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Income Tax Appellate Tribunal, HYDERABAD BENCH “A”, HYDERABAD
Before: SMT P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN
PER S. RIFAUR RAHMAN, A.M.:
These two appeals are preferred by the assessee against the orders passed u/s 143(3) r.w.s. 92CA(3) and144C(13) of the Income Tax Act, 1961 (in short ‘Act’) relating to AY 2012-13 and 2013-14. As similar issues involved in both these appeals, the same were clubbed and heard together and, therefore, a common order is passed for the sake of convenience,
Briefly the facts of the case, as taken from AY 2012-13 are, assessee company, engaged in the business of manufacturing and sale of urea & micro irrigation systems, trading of fertilizers & pesticides and also providing agri servicers wind energy generation, filed its return of income for the AY 2012-13 on 20/09/2012 admitting total income of Rs. 224,82,67,271/- and book profit u/s 115JB at Rs. 135,95,52,310/-. The return was processed u/s 143(1) and
2 ITA Nos. 93 & 2031/Hyd/17 Nagarjuna Fertilizers and Chemicals Ltd., Hyd. subsequently the case was selected for scrutiny. Accordingly, statutory notices were issued and the assessee filed the information as called for.
2.1 As the assessee entered into international transactions, the AO referred the case to Transfer Pricing Officer after obtaining prior approval from the CIT – 4, Hyderabad. The TPO decided as under:
Profile of the Assessee: Assessee is into the business of manufacture of fertilizers and chemicals for the agricultural industry. The assessee is leading manufacturer and supplier of plant nutrients in India.
3.1 International transactions: As per 3CEB report/TP document, the international transactions and the economic analysis are as under: Nature of International transaction Amount (Rs. Interest free loan provided 166,856,750
3.2 The assessee has not reported the following transactions either in TP document or in Form 3CEB Nature of transaction Amount (Rs. Investment in shares 923,907,000
3.3 The TPO observed that the assessee had carried out economic analysis at pages 26 to 36 of the TP document. With regard to the transaction of interest free loan provided, the assessee stated that it is an interest free loan and, hence, the assessee holds the transaction to be at arm’s length.
3.4 Interest free loan provided: The TPO observed that during the year, the assessee provided interest free loan to the tune of Rs. 166,856,750/-, Vide show cause letter dated 30/09/2015, the TPO proposed to charge interest @
3 ITA Nos. 93 & 2031/Hyd/17 Nagarjuna Fertilizers and Chemicals Ltd., Hyd. 14.75% p.a. on the said loan. The assessee, in its reply dated 17/11/2015, stated that since, it is an interest free loan, no interest shall be charged but if it is to charge any interest, the rate of interest charged on loan should be LIBOR plus by taking the following cases: 1. Geodesic Ltd. (2015) 2. PMP Auto Components (P) Ltd., (2014) 3. Hinduja Global Solutions Ltd. )2013) 4. Manugraph India Ltd. (2015)
3.5 After considering the submissions of the assessee, the TPO observed as under: “It is immaterial whether the source of the loan is interest free or interest bearing. Under arm's length situation how much interest could be earned is to be seen. RBI does not regulate the interest rate chargeable on the outbound loans, but loans received from the non-resident direct investor as well as loan extended to the subsidiaries/associates abroad has to be reported in a prescribed form. The advance from India and' Indian currency has been subsequently converted into the currency of the geographic location of the AE, the PLR of the Indian Banks ought to be applied as the external CUP. Thus the outbound loans are effectively Rupee loans. In case of a rupee sourced lending transaction, the lender in order to maximize its profits would try to benchmark its returns with the domestic interest rate rather than Libor. The ideal interest rate on outbound intra-group loans would be that interest rate which would have been charged by independent parties dealing in similar circumstances and during the same period of time. RBI does not permit Indian entities to lend loans to any entity other than their wholly owned subsidiaries and therefore there is no uncontrolled transaction available. Further the interest rate expected by the lender is equivalent to the opportunity cost of such funds. As a hypothetical CUP would be, where the Indian entity invests in bank deposits, stocks, mutual funds or real estate, the corresponding return would still be the effective Indian interest rate.”
In view of the above observations, the TPO charged interest on the loan @ 14.75, which comes to Rs. 2,46,11,370/- on Rs. 16,68,56,750/-. Therefore, TPO determined the arm’s length price of interest on loan at Rs. 2,46,11,370/-. Later, the TPO vide rectification
4 ITA Nos. 93 & 2031/Hyd/17 Nagarjuna Fertilizers and Chemicals Ltd., Hyd. order u/s 92CA(5) r.w.s. 154 dated 24/02/2016, revised the adjustment u/s 92CA(3) to Rs. 1,20,49,257/-.
Aggrieved by the order of TPO, the assessee raised objections before the DRP and DRP directed the TPO to apply the interest rate @ 12.13% as against the SBI PLR @ 14.75% applied by the TPO. Accordingly, the arm’s length price of interest on loan was worked out to Rs. 99,08,981/- u/s 92CA of the Act, as against Rs. 1,20,49,257/- by the TPO.
Aggrieved by the order of DRP, the assessee is in appeal before us raising the following grounds, which are common in both the appeals under consideration:
“General
The order of the learned AO is erroneous in law and on the facts of the case.
Transfer Pricing Adjustment u/s 92CA(3)
The learned Assessing Officer (AO) / Transfer Pricing Officer (TPO) / Dispute Resolution Panel ( DRP ) erred in making a transfer pricing adjustment of Rs.99,08,981 towards the interest arrived @ 12.13% per annum of loan advanced to associated enterprise.
The learned Assessing officer (AO) I Transfer Pricing Officer (TPO)/ Dispute Resolution Panel (DRP) ought to have considered that assessee is justified in not charging interest on loan given to associated enterprise due to commercial considerations.
The learned Assessing Officer ( AO ) / Transfer Pricing Officer ( TPO ) / Dispute Resolution Panel ( DRP ) ought to have considered that for foreign loan transactions, transfer pricing adjustment needs to be made basing on LIBOR as per judicial precedents.”
5 ITA Nos. 93 & 2031/Hyd/17 Nagarjuna Fertilizers and Chemicals Ltd., Hyd. 5.1 Assessee has pressed Ground No. 4 only and all other grounds are not pressed for adjudication, accordingly, the same are dismissed.
With regard to ground No. 4, the ld. AR of the assessee submitted that the DRP should have considered that for foreign loan transactions, transfer pricing adjustment needs to be made basing on LIBOR as per judicial precedents. For this proposition, he relied on the following cases: 1. CIT Vs. Cotton Naturals (I) (P.) Ltd., [2015] 55 Taxmann.com 523 (Delhi)/ 276 CTR 445 (Del.) 2. Rain Commodities Ltd., Vs. Addl. CIT, [2016] 65 Taxmann.com 240 (Hyd. Trib.) 3. CIT Vs. Vaibhav Gems Ltd., [2017] 88 Taxmann.com 12 (Raj.)
On the other hand, ld. DR relied on the order of DRP.
Considered the rival submissions and perused the material on record. On the similar set of facts, the coordinate bench of this Tribunal in the case of Rain Commodities Ltd., (wherein the both the Members are party), held as under:
“10. We have considered the submissions of both the parties and perused the material facts on record as well as the orders of the revenue authorities. The assessee facilitated the acquisition of CII Carbon LLC by RCUSA by lending loan to its wholly owned enterprises. The assessee has taken the decision to make investment in its AE either on share capital or lending loan using its business expediency. Since, it had made the decision to make loan to its AE. By virtue of amendment to section 92B, it is international transaction. Once it is considered as international transaction, it is prudent to make bench marking also in the international arena. Similar views were expressed by the coordinate bench of this Tribunal in the cases of Four Soft Pvt. Ltd. (supra), Siva Industries & Holdings Ltd. (supra) and Vijay Elecricals Ltd., (ITA No. 1159/Hyd/2013. It was held in the case of Siva Industries as below:
6 ITA Nos. 93 & 2031/Hyd/17 Nagarjuna Fertilizers and Chemicals Ltd., Hyd. “Once the transaction between the assessee and the AE is in foreign currency and the transaction is an international transaction, then, the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it is LIBOR rate which has to be considered while determining the arm’s length interest rate in respect of the transaction between the assessee and the AE’s.” Considering the above view, we are inclined to accept the decision of the CIT(A) and accordingly we dismiss the grounds of assessee as well as ground 2 of the revenue.” 8.1 The Hon’ble Rajasthan High Court in the case of Vaibhav Gems Ltd., (supra) relying on the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Cotton Naturals (I) (P.) Ltd., [2015] 231 Taxman 401, held that where interest free loans advanced to own foreign subsidiaries and LIBOR rate plus 2 percent was adjusted, it was to be held that assessee would be entitled for benefit of average LIBOR rate existing at that time.
8.2 The Hon’ble Delhi High Court in the case of Cotton Naturals (I) (P) Ltd., held as under: “We noted that CUP method is the most appropriate in order to ascertain arms length price of the international transaction as that of the assessee. We agree with the assessee’s contention that where the transaction was of lending money in foreign currency to its foreign subsidiaries the comparable transactions, therefore, was of foreign currency tended by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In such a situation, domestic prime lending rate would have no applicability and the international rate mixed being LIBOR should be taken as the bench mark rate for international transactions.”
8.3 In view of the ratios laid down as above, we are of the view that it is LIBOR rate which has to be considered while determining the arm’s length interest rate in respect of the transaction between the assessee and the AE’s. We, therefore, direct the AO/TPO to compute
7 ITA Nos. 93 & 2031/Hyd/17 Nagarjuna Fertilizers and Chemicals Ltd., Hyd. the arm’s length price of interest on loan. Accordingly, ground No. 4 is allowed.
As the facts and grounds in AY 2013-14 are materially identical to AY 2012-13, following the conclusions drawn therein, we allow ground No. 4 and dismiss other grounds as the same are not pressed by the assessee.
In the result, both the appeals of the assessee are partly allowed. Pronounced in the open Court on 20th July, 2018.
Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 20th July, 2018 kv Copy to:-
1) Nagarjuna Fertilizers & Chemicals Ltd., 8-2-248, Plot No. 56, Nagarjuna Hills, Punjagutta, Hyderabad – 500 082 2) ACIT, Circle – 16(1) Hyderabad. 3) DRP - 1, , Bengaluru 4) The Departmental Representative, I.T.A.T., Hyderabad. 5) Guard File