PRODAIR AIR PRODUCTS INDIA PRIVATE LIMITED, PUNE,PUNE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-4, PUNE, PUNE
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Income Tax Appellate Tribunal, PUNE BENCHES “C” :: PUNE
Before: SHRI SATBEER SINGH GODARA & DR. DIPAK P. RIPOTE
आदेश/ ORDER PER DR. DIPAK P. RIPOTE, AM: This is an appeal filed by the assessee against the Final Assessment Order dated 31.05.2022 passed under section 143(3) r.w.s. 144C(13) of the Act by Assistant Commissioner of Income Tax, Circle-4, Pune.
Brief Facts of the Case : 2. In this case the Assessee had filed return of Income on 29/11/2017 declaring a Loss of Rs.3,01,04,36,145/-. Since there
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was International transactions with the Associated Enterprise (AE) the case was referred to Transfer Pricing Officer (TPO) who passed an order under section92CA(3) on 24/07/2021 proposing an adjustment of Rs.3,41,50,685/- to the International transaction of Payment of Interest to AE on the Loan taken from the AE. The Assessee had obtained following loans and paid interest to AE.
ECB Loan number 1 ECB Loan number 2 Date of Loan 16/12/2014 18/05/2015 Agreement Loan Facility Rs.300,00,00,000/- Rs.1300,00,00,000/- Interest rate 10.5% 10% The TPO applied SBI Rate and calculated the Arm’s Length Price.
2.1 The Assessing Officer (NFAC) passed a Draft Assessment order u/s 144Cr.w.s. 143(3) of the Act on 28/09/2021. Aggrieved by the Order the Assessee filed objections before the Dispute Resolution, Panel-3, Mumbai(DRP-3).The DRP passed an order on 30/03/2022. DRP held that the Interest shall be calculated at SBI Base rate plus 25 basis points. The Assessing Officer, Assistant Commissioner of Income Tax Circle 4 (AO) passed Final Assessment Order as per the Directions of the DRP on
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31/05/2022 making an adjustment of Rs.75,00,000/- to the Total Income of the Assessee. Aggrieved by the Final Assessment Order the Assessee filed an appeal before ITAT.
The assessee has raised following grounds of appeal: “Ground No. 1: On the facts and in the circumstances of the case and in law, the Assistant Commissioner of Income Tax-4, Pune (‘the ACIT’) erred in passing the final assessment order in the absence of jurisdiction as per the provisions of Section 144B rendering the final assessment order to be null and void . The Appellant prays that the final assessment order is null and void being passed in violation of the law and deserves to be quashed. Ground No. 2: On the facts and in the circumstances of the case, and in law, the Ld. ACIT, pursuant to the directions of the Ld. DRP, erred in making a transfer pricing (‘TP’) adjustment of INR 75,00,000 to the income of the Appellant, by holding that the Appellant’s international transactions pertaining to interest on External Commercial Borrowing (‘ECB’) is not at arm’s length. Further, the Ld. DRP/Ld. ACIT/Ld. TPO while making adjustment on account of interest on ECB Loan erred in: a) Rejecting the benchmarking analysis conducted by the Appellant b) Allowing only a marginal spread of 25 basis points over the SBI Base Rate for determining the Arm’s Length Price by concluding that the credit risk is minimal in case of inter-company loan transaction. In light of above the Appellant prays that the TP adjustment ought to be deleted. Ground No. 3: Without prejudice to above, on the facts and in the circumstances of the case and in law, the Ld. DRP/Ld. ACIT/Ld. TPO erred in rejecting the alternate benchmarking analysis conducted by the
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Appellant after considering the range of normal lending rates of various banks prevailing in India during the quarter when the loan agreements were entered into. Ground No. 4: On the facts and in the circumstances of the case and in law, the Ld. AO erred in initiating the penalty proceedings under Section 274 r.w.s. 270 of the Act. In view of foregoing grounds of appeal, the Appellant most humbly prays that the abovementioned TP adjustment ought to be deleted.”
Submission of Ld. AR : 3. Ld.Authorised Representative(AR) for the assessee filed paper book. Ld.AR explained that the Assessee is a 100% subsidiary of Air Products and Chemicals Inc USA. Assessee is mainly engaged in manufacturing and sale of gases. Ld.AR invited our attention to the Transfer Pricing Study Report (page 135 to 233 of paper book). Ld.AR explained that assessee had obtained ECB Loan from Air Products Holding BV Netherland in two tranches. The Assessee has benchmarked the transaction of Interest Payment using ‘Other Method’. During the year assessee has paid Interest of Rs.159.17 crores to its AE Air Products Holding BV Netherland on the ECB loan. The Assessee considered Weighted Average Lending Rate (WALR) of various banks at that point of time. The Ld.AR invited our attention to page 181,182 of the paper book which were relevant
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pages of the Transfer Pricing Study Report. The Ld.AR read out the tables which are reproduced here as under : ECB Loan 1 Public Pvt Sector Foreign Scheduled Sector Banks Banks Commercial Banks banks Dec 2014 11.27% 12.09% 10.69% 11.45% Weighted Average Lending Rate 11.38% ECB Loan 2 Public Pvt Sector Foreign Scheduled Sector Banks Banks Commercial Banks banks May 10.89 % 11.84 % 10.22 % 11.06 % Weighted Average Lending Rate 11.00% 3.1 Ld.AR also pleaded that Safe Harbour Rules prescribe interest rate of SBI base rate plus 300 basis points. Ld.AR insisted that there has to be an appropriate mark up for the SBI Base rate. The DRP has not considered these facts.
3.2 The Ld.AR relied on following case laws : Granite Gate Properties Pvt Ltd ITA No.7025/Del/2017.
3.3 Ld.AR also submitted that the assessee’s transaction is within margin of 3% after giving effect to the DRP order hence adjustment is bad in law.
3.4 Ld.AR also pleaded that the Final Assessment Order is bad in law as it was not passed by National face less Assessment
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Centre but it was passed by Jurisdictional Assessing Officer ACIT, Circle-4, Pune. Ld.AR also submitted that before transferring case to the Jurisdictional AO it has to be approved by CBDT, no such approval is on record.
Submission of Ld.DR: 4. Ld.Departmental Representative(ld.DR) of the Revenue filed copy of report with reference to the validity of order challenged by the Assessee.
4.1 The Ld.DR submitted that the case of the assessee was transferred to Jurisdictional Assessing Officer (JAO) with the approval of CBDT. He read out the order sheet notings which says that the case has been transferred to JAO with the approval of CBDT as per the CBDT circular 225/97/2021/ITA-II dated 06/09/2021. The order sheet noting is part of the report filed by the Ld.DR. Therefore, the Ld.DR pleaded that there is no merit in the legal ground raised by the assessee.
Ld.DR submitted that the TPO has benchmarked the transaction using CUP method. TPO has used the SBI base rate as the CUP. Since the AE has given the loan to its group concern
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there is no risk of non-recovery of the loan. Therefore, no mark up is required.
Findings and Analysis : 6. We have heard both the parties and perused the records. We will first produce the basic facts of the case as appearing in the TPSR and the TPO’s order.
6.1 There are two loan agreements. Vide Loan Agreement dated 18/05/2015 between Air Products Holdings BV Netherland and Assessee, the Air Products Holdings BV Netherland had agreed to lend upto Rs.1300,00,00,000/-. The Loan was available for drawing from the date of agreement to 30th April 2017. The repayment was to be made in 13 quarterly intervals as per the schedule given in the agreement. The Clause 2 of the Agreement specified interest, which is reproduced as under : “The outstanding balance of the principal amount of the loan (which shall for the avoidance of doubt includes any amount of interest rolled up and added to the principal amount of the loan under the provisions of this section) shall bear Interest from the date hereof at 10.0%.”
Thus, actually Rate of Interest was 10% compound interest.
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6.2 The other Loan Agreement was dated 16/12/2014 for an amount upto Rs.300,00,00,000/- at Interest rate 10.5%. It also had provision of compounding. This Loan was to be repaid on or before 15/3/2021 as per the schedule mentioned in the agreement.
6.3 However as per the balance sheet actual loan availed as on 31/03/2018 is only Rs.1525,00,00,000/-from the Air Product Holdings BV Netherlands(page 124 of paper book). In the Form 3 CD Audit Report Air Product Holdings BV Netherland is a holding company of the assessee. (page 122, 123 of the paper book).
OECD Guideline on this issue: 6.4 OECD guideline on this issue are reproduced hereunder from the OECD Manual. “10.62. The creditworthiness of the borrower is one of the main factors that independent investors take into account in determining an interest rate to charge. Credit ratings can serve as a useful measure of creditworthiness and therefore help to identify potential comparables or to apply economic models in the context of related party transactions. Furthermore, in the case of intra group loans and other financial instruments that are the subject of controlled transactions, the effect of group membership may be an
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economicallyrelevant factor that affects the pricing of these instruments.
10.13. For example, consider a situation in which Company B, a member of an MNE group, needs additional funding for its business activities. In this scenario, Company B receives an advance of funds from related Company C, which is denominated as a loan with a term of 10 years. Assume that, in light of all good-faith financial projections of Company B for the next 10 years, it is clear that Company B would be unable to service a loan of such an amount. Based on facts and circumstances, it can be concluded that an unrelated party would not be willing to provide such a loan to Company B due to its inability to repay the advance. Accordingly, the accurately delineated amount of Company C’s loan to Company B for transfer pricing purposes would be a function of the maximum amount that an unrelated lender would have been willing to advance to Company B, and the maximum amount that an unrelated borrower in comparable circumstances would have been willing to borrow from Company C, including the possibilities of not lending or borrowing any amount (see comments upon “The lender’s and borrower’s perspectives” in Section C.1.1.1 of this chapter). Consequently, the remainder of Company C’s advance to Company B would not be delineated as a loan for the purposes of determining the amount of interest which Company B wouldhave paid at arm’s length……the accurate delineation of the actual transaction should begin with a thorough identification of the economically relevant characteristics of the transaction– consisting of the commercial or financial relations between the parties and the conditions and economically relevant circumstances attaching to those relations –, including: an examination of the contractual terms of the transaction, the functions performed, assets used, and risks assumed, the characteristics of the financial
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instruments, the economic circumstances of the parties and of the market, and the business strategies pursued by the parties.
10.18. In common with the analysis of any other transaction between associated enterprises, in applying the arm’s length principle to a financial transaction it is necessary to consider the conditions that independent partieswould have agreed to in comparable circumstances.
In the case of a loan from the parent entity of an MNE group to a subsidiary, the parent already has control and ownership of the subsidiary, which would make the granting of security less relevant to its risk analysis as a lender.
Therefore, in evaluating the pricing of a loan between associated enterprises it is important to consider that the absence of contractual rights over the assets of the borrowing entity does not necessarily reflect the economic reality of therisk inherent in the loan.”
6.5 Thus, when we read the OECD Guidelines on the issue of determination of Arm’s length Interest on the Loan taken from the AE, one needs to consider and analyze many factors. In this case the Loan was provided by an AE situated in Netherland which is one of the holding companies. However, in the Transfer Pricing Study Report submitted by the assessee the Assessee has not carried out proper analysis of the transaction. The relevant part of the TPSR is reproduced here as under :
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“11.1. Economic Analysis
The Weighted Average Lending Rate (‘WALR’) is a good external comparable available to benchmark the cost of an ECB.
Accordingly, we selected other method for confirming the arm’s length nature of the interest rate for AP India’s ECB from AE. Since the other method was selected, the CUP, RPM, CPM, PSM and the TNMM have not been considered.
The rate of interest paid to AE was compared with the WALR in India at the time of granting the ECB loan. The details of WALR38 at the time of entering into loan agreement by the company is given overleaf.”
Thus, no reason has been given by the assessee in the TPSR while considering the Weighted Average Lending Rate.
The assessee has not carried out Credit rating analysis of the assessee. In any Loan the Credit rating of borrower is the most important factor. However, in this case the Assessee has not tried to understand its Credit rating.
7.1 In the TPSR the assessee has mentioned that it has used “Other Method” for benchmarking the transaction. However, as per the Income tax Act no such “other method” is allowed.
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7.2 Thus, the Benchmarking Analysis of the impugned Interest claimed to have been carried out by the assessee suffers from many defects.
Be it as it may be, the TPO has applied State bank of India base rate. It is also a fact that normally no bank gives corporate loan at the Base rate of Interest. The exact dates of the Loan disbursements are also not mentioned in the Transfer Pricing Study Report of the assessee or Form 3CD.There is an Advance of Rs.10294,00,000/- by the Assessee to Air Products and Chemicals Inc USA. In the TPSR it is merely mentioned that the said advance is for supply of capital goods for Phase 2 of Kochi Project, however no specific schedule for delivery of the capital goods is mentioned. An independent third party while giving Loan will analyse all such advances given by the assessee. Interest Rates in other Countries : 9. As per OECD guidelines one also has to do economic analysis of the Lender. The Lender Air products Holdings BV Netherland is a Netherland based entity. The Interest rates in 2014, 2015 in Netherland were in the range 0.1 to 0.3 % per
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annum. Overall, the Interest Rate in USA, UK and many other developed countries were in the range of 0.5 to 2.5 % pa. One year LIBOR was hovering between 0.5 to 0.6% pa. in 2014. Thus, the funds were available at a very low interest rate outside India. This also means that the AE Air products Holdings BV Netherland would have earned Interest at the rate of 0.2% to maximum 2% had it given loan to an entity situated in Netherland, USA, UK etc.
On perusal of the Financials of the Assessee which has been filed in the paper book, it is observed that the Revenue of the company has gone up substantially, the company is also setting up phase 2 of Kochi Project, the company has only one Loan, i.e. This ECB Loan. There are substantial assets which assures proper interest payments. The revenue is as under : 31.03.2018 Rs. 31.03.2017 Rs. Sales of Finished 152199,00,000 308300,000 Goods Sale of traded Goods 169400,000 2500,000 Sale of Services 140000,000 66400,000 Total Operative 15611100,000 431800,000 Revenue Profit before Interest 2623500,000 187500,000 & Depreciation Interest paid & Bank 15768, 00,000 222800,000 Charges
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10.1 The Interest expenses are mainly on account of this impugned ECB. When we have analysed these Financials, it is observed that Revenue has grown 3.5 times, the profit before Interest and Depreciation has also grown almost 12 times. Any Financial Corporations/Banks considers projected Future Revenue and Projected Future Profit of the company before deciding the rate of interest to be charged on the Loan. In this case we have already analysed that the Assessee’s Revenue has increased 3.5 times and its Phase 2 was to commence .There are no earlier Loans in the Balance Sheet. Therefore, in these facts and circumstances of the case, as per FAR analysis the Risk involved in the Loan given to the assessee seems to be minimal. Therefore, we agree with the DRP that the Arm’s Length Interest should be SBI base rate plus 25 basis points. However, the Assessee had paid Interest at 10% and 10.5% pa at compounded rate. In the Agreement it is mentioned that if Assessee fails to pay any of the Instalment of Interest, the same will be added to the Principal amount, this results in Interest on Interest(the relevant terms of the loan agreement we have already reproduced). As per the Terms of the Loan the tax if any in India is to-be paid by the Assessee who is borrower and not the
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Lender. However, in India, the tax on Interest paid by the borrower is always the responsibility of the Lender, the borrower do not have to pay the tax on the interest paid. In India Banks do not calculate Interest on Loan in this way. Therefore, the Interest paid by the Assessee to its AE on the impugned ECB is not at Arm’s Length. Accordingly, we confirm that the Arm’s Length Interest in this case should be SBI base rate plus 25 basis points for the impugned Loan, which will be simple interest.
10.2 Accordingly the Ground Number 2 and 3 of the Assessee are rejected.
10.3 Ground No.4 is about initiation of Penalty which is premature, hence does not need any adjudication. Hence Ground No.4 rejected as unadjudicated.
Ground Number 1: 11. By this ground the assessee has challenged the validity of the Final Assessment Order.
11.1 The Ground No.1 of the Assessee is reproduced here as under for ready reference:
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Ground No.1: On the facts and in the circumstances of the case and in law, the Assistant Commissioner of Income Tax-4, Pune (‘the ACIT’) erred in passing the final assessment order in the absence of jurisdiction as per the provisions of Section 144B rendering the final assessment order to be null and void
The Appellant prays that the final assessment order is null and void being passed in violation of the law and deserves to be quashed.
Findings and Analysis : 12. In this case, draft assessment order under section 144C of the Income Tax Act was passed by Assessing Officer(AO) of the National Faceless Assessment Centre as per the newly inserted faceless assessment procedure. Prior to that National e- assessment centre through ITBA made a reference to the Transfer Pricing Officer under section 92CA of the Act for deciding Arm’s Length Price of the transactions. The Transfer Pricing Officer passed an order dated 24.07.2021. After that as per section 144C of the Act, the AO(National Faceless Assessment Centre passed draft assessment order under section 144C of the Act. The assessee’s filed objections before Dispute Resolution Panel(DRP) as per section 144C(2) of the Act. The relevant provision of section 144C are reproduced here as under:
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144C(1&2): “144C. (1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee.
(2) On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order,— (a) file his acceptance of the variations to the Assessing Officer; or (b) file his objections, if any, to such variation with,— (i) the Dispute Resolution Panel; and (ii) the Assessing Officer.”
12.1 Then, the Dispute Resolution Panel(DRP) passed order date 30.03.2022.
The Section 144B of the Act is about the ‘Faceless Assessment’. It was inserted w.e.f. 01/04/2021. The relevant sub-section 8 of section 144 is reproduced here as under : “(8) Notwithstanding anything contained in sub-section (1) or sub-section (2), the Principal Chief Commissioner or the Principal Director General, as the case may be, in-charge of National Faceless Assessment Centre may, at any stage of the assessment, if considered necessary, transfer the case to the Assessing Officer having jurisdiction over such case, with the prior approval of the Board.”
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13.1 It is observed that as per Section 144B(8) of the Act the ld.Pr.Chief Commissioner of Income Tax may transfer any case to the jurisdictional Assessing Officer after obtaining permission from the CBDT. In this case the Ld.DR filed copy of the report of the Assessing Officer. Copy of this report was also provided to the ld.AR.
The said report contains reproduction of the order sheet, which is maintained on the Income tax system called ITBA. As per the Order sheet the case of the assessee was transferred to the Jurisdictional Assessing Officer after obtaining permission from the CBDT. The Ld.AR has not produced any documentary evidence to rebut the facts recorded in the order sheet. Therefore, the Case of the assessee was duly transferred to the Jurisdictional Assessing Officer after obtaining due permission of the CBDT as per the Section 144B(8) of the Act. Therefore, the Jurisdictional Assessing Officer (JAO) had due authority of the law to pass the Final Assessment Order as per the Act once he has received the case on transfer as section 144B(8) of the Act. Accordingly, the Jurisdictional Assessing Officer, passed the final Assessment
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order. Hence, we do not find any illegality in the impugned Final Assessment Order.
14.1 Accordingly, the Ground No.1 raised by the assessee is dismissed.
14.2 No other ground or no other issue is pleaded before us.
In the result, the appeal of the Assessee is Dismissed.
Order pronounced in the open Court on 14th Dec, 2023.
Sd/- Sd/- (DR. DIPAK P. RIPOTE) (S S GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER पुणे / Pune; �दनांक / Dated : 14th December, 2023/ SGR* आदेशक��ितिलिपअ�ेिषत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT(A), concerned. 4. The Pr. CIT, concerned. 5. िवभागीय�ितिनिध, आयकर अपीलीय अिधकरण, “सी” ब�च, पुणे / DR, ITAT, “C” Bench, Pune. गाड�फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER, // TRUE COPY // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे/ITAT, Pune.
