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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
Before: SHRI BHAVNESH SAINI & SHRI L.P. SAHU
PER L. P. SAHU, A.M. This appeal is filed by the assessee against the assessment order dated 26.12.2014 r.w. the directions given by the Ld. Dispute Resolution Panel (DRP), vide order dated 21.11.2014, challenging the addition of Rs. 46,79,119/- made on account of the International Transaction in the nature of interest on loans granted to Associated Enterprises (for short ‘AEs’) of the assessee
2. Briefly stated relevant facts are that the assessee is engaged in the business of manufacturing and trading of readymade garments and job work besides involving in the activities mainly in various subsidiaries throughout the world. Portfolio of the assessee comprises of shares and securities of many group companies and also of non group companies. In the year under consideration, the assessee declared turnover in traded 1 goods at Rs. 31,33,51,395/-. During the relevant year the assessee had undertaken various International Transactions with its AEs and, among other things, had extended loans to its AEs in dollar denomination in earlier years. The assessee filed his return of income for the AY 2010-11 on 12.10.2010 declaring a total loss of Rs. 7,94,39,127/- and during the scrutiny proceedings, in view of the International transactions entered into by the assessee with the associated enterprises, AO referred the determination of the Arm’s Length Price (for short referred to as ‘ALP’) of the International transaction to the TPO. TPO vide order dated 27.01.2014 determined the ALP of the interest transaction with the AEs at Rs. 62,50,069/- by taking the ALP of the interest at 14.88%, basing on the SBI PLR for the FY 2009-10 at 11.88% PLUS 300 basic points. Pursuant to the draft assessment order assessee carried the matter to the Ld. DRP and Ld. DRP vide order dated 21.11.2014 approved the action of the Assessing Officer (for short ‘AO’) in rejecting the rate of interest at 6% offered by the assessee and directed the AO to determine the ALP by charging the SBI base rate as on 30th June of the relevant previous year plus 150 basic points . During the impugned year the loan was less than Rs. 50.00 Crores. However, Ld. AO proceeded with the matter and by way of impugned order made an addition of Rs. 46,79,119/- on account of the ALP of the interest component as per the Income Tax Act, 1961 (for short called as the ‘Act’). Hence, the assessee is before us in this appeal.
The ld. AR of the assessee at the outset submitted that the issue in this appeal is fully covered by the judgment of Hon'ble ITAT in Assessee's own case for A.Y 2009-10 wherein similar loans to same AE's have been decided vide PARA 7 of the order in favour of the assessee. The assessee has also submitted a ground-wise written synopsis before us stating as under :
Ground-wise submissions in brief are as under Ground No. 1: It is a general in nature and does not require any submissions or adjudication.
Ground No. 2-4: TP additions Rs. 46.79.119/-;
1. The assessee is an ultimate holding company of House of Pearl Fashion Group, a multinational ready to wear apparel conglomerate. It is mainly an investment company and also trades in the readymade garments.
The major business of assessee (in short HOPFL) comprised of investment activities mainly in various subsidiaries through out the world. Its portfolio comprises of shares and securities of many group companies as also of non group companies. The group profile has been noted by the TP in Para 1 of his Order.
3. The assessee during the year under consideration had undertaken various international transactions with its AEs, which have been recorded by the TPO in Para 1.1 of his Order
4. The assessee had extended the loans to some of its AE's in Dollar denomination and the 3 AE's, to whom loans were extended during the year are as under:-
Nor Pearl Knitwear Limited, Bangladesh @ interest rate of 6% per annum. (Accepted by TPO to be at ALP vide Page No. 12, Para 3.3 of TPO's Order.)
2. House of Pearl Fashions Limited, USA @ interest rate of 6% per annum.
3. Multination Textile Group Limited, Mauritius @ interest rate of 9% per annum.
The assessee justified the rate of interest of 6% from first two AE's and interest at rate 9% from third AE's on the basis of LIBOR plus mark-up of 0.2% to 0.3%. The prevalent LIBOR rate during the period of extending the loan was 0.212% and assessee concluded that 6% rate of interest from the first 2 AE's and 9% for third AE's was on ALP.
6. During the transfer pricing proceedings, the Ld. TPO has proposed an ALP adjustment based on prime lending rate of SBI, which was 11.88% plus 300 basis points towards the risk adjustment and apply 14.88% rate of interest as an ALP for the receipt of interest and proposed an addition of Rs 62,50,069.7- as per the calculations given at Page 6 of TPO's Order dated 27.01.2014 for two AE i.e M/s House of Pearl Fashions Limited, USA and M/s Multination Textile Group Limited, Mauritius.
Assessee filed a reference before the DRP. The Ld. DRP confirmed the addition pertaining to ALP of the interest transactions. The learned DRP, however, directed to charge interest (ALP) at base rate as on 30th June of the relevant previous year plus 150 basis points as per Para 10 of DRP's order.
As per DRP's direction, the SBI base rate as on 30th June, 2009 was about 7.5% and plus 150 basis, the rate works out to be 9.00% as against 13.25% charged by the TPO/AO. The AO, thus worked out the disallowance of Rs. 46,79,119/-- as per such directions of DRP which is contested in this Appeal. 3
As regards the loan to AE's situated in USA from whom interest @ 6% has admittedly been charged by the assessee, it is prayed the same is required to be held as an appropriate ALP and TPO's/DRP's view of charging interest @ 13.25% based on PLR of SBI is required to be rejected. In the latest judgements of Hon'ble Delhi ITAT in Assessee's own [ITA No. 1589/Del/2014] directed to A.O to compute the ALP of the Interest at 6% in respect of House of Pearl Fashions Limited, USA and Multinational Textile Group Limited.
In this appeal before your honour, the Assesee Company has already charged interest at the rate 6% or more on loan and advance given to these AE's which is in line with aforesaid judgement of Hon'ble Delhi IT AT. Therefore, the issue is fully covered by Assessee's own order for A.Y 2009-10.
Moreover, There are plethora of judgments on this proposition and the issue is almost settled that in the international transaction, the rate of interest is required to be charged based on the currency, in which the loan transaction takes place and LIBOR plus 100 to 300 points have been held to be the ALP in large number of cases, some of which are given in these synopsis.
Without prejudice to the above, the rate of ALP applied by AO on the said transaction i.e. PLR of SBI plus 300 basis points towards risk adjustment is highly excessive and the addition if any should be restricted to the LIBOR plus 200 basis point, as have been held in many judgments, some of which are as under:- a) Cotton Naturals India Pvt. Ltd. Vs DCIT [2013-T11-34-ITAT-Delhi-TP]. Approved by Hon'ble Delhi High Court [TS-117-HC-2015 (DEL)-TP]. b) Aurionpro Solutions Limited [TS-474-HC-2017 (BOM)-TP]. c) The Great Eastern Shipping Co. Ltd [TS-534-HC-2017 (BOM)-TP] d) Tata Autocomp Systems Limited [TS-45-HC-2015 (BOM)-TP] e) UFO Moviez India Ltd [TS-883-HC-2016(DEL)-TP] f) Hinduja Global Solutions Pvt. Ltd. Vs. Addl. CIT [2013-T11-122-ITAT-Mumbai]. g) Siva Ventures Limited [TS-218-ITAT-2013 (Chny)-TP]. h) Northgate Technologies Limited [TS- 164-ITAT-2013 (Hyd)-TP]. i) Mahindra & Mahindra Limited [TS-408-ITAT-2012 (Mum)] j) Maharishi Solar Technology Pvt. Ltd. [TS-306-ITAT-2012 (Del)-TP]. k) iGate Computer System Ltd [TS-250-ITAT-2015 (Pun)-TPJ The aforesaid judgment of M/s. Cotton Naturals India (P) Ltd. has been upheld by the Hon'ble Delhi High Court has reported in TS-117-HC-2015 (Delhi)-TP. It has been amongst other held in Para 22 as under: The conditions prevailing in the market in which the respective parties to the transactions operate, including the geographical location and the size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition, are all material and relevant aspects. If we keep the aforesaid aspects in mind, it would be delusive not to accept and agree that as per the prevalent practice, subsidiary AEs are often incorporated to carry on distribution and marking function. This is not an unusual but common. Once this is accepted, then we cannot accept the reasoning given by the TPO that the transfer pricing adjustment could restructure the transaction to reflect maximum return that a party could have earned and this would be the yardstick or the benchmark for determining the interest payable by the subsidiary AE. This is not what Chapter X of the Act and Rules 4 mandate and stipulate. The aforesaid provisions neither curtail the commercial freedom, nor do they bar or prohibit a legitimate transaction. They permit transfer pricing adjustment so as to bring to tax what would have been paid for the transaction in the same or similar comparable circumstances by an independent third party. This issue of charging interest from the AE has now widely been held to be that ALP, when the transaction is undertaken in foreign currency, should be on LIBOR plus mark-up of 1 to 2% and cannot be the PLR of Indian Banks etc. Since assesse has already charged more than these rates, thus no adjustment is warranted on these facts. In light of aforesaid judgments, it is prayed that the amount of addition by the AO/TPO, as per the direction of DRP, may kindly be deleted.
The learned DR, on the other hand, relied on the orders of the authorities below.
5. Addressing to the issue under consideration, we observe that the same is covered in favour of the assessee and against the Revenue by the decision of Co-ordinate Bench of Tribunal dated 08.11.2017 in assessee’s own case for A.Y. 2009-10 (ITA No. 1589/Del/2014, vide para 7 of the order, which reads as under : Now coming to the rate of interest, according to the assesse 6% offered in respect of House of Pearl Fashions Limited, USA is proper, whereas in respect of Multination Textile Group Limited a nominal interest at LIBOR plus 200 basic points may be charged However, the Ld. AO charged it at 16% reduced by the Ld. CIT (A) to the SBI base rate as on 30th June of the relevant previous year plus 150 basic points which according to the assessee comes to 9.5%. On this aspect the order of the TPO as noted earlier reads that interest at 6% p. a. was acceptable in case of Nor Pearl Knitwear Limited, Bangladesh holding that in view of such concern obtaining loan at interest rate ofSIBOR plus 3% p.a. However, when the matter came to the other two concerns, he had taken a view that the arm's length rate of interest would be the interest rate expected by an Indian lender either from bank or from any mutual fond etc., and on this premise he had chosen 16% taking clue from SBIPLR plus 350 points. There is an inherent inconsistency in the view taken by the TPO because, if at all the ALP interest in so far as the assessee is concerned is the interest rate expected by an Indian lender, then irrespective of the fact of Nor Pearl Knitweard Limited, Bangladesh obtained loan at Bangladesh at any rate less than this expected rate, he should not have accepted. The tested party in the case of Nor Pearl Knitwear Limited, Bangladesh and in the case of other two concerns is the assessee only. In respect of the same tested party the TPO cannot adopt two different yardsticks. Shifting of the testing parties in the same breath is not permissible. We, therefore, in this set of circumstances agree with the Ld. AR 5 that since loans or advances in case of the two other concerns also in foreign currency, and all the three persons stand in the same footing, as such, the same treatment has to be given to them equally. With this view of the matter, we direct the AO to re-compute the ALP of the interest at 6% in respect of House of Pearl Fashions Limited, USA AND Multination Textile Group Limited, Maritius also. These grounds of appeal are allowed in part accordingly Respectfully following the decision of Co-ordinate Bench, we decide this in favour of the assessee.
In the result, the appeal of the assessee is allowed.