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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A” : HYDERABAD
Before: SHRI S.S.GODARA & SHRI LAXMI PRASAD SAHU
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “A” : HYDERABAD (THROUGH VIDEO CONFERENCE)
BEFORE SHRI S.S.GODARA, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER Appellant Respondent ITA No. A.Y. Devgen Seeds and Asst.Commissioner of 187/Hyd/17 2012-13 Crop Technology Income Tax, Private Limited, Circle-17(1), Hyderabad Hyderabad 2225/Hyd/17 2013-14 [PAN: AACCD5732D]
For Assessee : Shri Nitesh Joshi, AR For Revenue : Shri P.Chandra Sekhar, DR Date of Hearing : 22-06-2021 Date of Pronouncement : 18-08-2021
O R D E R PER S.S.GODARA, J.M. : These two assessee’s appeals for AYs.2012-13 & 2013-14 arise against the ACIT, Circle-17(1), Hyderabad’s assessments dated 19-12-2016 and 25-10-2017 framed in furtherance to the Dispute Resolution Panel (‘DRP’)-1, Bengaluru’s directions dt.31-10-2016 and 23-08-2017 in F.No.45 & 293/DRP-BNG/ 2016-17, involving proceedings u/s.143(3) r.w.s.92CA(3) and u/s.144C(5) and r.w.s.144C(13) of the Income Tax Act, 1961 [in short, ‘the Act’]; respectively. Heard both the parties. Case files perused.
We are informed at the outset that the assessee’s identical sole substantive grievance canvassed in both these assessment years seeks to reverse the learner lower authorities’ action making Arm’s Length Price (ALP)
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adjustments of Rs.1,03,57,890/- and Rs.1,09,31,000/-; respectively regarding interest paid to overseas Associated Enterprises (AEs) of Fully Convertible Debentures (FCDs). 3. The Revenue next sought to highlight the fact of the learned lower authorities; right from the Transfer Pricing Officer’s (TPOs) to the DRP, have adopted judicial consistency in light of the very issue finalized in preceding AY.2011-12 that the assessee’s interest payment has to be benchmarked as per “SIBOR” rates involving international currency than those adopted in the domestic banking sector. 4. Learned counsel on the other hand has filed a detailed note urging us not to adopt judicial consistency in the impugned twin assessment years as under:
“1.The aforesaid appeals were heard by the Tribunal on 22.06.2021 with inter-alia liberty being given to the Appellant to file a brief synopsis of its submissions. The only ground involved in the present appeals is determination of arm's length rate of interest payable by it on the Fully Convertible Debentures (FCD) denominated in Indian currency issued to Devgen Pte Ltd, Singapore. Apart from the FCD, the Appellant had also borrowed External Commercial Borrowing (ECB) in foreign currency i.e., in Singapore Dollars again from Devgen Pte Ltd, Singapore. 2.For AY 2011-12 i.e. in the immediately earlier year also, a TP adjustment had been made in respect of interest on both sets of borrowings. The Appellant had been granted appropriate relief by the Dispute Resolution Panel (DRP). At Page 9 and 10 of the order (see Page 324 and 325 of the Factual Paper Book for AY 2013-14), the DRP has compared the interest rate on FCDs with the interest rates paid by the Appellant to Indian banks and held the same to be at arm's length considering availability of internal CUP. Aggrieved by the Final Assessment Order (pursuant to DRP directions) for AY 2011-12, the Revenue had filed an appeal before the Tribunal. When the matter reached the Tribunal the distinction between the ECB borrowings in foreign currency and the FCD issued in Indian currency, which was there before the DRP, was unfortunately not brought out. Therefore, the Tribunal has proceeded on the basis that both the borrowings are in foreign currency and should be benchmarked with reference to
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Singapore Inter Bank Offer Rate (SIBOR) (see pages 125 to 137 of the Case Law Paperbook). The said distinction did not make any difference to the conclusion reached by the Tribunal for the said year, as the rate at which interest was paid on FCD for the said year was lower than the rate of interest applicable to the borrowing in foreign currency. The difficulty that arises in the present appeal is that based on the conclusions reached by the Tribunal for AY 2011-12, the Revenue is arguing that for the present years also the rate at which interest should be paid on the FCD has to be benchmarked based on SIBOR. 3.The issues which arise for consideration of the Tribunal, in the present case, are as stated hereafter:- a. Whether the amount borrowed by the Appellant by issue of FCD is in Indian currency? b. Whether the arm's length rate of interest on such borrowing shall be the rate of interest prevailing in India as the borrowing is in Indian currency and the amount has been received/consumed in India? c. Whether in the facts and circumstances of the present case, the Tribunal would be justified in holding that the arm's length rate of interest on borrowing by way of FCD should be based on the rate of interest prevailing in India despite its order for AY 2011-12? 4.Since the issue involved in the appeals for both the years is the same, the facts relating to AY 2012-13 have been referred to. The brief facts, as may be relevant, for disposal of the issue arising in the present appeals are as stated hereafter:- a. On 01.04.2009, the Appellant had issued 1,70,00,000 FCDs of face value INR 10 each aggregating to Rs.17,00,00,000 which was subscribed by Devgen Pte Ltd, Singapore. As per the terms and conditions of issue, the Appellant was under an obligation to pay interest thereon at the rate of 4 % for the first two years and thereafter at the rate of 12 % from the third to the fifth year. The present appeals relate to the third and the fourth year when the interest has been paid at the rate of 2%. For assessment year 2011- 12 (being the second year) such interest was paid at the rate of 4%. The interest is to be paid in Indian rupees. b. It is an undisputed position that the Appellant has paid interest at the rate of 11.70 % on amounts borrowed from HDFC bank by it. It pleaded that this should be treated as an internal CUP (see the submission as recorded by the DRP in the fourth bullet point at page 2 of its order and the finding given at page 3 in the context of ECB), where it has been observed " ... , we are of the view, when interest paid to the bank (which can be considered as internal CUP) @ 11.70% is available. The payment of interest @ 5.94% for the assessment year, in our opinion, is reasonable and accordingly to be considered
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at arm's length." If 11.70% is regarded as the arm's length rate of interest, then, interest paid by the Appellant @ 12% on the FCD would fall within the range of +/- 5%. c. The TPO had taken the arm's length rate of interest on the FCDs at SIBOR +200 bps (see paragraph 7.2 at pages 3 and 4 of the TPO's order), while the DRP has taken such arm's length rate of interest at 5.94 % based on the rate on which interest is paid on ECB. Issue A 5. To show that the FCD was issued in Indian currency, the Appellant relies on the following: a. The terms and conditions for issue of FCD as submitted before the TPO by its letter dated 15.09 2015 is at page 297 of the Factual Paperbook. This shows that the currency in which the FCD were issued was INR. b. This Fact was also brought out in Note - 5 of the Appellant's Annual Accounts (see page 32 of Factual Paperbook) where the fact relating to ECB borrowing in Singapore dollar has been specifically brought out in note (ii) thereto. Attention is also invited to Note - 27 in the Additional information to the financial statements (see page 39 of the Factual Paperbook) wherein "expenditure incurred in foreign currency" in respect of interest on ECB borrowing is reflected. These show that if the FCD was issued in foreign currency then a similar disclosure would have been made in respect of the same. c. In case of ECB, the amount of SGD 43,00,000 has been converted into Indian rupees for the purpose of disclosure in the Financial Statements. In accordance with Accounting Standard 11, the same has been revalued on each Balance Sheet date. The same has been revalued as on 31 March 2012 -- going up from Rs 1,521.55 lakhs as on 31 March 2011 to Rs 1,740.53 lakhs on 31 March 2012 (see Note 5 in Financial Statements for AY 2012-13 -- Refer Page 32 of the Factual Paper Book for AY 2012-13). On the one hand, the FCDs have been consistently shown at Rs.1,700 lakhs in the Financial Statements (see Page 32 of the Factual Paper Book for AY 2012-13) because the same have been issued in Indian Rupees and hence are not required to be revalued on each Balance Sheet date. On the other hand, the ECB has been availed in foreign currency and is required to be repaid in foreign currency. Hence, the same has been revalued on each Balance Sheet date in accordance with Accounting Standard 11 (see Note 5 on Page 32 of the Factual Paper Book for AY 2012-13 and Note 26 on Page 39 of the Factual Paper Book for AY 2012-13). d. This fact is also brought out in the Transfer Pricing Study Report which was filed with the TPO by letter dated 25.05.2015 (see pages 211, 212, 225 and 240 to 244 of the Factual Paperbook). A perusal of pages 240 to 244 shows that the Appellant had benchmarked the
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interest on FCD by comparing the same with debentures issued by Indian companies, details whereof were obtained from NSDL. To corroborate the same the Appellant had also relied on the State Bank of India prime lending rate. e. Form 3CEB obtained by the Appellant from its Chartered Accountant under section 92E of the Act also brings out this distinction (see page 11 of the Factual Paperbook) 6.The Ld. DR in the course of hearing had relied upon observations of the DRP for AY 2013-14 to say that the assessee had received the FCD proceeds in foreign currency. The Appellant submits that this is factually incorrect. A bare perusal of the TPOs order for assessment year 2012-13 shows that the reference is to INR and not SGD (Singapore dollar). Assuming without admitting that there is any doubt in the matter, the Tribunal as the last fact finding authority and in the interest of substantial justice, may consider to direct the AO to ascertain the correct factual position. Issue B 7.It has been held in the following case that the arm's length rate of interest has to be determined based on such rate of interest applicable to the currency in which the amount is borrowed. CIT v. Cotton Naturals (I) (P.) Ltd. (see paragraphs 39 and 40 at pages 16 and 17 of the Case Law Paperbook) 8.It has been held in the following cases that the arm's length rate of interest has to be determined based on such rate of interest prevailing in the country where the loan amount is received/consumed by the borrower. • CIT v. Tata Autocomp Systems Ltd. (see paragraph 7 at pages 22 and 23 of the Case Law Paperbook) • Pr. CIT v. India Debt Management (P.) Ltd. (sec paragraphs 4 and 5 at pages 27 and 28 of the Case Law Paperbook) 9.In the following cases the Court/Tribunal were concerned with borrowing by way of issue of debentures in Indian currency by Indian assessee, where the rate of interest prevailing in India has been used for the purposes of bench marking. • Pr. CIT v. India Debt Management (P.) Ltd. (see paragraphs 2 to 6 at pages 25 to 28 of the Case Law Paperbook) • Adama India (P.) Ltd. v. DCIT (see paragraphs 8 and 9 at pages 47 to 49 of the Case Law Paperbook) • Adama India (P.) Ltd. v. ITO (see paragraphs 7 to 7.8 at pages 68 and 69 of the Case Law Paperbook)
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In case of Adama India (P) Ltd v DCIT (referred to above) decided by the Hyderabad Tribunal, the Indian entity had issued CCDs in Indian Rupees and the Hon'ble Tribunal, relying on the earlier year's order, has held that the interest on CCDs should be benchmarked on the basis of SBI Prime Lending Rate Issue C 11. I Though, unfortunately, the distinction between ECB borrowing in foreign currency and FCD borrowing in Indian currency was not specifically brought out before the Tribunal for AY 2011-12, a bare perusal of the said order shows that it has proceeded on the basis that both the borrowings are in foreign currency. In that year no Miscellaneous Application / Appeal was filed by the Appellant as the Tribunal had upheld the DRP's order holding the rate of interest paid for the said year was at arm's length. Even if the said distinction was brought out, the Tribunal's conclusion would not have changed because the rate of interest prevailing in India was higher than such rate of interest prevailing in Singapore. 12. In this regard, your attention is invited to the judgment of the Hon'ble Apex Court in Sri Agasthyar Trust v. CIT 236 ITR 23 (see pages 171 to 177 of Case Law Paperbook 2), wherein the Apex Court in its earlier order m East India Industries (Madras) (P) ltd. v. CIT 64 ITR 611 which was a case of a donor to the trust, based on amendment to the object of the Trust, had held that it is not charitable as one of the amended object vas not charitable. In the subsequent. proceeding which arose in the case of the Trust it was claimed before the Tribunal that the amendment on which the Hon'ble Apex Court relied upon was not effective as there was no power to carry out such amendment (see paragraph 3 at page 174 and paragraph to at page 176). Based thereon, the Tribunal's conclusion that the assessee trust would be entitled to exemption as a public charitable trust was upheld by the Hon'ble Apex Court (see paragraph 13 at page 177). The Appellant urges that based on the correct factual position it shall be open to the Tribunal to take a different view. In this regard, your attention is also invited to the following observations of Mr P N Bhagwari in the case of Distributor's Baroda Pvt Ltd v. UOI) 155 ITR 120) (SC) (para 2 of the ruling): 2.We have given our most anxious consideration to this question, particularly since one of us, namely, PH Bhagwati, 1. was a party to the decision in Cloth Traders' case (supra). But having regard to the various considerations to which we shall advert in detail when we examine the arguments advanced on behalf of the parties, we are compelled to reach the conclusion that Cloth Traders' case (supra) must be regarded as wrongly decided. The view taken in that case in regard to the construction of s. 80M must be held to be erroneous and it must be corrected. To perpetuate an error is no heroism. To rectify
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it is the compulsion of the judicial conscience. In this, we derive comfort and strength from the wise and inspiring words of Justice Bronson in Pierce vs. Delameter (A.M.Y. at page 18) " a judge ought to be wise enough to know that he is fallible and, therefore, everready to learn; great and honest enough to discard all mere pride of opinion and follow truth wherever it may lead : and courageous enough to acknowledge his errors". 13. Some of the cases discussed above have been decided post the Tribunal Order which also includes a decision in case of Adama India (P.) Ltd v ITO wherein co-ordinate bench of Hyderabad Tribunal has decided the matter in favour of the assessee and hence the same needs to be considered while deciding this issue. The following table shows the date of these rulings:
Sr.No Name of the case Date 1 Pr.CIT v. India Debt Management (P.) Ltd (417 15 April 2019 ITR 103) (Bom) 2 Adama India (P.) Ltd v. ITO (109 3 July 2019 taxmann.com 338) (Hyderabad Tribunal) 14.Alternatively, as the final fact finding authority, considering that the issue is recurring in nature and the cause of substantial justice, the Tribunal may consider whether the matter may be set aside to the AO/TPO for reconsideration to ascertain the correct factual position and then apply the applicable. legal position”.
We have given our thoughtful consideration to the preceding rival submissions and find no substance in assessee’s stand. This is for the precise reason that the learned co-ordinate bench earlier order (supra) had already upheld assessee’s interest payments benchmarked as per “SIBOR” rates in Revenue’s appeal (AY.2011-12). This taxpayer has sought to pinpoint a distinction in the impugned assessment year that since the learned earlier co-ordinate bench had agreed with its contentions having adopted SIBOR + interest benchmark, it did not deem it fit to invoke Section 254 rectification jurisdiction. And that the debentures in issue involve domestic currency only. The Revenue, on the other hand has invited our attention to the fact that the learned
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lower authorities have already declined the very argument on the ground that the impugned sum pertaining to the assessee’s debentures had been received in foreign currency only. 5.1. Be that as it may, the fact remains that the assessee had adopted the very SIBOR+benchmark all along in all preceding assessment years which stands accepted upto this tribunal. We thus find no merit in its stand seeking to adopt a different approach in the impugned assessment year just because the corresponding interest rate on the FCDs has seen an increase as compared to the earlier period. Hon'ble apex court’s landmark decision in Radhasoami Satsang Vs. CIT (1992) 193 ITR 321 (SC) has settled the law that judicial consistency can very well be adopted in income tax proceedings wherein the principles of res judicata are not applicable. We accordingly uphold learned lower authorities’ action under challenge making the impugned ALP adjustment(s) relating to assessee’s interest payments benchmarked at “SIBOR” rates. 6. These two assessee’s appeals are dismissed in above terms. A copy of this common order be placed in the respective case files.
Order pronounced in the open court on 18th August, 2021
Sd/- Sd/- (LAXMI PRASAD SAHU) (S.S.GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated: 18-08-2021 TNMM
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Copy to : 1.Devgen Seeds and Crop Technology Pvt. Ltd., Sy.No.64P & 79P, Block-1, 3rd Floor, Madhapur, Hi-tech City, Hyderabad. 2.Assistant Commissioner of Income Tax, Circle-17(1), Hyderabad.
3.Dispute Resolution Panel (DRP), Bengaluru. 4.Director of Income Tax (IT & TP), Hyderabad. 5.Addl. Commissioner of Income Tax (Transfer Pricing), Hyderabad. 6.D.R. ITAT, Hyderabad. 7.Guard File.