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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
आयकर अपीलीय अधिकरण “J” न्यायपीठ म ुंबई में। IN THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI श्री महावीर ससिंह, न्याययक सदस्य एविं श्री मनोज कुमार अग्रवाल, लेखा सदस्य के समक्ष । BEFORE SRI MAHAVIR SINGH, JM AND SRI MANOJ KUMAR AGGARWAL, AM आयकर अपील सुं./ (यनर्ाारण वर्ा / Assessment Year 2010-11) आयकर अपील सुं./ (यनर्ाारण वर्ा / Assessment Year 2011-12) Oriental Aromatics Limited The Dy. Commissioner of (amalgamated with Camphor Income-tax and Allied Products Limited. Circle-1(2)(2), Mumbai Changed its name to Oriental बनाम/ Aromatics Limited) Vs. Jehangir Bldg., 2nd Floor 133, M.G. Road, Mumbai-400 001 (प्रत्यर्थी/ Respondent) (अपीलार्थी / Appellant) स्र्थायी लेखा सुं./PAN No. AAACO4618F अपीलार्थी की ओर से / Appellant by : Shri Vipti T. Patel, AR प्रत्यर्थी की ओर से / Respondent by : Shri. Pavan Kumar Veerla, DR सुनवाई की तारीख / Date of hearing: 11.09.2019 घोर्णा की तारीख / Date of pronouncement: 06.12.2019 A a d o S a / O R D E R महावीर ससुंह, न्याययक सदस्य/ PER MAHAVIR SINGH, JM: These appeals of assessee are arising out of the different orders of Dispute Resolution Panel-II, Mumbai [in short ‘DRP’], in objection Nos. 30, 21, vide direction dated 14.11.2014 & 2 | P a g e ITAs No.1039/Mum/2015 687/Mum/2016 30.10.2015. The Assessments were framed by the Dy. Commissioner of Income Tax, Circle-10(2), Mumbai (in short ‘DCIT/AO’) for the assessment years 2010-11, 2012-13 vide order dated Nil, 30.10.2015 under section 143(3) read with section 144C (13) of the Income Tax Act, 1961 (hereinafter ‘the Act).
The first common issue in these two appeals of assessee is as regards to the direction of DRP and transfer adjustment made by AO/ Transfer Pricing Officer in regard to transaction of interest free loan to AE (associated enterprises), which did not cost anything to the assessee. This is a common issue in both the years and hence, we will take the facts from AY 2010-11 in and will decide the issue. The assessee has raised the following grounds No. 3 to 13 with respect to this issue.
Briefly stated facts are that the assessee company is engaged in the business of manufacturing of flavors and fragrances. The AO framed the assessment under section 143(3) read with section 144C(3) of the Act vide order dated Nil, the Transfer Pricing Officer on verification of audit report filed by the assessee in form No. 3 CEB noticed that the assessee company had transactions with its associated concerns. Therefore, reference was made under section 92CA(1) of the Act to the Transfer Pricing Officer on 15.02.2013 for computation of Arm’s Length Price in relation to the international transaction detailed in the audit report in form No. 3CEB. Accordingly, the Transfer Pricing Officer passed an order under section 92CA(3) of the Act dated 17.01.2014 by making 3 | P a g e ITAs No.1039/Mum/2015 687/Mum/2016 adjustment of ₹ 2,58,94,592/- to the Arm’s Length Price on account of interest free advances to the overseas AE. Accordingly, the assessee carried the matter by raising objections before the DRP and DRP also confirmed the action of the Transfer Pricing Officer/ Assessing Officer by applying the LIBOR rate. The DRP also upheld the Prime Lending Rate (PLR) considered by the AO as correct. However, further margin of 3% added to its detailed PLR tax entity on account of the factors including risk is involved. Hence, the DRP confirmed the adjustment made by Transfer Pricing Officer to the extent of 11% interest charged on the loans given as interest free to its AE by the assessee. Aggrieved, against the directions of the DRP as well as for making adjustment by the AO/ Transfer Pricing Officer, assessee came in appeal before Tribunal.
At the outset, the learned Counsel for the assessee stated that this loan transaction is part of the TP report furnished under section 92E of the Act relating to international transactions in form No. 3CEB. The learned Counsel for the assessee drew our attention to the relevant page 28 of assessee’s paper book: - “Oriental Aromatics Inc 21, Spielman Road Fairifield, NJ 07004 No written agreement entered US Dollar NIL No loan given during the year 4 | P a g e ITAs No.1039/Mum/2015 687/Mum/2016 No interest is being charged by the assessee from Associated Enterprise and therefore no arm’s length transaction price has been ascertained, since no income arises from such transactions.”
5. When these loan transactions pertains to its AE for AY 2003-04 and assessment has been framed under section 143(3) of the Act and no adjustment in those years were made in those earlier years, in this year the adjustment cannot be made on the basis of consistency. The learned Counsel for the assessee drew our attention to assessment orders for earlier years and the financials. The learned Counsel also drew our attention to the chart gives during the course of which read as under: - Assessment Year Order U/s 143(3) Form no. 3CEB Financials AY 2004-05 19.12.2006 31.10.2004 No AY 2005-06 15.10.2007 29.10.2005 Yes AY 2006-07 03.11.2008 24.11.2006 Yes AY 2007-08 10.12.2009 12.10.2007 Yes AY 2008-09 30.11.2010 12.08.2008 Yes AY 2009-10 08.12.2011 29.09.2009 Yes 6. The learned counsel for the assessee made arguments relying on Supreme Court decision in the Case of Radhasoami Satsang vs. CIT (1992) 60 Taxman 248 (SC), the adjustment on account of interest cannot be made as the revenue is consistently not making any disallowance on this aspect. Further, he also made argument on the first ground i.e. the reference to Transfer Pricing Officer is without any jurisdiction. For this, he referred to following ground No. 3: - 5 | P a g e ITAs No.1039/Mum/2015 687/Mum/2016
3. The transfer pricing proceedings initiated by the AO under Section 92CA (1) of the Act, are without any jurisdiction and ought to be quashed.”
Further, he made argument in respect to grounds on merits and the relevant Ground Nos 4 to 13 read as under: - “Addition on account of Transfer pricing adjustments.
4. the AO/ TPO/ DRP erred in making a transfer pricing adjustment of INR. 2,58,94,592/-.
The AO/ TPO/DRP erred in not considering the fact that there exists no basis of charge of income tax as per section 4 of the Act and thus, no income arises as per Section 92(1) of the Act on account of the loan given by the assessee to its AE. Accordingly, provisions of Chapter X of the Act are not applicable in the instant case.
The AO/ TPO/ DRP erred in not granting the assessee an opportunity of being heard before applying the provisions of Chapter X of the Act to the transaction of investment by the assessee in it AE, resulting in re-characterisation of 6 | P a g e ITAs No.1039/Mum/2015 687/Mum/2016 such transaction as an interest bearing loan, when in fact no interest income accrued or arose to the assessee. The order passed by the TPO is thus bad in law.
7. The AO/ TPO/DRP erred in making a transfer pricing adjustment when the transaction of interest free loan to Ae did not cost anything to the assessee, and thus had no bearing on profits, income, losses or assets of the assessee. Thus, the transaction is outside the purview of Chapter X of the Act.
The AO/ TPO/ DRP erred in observing that fresh loans were advanced by the assessee to its AE during the year under consideration, when in fact no such fresh loans were advanced.
9. The AO / TPO /DRP erred in observing that the source of investment (by way of loan), made by the assessee in its AE was loans taken from banks when in fact, as submitted by the assessee before the TPO/ DRP, the investment was made out of owned funds and hence there was no cost attached to the same.
7 | P a g e ITAs No.1039/Mum/2015 687/Mum/2016 10. The AO/ TPO erred in not giving 3% relief provided by the DRP while determining the ALP of rate of interest. 11. The AO/TPO/DRP erred in ignoring the functional analysis while benchmarking the transaction of investment (by way of loan) made by the assessee in its AE.
Without prejudice, the AO/TPO/ DRP erred in not considering LIBOR as the basis for benchmarking the foreign currency loan given by the assessee to its AE.
Without prejudice, the AO/ TPO/DRP erred in considering interest rates charged by an entity engaged in financing business for benchmarking interest on loan given by the assessee to its AE, instead of the potential opportunity loss of the assessee i.e. rates applicable to deposits.” 8. Alternatively, the learned Counsel for the assessee sated that in any case, the LIBOR rate should be applied as benchmarking to determine the arms’ length price and for this, he will not argue the other grounds in respect to jurisdiction of Transfer Pricing Officer as well as on merits. He stated that this issue is covered in favour of assessee in the case of CIT vs. 8 | P a g e ITAs No.1039/Mum/2015 687/Mum/2016 Everest Kento Cylinders Ltd. (2015) 378 ITR 57 (Bom), wherein LIBOR rate has been applied as benchmarking for determination of arms’ length price, the same can be directed to the Transfer Pricing Officer. The learned Sr. Departmental Representative fairly argued that application of LIBOR rate on this interest can be directed by the Bench to the Transfer Pricing Officer.
We have gone through the facts and find from the financial statements of the assessee company that the assessee company has not made any further investment by way of loan to its AE during the year under consideration. In fact, during AY 2010-11, the AE has repaid an amount of USD 5 lakhs out of the outstanding balance of such loan. This should be taken into consideration while applying the LIBOR rates. As the issue is squarely covered by the decision of Hon’ble Bombay High Court in the case of Everest Kento Cylinders Ltd (supra), where it is directed that LIBOR rate should be applied as benchmarking to determine the arms’ length price of International Transaction of loan. We direct the Transfer Pricing Officer accordingly.
Similar are the facts in AY 2011-12 in hence, same decision will also apply in AY 2011-12.
The next issue in this appeal of assessee in AY 2010-11, is as regards to the order of DRP directing the AO to disallow expenses relatable to exempt income at ₹25,05,072/- by invoking the provisions of section 14A of the Act read with Rule 8D of the Rules. For this, assessee has raised the following ground No. 2: - 9 | P a g e ITAs No.1039/Mum/2015 687/Mum/2016
2. The AO/ DRP, erred in making the disallowance of INR 25,05,072 by invoking provisions of section 14! Of the Act r.w. Rule 8D of the Income-tax Rules, 1962 (the Rules). He applied the provisions of Rule 8D in a mechanical way without appreciating the facts of the case and the account of the assessee.”
12. Briefly stated facts are that the assessee has claimed dividend income of ₹45,76,673/- and claimed the same as exempt under section 10(34) of the Act. The assessee has made suo moto disallowance of expenses relatable to exempt income i.e. expenses at ₹3090/-. The AO asked the assessee to furnish the details of expenses relatable to exempt income, assessee in response to this query replying vide letter dated 24.02.2012 that the assessee has not incurred any interest expenses or other expenses to earn exempt income and only demat charges and bank charges incurred directly to earn this dividend income which is disallowed to the extent of ₹3090/-. The AO has not gone into the details of expenditure and without recording any satisfaction straightway applied the rule 8D and made disallowance of interest expenses under Rule 8D(2)(ii) at ₹1,96,338/- and under Rule 8D(2)(iii) being 0.5% of average value of investment at ₹23,08,734/- thereby disallowed 25,08,162/-. After allowing the suo moto disallowance made by assessee of ₹3090/-, he disallowed balance expenses of ₹25,05.072/-. The learned Counsel for the assessee before us relied on the decision of the Hon’ble Supreme Court in the case 10 | P a g e ITAs No.1039/Mum/2015 687/Mum/2016 of Maxopp Investment Ltd. vs. CIT [2018] 402 ITR 640 (SC), wherein it is held as under: - “39. In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as 'income' under the head 'profits and gains from business and profession'. What happens is that, in the process, when the shares are held as 'stock-in-trade', certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share & Stock Brokers (P.) Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned.
We note from the facts in the State Bank of Patiala cases that the AO, while 11 | P a g e ITAs No.1039/Mum/2015 687/Mum/2016 passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as 'stock-in-trade', it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, 12 | P a g e ITAs No.1039/Mum/2015 687/Mum/2016 therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove."