MOSERBAER INDIA LTD.,NEW DELHI vs. ACIT, NEW DELHI

That assessing officer erred on facts and in law in computing taxable income of the appellant at Rs.1,43,95,15,290 as against returned loss of Rs. 6,63,65,973.

The lead appeal is for Assessment Year 2008-09, therefore, the brief facts of Assessment Year 2008-09 is taken here. The assessee company is engaged in the business of manufacture of optical and magnetic, storage media. The product range included recordable compact disks (CD-R) rewritable compact disks (CD-RW), pre-recorded CD/DVD, digital versatile disks in optical media and compact cassettes, microfloppy disks and digital audio tapes in magnetic media segment and home entertainment business. The case was referred to the Transfer Pricing Officer, New Delhi with the approval of CIT-II, New Delhi u/s 92CA of the I.T Act, 1961. The order of the Transfer Pricing Officer-1(3) was passed u/s 92CA (3) of the I.T Act, 1961 on 31/10/2011 where by the TPO has proposed following enhancements in the total income of the assessee for the international transactions undertaken by the assessee.

The Assessing Officer vide order dated 30/12/2012 passed an assessment order thereby making various additions.

Being aggrieved by the Assessment Order, the assessee has filed the present appeal before us.

The Ld. AR submitted that Ground No. 1 is general in nature. Hence Ground No. 1 is dismissed.

As regards Ground No. 2 relating to exports to AE, the Ld. AR submitted that during the relevant assessment year, the assessee supplied CD’s, Floppies etc. to its overseas AEs, viz., Global Data Media FZ LLC, Dubai (‘GDM’), European Optic Media Technology Gmbh (‘Europtic’} and OM&T BV (‘OM&T’) worth Rs.544.76 crores. The AEs were engaged in re-selling/ distribution of such products. For benchmarking the aforesaid international transaction, the assessee selected TNMM as the Most Appropriate Method (‘MAM’) applying Operating Profit/Sales (‘OP/Sales’) as the Profit Level Indicator (‘PLI’) and selected its overseas AEs as tested party, since the same were least complex. The benchmarking analysis of assessee is as under: Particulars Results No. of Comparable Companies 9 Average OP/Sales 2.75% AEs (GDM, Europtic and OM& -1.61%, -44.89%-134.20% TOP/Sales Thus, the tested party, i.e., the overseas AEs have earned less profit than its comparables. Accordingly, the international transaction was considered to be at arm’s length price. The TPO, by relying upon the TP orders for A.Ys 2005-06 & 2006-07, rejected the assessee’s action of selecting overseas AEs as tested party. By relying upon the said orders, he also rejected the PLI selected by the assessee. Further, by relying upon the TP order for A.Ys 2006-07, the TPO considered assessee as tested party and Operating Profit/ Total Cost (‘OP/ TC’) as PLI. The TPO also used internal TNMM as MAM and compared assessee’s profit of AE segment with the profit of non- AE segment. The Ld. AR submitted that transfer pricing adjustment cannot exceed profit of foreign AE. The Ld. AR relied upon the decision of this Tribunal in assessee’s own case for the A.Ys 2003- 04, 2005-06 & 2006-07. (Moser Baer India Ltd. Vs. DCIT 93 Taxmann. Com 79). The aforesaid decision was pronounced by this Tribunal on the basis of another decision of this Tribunal in assessee’s own case for the A.Y 2002-03 and the decision of Delhi High Court in the case of CIT Vs Global Ventedge (P) Ltd.: ITA 1828/ 2010 (SLP against this decision has been dismissed by the Supreme Court in CC No.21808/ 2013). The Ld. AR submitted that in the present case, all the 3 AEs had incurred losses in their audited financial statements for the relevant period. The Ld. AR submitted that following the decision of this Tribunal in assessee’s own case for the preceding assessment years and the decision of Delhi High Court in the case of Global Vantedge (P) Ltd. (supra), the transfer pricing adjustment in the present case calls for being deleted in totality. Without prejudice, the Ld. AR submitted that, foreign AE can be considered as a tested party as upheld by this Tribunal in assessee’s own case for the AYs 2003-04, 2005-06 & 2006-07. Thus, the Ld. AR submitted that the aforesaid transfer pricing adjustment shall not sustain at all.

The Ld. DR relied upon the Assessment Order & order of TPO.

We have heard both the parties and perused all the relevant material available on record. For AYs 2003-04, 2005-06 & 2006-07, the Tribunal held as under:- “7.8. On perusal of observations by Coordinate Bench of this Tribunal in assessee’s own case for assessment year 2002-03 (supra) which has been reproduced in earlier part of this order, it is observed that during assessment year 2002-03, assessee filed before Ld. TPO sufficient evidence to substantiate its claim of ALP not exceeding maximum amount received by Associated Enterprises from customers and actual value of international transactions.

As regards to Ground No. 3 relating to Transfer Pricing addition in respect of interest on loan given to foreign A.E, the Ld. AR submitted that the assessee had granted loan to its foreign AE, viz., Peraround Ltd., Cyprus and received interest of Rs.99,17,287 thereupon @ Euribor + 200 basis points, which was equivalent to 6.41%. The assessee for the purpose of benchmarking the aforesaid transaction and computing ALP thereof, considered returns available on investment opportunities in India (bank FD, certificate of deposit, commercial paper etc.) as reduced by the country risk premium of investing in the Indian market, which was equivalent to 4.69% (7.88%- 3.19%). The TPO benchmarked the aforesaid transaction @ 17.26% by applying the yield rate on corporate bonds. The said rate was computed by TPO on the basis of information received by him from various banks/ investment companies in India. The DRP directed the TPO to apply the Prime Lending Rate (‘PLR’) prescribed by RBI @ 13.25% to benchmark the transaction. The Ld. AR submitted that the aforesaid loan was granted by assessee in preceding assessment year, viz., A.Y. 2007-08, wherein, the interest rate charge by assessee was accepted to be at arm’s length price. Accordingly, under identical facts and circumstances, TPO cannot deviate from a settled position. The Ld. AR further submitted that the arm’s interest rate in respect of loan advanced to foreign A.E., LIBOR/EURIBOR should be taken as benchmark. The Ld. AR relied upon the following decisions, wherein, it has been held that, arm’s interest rate in respect of loan advanced to foreign AE should be computed based on interest rate applicable to currency in which loan has to be repaid (PLR is not relevant for foreign currency loans and LIBOR/ EURIBOR only can be considered for benchmarking the same):

The Ld. DR relied upon the Assessment Order.

We have heard both the parties and perused all the relevant material available on record. It can be seen that interest rate in respect of loan advanced to foreign AE should be computed based on interest rate applicable to currency in which loan has to be repaid. The assessee had granted loan to its foreign AE, viz., Peraround Ltd., Cyprus and received interest of Rs.99,17,287 thereupon @ Euribor + 200 basis points, which was equivalent to 6.41%. The assessee for the purpose of benchmarking the aforesaid transaction and computing ALP thereof, considered returns available on investment opportunities in India (bank FD, certificate of deposit, commercial paper etc.) as reduced by the country risk premium of investing in the Indian market, which was equivalent to 4.69% (7.88%- 3.19%). The aforesaid loan was granted by assessee in preceding assessment year, viz., A.Y. 2007-08, wherein, the interest rate charge by assessee was accepted to be at arm’s length price. Thus, the TPO was not correct in deviating its own decision from the previous year as per the rule of consistency. Besides this, the Ld. AR’s reliance on the decision of Jurisdictional Delhi High Court in the case of Commissioner of Income-tax -I v. Cotton Naturals (I) (P.) Ltd. 231 taxman 401 is very apt. The Hon’ble High Court held as under: “28. We do not agree with the finding recorded in paragraph 5 of the TPO’s order that the comparable test to be applied is to ascertain what interest would have been earned by the assessed by advancing a loan to an unrelated party in India with a similar financial health as the taxpayer’s subsidiary. The aforesaid reasoning is unacceptable and illogical as the loan to the subsidiary AE in the instant case is not granted in India and is not to be repaid in Indian Rupee. It is not a comparable transaction. The finding of the TPO that for this reason the interest rate should be computed at 14% per annum i.e. the average yield on unrated bonds for Financial Years (FY, for short) 2006-07, has to be rejected.”

As regards Ground No. 4 relating to deduction under Section 10B to be allowed without setting off the losses of other units, the Ld. AR submitted that the assessee had claimed deduction u/s 10B of the Act in respect of eligible unit without setting off losses of other units. The A.O/DRP held that section 10B deduction is allowable post setting off losses of other units. The Ld. AR submitted the present issue stands settled in favour of the assessee by the decision of Supreme Court in the case of CIT vs Yokogawa India Ltd.: 391 ITR 274, wherein, it has been held that, the state of deduction for section 10A would be while computing across total income of eligible undertaking under Chapter IV of the Act and not at the state of computation of total income under Chapter VI of Act, i.e. before setting off losses of other units.

The Ld. DR relied upon the Assessment Order.

We have heard both the parties and perused all the relevant material available on record. The issue of claiming deduction u/s 10B of the Act in respect of eligible unit without setting off losses of other units stands settled in favour of the assessee by the decision of Supreme Court in the case of CIT vs Yokogawa India Ltd.: 391 ITR 274, wherein, it has been held that, the state of deduction for section 10A would be while computing across total income of eligible undertaking under Chapter IV of the Act and not at the state of computation of total income under Chapter VI of Act, i.e. before setting off losses of other units. Ground No. 4 is allowed.

The Ld. DR relied upon the Assessment Order.

We have heard both the parties and perused all the relevant material available on record. The issue of reduction of deduction u/s 10B on account of sale of forward exchange contract is already decided in favour of the assessee for A.Y. 2003-04, 2005-06 and 2006-07 by the Tribunal. The Tribunal held as under: “5.3. We have perused the submissions advanced by both the sides in the light of the records placed before us and the judicial decisions relied upon by Ld. AR.

As regards to Ground No. 6 relating to reduction of deduction u/s 10B on account of scrap sale, the Ld. AR submitted that the Assessee claimed deduction u/s 10B in respect of Scrap sales. The Assessing Officer, however, held the same to be not derived from business undertaking. The DRP erroneously directed the Assessing Officer to exclude scrap sales from the purview of deduction under section 10B. Scrap sales are sales made by assessee’s existing exports business only. The Revenue has not been able to point out any other business from which such sales have been made. The issue is covered in favour of assessee by following decisions:

The Ld. DR relied upon the Assessment Order.

We have heard both the parties and perused all the relevant material available on record. Scrap sales are sales made by assessee’s existing exports business only and the Revenue was not able to point out any other business from which such sales were made. The decisions relied by the Ld. AR are applicable in the present case. The Hon’ble Karnataka High Court in case of GE BE (P) Ltd. (supra) held as under:

As regards to Ground No. 7, relating to disallowance of royalty/technical know-how, the Ld. AR submitted that during the relevant assessment year, the assessee made payment on account of royalty/ technical know-how and claimed deduction for the same. The assessing officer relying upon the decision of Supreme Court in the case of Southern Switchgear vs. CIT: 232 ITR 359 disallowed 25% of the total expenditure and held the same to be capital in nature. The Ld. AR submitted that the aforesaid issue stands covered in favour of assessee by the decision of this Tribunal in assessee’s own case for the assessment years 2003-04, 2005-06 & 2006-07.

The Ld. DR relied upon the Assessment Order.

We have heard both the parties and perused all the relevant material available on record. The Tribunal in assessee’s own case for A.Ys. 2003-04, 2005-06 and 2006-07 held as under:

As regards to Ground No. 8 relating to disallowance u/s. 14A, the Ld. AR submitted that the Assessing Officer, in the assessment order, without recording any satisfaction as to nexus of exempt income earned with expenses incurred by assessee during the relevant assessment year proceeded to make disallowance under section 14A of the Act by applying the provisions of Rule 8D. The Assessing Officer relied upon the decision of Daga Capital (ITAT) (SB) which stands overruled by the Mumbai High Court in the case of Godrej & Boyce vs. CIT: 328 ITR 81. The Ld. AR submitted that, even after coming into existence of Rule 8D, recording of satisfaction by the Assessing Officer qua nexus of exempt income earned with expenses incurred by assessee is a sine qua non, which is not complied with by the Assessing Officer in the present case. The Ld. AR relied upon the following decisions: • Maxopp Investment Ltd. vs CIT: 402 ITR 640 (SC) • Eicher Motors Ltd. Vs CIT: 398 ITR 51 (Delhi HC) • Associated Law Advisers Vs. ITO : 87 taxmann.com 148 (Delhi ITAT)

We have heard both the parties and perused all the relevant material available on record. The Ld. AR submitted that there is no exempt income earned by the assessee during the present assessment year. But the applicability of Rule 8D can not be done away by the assessee. The Ld. AR relied upon the decision of Maxopp Investment Ltd. (supra) wherein it is held as under: “41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.”

The Ld. DR relied upon the Assessment Order.

We have heard both the parties and perused all the relevant material available on record. During the present assessment year, the assessee had issued Zero Coupon Foreign Currency Convertible Bonds (‘FCCB’) with a total issue size of US$ 150 million to be listed in Singapore Stock Exchange. The said FCCB could not be issued/sold to/in India, USA or Canada. The issue was made in 2 Tranches of USD 75 million each. The gross yield to maturity (‘YTM’) of Tranche A was fixed at 6.10% p.a. and for Tranche B was 6.75% p.a., with compounding done on a semi-annual basis. The bond-holders also had an option of converting their FCCB’s into equity shares anytime on or after 31.07.2007 until 11.06.2012. The assessee incurred expenses of Rs. 10,33,76,854 on issue of FCCB’s and claimed the same as deduction in the return of income. These facts were not disputed by the Revenue at any point of time. The said expenditure, in accordance with the provisions of Section 78 of the Companies Act, 1956, was debited to Securities Premium account and not charged to P&L account by the assessee. Accordingly, the same was claimed as deduction in the return of income as a separate line item. The Hon’ble Delhi High Court in the case of CIT vs. Havells India Limited 352 ITR 376 had held that expenditure incurred on issue of debentures is to be allowed as revenue expenditure despite indications to effect that debentures are to be converted in near future into equity shares. Thus, the issue is squarely covered by the Hon’ble Delhi High Court decision. Ground No. 9 is allowed.

As regards to Ground No. 10 relating to disallowance of redemption premium amortised in respect of FCCB, the Ld. AR submitted that the assessee, for the purpose of payment of redemption premium to bond-holders in future, amortized the same in books of accounts over the tenure of bonds, on a prudent basis, as the same was an ascertained liability. The premium amortised every year, in accordance with the Company Law provisions, was also debited to Securities Premium account and not charged to P&L account. Accordingly, the same was claimed as deduction in the return of income as a separate line item. During the relevant assessment year, the assessee charged an amount of Rs.30,47,84,267 towards provision for redemption premium. Out of the same, an amount of Rs.4,35,97,176 (proportionate interest expenditure qua FCCB utilization towards purchase of capital assets) was suo motu not claimed as deduction in the return of income. Only Rs.26.11,87,091 (difference of Rs.30,47,84,267 - Rs.4,35,97,176) was claimed as deduction in the return of income. The Assessing Officer/ DRP disallowed the aforesaid redemption premium amortization by holding that the same is unascertained and contingent in nature. The Ld. AR submitted that at the end of the relevant assessment year, the FCCB were in the nature of debt and conversion thereof into equity, was solely at the option of the bond-holder. Accordingly, as a prudent businessman, the assessee was required to ascertain the future liability and create provisions in respect thereof. The Ld. AR also submitted that, in reality, only 1 % (approx.) of bond holders exercised the option of conversion. In-fact, on the basis of circumstances prevailing at the relevant time, conversion of bonds into equity shares was not at all a viable option for bond-holders, since, the market price of equity shares was much lower than FCCB price, due to global recession and crashing of share markets in India. The Ld. AR submitted that, in respect of the conversion of 1% (approx.) of FCCB by bond-holders into equity shares in subsequent years, the premium already amortized was reversed in books of accounts and was offered to tax in the return of income. The Ld. AR further submitted that it is a trite law that interest on debentures is an allowable expenditure. The Ld. AR relied upon the decision of Supreme Court in the case of Taparia Tools Limited vs JCIT: 372 ITR 605, wherein, it was held that, one time upfront discounted interest payment in respect of 5 years debentures was to be allowed as deduction in year of payment itself. The Ld. AR further submitted that the Apex Court also held that a different treatment towards interest in books of accounts could not be a factor which would deprive assessee from claiming entire expenditure as a deduction. Further, the Ld. AR submitted that the Courts in various decisions have also held that, premium on redemption of FCCB can be amortized over the life of FCCB and be claimed as deduction in the return of income. The Ld. AR pointed out the decision of Mumbai High Court in the case of CIT vs. S.M. Holding & Finance Pvt. Ltd.: 264 ITR 370. In that case, the assessee had issued zero interest unsecured redeemable convertible debentures of Rs.100 each redeemable after 10 years at a premium of 100%. Assessee claimed before the assessing officer a spread over. Assessee claimed that the premium payable by it was Rs.5,47,50,000 after expiry of 10 years. However, the assessee claimed deduction of Rs.54,75,000 p.a. The Assessing Officer disallowed the assessee’s claim for deduction of Rs. 54,75,000 on the ground that the liability was not ascertainable. The Assessment Order was confirmed by the CIT(A). However, the Tribunal overruled the CIT(A)’s order in view of the judgment of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT: 225 ITR 802. On further appeal, the High Court affirmed the decision of the Tribunal by holding that, since, during the relevant assessment year, no conversation was made, the redemption premium amortization was allowable as deduction. The Ld. AR also relied upon the following decisions: • CIT vs Shree Rajasthan Syntex Ltd.: 269 ITR 461 (Rajasthan High Court) • CIT vs Torrent Pharmaceuticals Ltd.: 393 ITR 625 (Gujarat High Court) • DCIT vs UAG Builders (P) Ltd.: 53 SOT 370 (Delhi ITAT) • Mahindra & Mahindra Limited Vs DCIT: 54 SOT 146 (Mumbai ITAT) • LMN India Limited: 307 ITR 40 (AAR)

The Ld. DR relied upon the Assessment Order.

We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee, for the purpose of payment of redemption premium to bond-holders in future, amortized the same in books of accounts over the tenure of bonds, on a prudent basis, as the same was an ascertained liability. The premium amortised every year, in accordance with the Company Law provisions, was also debited to Securities Premium account and not charged to P&L account. Accordingly, the same was claimed as deduction in the return of income as a separate line item. During the relevant assessment year, the assessee charged an amount of Rs.30,47,84,267 towards provision for redemption premium. Out of the same, an amount of Rs.4,35,97,176 (proportionate interest expenditure qua FCCB utilization towards purchase of capital assets) was suo motu not claimed as deduction in the return of income. Only Rs.26.11,87,091 (difference of Rs.30,47,84,267 - Rs.4,35,97,176) was claimed as deduction in the return of income. At the end of the relevant assessment year, the FCCB were in the nature of debt and conversion thereof into equity, was solely at the option of the bond-holder.

In result, A.Y. 2008-09 filed by the assessee is partly allowed for statistical purpose.

The Ld. AR during the course of hearing submitted that the other Assessment Years i.e. 2009-10 and 2010-11 are identical. The Ld. DR submitted that the grounds of assessee’s appeal in all the three assessment years are identical.

We have heard both the parties and perused all the relevant material available on record. The issues are identical in the appeals filed by the assessee for A.Ys. 2009-10 and 2010-11. Hence, and 1617/DEL/2015 are partly allowed as per the direction given in 2008-09 for each identical ground separately.

In result, and 1617/DEL/2015 are partly allowed for statistical purpose.

As regards, the Revenue’s appeal for Assessment Year 2009-10 being the Ld. AR submitted that As regards Ground No. 1 & 2 of the Revenue’s appeal, the same is already dealt while dealing with the assessee’s appeal. Hence, the Ground No. 1 and 2 of the Revenue’s appeal are dismissed.

As regards Ground No. 3, the Ld. AR submitted that the same is relating to transaction of payment of share application which does not fall within the purview of term international transaction under Section 92B. The Ld. AR relied upon the decision of the Delhi Tribunal in case of Bharti Airtel Ltd. Vs. Additional CIT 161 TTJ 428. The Ld. DR could not controvert the same. Thus, the issue is squarely covered in favour of the assessee.

We have heard both the parties and perused all the relevant material available on record. The Tribunal in case of Bharti Airtel Ltd. (supra) held as under: “35. ……………..Suffice to say that we have reached our conclusions on the basis of the legal provisions under section 92B and no judicial precedent, contrary to our understanding of these legal provisions, has been cited before us. There is a decision of the co-ordinate bench in the case of Mahindra & Mahindra (supra), referred to in the DRP order, but that decision does not deal with the scope of amended section 92B and leaves the issue open by stating that post insertion of Explanation to Section 92B, the matter will have to be examined in the light of the amended law. We have held that even after the amendment in Section 92B, by amending Explanation to Section 92B, a corporate guarantee issued for the benefit of the AEs, which does not involve any costs to the assessee, does not have any bearing on profits, income, losses or assets of the enterprise and, therefore, it is outside the ambit of ‘international transaction’ to which ALP adjustment can be made. As we have decided the matter in favour of the assessee on this short issue, we see no need to address ourselves to other legal issues raised by the assessee and the judicial precedents cited before us. 36. For the reasons set out above, and as we have held that the issuance of corporate guarantees in question did not constitute ‘international transaction’ within meanings thereof under section 92B, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of Rs. 33,10,161. The assessee gets the relief accordingly.”

In result, filed by the Revenue for A.Y. 2009-10 is dismissed.