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Income Tax Appellate Tribunal, ‘’D’’ BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI WASEEM AHMED
आदेश/O R D E R PER BENCH: These Cross Appeals are filed by the Revenue and the Assessee against the orders of the Commissioner of Income Tax (Appeals) Ahmedabad, dated 20/08/2014, 16/03/2015 and 29/10/2014 arising out of orders passed by the Assessing Officer dated 07/02/2011, 24/02/2012 and 23/05/2013 for the Assessment Years 2007-2008, 2008-2009 and 2009-2010 respectively. Since the issue raised in these appeals and Cross Objection are common, we proceed to dispose off all these appeals by this common order.
First, we take up Revenue’s appeal bearing no. 2849/Ahd/2014 and assessee’s CO. 330/Ahd/2014. The Revenue has raised following grounds of appeals.
The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.3,65,68,726/- resulting from an upward adjustment made by the TPO, on Interest paid by the assessee towards loan. 2. On the facts and in the circumstances of the case, the Ld.CIT(A) ought to have upheld the order of the Assessing Officer 3. It is, therefore, prayed that the order of the Ld.CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent.
ITA nos.2849/Ahd/2014 with CO No.330/Ahd/2014 & other Asstt. Year 2007-08 to 2009-10. 3
2.1 The assessee has raised following grounds in the CO 330/Ahd/2014 for A.Y 2007-2008 1. The Id. CIT(A) has grossly erred in law and on the facts of the case in confirming the action of Id. AO in making Transfer Pricing addition to the extent of Rs.32,79,706/- out of total addition of Rs.3,65,68,726/- made by the Id. AO on account of upward adjustment on interest paid to the Associate Enterprise. 2. The Id. CIT(A) has erred in law and on the facts of the case in adopting and applying Libor + 2.8% as ALP interest rate as against Libor + 3% rate of interest paid by the Appellant on External Commercial Borrowing made by the Appellant to the Associate Enterprise. 3. The Id. CIT(A) as well as the Id. AO failed to appreciate that the Appellant had entered into the loan agreement with the Associate Enterprise on 29/05/2003 for a period of 5 years with fixed rate of interest @ Libor + 3%, and therefore, the said rate of interest cannot be reviewed year on year basis so as to make Transfer Pricing addition. 4. The Id. CIT(A) inasmuch as the Id. AO failed to appreciate that the Appellant has paid interest @ Libor + 3% on such loan for the entire tenure of the agreement, which has been accepted as ALP by the then Id. AO in the Assessment Year 2006-07, and therefore, in view of rules of uniformity and consistency, the same approach ought to have been adopted and no addition could have been made in the year under consideration. 5. The Id. CIT(A) as well as the Id. AO failed to appreciate that the interest paid by the Appellant to the Associate Enterprise is at Arm's Length Price as per the scheme of the Act, and therefore, no addition could have been made by the Id. AO. 6. Alternatively and without prejudice to above, the Id. CIT(A) has further erred in law and on the facts of the case in not appreciating that, if various factors are considered while making comparison with the loan obtained by the Chennai Container Terminal Pvt. Ltd., the ALP of the interest would come to interest @ Libor + 3%, which has been charged by the Appellant to the AE, and therefore, upward adjustment of Rs.3,65,68,7267- made by the Id. AO ought to have been deleted by the Id. CIT(A) entirely as against part relief. 7. Alternatively and without prejudice to above, the Id. CIT(A) has further erred in law and on the facts of the case in not appreciating that the
ITA nos.2849/Ahd/2014 with CO No.330/Ahd/2014 & other Asstt. Year 2007-08 to 2009-10. 4
upward adjustment on account of interest of Rs.32,79,7067- as determined by him was within the tolerance limit of 5% of interest of Rs.13,17,14,081/- paid by the Appellant to Associate Enterprise, and therefore, as per the second proviso to S.92C of the Act the interest of Rs.13,17,14,081/- paid by the Appellant should have been treated as deemed Arm's Length Price, and accordingly, the entire addition made by the Id. AO ought to have been deleted by the Id. CIT(A). 8. Both the learned authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. 9. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.
The issue raised by the Revenue is that Ld. CIT (A) erred in deleting the addition made by the AO in part on account of the payment of interest expenses.
Briefly stated facts are that the assessee is a limited company and engaged in the business of cargo handling. The assessee in its balance sheet has shown a working capital loan of Rs. 186,67,00,000/- from its AE based in London. The assessee obtained the loan after taking approval from the Reserve Bank of India vide letter No. E.C(AH)NR No.173/05.25.307/03-04 dated 16/09/2003. Accordingly, the assessee has paid interest of Rs. 13,17,14,081/- at the rate LIBOR + 3% p.a. as agreed with the AE.
4.1 The assessee to justify the rate of interest on loan taken from the AE submitted that there is another company namely Chennai Container Terminal Pvt. Ltd. ( in short CCTPL) belong to the same group of DP world and also
ITA nos.2849/Ahd/2014 with CO No.330/Ahd/2014 & other Asstt. Year 2007-08 to 2009-10. 5
engaged in the same business activities. The assessee further submitted that CCTPL had obtained term loan of US$ 9 million from the Standard Chartered Bank(Mauritius) at the rate of LIBOR + 2.2% in terms of External Commercial Borrowing (in short ECB) guidelines issued by the RBI in the financial year 2005-06 which was outstanding as on 31/03/2007. The assessee accordingly claimed that the rate of interest of CCTPL could be taken as a comparable case but after giving certain adjustment as enumerated below:
Capital structure The assessee having secured loan of Rs. 955.66 cr. whereas CCTPL is having an unsecured loan of Rs. 204.37 cr. Therefore, the debt-equity ratio of the assessee and CCTPL is of 2.61:1 and 1.40:1 respectively. Thus assessee claimed to have taken the loan at a higher rate of interest. 2. Operational performance CCTPL is handling 881586 foot equivalent units(TEUs) whereas the assessee is handing 542363 foot equivalent units which is less than by 38.50 percent. 3. Commencement of business The assessee commenced its business in the financial year 2003-04 whereas CCTPL started its business in the financial year 2001-02. The assessee also claimed that it had repaid the entire loan in the financial year 2008-09 when it was able to arrange its fund.
However, the TPO disregarded the contentions of the assessee and also disregarded the comparable suggested by the assessee on the following grounds.
ITA nos.2849/Ahd/2014 with CO No.330/Ahd/2014 & other Asstt. Year 2007-08 to 2009-10. 6
The assessee has taken a loan for US$ 40 million whereas CCTPL has taken a loan of US$ 9 million.
At the time when the assessee took the loan, M/s CCTPL was not part of the DP world group though the assessee was very much part of the DP world group which is a very important factor in deciding the rate of interest. M/s CCTPL has taken loan after furnishing corporate guarantee to the Standard Chartered Bank whereas assessee was not required to furnish any such guarantee.
The credit rating of CCTPL was not good in comparison to the assessee.
The assessee has compared the rate of interest at the end of the financial year 2006-07 which is not correct. In fact, the comparison needs to be made in the year when the loan was taken.
5.1 The TPO has taken the comparison with the interest rate of third-party company namely, Torrent Pharmaceuticals Ltd. ( in short TPL) having an office in Gujarat itself. M/s TPL has taken a loan of US$20 million at the rate of LIBOR + 0.77 percent without furnishing any guarantee of whatsoever.
In view of the above, the TPO has benchmarked the rate of interest for the assessee at the rate of LIBOR + 0.77 percent and accordingly the excess interest of Rs. 3,65,68,726/- was disallowed and added to the total income of the assessee.
ITA nos.2849/Ahd/2014 with CO No.330/Ahd/2014 & other Asstt. Year 2007-08 to 2009-10. 7
Aggrieved assessee preferred an appeal to Ld. CIT (A). The assessee before the Ld. CIT (A) submitted that the TPO had not given any opportunity in respect of comparable selected by him.
6.1 The loan was taken by the assessee from its AE after taking the approval from Reserve Bank of India. As such interest was paid within the range as specified by the RBI. The provision of Rule 10B (2)(d) of Income Tax Rule required that the rate suggested by the Government should be considered while selecting the comparable.
6.2 The assessee also submitted that on the same set of facts the TPO in the assessment year 2006-07 had accepted the rate of interest on the money borrowed from the AE.
6.3 The loan was obtained by the assessee from its AE for capital expenditure or to invest only in the subsidiary or joint venture outside India. But the TPO misunderstood that the loan was taken for working capital.
6.4 The TPO also erred in holding that CCTPL was not part of the DP group during the relevant time.
Regarding TPL assessee submitted that the comparable selected by the TPO suffers from several infirmities as detailed under:
It is not clear whether the TPL has taken the loan for working capital or not whereas the assessee has taken the loan for capital expenditure.
ITA nos.2849/Ahd/2014 with CO No.330/Ahd/2014 & other Asstt. Year 2007-08 to 2009-10. 8
There is no mention that TPL took a loan from the bank. Thus there is no clarity whether the TPL took the loan from the bank or its associated enterprises.
TPL is into the business of Drug manufacturing and belongs to pharmaceutical industries whereas the assessee is into the business of Cargo handling.
There is a huge difference between the debt-equity ratio of both the entities. The debt-equity of TPL is 0.60:1 whereas the debt-equity ratio of the assessee is 2.61:1.
TPL is a profit making company and declared earning per share at the rate of 13.35 whereas the assessee has declared earning per share at the rate of -5.89.
The profit of TPL has increased by 37.68 percent in comparison to the last year.
There is a huge difference between credit rating of TPL vis-à-vis of the assessee.
The assessee being the first-year operation has obtained the loan of Rs. 186,67,00,000/- without any collateral for 5 years. Therefore it has paid the interest at arms length. The assessee has taken the loan at interest at the rate of LIBOR + 3% whereas RBI has prescribed LIBOR + 3.5 % which is lower than rate suggested by the RBI.
ITA nos.2849/Ahd/2014 with CO No.330/Ahd/2014 & other Asstt. Year 2007-08 to 2009-10. 9
8.1 If assessee had taken the loan from any Indian bank then it would have paid a higher rate of interest than the rate it paid.
The Ld. CIT(A) after considering the submission of the assessee rejected the comparable selected by the TPO due to the following reasons.
The operations of the TPL are different from the assessee.
There is no clarity whether the TPL has given any collateral to the Bank, but it is clear that assessee has taken the loan without any collateral.
TPL is a cash-rich company, and therefore it has better debt-equity ratio and credit rating than the assessee.
In view of the above the Ld. CIT (A) rejected the comparable of TPL and held that CCTPL is right comparable for benchmarking of interest. The Ld. CIT (A) after considering the factor as discussed above further held that it would be justifiable to take the rate of interest as arm length at the rate of LIBOR + 2.80 percent. Accordingly, Ld. CIT (A) deleted the addition made by the AO in part.
Being aggrieved by the order of Ld. CIT (A) both Revenue and assessee are in appeal before us. The Revenue before us is against the deletion made by the Ld. CIT(A) for Rs. 3,32,89,020/- Whereas the assessee is in the appeal for confirmation of the addition made by the TPO for Rs.32,79,706/-.
ITA nos.2849/Ahd/2014 with CO No.330/Ahd/2014 & other Asstt. Year 2007-08 to 2009-10. 10
The Ld. DR, before us, submitted that while benchmarking rate of interest there is no need to compare the nature of industries.
11.1 Ld. AR before us contended in the earlier year the TPO has accepted the rate of interest on the borrowed fund from the AE. Therefore the interest rate for the year under consideration should also be allowed.
11.2 The learned AR alternatively submitted that at the most the order of the learned CIT-A should be upheld.
Both the parties before us relied on the order of authorities below as favourable to them.
We have heard the rival contentions of both the parties and perused the materials available on record. The assessee in the case on hand has paid the interest on the money borrowed from the associated enterprises. The interest was paid at the rate of LIBOR+300 basis points. But the AO was of the view that the interest in the instant case should not exceed LIBOR+77 basis points. Accordingly, the AO disallowed the excess interest paid to the associated enterprise.
14.1 However, the learned CIT (A) restricted the disallowance of interest expenses to 20 basis points by observing that the basis adopted by the AO for the disallowance of interest was not proper.
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14.2 The facts of the case have already been discussed in the preceding paragraph, and there is no dispute concerning the same. Therefore, we are not inclined to repeat the same for the sake of brevity and convenience.
14.3 It is an undisputed fact that the assessee has paid interest on the money borrowed from its AE at the rate of LIBOR+300 basis points in the assessment year 2006-07 which was accepted by the TPO in the assessment framed under section 143(3) read with section 92CA(3) of the Act. Thus, the order of the TPO for the assessment year 2006-07 has reached its finality. Therefore, in our considered view the TPO cannot take different view until and unless there is a change in the facts and circumstances. There is also no ambiguity that the assessee has paid the interest in the year under consideration which was also there during the assessment proceedings for the assessment year 2006-07. As there was no change in the facts and circumstances, we are of the view that no disallowance on account of interest expenses for the year under consideration is warranted.
14.4 We also note that the rate of interest paid by the assessee cannot be compared with the Torrent pharmaceutical Ltd as proposed by the AO. It is because there lie certain differences between both the companies as enumerated below: i. The assessee has shown earning per share at a loss at Rs. -5.89 whereas torrent pharmaceutical Ltd has shown earning per share at Rs. 13.35 only.
ii. The natures of activities of both the companies are not comparable.
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iii. The debt-equity ratio of the assessee is 2.61:1 whereas the debt- equity ratio of torrent pharmaceutical Ltd is 0.60:1.
iv. The assessee is not a cash-rich company whereas torrent pharmaceutical Ltd is a cash-rich company.
v. The credit rating of the assessee and torrent pharmaceutical Ltd is altogether different as submitted by assessee reproduced as under: Credit Rating given by ICRA Credit Rating given to Torrent Pharmaceuticals Ltd by ICRA during F.Y.2009-10. ICRA has reaffirmed LAA rating to Long Term fund based limits of Rs.4700 million indicating high credit quality. Further the ICRA has also reaffirmed A1 to Rs.100 million short term non fund based facilities and Rs.600 million Commercial paper programme indicating highest credit quality. Please find attached herewith letter showing credit rating given by ICRA to Torrent Pharmaceuticals Ltd vide Annexure 2
Credit Rating given to MICT pvt ltd by ICRA during F.Y.2009- 10. ICRA has assigned LA rating to long Term Borrowing of Rs.8.0 million of MICT pvt Ltd. ICRA has also assigned A2 to the Rs.600 million short term non fund based facilities. ICRA has placed both rating watch with negative implications. Please find attached herewith letter showing credit rating given by ICRA to MICT Pvt Ltd. vide Annexure-3 vi. The assessee in the year under consideration has incurred losses whereas the torrent pharmaceutical Ltd has shown a profit.
ITA nos.2849/Ahd/2014 with CO No.330/Ahd/2014 & other Asstt. Year 2007-08 to 2009-10. 13
Moreover, the profit of torrent pharmaceutical Ltd has increased by 37% in comparison to the immediately preceding year.
vii. The assessee has borrowed money from its associated enterprise whereas there is no clarity about the money borrowed by the torrent pharmaceutical company whether it was borrowed from the bank or the AE.
viii. The assessee has taken a loan from its AE without any collateral whereas there is no information about torrent pharmaceutical Ltd whether it has borrowed loan on the collateral furnished to the lender. In view of the above, we are of the considered opinion that the rate of interest paid by torrent pharmaceutical Ltd cannot be compared with the rate of interest on the money borrowed with the assessee.
14.5 Similarly, we also note certain similarities and dissimilarities between the rate of interest of the assessee and CCTPL which can be enumerated as under: i. The activities of both companies are similar. Therefore, this company can be taken for comparison.
ii. The debt-equity ratio of the assessee is this 2.61:1 whereas that equity ratio of any CCTPL is 1.40:1. As there is a difference between the debt-equity ratio of the assessee and CCTPL, therefore there has to be some adjustment in the rate of interest on account of this.
ITA nos.2849/Ahd/2014 with CO No.330/Ahd/2014 & other Asstt. Year 2007-08 to 2009-10. 14
iii. The assessee has borrowed money from AE whereas CCTPL has borrowed money from the bank. This factor should also be adjusted in determining the rate of interest.
iv. The credit rating of the assessee and CCTPL is altogether different which is also an important factor in deciding the rate of interest.
v. The assessee has taken a loan without any collateral whereas the CCTPL has taken a loan after furnishing sufficient collateral to the bank. This factor also needs to be adjusted while determining the rate of interest. 14.6 However, we note that the learned CIT (A) has made the adjustments of the above factors while comparing the rate of interest of the assessee with the rate of interest of CCTPL. But the learned CIT (A) has adjusted on a consolidated basis without adjusting individual factors as discussed above. As such in our considered view, the learned CIT (A) should have made the adjustments in the rate of interest after considering all the factors as discussed above individually. Accordingly, we are reluctant to confirm the order of the learned CIT (A).
14.7 However, after considering the facts in totality as discussed above, we are inclined to follow the rule of the of consistency in view of the judgment of Hon’ble Supreme court in the case of Radhasoami Satsang reported in 193 ITR 321 wherein it was held as under: “13. We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assess ment years has
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been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. 14. On these reasonings in the absence of any material change justifying the revenue to take a different view of the matter—and if there was no change it was in support of the assessee—we do not think the question should have been reopened and contrary to what had been decided by the Commissioner in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under sections 11 and 12.”
In view of the above we hold that in the given facts and circumstances, the rate at which the interest paid by the assessee to AE is at arm's length and no adjustment is warranted. We also make clear that the finding should not be used /quoted as a precedent in other cases as we are allowing the appeal of the assessee on the basis of the rule of consistency. Hence, the ground of appeal of the assessee is allowed, and the ground of appeal of the Revenue is dismissed.
Now coming to appeal of the Revenue and CO of the assessee bearing No. the ITA No.1457/Ahd/2015 and 12/Ahd/2015 for A.Y. 2008-09
The TPO after applying certain filters has selected 7 comparables and workout average rate of interest LIBOR + 95.57 basis points. The TPO also considered the TPL as a comparable case which was taken in the immediately preceding year where the rate of interest was LIBOR +77 basis points. Thus, the TPO worked out the proposed rate of interest at LIBOR + 86 basis points.
ITA nos.2849/Ahd/2014 with CO No.330/Ahd/2014 & other Asstt. Year 2007-08 to 2009-10. 16
16.1 On questioned by the TPO, the assessee submitted that the comparable selected by the TPO cannot be considered due to the fact they belong to different nature of business activities, the risk profile of each industry, financial strength and condition in which the comparable companies took the loans.
16.2 However, the TPO was of the view that it was the duty of the assessee to benchmark the interest rate on the basis of any of the method prescribe u/s 92C of the Act.
16.3 The TPO also held that while selecting the comparable the necessary filter regarding the receipt of the loan, quantum and period of the loan have been applied. As such these comparables have been selected from the public domain after applying the best filter. Accordingly, the TPO made an upward adjustment on account of interest for Rs. 3,93,98,016/- and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to Ld. CIT (A). The assessee submitted that it had applied the CUP method for benchmarking the rate of interest on the basis of the quotation taken from various internationally acknowledged commodities exchange.
17.1 The comparables selected by the TPO are not similar to the assessee. As such the comparable companies are a big player and got a very sound credit rating.
ITA nos.2849/Ahd/2014 with CO No.330/Ahd/2014 & other Asstt. Year 2007-08 to 2009-10. 17
17.2 However, the Ld. CIT (A) held that in the own case of the assessee his predecessor has determined the arm length price at the rate of LIBOR + 2.80 percent. Accordingly the Ld. CIT (A) following the same has deleted the addition made by TPO in part.
17.3 Being aggrieved by the order of Ld. CIT (A) both the Revenue and assessee are in appeal before us.
Both the learned DR and the AR before us relied on the order of authorities below as favorable to them.
We have heard the rival contentions and perused the materials available on record. We have already adjudicated the issue as discussed above in favor of the assessee and against the revenue wide paragraph number 12 of this order. Therefore respectfully following the same we allow the ground of appeal of the assessee and dismiss the ground of appeal of the revenue.
Now coming to the other Revenue appeal and COs of the assessee bearing numbers 3473/Ahd/2014 & CO-23/Ahd/2015
All the issues raised by the Revenue and the assessee in the above- stated appeal and the CO are identical to the issues raised by the Revenue and the CO of the assessee bearing number 2849/Ahd/2014 and CO 330/Ahd/2014 which we have adjudicated in favor of the assessee and against the revenue. Therefore respectfully following the same, we allow the grounds raised by the assessee in CO and dismiss the grounds raised by the Revenue in the appeal filed by it.
ITA nos.2849/Ahd/2014 with CO No.330/Ahd/2014 & other Asstt. Year 2007-08 to 2009-10. 18
In the combined result, the Revenue’s appeals are dismissed, and COs of the assessee are allowed.
Order pronounced in the Court on 04/03/2019 at Ahmedabad.
-Sd- -Sd- (RAJPAL YADAV) (WASEEM AHMED) JUDICIAL MEMBER (True Copy) ACCOUNTANT MEMBER Ahmedabad; Dated 04/03/2019 manish आदेश क� ��त�ल�प �े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण / DR, ITAT, 6. गाड� फाईल / Guard file. आदेशानुसार/BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad