the assessee.) Page no. 151 of the assessee's PB, gives the charges/commission fixed by the Bank against various types 1357/Mum/2014 M/s. Afcons Infrastructure Limited of Guarantees extended by the assessee. It is apparent that the Bank does not distinguish among "letter of Credit", "Performance Guarantee", "Maintenance Guarantee" etc while charging Commission. Hence, the distinction made by the Ld. AR between "Corporate Guarantee" and "Performance Guarantee" is only artificial and will not have any bearing in present set of factual matrix. II. The crux of the argument of the Ld. Sr. Counsel of the assessee is that since the has received dominant share in the profit from the project awarded to its AE {in the profit sharing ratio of 80:20), one should automatically concluded that the entire "performance" of the project was undertaken by the assessee, and not by its AE. And hence, the Guarantee given to Bank gets the colour of "Performance Guarantee" to self, instead of "Corporate Guarantee" given to the bank on behalf of its AE. Comments- The aforesaid argument is not tenable since- (i) As stated in the preceding paragraphs, the sub-contract given to the assessee by the AE was just 13.5% of the total contract value of 1,546.56 crores. Hence, the "performance" of the assessee in the contract can at most be considered the extent of 13.5% only. (ii) As far as "performance" and "share of profit" in the project related to the assessee and the AE are concerned, the financial details of both entities as on 31sl March, 2009 are available on page no. 132-139 of the assessee's paper book. This is reproduced as below for the sake of convenience. Heads Afcons Infrastructure Ltd. Afcons Constructions Mideast (AE) {Assessee) Income & Expenditure Account (As on 31.03.2009) Amount Remarks Amount Remarks in Rupees in Rupees Income 138.96 39.98 crores From AE as from crores subcontract Operations including Service charges 1357/Mum/2014 M/s. Afcons Infrastructure Limited Expenditure 138.66 = 99.8% of 6.06 Crores =15.15% of under crores Income of Income from different Project Project Heads Profit for 0.30 crores -0.21% of 33.48 = 83.4% of the the period Income from Crores Income from Project Project Balance Sheet (As on 31.03.2009) Fixed 4.20 0 No fixed Asset Assets (After crores at the end of Depreciation.) year Construction 30. 82 1.08 Crores material crores Sundry 162.36 37.33 Debtors crores Crores Cash £ 72.96 0 No Balance at Bank Balance crores the end of year Loans 11.48 1.83 Crores and crores Advances Liabilities 258.19 6.77 Crores of different crores types There is astronomically high profit earned by the assessee from the sub-contract @ 83.4% while from the same project, miniscule profit of Rs. 30 lac 0.21% is earned by the AE. The meagre expenditure of 15.15% from any contract or sub contract only raises doubt of shifting of expenditure from the assessee's account 1357/Mum/2014 M/s. Afcons Infrastructure Limited to the AE's account so as to achieve disproportionally high profit by the assessee. (b) The aforesaid observation gets strengthen by the comparison of the Balance Sheet figures. Generally, "nil" fixed asset at the end of the FY, is unusual in a running project. Same observation can be made with respect to "nil" cash and bank balance. Other balance sheet figures also indicate that major components of the project are undertaken and performed by the AE and not the assessee. (iii) Hence, the claim of the Ld. Sr. Counsel that as the assessee has earned 80% of the profit from the project, is baseless because such a profit is earned only due to shifting of expenditure related to the sub-contract from the assessee to the AE. The financial results no-where indicate that the assessee has "performed" the project, in any manner, for which Corporate guarantee to the tune of Rs. 824 crores was given to the bank on behalf of the AE. The cash and bank balance of Rs. 72.96 crores as on 31 March, 2009, in the books of the assessee, only reinforce this observations. The documents or agreements prepared in this regard can only be considered as a self serving document. III.(a) Claim of a Share holder activity (1) According to the assessee, the whole intention of availing the banking facilities by AE from Bank was to execute the contract awarded in which appellant has significant interest. Hence, in order to achieve its own interest of earning a profit from the said contract, the appellant decided to extend the said guarantee to Bank on behalf of AE. The profit earned by the appellant from the sub-contract, which is a part of the said contract, resulted in an increase in revenue of the appellant. Comments- 1. It is respectfully submitted that in all International business involving multiple transactions with foreign AE, the intention has always remained to expand the business and to earn profit from the said transactions, by the domestic entities. However, as per the Indian Transfer Pricing Regulations, the moment an international transaction is entered into, the transaction has to be benchmarked keeping ALP principles.
1357/Mum/2014 M/s. Afcons Infrastructure Limited 2. Moreover, in the instant case, Corporate Guarantee was demanded by the AE as the Bank or financial institution did not consider its assets or creditworthiness as adequate securities and such Corporate Guarantee is given by the assessee, for which the AE is willing to pay the cost (whether paid or not) in the same manner as it it would pay to an independent enterprise providing guarantee to its financial requirements, it will not be a shareholder activity but would fall within the scope of intra group service (ii) It is also claimed that the appellant has benefitted by the extension of the said guarantee and not the said AE. Since it was in the form of quasi equity, no guarantee fee was charged by AIL Comments- As discussed in the preceding paragraphs, the "exceptional" benefit derived by the assessee is largely attributable to shifting of expenses to AE and not as a result of commensurate "performance" or activities undertaken by the assessee. Moreover, extending of Guarantee (to the bank) on behalf of the AE and sharing of profit after completion of a project are two different international transactions that need separate benchmarking. The concept of quasi-equity cannot be artificially introduced to such international transactions. III. (b) On Commercial Expediency- (1) According to the assessee, after negotiation, the JV partner agreed on a profit sharing of 80.20 inspite of ownership structure of 49:51. In other words, appellant received an additional share of 31% (80-49) for providing the technical and financial backbone Appellant is also awarded subcontract work from AE for the project for which the guarantee was extended. As AIL received much more than arm's length profits from the JV, it will be appreciated that nil transfer pricing adjustment is required from Indian side. Comments 1. As stated in the preceding paragraphs, the heavily tilted profit by the assessee is possible only due to shifting of expenses to AE and not as a result of commensurate "performance" or activities undertaken by the assessee It can't be overlooked at this stage that the sub-contract given to the assessee by the AE was just 13.5% of the total contract value of 1357/Mum/2014 M/s. Afcons Infrastructure Limited 1,546.56 crores. Moreover, extending of Guarantee (to the bank) on behalf of the AE and sharing/shifting of profit after completion of a project two different international transactions that need separate benchmarking exercises. 2. it is further submitted that commercial expediency has no role in examination of a transaction from the perspective of transfer pricing, therefore, guarantee fee ought to be charged for the services being rendered. Reliance is placed on the following judgments
In rejoinder, it has been clarified that in so far as submission of the ld. DR that arithmetically, the profit has been earned by the assessee by shifting of expenditure relating to sub- contract to its AE i.e. Afcons Mideast is completely incorrect and also it is neither in the case of the ld. TPO or ld. DRP at any stage of the proceedings. Nowhere, the ld. DR has pointed out which expenditure booked by the sub-contractor have been booked by Afcons Mideast in its books of accounts.
Before us ld. Counsel had also argued that such kind of performance guarantee is not an international transaction, however, at the time of hearing, we clearly stated that we are not inclined to agree with such a contention and accordingly, ld. Senior Counsel confined his arguments mostly on merits. Therefore, on this issue, we are not adjudicating the said plea.
We have heard rival submissions and perused the relevant finding given in the impugned order as well as material referred to before us. As noted above, assessee is in the business of construction of infrastructure projects and in order to secure the 1357/Mum/2014 M/s. Afcons Infrastructure Limited contract for construction of a bridge in Dubai with Road Transport Authority in Dubai, it had found limited liability Company in Dubai called as Afcons Mideast LLC. As per the UAE regulation assessee could not hold more than 49% in Afcons Mideast as 51% shareholding was to be held by local sponsorer. Despite the shareholding structure, the share capital of Afcons Mideast stood at Rs.42,62,400/- and it was agreed that the shareholders of the assessee company would be entitled to 80% of the profits of Afcons Mideast. Afcons Mideast was awarded contract amounting to Rs. 1,546.56 Crores and part of the work amounting to Rs.210.28 Crores was sub-contracted to the assessee company. The balance work has been performed by Afcons Midcast solely relying on the infrastructure in the form of the man-power, machines, technology, project management skills and organisational support provided by the assessee. In effect contract work performed by Afcons Midcast was done by assessee through its own support services. That is the reason, the assessee has earned profits at Rs.31.19 crores whereas Afcons Mideast has only earned Rs.30 lakhs. The entire profit earned by the assessee as a sub-contractor and for providing support services was Rs. 130.05 crores while Afcons Mideast earned only Rs. 10.86 crores from execution of the said project. Thus, 92.29% of the profits had accrued to the assessee as a sub-contractor and for the support services. Even for the balance 7.71% of the profits accruing to Afcons Mideast, then again 80% of such profits belonged to the assessee company as its share of profit. In substance, the assessee company has earned 99.10% of 1357/Mum/2014 M/s. Afcons Infrastructure Limited the profits. This factual background is very important to understand the impugned transaction of performance guarantee on which adjustment has been made by the ld. TPO, because while determining the arm’s length price where is the real benefit arisen or accrued is very crucial and FAR analysis of the transaction.
As noted above, for the performance of the entire contract work, guarantee was provided by FGB for provision of banking facilities to Afcons Mideast which in the F.Y. 2008-09 was of Rs. 824 Crores. During the year four types of facilities were provided as noted above which mostly consist of letters of credit, letters of guarantee and letters of advance payment, performance bond and letter. By way of security for providing these facilities FGB required the assessee to execute irrevocable and unconditional corporate guarantee and accordingly, performance guarantee was given by FGB in favour of Road Transport Authority, Dubai. It was only a guarantee that Afcons Mideast would not suspend or delay repayment of the advance of AED 108 million. The assessee had not charged any guarantee fee from Afcons Mideast on the ground that effectively guarantee has been given for its own performance of the contract or a guarantee given for repayment of advance which would also only arise in the case of a non-performance of the contract by the assessee. Thus, we agree with the contention of the ld. Senior Counsel that giving the performance of the corporate guarantee was to execute the work which in effect was carried out by the assessee itself for which the majority of the profit and the benefit went to the 1357/Mum/2014 M/s. Afcons Infrastructure Limited assessee. Even it is to be treated as international transaction, then also under the scope and meaning of international transaction as defined in Section 92B- “92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.”
Ergo, it is to be seen whether such transaction is having a bearing on the profits, income, losses or assets or any kind of a mutual agreement or arrangement for the allocation or apportionment or contribution to any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided. Thus, the transaction or the arrangement should have the bearing of profit or income or any kind of benefit or facility. Here providing of performance guarantee or corporate guarantee did not gave benefit to the AE, albeit on the facts of the case the entire benefit for giving such 1357/Mum/2014 M/s. Afcons Infrastructure Limited guarantee is only to the assessee because the guarantee was given to carry out the work which was done de-facto by assessee. Even the work performed by the Afcons Mideast was totally done by the support service through infrastructure and man power and the organizational support of the assessee company only and that’s the reason why the entire reward and profit went to the assessee Once, the entire benefit and the profits belong to the assessee, and then it cannot be held that assessee has given any kind of benefit by providing corporate guarantee to Afcons Mideast. Here, in this case what has to be seen that the entire functions to carry out the work either in the form of sub-contract or executing the contract work by providing entire support services through its own infrastructure, man power, management, technological support, organizational support, etc. all has been done by the assessee. The function of the AE in the execution of work was only on paper and as a legal entity to comply with the domestic laws. In substance there is negligible function performed by the AE. Apart from that, even the assets deployed belonged to the assessee. The entire risk lied upon the assessee that is the risk assumed for executing the contract and carrying out the entire work solely belonged to the assessee. Ergo the rewards of the risks were also entirely reaped by the assessee in the form of 99% profit. Thus, even if one does FAR analysis of the performance guarantee given by the assessee to FGB for execution of the contract where entire risk and rewards and the benefit was of the assessee only, then where is the question of 1357/Mum/2014 M/s. Afcons Infrastructure Limited making any adjustment of ALP in the hands of the assessee that any benefit has been passed on to the AE.
Even if it is reckoned as international transaction, then also on FAR analysis and looking to fact that the reward or profit to the AE is almost negligible, i.e. the ultimate profit is not even 1%, the adjustment if at all would also be negligible on the facts of the present case. Thus, on the facts of the present case we hold that no transfer pricing adjustment can be made on account of corporate guarantee. Accordingly, the addition made by the ld.TPO / ld. AO is deleted.
Next issue relates to adjustment of Rs.55,59,523/- in respect of receipt of interest on loan given to Afcons Mideast and Afcons Infrastructure International Ltd.
The brief facts are that assessee had given advances amounting to Rs.14.66 Crores to Afcons Construction Mideast LLC and assessee had charged interest @12% per annum on daily balance of such advances and amount of interest received from M/s. Afcons Mideast amounting to Rs.2,16,19,153/-. Assessee has also given advance of Rs.1.40 Crores to Afcons Infrastructure International Ltd., Mauritius, from whom assessee had charged interest @12% per annum on daily advance of the said balance. The amount of interest received during the relevant financial year amounting to Rs.6,18,936/-. The ld. AO after collecting information u/s. 133(6) from M/s. CRISIL noted that yield from BBB grade corporate bond was 14.39% for five years 1357/Mum/2014 M/s. Afcons Infrastructure Limited period for F.Y.2007-08. As the case of the assessee according to him falls between the range of BB and D ratings and therefore, he held that unrated bonds will be varied by giving the credit period spread by minimum 20% over the equivalent rated bond of similar tenure which would be @20%. Thus, he held that arm’s length rate is 18.66% and worked out arm’s length price of Rs.3,36,17,782/- and after reducing the interest recovered @12% transfer pricing adjustment of Rs.1,19,98,629 was made. After the ld. DRP, the arm’s length rate of interest was determined at 15% p.a. 19. Before us, ld. Sr. Counsel submitted that transaction of receipt of interest on advances has to be benchmarked based on local market conditions of the borrower entity and therefore, the rate of interest of the Indian market is not a relevant factor. The rate of interest in respective markets of the AE should be considered. United Arab Emirates Interbank, i.e., EIBOR offered rate was approximately 1.50% as on 31/03/2009 and if EIBOR +2% is applied, the arm’s length rate of interest works out to approximately 3.50%. Since the assessee has charged 12% which is much more than the rate prevailing in the local market, hence no addition is warranted. 19. On the other hand, ld. DR strongly relied upon the order of the ld. AO. 20. It is an undisputed fact that loan has been provided to the AE at UAE and Mauritius. The assessee was provided EIBOR rate which was applicable in UAE was 1.50% and if 200 basis 1357/Mum/2014 M/s. Afcons Infrastructure Limited points is applied considering the RBI circular or External Commercial Borrowings, then it will come down to 3.50%. The one year LIBOR rate prevailing as on 31/03/2009 was 3.12% and he apply 200 basis points on the LIBOR rate, then also interest worked out to 4.12%. Thus, in any scenario, the interest @12% free loan given to AE is much more than the arm’s length rate of interest because arm’s length rate of interest has to be taken because arm’s length rate of interest has to be taken on the respective market rate of the AE and not by Indian market. Accordingly, the adjustment made by the ld.AO is deleted.
In Revenue’s appeal, the first issue is disallowance of interest u/s. 36(1)(iii) in respect of loans to Afcons Pauling Joint Venture. The ld. AO from the perusal of the balance sheet as on 31/03/2009 revealed that assessee had shown interest bearing secured loans at Rs.31923.68 lakhs and unsecured loans of Rs.37127.72 lakhs. On the interest bearing funds, assessee had paid interest of 8566.26 lakhs which resulted in average rate of 12.40%. The ld. AO noted that assessee has advanced loans to its joint ventures on which no interest has been charged for sums aggregating to Rs.771.76 lakhs. Accordingly, ld. AO made disallowance @12% which worked out to Rs.8.57 lakhs. The ld. DRP had given following directions to the ld. AO. “We have considered the facts of the case, the objections of the assessee and the evidences placed on record. The assessee has relied upon the decision of honourable Mumbai ITAT in its own case for the assessment year 1997-98, wherein it was directed to exclude the loans as on 1 April 1996 while computing the disallowance of interest. This direction was given on the fact 1357/Mum/2014 M/s. Afcons Infrastructure Limited that in the assessment years prior to Ay 97-98, there is no finding that any interest-bearing or funds were utilised for making such advances and no disallowance of interest was made in the earlier years. The assessee has also made a statement before us that against such finding of the Tribunal, the revenue has not preferred any further appeal before the High Court, In view of the above stated position, the AO is directed to restrict the disallowance of interest only to the extent as it relates to incremental advance party wise as compared to balance outstanding as on 31st of March 1996. As regards the interest on the balance amount, we uphold the action of the AO and the rate of interest 12% applied by him. The AO is directed to modify his order accordingly.”
It has been informed that the issue stands covered by the decision of the ITAT from A.Y.2001-02 to 2008-09. Since, the ld. DRP has followed the initial order of the Tribunal in A.Y.1997-98 which has been followed in subsequent years wherein it was held that interest disallowed should be in respect of incremental loans given from 31/03/1996. Once the position from the earlier years has been settled that the opening balance of the loan is to be excluded for making the loans, then we do not find any infirmity in the directions of the ld. DRP which is in accordance with the direction of the Tribunal in earlier year. Therefore, the ground raised by the Revenue is dismissed.
In so far as disallowance of depreciation of Rs.25,000/- and written down value of speed boat, it has been submitted that the issue is in favour of the assessee by ITAT in assessee’s own case for the A.Y. 2001-02, A.Yrs. 2002-03 to 2005-06 and A.Yrs 2006- 07 to 2008-09. As per the Tribunal order, it was held that:-
1357/Mum/2014 M/s. Afcons Infrastructure Limited (i) As per the facts on record, machinery was purchased by the principal but the assessee had been vested with the possession of them and utilized them for its business. (ii) It is not disputed that the principal has debited the cost of machinery to the assessee's account and the assessee has capitalized it in its books of account. (iii) The Tribunal applying the ratio laid down in the decisions of Mysore Minerals Ltd (SC), Dilip Singh Sardarsingh Bagga (Bom.) Varanasi Auto Sales (All.), dismissed the department's ground.
Accordingly, ground raised
by the Revenue is dismissed.
25. In so far as the disallowance of professional fees of Rs.64.33 lakhs paid for arbitration award, the facts discussed in the assessment order reads as under:- “The assessee has stated that in its return of income, it had reduced the sum of Rs.10,66,78,858/- on account of 'arbitration credits taken to Profit & Loss Account' on the basis that the award is being challenged by the clients before the Hon'ble High Court. However, now it is learnt by the assessee that its client viz. Chennai Port Trust has not challenged the Arbitration Award dated 03.07.2008 in respect of contract agreement No.62/1999 and Arbitration Award dated 15.07.2008 in respect of contract agreement No.13/2001 and moreover the assessee has also received the sum of arbitration awards together with interest, details of which are given hereunder; Arbitration Contract Arbitration Interest on Award date Agreement No. Award (Rs.) arbitration award (Rs.) 03.07.2008 62/1999 31005853 9332762 1357/Mum/2014 M/s. Afcons Infrastructure Limited 15.07.2008 13/2001 3315117 1011110 TOTAL 34320970 10343872 4.2 The assessee contended that, since the awards have not been challenged before the Hon'ble High Court by the said client and as the said sums of arbitration awards have been received by the assessee company in subsequent years, the assessee suo moto offers for disallowance the sum of Rs.4,46,64,842/- 134320970 + 10343872]. The assessee's contention is considered and accordingly the sum of Rs.4,46,64,842/- 134320970 + 10343872] was proposed to be disallowed in the draft assessment order. On this disallowance, the assessee not raised any objection before the Hon'ble DRP. Therefore, an amount of Rs. 4,46,64,842/- is added to the total income of the assessee company.
26. It has been submitted that this issue is covered by the decision of the Tribunal in assessee’s own case for A.Y.2005-06 and for the A.Y.2006-07 and 2007-08.
27. The Tribunal in A.Y.2005-06 has held that, firstly, the professional fees was incurred in respect of arbitration award and therefore, same was for the business of the assessee. Secondly, assessee was justified in claiming the said amount as expenditure in its profit and loss account and lastly, the Tribunal declined the observation of the ld. AO that since the income from arbitration award is excluded from the total income, therefore, professional fees incurred in this should be disallowed. This exact observation of the ld. AO as made in the present 1357/Mum/2014 M/s. Afcons Infrastructure Limited assessment year also has been rejected and accordingly, the ground raised by the Revenue is dismissed.
In the result, appeal of the assessee is allowed and Revenue’s appeal is dismissed. Order pronounced on 9th November, 2023.