APOLLO INTERNATIONAL LTD.,NEW DELHI vs. DCIT, NEW DELHI

Date of hearing 09.04.2019 Date of pronouncement 12.04.2019 ORDER PER O.P. KANT, A.M.: This appeal by the assessee is directed against the final assessment order dated 07.11.2015 passed by the Dy. Commissioner of Income Tax, Circle-2(1), New Delhi (hereinafter referred to as ‘the Assessing Officer’) for assessment year 2010- 11, pursuant to the direction of the learned Dispute Resolution Panel (in short ‘DRP’) dated 17.10.2014. The grounds raised by the assessee in appeal are reproduced as under:

1. The assessment order passed in pursuance of the directions issued by the Hon’ble Dispute Resolution Panel (DRP) is vitiate order as the Hon’ble DRP erred both on facts and in law in partially confirming the arbitrary adjustment made by the learned Transfer Pricing Officer ( Ld. TPO) relating to the delayed payments received by the appellant from its Associated Enterprise.

3. The Ld. AO / Ld. TPO erred in proposing to enhance, the returned income of the appellant by Rs. 5,95,999/-/- by treating the delayed receipts of export proceeds as deemed loan advanced to Associated Enterprise (AE) and charging notional interest for the period of delay @ 14.75% p.a. and in doing so have grossly erred in: i) disregarding the ALP determined by the appellant in the transfer pricing documents maintained by it; ii) completely disregarding the detailed and proper comparability analysis submitted by the appellant; iii) disregarding various judicial pronouncements in undertaking the TP adjustment; iv) not granting the benefit of the +/- 5% range as allowed in the proviso to section 92C(2) of the Income tax Act. 4. The Ld. Assessing Officer has erred in disallowing an amount of Rs. 16,11,000/- under section 14A of the Act read with rule 8D of the rules and in doing so have grossly erred in: i) holding that the appellant is under an obligation to compute disallowance as per provisions of rule 8D of the rules; ii) making addition under section 14A of the Act without recording his dissatisfaction having regard to the tax audit report and accounts of the appellant that expenditure of Rs. 8,17,000 has been incurred by the appellant for earning exempt income.

2. Briefly stated facts of the case are that the assessee was engaged in the business of trading of tyres. For the year under consideration, the assessee filed return of income on 29.09.2010, declaring income of Rs.13,10,61,035/-. The case was selected for scrutiny and notice under Section 143(2) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) was issued and complied with. The Assessing Officer noted the international transactions of export/import of tyres, reimbursement of expenses paid etc. In view of the international transactions carried out by the assessee with its Associated Enterprises (AEs), the learned Assessing Officer referred the matter of determination of arm’s length price of the international transaction to the learned Transfer Pricing Officer (TPO). The TPO though accepted the international transactions reported by the assessee, however, held that export proceeds were received after substantial delay and, therefore, he proceeded to make the adjustment for interests on delayed receivables from the AEs. The Ld. TPO made adjustment of Rs.5,59,999/- in respect of the outstanding receivables from the AEs beyond the credit period of 90 days at the rate of interest of 14.75% based on PLR of State Bank of India. The Ld. Assessing Officer passed draft assessment order on 27.01.2014, including the proposed transfer pricing adjustment of Rs.5,95,999/- and also disallowance under Section 14A of the Act. 2.1 Aggrieved, the assessee filed objections before the learned DRP, who upheld the disallowance proposed by the Assessing Officer. Pursuant to the direction of the Ld. DRP, the Assessing Officer passed final assessment order. Against the impugned final assessment order, the assessee is in appeal before the Tribunal raising the grounds as reproduced above.

“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 re-paid 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.”

11.14 Now the position of law as stands is that the decision of Hon'ble Jurisdiction High Court is directly on the point in dispute whereas the decision of Hon'ble Supreme court in the case of Rajendra Prasad Moody (supra) has been rendered in the context of section 57(iii), the applicability of which has been ruled out by Hon'ble Delhi High Court in the case of Cheminvest (supra). 11.15 Under Article 227 of the Constitution of India, the courts function under the supervisory jurisdiction of Hon'ble High Court. The decisions rendered by Hon'ble High Court are binding on all subordinate courts working within its jurisdiction. In this regard we may refer to the following decisions: (i) CIT v. Thana Electricity Supply Ltd. (1994) 206 ITR 727 (Bom.), wherein on the issue of whose decision-is binding on whom", the.

Hon'ble Bombay Court considered in detail the hierarchy of the courts and has observed as under: "It is also well-settled that though there is no specific provision making the law declared by the High Court binding on subordinate courts, it is implicit in the power of supervision conferred on a superior Tribunal that the Tribunals subject to its supervision would conform to the law laid down by it. It is in that view of the matter that the Supreme Court in East India Commercial Co. Ltd. v. Collector of Customs, AIR 1962 SC 1893 (at page1905) declared: "We, therefore', hold that the law declared by the highest court in the State is binding on authorities or Tribunals under its superintendence, and they cannot ignore it. ...." This position has been summed up by the Supreme Court in Mahadeolal Kanodia v. Administrator General of West Bengal, AIR 1960 SC 936 (at page 941) as follows: "Judicial decorum no less than legal propriety forms the basis of judicial procedure. If one thing is more necessary in law than any other thing, it is the quality of certainty. That quality would totally disappear if judges of co- ordinate jurisdiction in a High Court start overruling one another's decisions. If one Division Bench of a High Court is unable to distinguish a previous decision of another Division Bench, and holding the view that the earlier decision is wrong, itself gives effect to that view, the result would be utter confusion. The position would be equally bad where a judge sitting singly in the High Court is of opinion that the previous decision of another single judge on a question of law is wrong and gives effect to that view instead of referring the matter to a larger Bench." The above decision was followed by the Supreme Court in Baradakanta Mishra v. Bhimsen Dixit, AIR 1972 SC 2466, wherein the legal position was reiterated in the following words (at page 2469) : "It would be anomalous to suggest that a Tribunal over which the High Court has superintendence can ignore the law declared by that court and start proceedings in direct violation of it. If a Tribunal can do so, all the subordinate courts can equally do so, for there is no specific provision, just like in the case of Supreme Court, making the law declared by the High Court binding on subordinate courts. It is implicit in the power of supervision conferred on a superior Tribunal that all the Tribunals subject to its supervision should conform to the law laid down by it. Such obedience would also be conducive to their smooth working; otherwise there would be confusion in the administration of law and respect for law would irretrievably suffer,"

(ii) CIT v. Svnil Kumar (1995) 212 ITR 238 (Raj.), it was observed as under: "The point which has been raised could have been considered to be debatable because other High Courts have taken a different view. But since the view taken by this court is binding on the Tribunal and other authorities under the Act in this State, it could not be considered to be a debatable point in view of the decision of this court in the case of CIT v. M.I, Sanghi [1988] 170 ITR 670." (iii) Indian Tube Company Ltd. v. CIT & others (1993) 203 ITR 54 (Col.) , it was observed as under: "In the impugned order, respondent No.1 has rejected the petitioner's contention by stating that, although the Calcutta High Court had held that an assessee was entitled to interest on such refund calculated up to the date of the order passed consequent upon an appeal or revision of the original assessment, this view had not been accepted by the Bombay High Court, the Allahabad High Court and the Kerala High Court. Respondent No.1, accordingly, chose to accept the view of the Bombay, Allahabad and Kerala High Courts in preference to the view of the Calcutta High Court. In my view, the order of respondent No. 1 cannot be sustained on the simple ground that respondent No. 1 is an authority operating within the State of West Bengal and is bound by the decisions of the Nigh Court of this State ( see CIT v. Indian Press Exchange Ltd. [1989] 176 ITR 331 (Col) ; East India Commercial Co. Ltd. v. Collector of Customs AIR 1962 SC 1993, paragraph 29). In that view of the matter, the impugned order must be set aside and the Commissioner is directed to consider the matter afresh in keeping with the decisions of this court after giving the petitioners an opportunity of being heard. At least 48 hours clear notice must be given to the petitioners. The Commissioner will communicate the final order to the petitioner within eight weeks from the date of hearing. (iv) CIT v. J.K. Jain [1998] 230 ITR 839 (P&H), observing as under: "We have carefully examined the records and have heard Ld. counsel representing the parties. We are in respectful agreement with the view expressed by the Allahabad High Court in Omega Sports and Radio Works' case [1982] 134 ITR 28, as also the decision of this court in Mohan Lal Kansal's case [1978] 114 ITR 583. Following the decision in the two cases referred to above, we hold that it was not a case of divergence of opinion inasmuch as the opinion expressed by this court was binding upon the Tribunal." 11.16 Therefore, in our considered opinion, no contrary view can be taken under these circumstances. We, accordingly, hold that only those investments are to be considered for computing average value of investment which yielded exempt income during the year.” (emphasis supplied externally)