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Income Tax Appellate Tribunal, MUMBAI ‘K’ BENCH, MUMBAI.
Before: Shri B.R. Baskaran (AM) & Shri Rahul Chaudhary (JM)
The assessee has filed this appeal challenging the final assessment order dated 30-03-2021 passed by the assessing officer for AY 2016-17 u/s 143(3) r.w.s 144C(13) of the Act in pursuance of directions given by Ld Dispute Resolution Panel (DRP).
2. The grounds of appeal urged by the assessee read as under:-
“The grounds stated hereunder are independent of, and without prejudice to one another.
That on the facts and circumstances of the case and in law, the Learned Assessing Officer ('AO')/Transfer Pricing Officer ("TPO') Dispute Resolution Panel (DRP), have erred in making transfer pricing adjustments of Rs.73.13,91,129/-on account of interest on loans provided to its associated enterprises ("AE') and charging notional interest on share application money pending allotment in respect of international transactions of the Appellant, alleging the same to be not at arm's length
2 Bombay Rayon Holding Limited in terms of the provisions of sections 92C(1) and 92C(2) of the Act, read with Rule 10D of the Income-tax Rules, 1962 ("Rules")
1.1. On the facts and circumstances of the case and in law, without prejudice without admitting and in the alternative, the AO/TPO/DRP erred in not following the order of the Hon'ble ITAT, Mumbai in the appellant's own case for AY 2009-10 to AY 2014-15 dated 06 April 2020 (ITA no 5986- 91/Mum/2018) on the identical issue whereby the Hon'ble ITAT had restricted the TP adjustment to LIBOR+200 bps in all the years and on both loan and share application money given transactions.
1.2. On the facts and circumstances of the case and in law, without admitting, the AO while making the above adjustment in the order passed u/s 143(3) r.ws. 144C(13) of the Act has erred in the taking an amount of INR 76,91,37,161/- as against INR 73,13,91,129/- as computed by the TPO and confirmed by the DRP. Without providing any findings for the additional disallowance.
That on the facts and circumstances of the case and in law, the Appellant had provided loan to its AE for acquisition of brand to expand its presence in the European market in FY 2008-09 upto FY 13-14. However in the subsequent years the brand was not successful therefore it was written off The Lamed AOTPOT disregarded this fact of business expediency and computed interest on the advances given by the Appellant
3. That on the facts and circumstances of the case and in law the Learned AO/TPO/DRP erred in not considering the surrounding circumstances in which the Appellant and its AE were operating.
4. That on the facts and circumstances of the case and in law the Learned AO/TPO/DRP has disregarded fact, that there is no transfer of profits from the Appellant to its AL. further the AE to whom the loan has be advanced is also incurring into losses.
5. That on the facts and circumstances of the case and in law, the Learned AO/TPO/DRP erred in facts and by disregarding the fact that the loan converted to share application money constituted shareholder activities. Therefore, the AO/TPO/DRP erred in computing interest for share application money.
6. That on the facts and circumstances of the case and in law, the loan provided by the Appellant to its AE was subsequently converted into share application money. The Learned AO/TPO/DRP erred in proposing an adjustment con conversion since there is no income arising from the international transaction for receipt of share application, being an investment and shareholder activity.
7. That on the facts and circumstances of the case and in law, without prejudice, the Learned AO/TPO/DRP erred, in law and in fact, that for 3 Bombay Rayon Holding Limited interest imputation, the rate of interest should not exceed the LIBOR the underlying transaction is in foreign currency.
8. That on the facts and circumstances of the case and in law, without prejudice, the Learned AD/TPO/DR erred in computing interest at Rs. 73,11,33,454 based on PLR rate plus 300 bps for loan advanced advances given including on account of share application to one AE vis-à-vis computing interest at Rs.2,57,675 based LIBOR rate for loan advanced to another AE on the advances given to the AE in FY 08-09 upto 14-15.
Interest u/s. 234A 9. On the facts and circumstance of the case and in law, the learned AO erred in computing interest under section 234A of the Act.
Interest u/s 234B 10. On the facts and circumstance of the case and in law, the learned AO erred in computing interest under section 2348 of the Act.
Interest w/s 234C 11. On the facts and circumstance of the case and in law, the learned AO erred in computing interest under section 234C of the Act.
Penalty u/s 271(1) 12. On the facts and circumstance of the case and in law, the learned AO erred in initiating penalty u/s 271(1)(c) of the Act.
The Appellant prays that the additions made by the learned AO/TPO and upheld by the Hon'ble DRP be deleted and consequential relief be granted.”
The assessee herein is a subsidiary of M/s Bombay Rayon Fashions ltd (BRFL). The assessee company has established as a wholly owned subsidiary company in Italy with the name “BRFL Italia SRL” (Associated Enterprise), with the objective of making the group to have global presence in the European market and sell its goods under the brand name “GURU”.
The ground nos. 9 to 12 are either general or consequential and hence they do not require specific adjudication. The remaining grounds urged by the assessee are directed against the transfer pricing adjustments made by the TPO and which were confirmed by Ld DRP. The assessee had given loans/share application money to its Associated
4 Bombay Rayon Holding Limited Enterprise, referred above, without charging any interest thereon. The details of loans given by the assessee have been classified into three categories:- (a) The assessee had advanced loans to the Associated Enterprise (AE) referred above in the earlier years to the tune of Rs.318.33 crores. The same loan continued to be carried forward during the year under consideration.
(b) The assessee had advanced Share application money to the AE, pending allotment in the earlier years to the tune of Rs.101.86 crores. The same amount continued to be carried forward during the year under consideration.
(c) During the year under consideration, the assessee has given fresh EURO loans of 9,00,000 Euros.
The TPO made transfer pricing adjustments by way of charging interest on the above said loans. With regard to the first two items of loans/advance, the TPO determined ALP adopting SBI’s Prime Lending Rate (PLR) plus 300 bps. With regard to the third item, the TPO made search in Bloomberg database and determined the interest rate of 2.5612% and applied the same. All the three adjustments made by the TPO resulted in a cumulative transfer pricing adjustment of Rs.73,13,91,129/-. The ld DRP confirmed the Transfer pricing adjustments proposed by the TPO and accordingly, the AO passed the final assessment order adding the above said T.P adjustment amount of Rs.73.13 crores to the total income of the assessee. The assessee has challenged the same in this appeal.
We noticed that the assessee had given the funds by way of loans and share application money (the first two items, referred above) in the earlier years. With regard to the T.P adjustment made in respect of these two items, the assessee raised several contentions before us, viz., (a) that the funds were given on commercial expediency; (b) that the funds were given to AE out of interest free funds available with the assessee;
5 Bombay Rayon Holding Limited (c) that there was no intention of shifting profits; that the subsidiary is incurring losses; (d) that the loan converted into share application money constituted shareholder activity.
All these contentions have been raised in the earlier years also. Besides the above contentions, the Ld A.R has raised one more contention during the year under consideration, i.e., the assessee has written off the above said amounts in the succeeding year, i.e. AY 2017-18, since there was no hope of recovery of the amounts given. It was further submitted that the insolvency proceedings of AE started in 2015 itself. Accordingly, it was contended that there is no rationale in imputing interest expenses, when the recovery of principal amount itself is in jeopardy.
We noticed that, in the earlier years also, the TPO made identical transfer pricing adjustment, which were challenged before the Tribunal. The ITAT has passed a combined order for AY 2009-10 to 2014-15 in and others dated 06-01-2020). As noticed earlier, the assessee had raised identical contentions listed in (a) to (d) above in those years also and all those contentions were rejected by the ITAT. The assessee had put up an alternative contention before the Tribunal that the interest rate should be adopted at LIBOR rate plus 200 bps. The Tribunal accepted the above said alternative contention of the assessee and accordingly held that the interest should be computed by adopting LIBOR plus 200 bps. For the sake of convenience, we extract below the operative portion of the order passed by the ITAT in AT 2009-10 to 2014-15:-
“24. As regards the issue on merits, we note that assessee is a wholly owned subsidiary company of M/s. Bombay Rayon Fashions Ltd. The assessee has granted funds to its 100% subsidiary in Italy. The purpose was to take over the retail business of Jam Session Holding SRL which owned a brand name ‘GURU’. The assessee has given funds during the F.Y.2008-09 to 2013- 14 to the said subsidiary company and no interest has been charged on the loans so provided. During the search action,
6 Bombay Rayon Holding Limited M/s. Bombay Rayon Fashions Ltd., Managing Director Mr. Prashant Agarwal had agreed that assessee should have charged interest on loan advance to the AE @ LIBOR +2%. He had also offered for taxing the said sums in the hands of the assessee for respective financial years. In this context, the assessment was reopened. The assessee has not charged any interest on the loan advanced to the AE. The Transfer Pricing Officer has noted that lending and borrowing is not the main business of the assessee. It was also noted that assessee had given loans to its AE without any arm’s length compensation even when the loan is unsecured one and subsidiary has not offered any security for the same. No written agreement concerning the loan has been filed with any of the authorities. No other document is on record fortifying the claim of the assessee. Hence, assessee justification of granting interest free loan is simply ipse-dixit. Assessee’s plea is that interest was not charged on loan provided to AE as the sums were received from the holding company on which, no interest has been paid. This has rightly been rejected by the authorities below. The authorities below have also rejected the assessee’s contention that there is no transfer of profits from the assessee to the AEs that the AE is into losses and hence, there is no shifting of profits. That assessee had provided loans to business expediency, that loan provided was converted into share capital in the subsequent year that loan profit to written off in the subsequent years. In this regard, we note that interest free loans given to the AE have been categorically held to be international transaction calling for the adjustment of ALP in catena of case laws. The assessee’s plea that it was for business expediency and that it was out of own funds have been correctly rejected by the authorities below. In this regard, the decision of ITAT Delhi Bench in the case of Perot Systems TSI (India) Ltd. [2010] 37 SOT 358 (Delhi) is relevant. In that case, the ITAT did not accept the arguments of commercial expediency as well as the reliance on the Hon’ble Supreme Court in the case of SA Builders. Similar view has been taken in other decisions referred above including Tata Autocomp systems Ltd 21 taxmann.com 6 (Mum.) vide order dated 30/04/2012. This decision was affirmed by Bombay High Court in 56 Taxman.com 206.
In this regard we may also gainfully refer to the decision of ITAT Special Bench in the case of Instrumentarium Corporation Ltd. supra which reads as under:-
In our considered view, the commercial expediency of a loan to subsidiary is wholly irrelevant in ascertaining arm's length interest on such a loan. There is indeed no bar on anyone advancing an interest free loans to anyone but when such transactions are covered by the international transactions between the associated enterprise, Section 92 of the Act mandates that the income from such transactions is to be computed on the basis of arm's length price. The judicial precedents relied by the assessee, such as in the case of SA Builders Ltd. -(supra), in support of the proposition that interest free advance to the subsidiary, in which assessee has deep interest, are justified on the grounds of commercial expediency are in the context of the question whether such a use of borrowed
7 Bombay Rayon Holding Limited funds can be said to be for the purposes of business, and, accordingly, whether interest on borrowings for funds so used can be allowed as a deduction in computation of business income of the assessee. That is not the issue here, and these judicial precedents on the commercial expediency, therefore, have no relevance in computation of arm's length price of loan given to an associated enterprise. Similarly, learned counsel's contention that a notional income cannot be taxed, and reliance on Shoorji Vallabhdas & Co.'s case (supra) in this regard, is wholly misplaced because that proposition is in the context of tax laws in general, whereas, transfer pricing provisions, being anti abuse provisions with the sanction of the statute, come into play in the specific situation of certain transactions with the associated enterprise. The general provisions of the law have to give way to these specific anti abuse provisions. While a notional interest income cannot indeed be brought to tax in general, the arm's length principle requires that income is computed, in certain situations, on the basis of certain assumptions which are inherently notional in nature. When the legal provisions are not in pari materia, as the provision of normal computation of income and the provision of computation of income in the case of international transactions between the associated enterprises, what is held to be correct in the context of one set of legal provisions has no application in the context of the other set of legal provisions.”
Keeping in mind the exposition in the above case, it is amply clear that loan to the AE is international transaction and it needs to be benchmarked for ALP determination. The decision of KSS Limited(supra) relied upon the ld. Counsel of the assessee is not applicable here as there is no agreement whatsoever between the parties i.e. between the assessee and the AE. In the said case there were back to back agreements and the explanation were found to be cogent. Moreover in the said case, when the arrangement did not work out the entire advance was refunded to the assessee through the AE over the period of time. However, in the present case the entire amount has been written off as non-refundable. So the decision of KSS Ltd. does not help the case of the assessee. Rather it has been rightly relied upon by the ld. departmental representative in support of the proposition that interest free sums given to the AE dehors any cogent documentation of purpose are liable for determination of arm’s length price as per provisions of Section 92B Explanation C.
Another issue in this regard for A.Y.2010-11 onwards is that the loan has been converted into share application money. In this regard, the ld. Counsel of the assessee has placed reliance upon several case laws that share application money is shareholder fund and no interest should be attributable to the same. In the present case, we find that authorities below have given a clear finding that the plea that so called share application money which is said to be given for strategic purpose for acquiring control is not sustainable at all. Assessee has full control over the AE. It could not be said that giving further loans and considering it as 8 Bombay Rayon Holding Limited share application advance can strengthen assessee’s control over the same. Hence, the plea that the loan was advanced as strategic shareholder function totally fails. Moreover it is not the issue of inordinate delay of conversion of share application money into share capital. The fact is that the issue of conversion into share capital was given a complete go by and subsequently the entire amount was written off as irrecoverable. Hence, the case laws relied by the assessee’s Counsel are in totally different context. Hence, this plea does not fortify the case of the assessee.
Now, we come to the issue of application on interest rate on the said sum advanced. In this regard we note that the DRP has distinguished the decision in the case of CIT vs. Tata Autocomp systems Ltd (supra) by observing that the said decision does not render any ratio. In our considered opinion, this observation of the Dispute Resolution Panel totally uncalled for. We are of the considered opinion that decision of the Jurisdictional High Court is fully binding upon all the Courts and Tribunal of subordinate jurisdiction. We note that in the said case the assessee advanced funds to its wholly owned subsidiary in Germany on interest-free terms. The TPO held that the transaction was an "international transaction" and held that the assessee ought to have received interest at 10.25% being the lending rate charged by the banks in India (Arms length price). The DRP enhanced the rate of interest to 12%. On appeal, the Tribunal followed its earlier view in WF Ltd. Vs. DCIT (ITA No.673/Mum/06) and DCIT Vs. Tech Mahindra Ltd (46 SOT 141) and held that as the amount was advanced to an AE in Germany, the ALP rate of the interest had to be determined by adopting the EURIBOR rate of interest i.e. rates prevailing in Europe. The Department challenged the said finding of the Tribunal in the High Court on the basis that the EURIBOR does not govern the monetary markets or interest rates in India, which is the residence country of assessee and EURIBOR rate is not applicable to the loans for which foreign currency has to be purchased by the Lender. HELD by the High Court dismissing the appeal:
“We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. Vs. DCIT I (supra) and DCIT Vs. Tech Mahindra Ltd."46 SOT 141 to reach the conclusion that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr.Suresh Kumar the learned counsel for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in VVF Ltd. Vs. DCIT (supra) and DCIT Vs. Tech Mahindra Ltd. (supra) on the above issue. No record has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. Vs. DCIT (supra) and "DCIT Vs. Tech Mahindra Ltd "(supra). The Revenue not : having filed any appeal, has in fact accepted the decision of the Tribunal in "VVF Ltd. Vs. DCIT (supra) and "DCIT Vs. Tech Mahindra Ltd."(supra). In view of the above we see no reason to entertain the present appeal as in similar matters
9 Bombay Rayon Holding Limited the Revenue has accepted the view of the Tribunal which has been relied upon by the impugned order”.
We followed the above said case law and accordingly, hold that the arm’s length price computed by adopting the lending rate of banks in India is not sustainable. In this regard, we agree with the alternative submission of the assessee that the interest should be charged at LIBOR+200 bps. Such charging of interest has been approved by Hon’ble Jurisdictional High Court in several other case laws. We direct accordingly. It may not be out of place to mention that revenue’s insistence on application of bank rates in India will throw open the issue of assessee not incurring any expenditure on the funds for advancing the loan. As we have already held this issue is not to be considered for the computation of arm’s length price for an international transaction here.
In the additional ground, the assessee has raised the issue of arm’s length price of international transaction of interest free loans being computed on adhoc basis and not in accordance with Section 92C of the Income Tax Act. In this regard, we note that assessee has not provided any details whatsoever. Assessee has itself not done any benchmarking. Our decision as above has the mandate of Hon’ble Jurisdictional High Court in the case of Tata Autocomp systems Ltd (supra). Hence, this additional ground raised by the assessee is dismissed.”
We notice that the contentions raised by the assessee listed as (a) to (d) in the preceding paragraph has been dealt by the co-ordinate bench and all those contentions have been rejected. Before us, as noticed earlier, the assessee has raised one more contention that the AE has suffered huge and hence the assessee had to write off the amounts due from its AE in the succeeding year. Since the insolvency process has started during the financial year under consideration, it was contended that the T.P adjustment should not have been made in this year. In support of these contentions, the Ld A.R placed his reliance on the following case law:-
(a) Bombay Dyeing & Mfg. Co Ltd vs. DCIT (2017)(87 taxmann.com 213)(Mum ITAT) (b) KEC International Ltd vs. DCIT (ITA No.17/Mum/2018 dated 14.09.2020) 10 Bombay Rayon Holding Limited
We have gone through both the case laws.
(i) In the case of Bombay Dyeing & Mfg Co Ltd, the facts are that the AE of the assessee was having an outstanding balance on which TP adjustment by way of interest was made. It was submitted that the outstanding balance does not represent “international transaction” at all, as the outstanding debit balance has arisen mainly on account of reimbursement of the counter guarantee fee and not in the course of business. In the facts of this case, the Tribunal held that the “outstanding balance” with the AE, referred above, is not covered within the ambit of “international transaction”. In the instant case, the money given to the AE has been held to be international transaction and hence the assessee cannot take support of this decision.
(ii) In the case of KEC International Ltd, the contribution made by the assessee was to a Joint Venture, wherein the assessee was also a partner. The said contribution was made as per the pre-existing liability. Hence the facts of this case are distinguishable.
The Ld A.R made an alternative contention that the T.P adjustment should be restricted to LIBOR rate only and there is no requirement to make a mark up of 200 bps, since the assessee has written off the amounts in the succeeding year. Accordingly, in the facts and circumstances of the case and also in view of the peculiar features attached to the AE, we are of the view that this alternative contention deserves acceptance. Accordingly, we direct the AO/TPO to make transfer pricing adjustment in respect of first two types of advances adopting the applicable LIBOR rate only.
In respect of third type of advance given during the year, we notice that the TPO has determined interest rate of 2.5612% on the basis data collected
11 Bombay Rayon Holding Limited from the bloomberg website. Before us, no material was placed to contradict the same. Accordingly, we confirm the order passed by the TPO on this issue.
In the result, the appeal filed by the assessee is partly allowed.
Pronounced in the open court on 01.02.203.