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Income Tax Appellate Tribunal, K Bench, Mumbai
IN THE INCOME TAX APPELLATE TRIBUNAL "K" Bench, Mumbai Before Shri Pawan Singh, Judicial Member and Shri M. Balaganesh, Accountant Member ITA No. 7310/Mum/2018 (Assessment Year: 2014-15) (Virtual hearing in VC No. –II) M/s. Laqshya Media Ltd. D C I T - 10(2)(1) Laqshya House Room No. 509/216A Next to Rameshwar Temple, Vs. Aayakar Bhavan, M.K. Road Saraswti Baug, Society Road, Mumbai 400020 Jogeshwari (E), Mumbai 400060 PAN – AAACL5004C Appellant Respondent Appellant by: Shri Rajan Vora-AR Respondent by: Shri Anand MohanCIT-DR Date of Hearing: 08.07.2020 Date of Pronouncement: 17.07.2020 O R D E R PER PAWAN SINGH, JUDICIAL MEMBER This appeal filed by the assessee is directed against the assessment order passed by the Assessing Officer under Section 143(3) r.w.s. 144C(1) of the Income Tax Act, 1961 (hereinafter "the Act") dated 29th October, 2018, passed in pursuance of the directions of Dispute Resolution Penal (DRP) dated 28th August, 2018 for A.Y. 2014-15.
The assessee has raised the following grounds of appeal: - “On the facts and in the circumstances of the case and in law, the learned AO/ learned Deputy Commissioner of Income-tax, Transfer Pricing - 3(1)(1)(hereinafter referred to as TPO')/ Hon'ble DRP has: GENERAL GROUND 1. erred in assessing the total income at 5,67,38,117as against returned loss of Rs.8,55,13,089 computed by the Appellant; PART B -TRANSFER PRICING GROUND: 2. Adjustment of Rs.20.58.028/- pertaining to providing of Corporate Guarantee (CG) to Associated Enterprise (AE)
2 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd 2.1 erred in making an adjustment under Section 92CA(3) of the Act of Rs.20,58,0287- in respect of CG given by the Appellant to its AE, Laqshya Media International, Mauritius ('LMI') against the guarantee given by LMI to HSBC Bank Middle East Ltd and National Bank of Dubai for the amount borrowed by the Appellant's step down Dubai subsidiary Right Angle Media FZ LLC('RAM' or 'AE') which has been withdrawn with effect from 1 April 2012; 2.2 erred in not appreciating the fact that the Appellant has withdrawn the corporate guarantee provided to its AE with effect from 1 April 2012 and hence no guarantee existed for the year under consideration and thereby no adjustment is warranted in this regard; Without prejudice grounds: 2.3 erred in not appreciating the fact that the transaction of providing corporate guarantee to AE is not an International Transaction within meaning of Section 92B; 2.4 erred in not considering the overall financial structuring arrangement between the Appellant and AEs, where over and above the share capital invested, funds were also provided, CG was given and therefore no adjustment could have been made in respect of CG without considering other funding arrangement; 2.5 erred in not appreciating the fact that the CG is given by the Appellant owing to the significant economic, strategic business relationship with the AEs for protection of goodwill, reputation and investment as well as development of the business of Appellant company; 2.6 erred in determining the ALP of the guarantee fee at 1.25% by calculating an average of bank guarantee fee charged without adopting any method prescribed under Indian Transfer Pricing regulations; 2.7 erred in not appreciating the fact that corporate guarantee should be benchmarked at 0.5% as ALP after considering the view taken by Hon'bie Tribunal in Appellant's own case for earlier years. 3. Adjustment of Rs. 13.07.81.4827- pertaining to Interest on Loan given to AE 3.1 erred in making an adjustment under section 92CA(3) of the Act of Rs.13,07,81,482/- on account of interest on loan given by Appellant to its AE, LMI by considering arm's length rate of interest at 13% and 14% p.a; 3.2 erred in not appreciating the fact that the loans given by the Appellant to its AE, LMI (wholly owned subsidiary), were in the capacity of the parent company, under commercial arrangement and in business interest of the Appellant itself and hence, is a shareholder activity;
3 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd 3.3 erred in making adjustment on account of interest on loan given to AE, as the same is being waived off by the Appellant, having regard to the weak financial position of the AE; 3.4 erred in not understanding the business exigencies and business realities that interest on loan advanced to AE's could not be recovered, as the recovery of loans itself was doubtful; 3.5 erred in not applying the principles of real income theory whereby only the income which has really accrued or arisen can be taxable and no tax can be levied on hypothetical income; 3.6 erred in determining the ALP of interest on loans given to AE at 13% p.a and 14% p.a without undertaking benchmarking analysis as per Indian Transfer Pricing Regulations; and 3.7 Without prejudice to the above grounds, erred in not appreciating the fact that interest rate in respect of advances given to AE should be based on LIBOR. PART II - CORPORATE TAX GROUNDS: 4. Disallowance of Interest of Rs.64,95,182/- under section 36(1)(iii) of the Act 4.1 erred in making disallowance of interest expenditure claimed by the assessee under section 36(1){iii) of the Act amounting to Rs.64,95,182 on the ground that interest free funds were advanced to the subsidiaries of the Assessee out of interest- bearing funds and hence, the same were not used for business purposes; 4.2 erred in not following principles of judicial discipline by not following the order of Hon'ble ITAT in Appellant's own case for earlier years, wherein such disallowance has been deleted; 4.3 erred in making a disallowance of the interest expenditure claimed by the appellant, without appreciating the commercial expediency in advancing interest free loans to its subsidiaries; 4.4 erred in not appreciating the fact that the advances to Subsidiary Companies were made from own surplus funds and no portion of the borrowed funds was used for the same; and 4.5 erred in not appreciating the fact that borrowed funds on which interest was paid, was used wholly and exclusively for the purpose of business and hence disallowance of Rs.65,95,182/- during the year under consideration cannot be sustained. 5. Disallowance under section 14A read with Rule 8D of Rs.5,13,050/- 5.1 erred in disallowing an amount of Rs.5,13,050/- under section 14A read with Rule 8D of the Act for the year under consideration without appreciating the fact that the no expenditure has been incurred in the year under consideration;
4 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd 5.2 erred in not appreciating the fact that no dividend income (exempt income) has been earned during the year and thereby no disallowance under section 14A of the Act could be made; 5.3 erred in not excluding the strategic investment made in subsidiary company from amount of investment, while computing disallowance under section 14A of the Act read with Rule 8D(2)(ii) & 8D(2)(iii) of the Rules; and 5.4 erred in making an addition of Rs.5,13,050/- to Book Profits for the purpose of section 115JB on account of disallowance u/s 14Aof the Act. 6. Mismatch of income as per Form 26AS data 6.1 erred in making an addition of Rs.24,03,464/- in respect of amounts remaining unreconciled with Form 26AS, without following the directions of DRP which had directed the AO to make addition only after making enquiry with the concerned parties and the appellant is unable to rebut the evidence. 6.2 erred in not taking cognizance of evidences filed by Assessee to reconcile the mis-match in Form 26AS details; 6.3 erred in not appreciating the fact that the total sales as reflected in the financial statements of the Assessee is more than the total receipts as reflected in Form 26AS; 6.4 Without prejudice to the above grounds, erred in not granting corresponding IDS credit for the above addition. 7. Short grant of IDS credit of Rs.2,17.73.430/- 7.1 erred in granting IDS credit of Rs.41,12,0607- instead of Rs.2,58,85,490/-as claimed by the Appellant for the year under consideration i.e. short grant of IDS credit of Rs.2,17,73,430/-; 8. Non-grant of set-off of brought forward business losses and unabsorbed depreciation 8.1 erred in not granting set-off of brought forward business losses and unabsorbed depreciation against the assessed income as claimed by the Appellant 9. Levy on Interest under section 234A 9.1 erred in levying interest under section 234A of the Act of Rs.2,85,932, without appreciating the fact that the Appellant had filed the return of income, within the time limit prescribed under section 139(1) of the Act. 10. Levy on interest under section 234B 10.1 erred in levying interest under section 234B of the Act of Rs.78,63,130. 11. Penalty under section 271 (1 )f c) of the Act 11.1 erred in initiating penalty under section 271{1)(c) of the Act.”
5 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd 3. Brief facts of the case are that the assessee, a company engaged in the business of outdoor media advertising services, filed its return of income for A.Y. 2014-15 declaring loss of Rs. 8.55 crores under the normal provisions of the Act. The assessee, along with the return of income, furnished report in Form No. 3CEB reporting international transactions with its Associated Enterprises (AE). Consequent upon reporting international transaction, the assessing officer (AO) made reference to the Transfer Pricing Officer (TPO) for computation of arms length price (ALP) with regard to international transactions. The TPO, while undertaking the transfer pricing assessment, after granting opportunity to the assessee suggested adjustment of Rs. 20,58,028/- on account of corporate guarantee extended by assessee to its AE and Rs. 13,28,39,482/- on account of interest on loans given to Laqshya Media International, Mauritius (LMI)/AE. On receipt of report of TPO, the AO included the addition/ adjustments in the draft assessment order. The AO also made addition/ disallowance under Section 14A of the Act of Rs. 5,13,050/-,disallowance under Section 36(1)(iii) of the Act of Rs. 64,95,182/-and addition on account of mismatch of 26AS of Rs.1,26,28,368/-. A copy of the draft assessment order was served upon the assessee. The assessee exercised its option to file objection before the Dispute Resolution Panel (DRP). The learned DRP allowed partial relief on addition made based on reconciliation of Form 26AS. However, the adjustments suggested by the TPO on account of corporate guaranty and interest on loan to AEs, addition under Section 14A and disallowance under Section 36(1)(iii) of the Act were upheld. Further aggrieved, the assessee has filed the present appeal before the Tribunal.
We have heard submissions of the learned authorised representative (A.R.) of the assessee and the learned departmental representative (D.R.) for Revenue and perused the material available on record. Ground No. 1 is general in nature and need no adjudication.
Ground No. 2 relates to adjustment relating to corporate guarantee. The facts relating to this issue are that the assessee has given corporate guarantee of AED 53 Million to its subsidiary on 1st October, 2008. The AE in turn given guarantee to HDFC Bank, Middle East, Dubai for AED 20
6 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd Million towards repayment of term loan availed by M/s. Right Angle Media (RAM), step down subsidiary of the assessee, from the said bank on the terms and conditions as mentioned in the facility letter dated 12.11.2007 of HDFC Bank Middle East Ltd. and facility letter dated 23.09.2007 of National Bank of Dubai. This corporate guarantee provided to the AE was reduced to AED 51 million vide amended deed Amendment Deed dated 04.01.2010 and further reduced to AED 40 million vide Guarantee Deed dated 29.04.2010. This guarantee was availed up to 01.07.2013. It was allowed prematurely cancelled/withdrawn by the step down subsidiary. The assessee has not reported this corporate guarantee in its report in Form No. 3CEB on the grounds that the assessee has not charged any guarantee fees. On show cause notice by the TPO, the assessee explained that no claim was raised by the assessee on AE against the corporate guarantee and the assessee has not incurred any cost or financial loss on the issuance of the said guarantee. The corporate guarantee was a bilateral agreement between the assessee and its step down AE. The TPO disregarded the contention of the assessee and held that corporate guarantee given by assessee to its AE was withdrawn by way of mutual consent. The TPO took his view that the intimation of withdrawal of guarantee to RAM was communicated only in August, 2013. The TPO benchmarked the transaction of guarantee fees @1.25% which is average of fees charging for bank guarantee by banks. The DRP affirmed the action of the TPO.
The learned A.R. of the assessee submits that no adjustment of corporate guarantee is warranted as the same has been withdrawn w.e.f. 01.04.2012. The learned A.R. of assessee further submits that similar issue was raised in appeal for A.Y. 2013-14. However, the Tribunal has not accepted the submission of the assessee that no corporate guarantee existed in A.Y. 2013-14. However, the Tribunal, by following the decision of the Hon'ble Bombay High Court in the case of CIT vs. Everest Kanto Cylinder Ltd. (378 ITR 57), restricted the addition to 0.05%. The learned A.R. submits that during the year under consideration transaction pertaining to corporate guarantee does not exist; therefore no adjustment is liable to be made. In alternative submission the learned A.R. submits that the addition should be
7 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd restricted to 0.05% of guarantee amount only till July 2013 till it was cancelled, if the decision of the Hon'ble Bombay High Court in the case of Everest Kanto Cylinder Ltd. (supra) is followed.
On the other hand, the learned D.R. for Revenue supported the orders of the lower authorities. The learned D.R. further submits that the assessee and its AE have mutually agreed to withdraw the corporate guarantee. Unless and until they inform to the bank for withdrawal/ cancellation of corporate guarantee, assessee cannot take unilateral decision. Accordingly the AO submitted that he relied upon the order of the TPO/DRP and prayed for affirming the same.
We have considered the submission of both the parties and perused the material available on record. We have noted that almost on similar set of facts in assessee’s own case for A.Y. 2013-14 (ITA No. 7340/Mum/2017 dated 06.01.2020), the TPO made adjustment of corporate guarantee @ 1.25% and on appeal before the Tribunal the same was reduced to 0.5% by following the decision of the Hon'ble Bombay High Court in the case of Everest Canto Cylinders Ltd. (supra). Considering the decision of the Hon'ble Jurisdictional High Court we accept the alternative pleas of the learned A.R. of the assessee to restrict the adjustment on account of corporate guarantee @0.5% till July 2013 till the corporate guarantee remained in existence. The learned TPO is directed accordingly to restrict the adjustment on account of corporate guarantee @0.5% till July 2013. In the result, this ground of appeal is partly allowed.
Ground No. 3 relates to adjustment relating to interest on loan given to AE. The learned A.R. of the assessee submits that in the previous financial year the assessee granted loan of Rs. 94.55 crores to its AE. Laqshya Media International, Mauritius (LMI) for further lending to step down subsidiaries Rs. 78.72 crores @14% and Rs. 2.83 @13% and Rs.13 crores for acquiring shares of overseas entity by AE at 13%. Out of Rs. 94.55 cores an amount of Rs. 81.55 crores was lent to RAM through LMI and subsequently through Gulf Media Holding, Mauritius and remaining Rs. 30 crores was given to LMI to acquire shares of APJ Digital. The learned A.R. for
8 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd the assessee submits that the assessee grated to loan of Rs. 78.72 crore to LMI for the purpose of lending to RAM through Gulf Media Holding. The assessee agreed to grant loan to LMI aggregating Rs.159.04 crores vide Board Resolutions dated 10.02.2009 and 14.04.2009 and loan agreement dated 17.07.2009 for the purpose of lending to RAM @14%. The loan was unsecured in nature and would remain outstanding until such time as: -
(i) LMI repays the loan to LML, in its entirety including accrued interest (ii) LML and LMI mutually agree to restructure the loan by way of revised loan agreement Remaining outstanding loan of Rs. 2.83 crores was granted to LMI vide Board Resolution dated 09.04.2007 and Loan Agreement dated 11.04.2007 @ 13%. The loan advanced to LMI and Gulf Media Holding has further granted loan to RAM, which is a Media Free Zone Company registered with Dubai Technology and Media Free Zone Authority, Government of Dubai. RAM is engaged in providing out of Home Media Advertising solutions, which was awarded the contract for setting up Air Conditioner Bus Shelter project in Dubai by the Road Transport Authority of Dubai, but the same was not extended. RAM had defaulted in repayments of secured loans payable to HSBC and NBD Dubai. The learned A.R. showed the loss incurred by RAM in a tabulated form and total net worth of RAM in financial year 2013 is - 178.22 million AED. For the loan given to LMI for acquiring the shares of APJ Digital, the learned A.R. submits that the share sale and purchase agreement was entered into between LMI Mauritius and APJ Capital on 17.03.2009 for purchase of APJ Digital Mauritius for a purchase consideration of Rs. 20 crores. Based on the agreement an amount of Rs. 13 crores was paid in two tranches by LMI Mauritius to APJ Capital out of loan taken from LML. It was submitted that on account of the fact that the digital business has not picked up and to carry on the same would require large capital investments with long gestation period the assessee decided not to make further investments in the same. Since the LMI did not meet the terms of Sale Purchase Agreement,this resulted in forfeiture of Rs.13crores already
9 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd paid by LML to APJ Capital. Accordingly recovery of Rs. 13 crores became doubtful.
The assessee after considering the precarious financial position of the AE waived the interest on loans given to the AE. The weak financial position of the AE and facts evidencing that recoverability of investment as well as loan given to AE is bad due to the following reasons: -
RAM has been incurring continuous losses (RAM has incurred a loss of AED 56,379,651 for the year ended 31 March 2013, has net current liabilities of AED 91,792,229 and net liabilities of AED 159,831,439 as at that date) The same is reflected in note 2(b) in the Financial Statement of Right Angle Media, Dubai for the FY 2012-13 on "Going Concern". GMH (holding company of RAM) in its note 7 of Financial statements of FY 2013-14 also stated that an impairment loss of USD 5,731,968 representing 25% of the loan advanced to RAM has been accounted for in FY 2011-12 based on the assessment of the recoverability of the loan from RAM in line with its long term project and its ability and capacity to recover from the economic crisis in Dubai. Appellant has made substantial provision against the loan given to RAM - LML had provided Rs.13.00 crores in FY 2009-10 and Rs.39.63 crores in FY 2011-12 and Rs.0.25 Crores in FY 2013-14 aggregating to 52.88 Crores against outstanding loan of Rs.94.55 Crores. Appellant also made provision for the accrued interest of Rs. 2.61 crore in FY 2009-10 and Rs. 23.53 crores in FY 2011-12 in the books of LML, as principal loan itself was doubtful of recovery for the reasons mentioned above. The provision for accrued interest was increased to Rs. 26,29 crores and Rs. 26.61 crores during the financial year 2012-13 and 2013-14 respectively. Since the financial position of the AE and step- down subsidiaries further deteriorated as explained above, the AE waived of all the loans granted to step down subsidiaries during FY 2014-15 and LML also converted its entire loan of Rs. 94.55 Crores extended to LMI into Preference Share Capital on 11 June 2014 and also made provision of Rs. 59.15 Crores for investment in equity and preference shares for diminution in value of investments other than temporary. In FY 2016-17, RTA Dubai re-possessed the BQS set-up by the RAM and accordingly, the RAM lost control over the project and was to also liable to pay claim of AED 11.27 Crores to RTA, Dubai for settlement. This had created material uncertainty with regard to the recoverability of investment and loan granted to RAM by AE and correspondingly by the AE to Assessee. RAM's financial for FY 2016-17 were prepared on liquidation basis, which is evident from note 1,2 on "Going Concern" of financial statements of FY 2016-17 of! Right Angle Media, Dubai, which means it
10 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd is a "Sick Company" and does not have any asset for purpose of payment to lenders nor LML. Investment in preference shares of Laqshya Mauritius of Rs.94.55 Crores was converted to equity shares 13 ' March, 2017. Entire equity investment of Rs.107.03 Crores in Laqshya Mauritius was provided for diminution/ impairment in value as on 31 March 2017. All the interest accrued up to FY 2010-11 on the loan given to AE has been written off in the books of accounts of the assessee on 31 January 2017. 11. The ld. AR for the assessee explained that due to weak financial positions of the AE’s interest on loans given to AE were waived off in AY 2011-12, 2012-13 and in 2013-14. The interest accrued for previous years were accounted by assessee in its books of account. In AY 2014-15, LML converted entire loan given to AE into preference shares and substantial portion of investment was impaired in the books of account. It was submitted that in AY 2016-17, RTA Dubai re-possessed the BQS set up by RAM and accordingly RAM lost its control over the project. Investment in preference shares of LMI was converted into equity shares on 13 March 2017 and entire investment in equity shares impaired. Interest accrued up to FY 2010 -11 on the loan given to AE has been written off in the books of account of the assessee on 31 January 2017.
The learned AR of the assessee further submits that appropriate CUP for benchmarking the transaction of way of interest on loan would be “Stressed Assets”, since the AE is of the assessee are not in a position to discharge its liability neither to the assessee nor to any third party lenders /investors in the group, accordingly it was submitted that comparables like stressed company should be considered, wherein the loans advanced by banks were turned into stressed assets as there was no recovery of principal as well as interest on loans and hair-cut was also taken on the principal amount due to the bankers. The learned AR of the assessee also gave the examples of a comparables companies like Alok Industries, Bhushan Steel, Electrosteel Steels, Synergy Doory Automotive and Jet-Airways.
In alternative and without prejudice submission the learned AR for the assessee submits that interest on the loans given to AE to be benchmark by
11 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd using the prevalent rate in the country where loans utilised for appropriate LOBOR rates as per the decision of Bombay High Court in case of Tata Auto Comp Limited (374 ITR 516 Bom). The loans were ultimately utilised in Dubai.
The learned AR of the assessee submits that TPO and ERP made adjustment of ₹ 13.07 crore by disregarding the factual matrix and principal of commercial expediency and real income theory, without undertaking any benchmarking analyses. In his all fairness the learned AR of the assessee submits that the Tribunal in assessee’s own case for AY 2012-13 in ITA No. 1984/Mumbai/2017 dated 14th November 2018 has disregarded the argument of assessee that real income theory does not apply to transfer pricing proceedings and the loans were advanced to AE cannot be challenged due to commercial expediency. The assessee has filed Miscellaneous Application (MA) before the Tribunal to make the certain rectification in the order passed on 14th November 2 018. The Tribunal vide its order dated 12 March 2 019 in assessee’s MA had directed to calculate ALP within framework of law laid down in para 5.6 the said order. The decision for AY 2012-13 was further followed by Tribunal in appeal for AY 2013-14 and the matter is restored back.
In of the aforesaid background the learned AR of the assessee prayed that the AO/TPO may be directed to undertake fresh benchmarking applying of transaction of interest of loan given to AE by using appropriate CUP, considering the fact that assessee waived of the entire interest on loan given to AE for the year under consideration under the precarious financial condition, wherein recovery of principal amount itself was not possible, has loan was a “stressed assets” and appropriate comparable in such scenario would be “stressed assets” for Banks. And in without prejudice contention the ld AR for the assessee submits that TPO be directed to consider the fact that the loans were utilised by AEs, outside India and hence rates as per country in which loan is utilised is appropriate CUP to benchmark the loans advanced to foreign AE.
12 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd 16. On the other hand the learned DR for the revenue supported the order of lower authorities. The ld. DR for the revenue further submits that the granting of the loan to AEs is an international transaction and the same is required to be benchmark in accordance with the provisions of Chapter X of the Act. The ld DR further submits that the assessee is required to charge interest rate for loan advanced to foreign subsidiary based on market determined interest rate applicable to currency in which loan has to be repaid or as per national interest rate of interest, if the same is payable in India. In support of his submissions the ld DR for the revenue relied on the decision of Delhi High Court in CIT VS Cotton Naturals (I) (P) Ltd [2015] 55 txamann.com 523 (Delhi High Court).
We have considered the rival submission of the parties and have gone through the orders of authorities below. We have also deliberated on the decision of Tribunal for assessment year 2012-13, which was followed in assessment year 2013-14. We have seen that the similar submission of learned AR of the assessee with regard to commercial expediency of loan given to subsidiary, was repudiated by coordinate bench of Tribunal in assessment year 2012-13 by holding that the commercial expediency of loan to subsidiaries is wholly irrelevant in ascertaining arm’s length price of interest on loan to AE’s by following the decision of Special Bench of Kolkata Tribunal in Instrumentarium Corporation Ltd versus ADIT (71 taxmann.com and 93). The coordinate bench of Tribunal in assessee’s own case for AY 2012-13 in ITA No. 1984/Mum/2017 passed the following order;
“5.6 We have carefully considered the submissions and relevant material on record. The undisputed facts are that pursuant to contractual terms, the assessee had advanced loans to its AE in furtherance of business interest i.e. for the purpose of further lending to step down subsidiary as well as to acquire the stake in another entity. It is also undisputed fact that as per the contractual terms, the assessee was entitled for interest ranging from 13%-14% and the same has also been recognized as income in the earlier years. However, for the impugned AY, no interest has been charged by the assessee primarily in view of the fact that the aforesaid loans became doubtful due to losses sustained by its AE. The primary argument of Ld. AR rest on the
13 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd premise that the loans being stressed asset / non-performing assets and therefore, are to be benchmarked at Nil rate of interest. However, the fact remains the same that the assessee has advanced loan pursuant to loan agreements / arrangements to its AE and was entitled to certain rate of interest. These loan transactions as entered into by the assessee with the AE squarely falls within the ambit of Section 92(1) / 92B as an international transactions as accepted by the assessee in its TP study and the statutory provisions mandates that the income from such transactions is to be computed on the principle of arm's length price irrespective of the fact that no such income has actually accrued to the assessee. This being so, the argument of principles of commercial expediency or notional income or revenue neutrality as raised before us fails since as long as the transaction is an international transaction within the framework of law, the computation of income there- from has to be on the basis of arm's length principle. This conclusion or our draws strength from the ratio of decision of Kolkata Tribunal (Special bench) rendered under similar circumstances in Instrumentarium Corporation Limited Vs. ADIT [71 Tamxann.com 193] wherein Hon’ble Bench held as under:- 37. 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 loan 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 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
14 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd 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 view the same, we reject the various contentions raised by Ld. AR, in this regard. 5.7 Now the only question that survives for our consideration is applicable interest rate against the same. The Ld. AR has supported the argument that the same should be benchmarked at LIBOR with the following judicial pronouncements:- (i) Cotton naturals India Pvt. Ltd. [55 Taxmann.Com 523 Hon’ble Delhi HC] (ii) Tata Auto-comp Systems Ltd [374 ITR 516 Hon’ble Bombay High Court] (iii) Transport Corporation of India Ltd. [ITA 117/Hyd/2016 Hyderabad Tribunal] (iv) Piramal Glass Limited [ITA No. 157/Mum/2016 Mumbai Tribunal] (v) Instrumentarium Corporation Ltd. [ITA 1584/Kol/2009 Kolkata Tribunal] The Ld. AR submitted that the assessee had advanced loans in foreign currency i.e. US Dollars and therefore, the benchmarking was to be done at LIBOR in terms of above judicial pronouncements. To support the same, additional evidences in the shape of outward remittance advices issued by the bank and other documents has been placed on page numbers 633 to 646 of the paper book. In contrast to this, Ld. DRP at para 3.26.1 of its directions, upon perusal of loan agreement, had opined that the loan was repayable in Indian Currency and therefore, the same was to be benchmarked as per Indian rates in terms of judgment of Hon’ble Delhi High Court rendered in Cotton naturals India Pvt. Ltd. [supra]. Since additional evidences have been placed before us for the first time which are germane to the adjudication of the issue and the fact as to the currency in which the loan was granted and the currency in which it was repayable is not quite certain, the issue requires re-appreciation by
15 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd lower authorities. For the aforesaid limited purpose, the matter stand remitted back to the file of Ld. AO / TPO with a direction to the assessee to provide requisite details & information to substantiate the claim. This ground stand partly allowed for statistical purposes.” 18. We have noted that subsequent to the aforesaid order the assessee filed MA vide MA No. 11/Mum/2019, which was disposed off vide order dated 12.03.2019, the relevant part of the order is extract below; –
“3. We have carefully considered the same. Upon careful consideration of para 5.6 of the stated order, we find that only a principle has been drawn on the strength of statutory provisions to arrive at a conclusion that so long as the transactions is an international transaction within the framework of law, the computation of income there-from has to be on the basis of arm’s length principle. While arriving at such a conclusion, strength has been drawn from the cited decision of the special bench. This being the case, the submission that the cited decision was factually different and distinguishable, in our opinion, carry no weight.
Proceeding further, in para 5.7, the matter of quantification of appropriate applicable rate has been remitted back to the file of Ld. AO / TPO with certain observations in the light of additional evidences submitted by the assessee. It is made clear that the Arm’s Length Price of the stated transactions shall be determined within the framework of law keeping in view the principle laid down in para 5.6 of the said order. Needless to add that the assessee is free to agitate the applicable rate of stated transactions.” 19. We have further noted that order of AY 2012-13 was followed in AY 2013-14, therefore, respectfully following the orders of the coordinate benches of the Tribunal this issues is restored back the file of TPO/AO to pass the order by following the directions in the order dated 14.11.2108 and 12.03.2109 (order on MA). Further considering submissions of the ld. AR for the assessee, which we have recorded in para 16 (supra), the TPO/AO is directed to consider the same and decide in accordance with law. Needless to direct that before deciding the issue afresh the TPO/AO shall grant opportunity of hearing to the assessee. In the result this ground of appeal is allowed for statistical purpose.
16 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd 20. Ground No. 4 relates to disallowance under Section 14A of the Act. The APO made addition/ disallowance under section 14A of Rs. 5,13,050/- by taking view that the assessee made investment of Rs. 22.79 Crore at the end of relevant financial year. The AO made disallowance @ 0.5% of average value of investment. The DRP affirmed the disallowance made by AO holding that disallowance made by him is in accordance with Rule 8D(2)(iii) being .5% of average value of investment.
The learned A.R. submits that during the year the assessee has not earned exempt income and had not incurred any expenditure in relation to income which does not form part of the total income. Thus, no disallowance under Section 14A of the Act is warranted. The learned A.R. further submits that similar issue was raised in appeal for A.Y. 2013-14 wherein it was held that when there is no exempt income earned for the year no disallowance under Section 14A is warranted.
On the other hand, the learned D.R. for the Revenue supported the order of the Assessing Officer.
We have considered the submissions of both the parties and noted that during the year the assessee has shown investments of Rs. 23.17 crores. The assessee in its Tax Audit Report submitted that no exempt income is earned by the assessee and that no expenditure was incurred for earning exempt income. Considering the submission of the learned A.R. of the assessee that no exempt income was earned by the assessee and the AO has not identified any exempt income, therefore, following the decision of the Tribunal in assessee’s own case for A.Y. 2013-14, wherein the Coordinate Bench has followed the decision of the Hon'ble Delhi High Court in the case of Chem Invest Ltd. vs. CIT (378 ITR 33 Bom) and the decision of the Hon'ble Bombay High Court in the case of Principal CIT vs. Ballarpur Industries Ltd. in (ITA No. 51 of 2016), no disallowance in this regard for the year under consideration is warranted. Therefore, the AO is directed to delete the entire disallowance under section 14A. Since we have deleted the entire disallowance under section14A, similarly no adjustment on account of disallowance of section 14A in the book profit under section 115JB is
17 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd warranted as per the decision of the Special Bench of the Delhi Tribunal in Vireet Investments Pvt. Ltd. (82 taxmann.com 415 [Delhi - Trib.) (SB)]. In the result this ground of appeal is allowed.
Ground No. 5 relates to disallowance of interest under section 36(1)(iii) of the Act. During the assessment, the AO noted that assessee has incurred interest of Rs. 6.71 crore. It was further noted that the assessee has advanced interest free loan to its subsidiary. The AO issued show-cause notice for interest disallowance under section 36(1)(iii). The assessee filed detailed submission vide reply dated 30.11.2017 as recorded in para-7.2 of the draft assessment order. In the reply the assessee submitted that the advance to the subsidiaries was given for commercial expediency and that the assessee had sufficient interest free funds available with it. The AO disregarded the contention of the assessee. The AO made disallowance under section 36(1)(iii) by taking view that assessee is unable to justify the commercial necessity for making interest free advances to its subsidiaries nor been able to substantiate beyond doubt that advance had been made from own funds. The AO disallowed Rs. 64,95,182/-. The DRP confirmed the action of the AO by following the order of earlier years.
The learned A.R. of the assessee submitted that this issue has been raised in appeal in previous assessment years wherein the Tribunal has held that no disallowance under Section 36(1)(iii) of the Act is warranted wherein the interest free loans advanced to the subsidiaries were out of commercial expediency. Thus, this ground of appeal is also covered in favour of the assessee.
On the other hand the ld. DR for the revenue supported the order of the lower authorities.
We have considered the submissions of the parties and have perused the record. We have noted that on identical ground of appeal, the coordinate bench of Tribunal in earlier year (AY 2013-14 in ITA No. 7340/Mum/2017 dated 06.01.2020) passed the following order;
18 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd “20. Corporate tax disallowance of interest under section 36(1)(iii} of the Act On this issue it was noted by the assessing officer that assessee has given interest free loans to its subsidiaries without charging any interest. The assessee's explanation that assessee had sufficient own funds to give interest- free loan to subsidiary companies was rejected. Hence disallowance of interest was done amounting to Rs 4,51,66,441. 21. The dispute resolution panel following its earlier decision upheld the assessing officer's action. Against this order assessee is in appeal before the ITAT. 22. We have heard both the sides and perused the records. Learned counsel of the assessee reiterated that in assessee's own case ITAT for assessment year 2009 - 10 to assessment year 2012 - 13 has held that no disallowance in this regard is warranted as the interest free loan advanced to the subsidiaries was out of commercial expediency. Furthermore, the tribunal had also held that assessee's interest free funds to grant loans were sufficient and in this regard it had placed reliance upon Hon 'ble Bombay High Court decision in the case of CIT vs HDFC bank. In these circumstances learned counsel contended that no disallowance in this regard is warranted. He further contended that facts are identical and assessee's interest free funds are more than the advances given to AE's. 23. Upon careful consideration we find that since facts are identical and DRP has also followed its earlier year order which has been reversed by the ITAT, respectfully following the above said precedent we direct that no disallowance in this regard is to be made
Respectfully following the decision of the Coordinate Bench in earlier assessment years, wherein it was held that the assessee has sufficient interest free funds available with it and the advances was given for commercial expediency; hence we are in agreement with the submissions of the assessee that this ground of appeal is covered in favour of the assessee. Hence, we are inclined to delete the addition/disallowance under Section 36(1)(iii) of the Act. No contrary fact or law is brought to our notice. Ins the result this Ground of appeal is allowed.
Ground No. 6 relates to addition on account of mismatch in 26AS data. The ld AR for the assessee submits that during the course of the
19 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd assessment proceedings, the AO provided the assessee with the copy of Form 26AS and asked the assessee to reconcile the data vis-à-vis Profit & Loss account of the assessee due to a mis-match. The assessee vide its reply dated 8.11. 2017, 30.11.2017 and 22.12 2018 submitted the party- wise reconciliation of receipt as per profit and loss account with the data appearing in 26AS database along with the supporting evidences. The AO made addition solely on the basis of un-reconciled entries with the 26AS statement. The addition ought not to be sustained since the assessee has no control over entries recorded by third parties in the PAN of the assessee. DRP directed the AO to verify and reconcile the entries with Form 26AS. During the course of final assessment proceedings the AO made an addition to Rs. 24,03,464/- despite the directions of DRP to verify and reconcile the entries with Form 26AS. The ld AR for the assessee further submitted that the assessee declared income of Rs.108,88,03,554/- which is far exceeds the income shown Rs.106,81,87,636/- in Form 26AS information. Accordingly, no disallowance is warranted on account of mismatch in details with Form 26AS. The ld AR for the assessee submits that this issue is also squarely covered by the decision of this Hon’ble Tribunal in the assessee’s own case for AY 2012-13 (ITA 1984/Mum/2017) dated 14.11.2018. 30. On the other hand the ld. DR submits that this issue may be restored to the file of AO for verification of facts and to for passing the order accordingly.
We have considered the submissions of the parties and have perused the order of the authorities below. The AO while passing the draft assessment order made addition on account of mismatch of 26AS of Rs.1,26,28,368/-. After the direction of DRP the addition was restricted to Rs. 24,03,464/-. We have seen that in assessee’s own case for AY 2012-13 in ITA 1984/Mum/2017 dated 14 November 2018 on similar issues the Tribunal held as under: -
“The root of next issue lie in the fact that certain incomes as reflected in Form 26AS were not found to be credited in the Profit & Loss Account and the income to the extent of Rs. 1.02 Lacs could not be reconciled by the
20 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd assessee. The Ld. DRP directed id. AO to make further enquiries from the parties confirmed. Since no response was received from the concerned parties tilt the date of impugned order, the addition thereof was made in the hands of the assessee. The Ld. AR has pleaded that the additions are not warranted and raised an alternative plea that the credit of TDS against those payment should be granted to the assessee. Upon due consideration of factual matrix, we find that onus to reconcile the entries was on assessee. Since impugned order was passed on 31/01/2017, Ld. AO is directed to re- appreciate the entries in Form 26AS and re-adjudicate the same in the light of the confirmations/ any other evidences received after the date of the impugned order. This ground stand allowed for statistical purposes"
Respectfully following the above mentioned decisions of the Tribunal we restore the issue to the file of the AO to reconsider the issue and verify the facts including reconciling the entries in Form-AS26 and grant appropriate relief to the assessee in accordance with law. In the result this ground of appeal is allowed for statistical purposes.
Regarding Ground Nos. 7-10 the learned A.R. of the assessee submits that in view of the rectification order passed by the AO dated 18.03.2019 these grounds have become infructuous. Considering the submissions of the ld. AR for the assessee these grounds of appeal are dismissed being infructuous.
Ground No. 11 relates to initiation of penalty under Section 271(1)(c) of the Act. This ground of appeal is premature and need no adjudication.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 17th July, 2020.
Sd/- Sd/- (M. Balaganesh) (Pawan Singh) Accountant Member Judicial Member Mumbai, Dated: 17th July, 2020 Copy to: The Appellant 1. The Respondent
21 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd 2. DRP-1, Mumbai 3. The Pr.CIT - 10, Mumbai 4. The DR, “K” Bench, ITAT, Mumbai By Order n.p. Assistant Registrar ITAT, Mumbai Benches, Mumbai
22 ITA No. 7310/Mum/2018 M/s. Laqshya Media Ltd
S.No. Details Date Initials Designation Draft dictated on 1 Part of the order was prepared by 08.07.2020 Sr. PS/PS author on systm 2 Draft placed before author 15.07.2020 Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member Approved Draft comes to the Sr. 5 Sr. PS/PS PS/PS 6 Kept for pronouncement Sr. PS/PS 7 File sent to Bench Clerk Sr. PS/PS Date on which the file goes to Head 8 Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order Dictation pad attached