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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI B.R. BASKARAN & SHRI VIKAS AWASTHY
PER VIKAS AWASTHY, JM:
This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals) – 56, Mumbai [in short “the CIT(A)”], dated 25.05.2017 for AY 2011-12.
Shri Uodal Raj Singh representing the Department submitted that the primary grievance of Revenue is that the CIT(A) in an arbitrary and unjustified manner accepted two fresh comparables, namely Shriram Transport Financial Company and Gujarat NRE Coke Ltd. without affording opportunity to the AO/TPO to comment on the additional comparables introduced during the First Appellate proceedings. The ld. DR submits that the CIT(A) has resorted to cherry picking of two comparables without following scientific search process. The ld. DR further submits that the CIT(A) has erred in holding that the effective interest rate of 12.4% paid by the assessee being lower than the Arm’s Length Price (ALP) interest rate of 14.13% meets the arm’s length requirement without appreciating the fact that the comparable loan transactions were in different geographical locations than that of the AE’s to whom debentures were issued. The ld. DR prayed for reversing the findings of the CIT(A) and upholding the order of TPO.
Per contra Shri Vijay Mehta appearing on behalf of the assessee submitted that the issue raised in present appeal by the Revenue has already been considered for the Tribunal in assessee’s own case in IT(TP)A No. 7518/Mum/2014 for AY 2010-11 decided on 10.03.2016. The ld. AR submits that the CIT(A) has decided the issue following aforesaid order of the Tribunal. The CIT(A) has only made passing reference to the additional comparables furnished by the assessee during appellate proceedings. The reason to allow this ground by CIT(A) is not the additional comparables. The ld. AR stated at Bar that, even if the aforesaid two additional comparables, i.e. Shriram Transport Financial Company and Gujarat NRE Coke Ltd. are ignored still no TP adjustment would be required, in the light of decision of the Tribunal in assessee’s own case for AY 2010-11. The ld. AR further submitted that the Revenue had assailed the order of Tribunal dated 10.03.2016 before the Hon’ble Bombay High Court in Income Tax Appeal No. 266 of 2017. The aforesaid appeal of Revenue was dismissed by the Hon’ble High Court vide order dated 15.04.2019. Thereafter, Revenue carried the issue before the Hon’ble Supreme Court of India. The SLP of Revenue was dismissed (123 taxmann.com 397).
We have heard the submissions made by rival sides and have examined the orders of the authorities below. The Revenue has raised as many as 10 grounds of appeal. Ground Nos. 1 to 7 are on single issue, i.e. transfer pricing adjustments with respect to interest on convertible debentures issued by the assessee. The primary grievance of Revenue is that during the First Appellate proceedings, the assessee introduced two additional comparables, i.e. Shriram Transport Financial Company and Gujarat NRE Coke Ltd. The CIT(A) accepted the two additional comparables without affording opportunity of rebutting to the TPO/AO. Further, the aforesaid comparables have been cherry picked without following scientific search process.
5. A perusal of the impugned order reveals that the CIT(A) has allowed relief to the assessee accepting assessee’s arm’s length rate of interest following the decision of Tribunal in assessee’s own case for AY 2010-11 (supra). Though the CIT(A) had made reference of the two additional comparables mentioned by the assessee during First Appellate stage, however, no reliance has been placed on those comparables to allow relief to the assessee. The CIT(A) has only recorded the contentions of the assessee with respect to the additional comparables but has not given any findings for inclusion of comparables to determine the ALP of transactions.
6. We find that the transfer pricing adjustment in respect of interest expenses incurred on account of compulsory convertible debentures issued by the assessee to its AEs were subject matter of consideration before the Tribunal in IT(TP)A 7518/Mum/2014 (supra). The Coordinate Bench after recording the facts of the transactions concluded as under: - “15. The last leg of the controversy is, whether the benchmarking analysis done by the assessee is correct or not and whether the average rate of interest of 11.30% paid by the assessee to its AE is at ALP or not. So far as the assessee’s benchmarking analysis as done in TP Study report based on external data using Thomson Reuters’ DealScan, and Bloomberg Database, we find that such an approach is not correct, firstly, there are no INR denominated debt issuance available on such databases and; secondly, in absence of such a data the assessee has to carry out huge adjustments on account of country risk, currency risk and tenor risk. With all these factors of adjustments, it would be difficult to arrive at an appropriate arm’s length range of price; therefore, in our opinion such an approach of the assessee for benchmarking the arm’s length interest rate may not be correct. However, as regards the search undertaken for comparable debt issuances in BSE data, we find that the assessee has shortlisted two comparables namely; Starlight Systems Private Limited and Share Microfin Limited which have a coupon rate of 15% and 13.75%. Since these data belong to year 2013, the assessee had made minor tenor adjustment to factor the time period to arrive at interest rate of 15.97% and 14.05% giving a mean rate of 15.01%. Though the assessee was required to benchmark its transaction by taking the financial year data for year 2009-10, but, if such a data were not available then it cannot be held that such a tenor adjustment for taking into time period cannot be made under CUP, if it has been made quite accurately taking into account the material factors relating to time of the transaction affecting the price. We though agree that, a high degree of comparability is required under CUP, but in absence of such a comparable data, a minor adjustment can be made to eliminate the material effect of time difference for arriving at a comparable uncontrolled price. Now before us, the assessee had filed two comparable transactions for the year 2009, that is, for the same financial year in the case of Shriram Transport Financial Company Ltd. and Tata Capital Ltd., wherein, for credit rating of AA Enterprises the coupon rate of interest per annum was between 11% to 12% for a tenor of 60 months. The yield on redemption is also around 11.25% to 12%. If for a credit rating company AA or AA(+) the interest rate is ranging between 11% to 12%, then in the case of the assessee which is admittedly BBB(-) credit rating company, 11.30% interest paid by the assessee to its AE is much within the arm’s length rate. This data/document from public domain now made available before us is worth relying to benchmark and analyze the current transaction of coupon rate of interest paid/payable on CCDs issued by the assessee. Accordingly, we hold that 11.30% interest rate is at arm’s length price. Thus, in our conclusion, the transfer pricing adjustment made by the TPO and as confirmed by the DRP at Rs.48,53,19,310/-stands deleted and consequently ground no. 1 is allowed.” Thus, the Tribunal accepted ALP of the interest rate as determined by the assessee.
7. Thereafter, the Revenue carried the issue before the Hon’ble Bombay High Court. The question for consideration before the Hon’ble High Court was: “(a) Whether, on the facts and in the circumstance of the case and in law, the Hon’ble Tribunal erred in comparing the overall average rate of interest of 11.30% during the year without appreciating that each series of debentures issued in different years was a separate international transaction and each transaction was required to be benchmarked separately?” The Hon’ble High Court answered the question in favour of the assessee holding as under: - “3. Having heard learned Counsel for the parties and having perused the materials on record, we are broadly in agreement with the view of tribunal. The significant features of the assessee’s case were that the assessee was mainly engaged in identifying the companies in financial distress whose products were otherwise viable and taking over or financing of such companies. The business of the assessee was thus froth with inherent risks. Its credit rating therefore was relatively low of ‘BBB-’. The assessee was raising funds for such investments through issuance of debentures to its AEs. The tribunal even on comparison found that the average rate of interest of 11.30% paid by the assessee to its AEs was not excessive and was in any case lower than in the comparable instances. The tribunal rejected the transfer pricing adjustment comparing the rate of return for the assessee’s US based AE. This later conclusion of the Tribunal is supported by following decisions.
4. Division Bench of Delhi High Court in case of Commissioner of Income Tax Vs. M/s Cotton Naturals (I) Pvt. Ltd., reported in (2015) 55 Taxmann.com 523, had held and observed as under; “39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/deposits are significantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under: "The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lender's State or that in the borrower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt. B1. II 725 (1994), re. 1 AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no _special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money."
Similarly this Court in case of Commissioner Income Tax2, Vs. Tata Autocomp Systems Ltd., reported in 374 ITR 516, had observed as under; “7. 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. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra) to reach the conclusion that ALP in the case of loans advanced to AEs 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. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra) on the above issue. No reason 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. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra). The Revenue not having filed any appeal, has in fact accepted the decision of the Tribunal in VVF Ltd. v. Dy. CIT (supra) and Dy. CIT v. Tech Mahindra Ltd. (supra). ”
Before closing this issue we may note that the tribunal in the impugned judgment has made certain observations suggesting that the identification of the “tested party” is imperative while applying other methods from comparison for transfer pricing and not while applying CUP method. Our non-consideration of the revenue’s Appeal in the present case, should not be seen as putting our seal on such observations of the tribunal. In other words, we keep such question open to be examined in an appropriate case. In the present case, independent of such observations of the tribunal, we find that the conclusions arrive at, are based on evidence on record which conclusions call for no interference.” 8. The Revenue further filed SLP before the Hon’ble Supreme Court of India. The said SLP by Revenue was dismissed vide order dated 17.12.2020 (supra). No contrary material has been brought to our knowledge by Revenue to force us to take a different view. In the light of facts of the case and the aforesaid decisions, ground Nos. 1 to 7 of the appeal are dismissed being devoid of any merit.
In ground No. 8 of appeal, the Revenue has assailed the findings of CIT(A) in deleting disallowance of Rs.3,07,23,732/- u/s. 14A r.w Rule 8D in respect of exempt income. A perusal of the impugned order reveals that during the period relevant to assessment year under appeal, the assessee has not earned any exempt income. The issue is no more res integra. The Hon’ble Apex Court in the case of PCIT vs. State Bank of Patiala 99 taxmann.com 286 has held that no disallowance can be made where no exempt income has been earned during the year. The Coordinate Bench, following the decision rendered in the case of Cheminvest Ltd. vs. CIT 378 ITR 33 (Del) deleted disallowance u/s. 14A of the Act in A.Y 2010-11 as the assessee had not earned any exempt income. Revenue has failed to controvert the fact that assessee has not earned any exempt income during the relevant period. Thus, in light of the facts and settled legal position ground No. 8 of appeal is dismissed.
Ground Nos. 9 & 10 are general in nature, hence, require no adjudication.
In the result, appeal by the Revenue is dismissed.
Order pronounced in the open court on Thursday the 29th day of December, 2022.