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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
BEFORE SHRI SHAMIM YAHYA, AM AND SHRI RAVISH SOOD, JM (Assessment Year: 2012-13) M/s. Manugraph India Limited Asst. CIT-3(2)(1) Room No. 608, 6th Floor, Sidhwa House, N. A. Sawant Marg, Vs. Colaba, Mumbai-400 005 Aayakar Bhavan, M K Road, Churchgate, Mumbai-400 020 PAN/GIR No. AAACM 7246 H (Appellant) : (Respondent) Appellant by : Shri Rajan Vora and Shri Pranay Gandhi : Shri V. Jenardhan Respondent by Date of Hearing : 06.11.2018 : 04.02.2019 Date of Pronouncement O R D E R Per Shamim Yahya, A. M.:
This appeal by the assessee is arising out of the order of the Assessing Officer
(A.O. for short) passed u/s. 143(3) r.w.s. 144C(5) & 144C(13) r.w.s. 92CA(3) of the Income Tax Act, 1961 (‘the Act' for short) dated 27.12.2016 pursuant to the direction of the Dispute Resolution Panel-3, Mumbai (‘DRP' for short) dated 23.09.2016 and pertains to the assessment year (A.Y.) 2012-13.
The grounds of appeal read as under:
PART I —TRANSFER PRICING GROUNDS: 1. Adjustment of Rs.96,08,615/- on account of interest on loans advanced to Associated Enterprise (AE) 1.1 erred in making an adjustment under Section 92CA(3) of the Act of Rs.96,08,615/- on 1.2 erred in making the addition on account of interest on loan given by Appellant to its AE, without appreciating the fact that the Appellant has charged interest at 6 months LIBOR + 400 bps on the advances given to the AE after considering the internal CUP of: a) LIBOR+200 bps being interest charged by SB! on foreign currency loans taken by MIL: and b) LIBOR+350 bps being interest charged by foreign bank to MDGM on line of credit advanced to AE 1.3 erred in making the interest adjustment on advances given to AE, without appreciating the fact that the said advances have been provided out of internal accruals of the Appellant and no cost is associated with the said advances: / 1.4 erred in not accepting the fact that the advances given by the Appellant to its AEs (wholly owned subsidiaries), were in the capacity of the parent company, under commercial expediency and in business interest of the Appellant itself and hence, is a shareholder activity: 1.5 erred in conducting fresh search analysis using Bloomberg database and thereby converting the floating LIBOR based rate of interest charged by the Appellant into fixed rate of interest at 6.819% while determining the ALP of the interest to be charged on loan advanced to AE; 1.6 Without preludice to the above, erred in violating the principles of judicial discipline in not following the orders of the Honble Tribunal in Appellants own case for AY 2008-09, AY 2009-10 and 2010-11 wherein the Honble Tribunal has held that the 6 months LIBOR+200bps as Arm's length price for interest on loans given to foreign AE; 1.7 Without prejudice to above, erred in not following the direction of DRP to re- compute interest based on number of days for which loan was outstanding and computing adjustment of interest on account of loans advanced to AE at Rs.96,08,615 as against Rs.79,33,205 computed by the Appellant on account of the following: calculating the interest on loans given to AE for period 365 days as against the a) actual period of 315 days (ie from 1 April 2011 to 9 February 2012) and thereby making an adjustment of excess interest for period of 51 days; and computing interest charged by Appellant at the rate of 4.522% p.a., for the entire b) period, without appreciating the fact that, during the year. the Appellant had charged different rates at six months LIBOR + 400 bps (ie. 4.522%, 4.7799% and 4.797%) for the loans given to its AE.
2. Interest under section 234B and Section 234C of the Act 2.1 erred in levying interest of Rs33,49,209 under section 234B of the Act and interest of Rs.34,15,348 under section 234C of the Act: 3. Non-grant of credit of dividend distribution tax of Rs.74,01,125 3.1 erred in not granting credit of dividend distribution tax paid of Rs.74,01,125/- 4. Initiating penalty under Section 271(1)(c) of the Act 4.1 erred in initiating penalty proceedings under Section 271(1)(c) of the Act.
Apropos transfer pricing issue of adjustment of Rs.96,08,615/- on account of interest on loan advance to Associated Enterprise (AE).
The Transfer Pricing Officer (TPO for short) on this issue proposed adjustments after considering the assessee’s response. The TPO's order can be gainfully read as under:
4. Interest on advances given to the AE Following is the summary of the loan transactions with M-DGM for the year ended 31st March, 2012: Date of issue/payment Loan amount USD Period Period To No. of From Days
Opening balance 8,056,996.98 01.04.2011 31.03.2012 365 27.09.2011 (127,700.63) 01.04.2011 26.09.2011 179 01.10.2011 185,508.00 01.10.2011 31.03.2012 92 01.01.2012 99,305.00 01.01.2012 31.03.2012 40 Total USD 7,977,700.63 It was submitted by the assessee that the company has charged interest on the above loan at USD 6 months LIBOR plus 400 basis points. 4.1 In accordance with the decision of Hon'ble Bombay High Court in the case of Tata Autocomp Systems Ltd., it is proposed that the benchmarking of the interest on the said has to be done on the basis of LIBOR. A search
The assessee’s objection in this regard was rejected by the DRP. The DRP's
order is as under:
4.19 The submission made by the assessee has been considered. The assessee has relied on the judgement of Hon'ble ITAT wherein a six month LIBOR+200 bps has been held to be proper arms length interest rate. It has also relied on foreign currency loans obtained by itself at LIBOR+200bps from SBI as well as line of credit advanced to MGDM Inc. at LIBOR+350bps. It has objected to the use of fixed rate LIBOR by the TPO according to which a benchmark rate of 6.819% has been adopted. The TPO, on the other hand, has held LIBOR+400bps to be a proper arm's length interest rate. He has relied on Bloomsberg database of loans in US while computing the LIBOR rate, and has arrived at the average spread of all USD loans made in US at 170.64 bps and by converting floating rate LIBOR+170bps to a fixed rate interest for a loan of five year duration, an interest rate of 6.819% has been arrived at. The TPO has used Bloomsberg data base to arrive at this value. 4.20 The reliance placed by the assessee on earlier judgements of the hon'ble ITAT is not found to be in accordance with the facts of the case. It is seen that the facts in the current year are totally different from that in those years when the Department did not have access to reliable data and the benchmarking was done on estimate basis. In that year, the department had not relied on proper and reliable data base in order to arrive at the correct spread and the correct LIBOR. Accordingly, the hon'ble ITAT was constrained to use the best possible data in order to ensure justice. 4.21 In the current year, reliable data in the form of Bloomsburg data base has been used by the TPO to arrive at the correct spread as well as the correct LIBOR to be used in respect of the tenure of 5 years. The comparables presented by the assessee are found to be not applicable to the facts of this case. The SB! loan has been taken by The assessee and not by the AE. The credit rating of the AE is different. Hence, the loan taken by the assessee cannot be taken as proper CUP. Similarly, the line of credit obtained by the AE is a short term arrangement and cannot be compared to a term loan of 5 years. The TPO has used the bloomsberg data base for searching out the interest rate spread and LIBOR for the tenure for which the assessee has advanced these loans Hence, the data used by the TPO is found to be more accurate and reliable. In light of this factual position, the various instances cited by the assessee are not liable to be followed. 4.22 The interest rate of 6.819% arrived at by the TPO is confirmed. The objection raised by the assessee is dismissed. 4.23 The assessee has raised a ground about incorrectness of the computation of interest by submitting that the TPO has computed interest for the entire year while the actual period of loan was 315 days. The TPO is directed to re-compute the interest based on the number of the days for which the loan was outstanding. 4.24 The assessee has also sought benefit of the safe harbour of 5% as contemplated under second proviso to section 920(2). Needless to say, the assessee would be eligible to the said benefit only if the adjustment is within the specified percentage of the international transaction (the actual interest charged by the assessee). In case the adjustment exceeds the specified percentage, the entire difference would be liable to adjustment.
Against the above order, the assessee is in appeal before us. The assessee’s
submissions are as under:
2.15 At the outset, the Appellant submits that the interest on loans advanced to MDGM at LIBOR+400bps is at arm's length since the Hon'ble Mumbai Tribunal in Appellant's own case for AY 2008-09 to AY 2010-11 has accepted the transaction to be arm's length at floating rate of LIBOR+2% (Copy enclosed at 169 to 182, 183 - 192 and 193204 respectively of the paper-book), In AY 2008-09 (refer page 169 to 182 of the paper-book), the Hon'ble Tribunal has held
We have considered the rival submissions as well as relevant material record. At the outset, we note that this issue of arm's length Interest in respect of the loan provided by the assessee to its AE has been considered by the Tribunal in the series of decisions relied upon by the assessee. The Tribunal in the case of Everest Kanto Cylinder Ltd. (supra), has considered this issue in para 11 and 12 as under:- 11. We had considered rival contentions and gone through the orders of lower authorities. As per our considered opinion, appropriate international rates should be used for the purpose of the comparability analysis. For this purpose, the London Inter-Bank Offer Rate (LIBOR) is an internationally recognized rate for benchmarking loans denominated in foreign currency. For this purpose, reliance may be placed on the following decision of the coordinate bench.-- Great Eastern Shipping Co.Ltd (ITA No 397/M12012) dated 10 January 2014; i) Mahindra & Mahindra Limited (ITA No 7999/M/2011) dated 8 June 2012; ii) iii) Hinduja Global Solutions Limited (ITA No 2541M12013) dated 5 June 2013 iv) Aurionpro Solutions Limited (ITA No 7872/M1201 1) dated 12 April 2013: Aurobindo Pharma Ltd (ITA No 1866/Hyd/2012) dated 29 November 2013: v) vi) Cotton Naturals (I) Pvt. Limited (ITA No 5855/Del/2012) dated 8 February 2013; vii) Siva Industries and Holdings Ltd. vs ACIT, ITAppeal No. 2148 (Mds.) of 2010; viii) Bharti Airtel Ltd (ITA No 581 610e11201Z) dated 11 March 2014 ix) Infotech Enterprises Limited (I TA No 115/Hyd/201 1) dated 16 January 2014: 12. In light of the above decisions, the rate to be used for undertaking an adjustment should be LIBOR and not the average yield rates considered by the learned TPO. The LIBOR rate for March 2008 was 2.6798%. However the assessee has charged 7% from its AE as per the internal CUP available. Thus, the assessee has charged interest to EKC Dubai and EKC China at the rate higher than existing LIBOR rates. Accordingly, the said transaction of providing loan to EKC Dubai and EKC China is at arm's length. Additions made by the AO are accordingly set aside." Following, the orders of this Tribunal, we direct the AO/TPO to adopt 13. LIBOR +2% as arm's length interest in respect of loan provided by the assessee to its AE."
2.16 Further, the Tribunal in Appellant's own case for AY 2009-10 in the order dated 13 April 2016 (Refer page no 183 to 192 of the paperbook) has held as under: 7. The line of reasoning adopted in this case, as evident from a reading of the orders of the authorities below, was materially similar to the reasoning adopted in the case of UFO Movies (supra) which has been rejected by the coordinate benches/ Respectfully following the views of the coordinate benches, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned arm's length price adjustment of Rs 1,35,05,896 in respect of interest on loan advanced to the AE. The assessee gets the relief accordingly. 2.17 Also, the Tribunal in Appellant's own case for AY 2010-11 in the order dated 16 September 2015 (Refer page no 193 to 204 of the paperbook) has held as under: "The applicability of interest rate based on LIBOR had come-up for consideration before the Tribunal in the case of the assessee in AY 2008-09 wherein, the Tribunal relying upon the decision of the Co-co-ordinate Bench in the case of Everest Ken to Cylinder Ltd. (supra) had directed the Assessing Officer/TPO to adopt LIBOR +2% as Arm's lengths interest. As pointed out by the Ld. Counsel,
Tribunal in the case of Everest Kento Cylinder Ltd. has been upheld by the Hon'ble Bombay High Court in the Income Tax Appeal No. 1165 of 2013. Thus, following the earlier years precedence, we also hold that interest rate charged by the assessee on the loan given should be benchmarked with LIBOR +2% as Arm's Length and, therefore, no adiustment is called for. Thus, ground no. 1 as raised by the assessee is treated as allowed." 2.18 Further, in this regard, reliance is also placed on following decisions wherein LIBOR rates have been affirmed for benchmarking loans given to foreign subsidiaries: • Cotton Natural India Pvt. Ltd. (ITA no. 233/2014) dated 27 March 2015 (Delhi HC) • Tata Autocomp Systems Ltd (ITA No 1320/2012) dated 13 February 2015 (Bombay HC) • Aurionpro Solutions Ltd (Bombay HG) (ITA no. 1869 of 2014) dated 9 June 2017 (Bombay HG) 2.19 In light of the above, it is respectfully submitted that since the Appellant has recovered interest at 6 months LIBOR+400 bps which is higher than internal CUP available of LIBOR+200 bps and LIBOR+350 bps, the interest charged by the Appellant at 6 months LIBOR+400 bps is at arm's length. Accordingly, the directions issued by the Hon'ble DRP are in violation of principles of judicial discipline and needs to be quashed. 2.20 Further, the Appellant respectfully submits that the Appellant has consistently recovered interest based on 6 months LIBOR+200 bps (floating rate) based on internal CUP available from the AE from AY 2008-09 to AY 2011-12, which has been accepted by the Honble Tribunal in all the past years. Accordingly, it is respectfully submitted that the approach adopted by the learned TPO/ DRP of converting the floating LIBOR rate to fixed rate of 6.819% is not warranted as the floating rate at LIBOR+200 bps has been consistently been approved by the Hon'ble Tribunal in Appellant's own case for AY 2008- 09 to AY 2010-11. In this regard, reliance is placed on following decisions wherein it has been held that as the facts of the case remain the same through different assessment years, mode of assessment cannot be changed without reasons in view of the principle of consistency and accordingly, no disallowance is warranted in the instant year: • Radha Saomi Satsang v CIT (193 ITR 321). • CIT v Berger Paints (266 ITR 99 (SC)) • DhansiRam Aggarwalla v CIT (217 ITR 4 (Gau)) • CIT V Shree Ram Memorial Foundation (158 ITR 3 (Del)) • CIT v Neo poly Pack (245 ITR 492 (Del)) • UDI v Kuomidini Narayan Dalal and Another (249 ITR 219 (SC)) • UOl v Satish Panna Lal Shah (249 ITR 221 (SC)) • CIT v J.K. Charitable Trust (308 ITR 161 (SC)) • Racold Thermo Limited (ITA No.1454/PN/2010) dated 11 September 2015 • Affinity Express India Pvt Ltd (ITA No.595/PN/2013) dated 29 April 2015 2.21 In light of the above decisions, it is respectfully submitted that the floating rate charged by the Assessee at 6 months LIBOR+400 bps charged by the Assessee based on Internal CUP available is at arm's length in respect of transaction of loans provided by the Assessee to its AE and thereby the adjustment made by the TPO of Rs.98,08,615/- should be deleted. Without prejudice submissions: 2.22 It is respectfully submitted that the learned AD has erred in not following the direction of Hon'ble DRP to re-compute the interest based on the number of the days for which the loan was outstanding. While doing so, the learned TPO/ AG has made following errors:
AE for period 365 days as against the actual a) period of 315 days (ie from 1 April 2011 to 9 February 2012) and thereby making an adjustment of excess interest for period of 51 days; and computing interest charged by Appellant at the rate of 4.522% pa., for the entire b) period, without appreciating the fact that, during the year, the Appellant had charged different rates at six months LIBOR + 400 bps (le. 4.522%, 4.7799% and 4.797%) for the loans given to its AE. (Refer the rectification application filed by the TPO for working of correct information at page 221 to 226 of the paperbook) 2.23 Accordingly, it is respectfully submitted that if the said errors are rectified the adjustment shall reduced to Rs.79,33,205 as against Rs.96,08,615 as computed by the learned AO/ TPO.
The ld. Departmental Representative (ld. DR for short) placed reliance on the orders of the authorities below. He submitted that the loan was converted into equity. SBI loan was at floating rates. Hence the precedents referred are not applicable on these facts.
Hence, the adjustment in the rates made by the T.P.O is justified. That earlier there was an error due to absence of proper data, which has now been corrected.
Upon careful consideration, we find that on identical issue, the ITAT in assessee’s own case has accepted floating rate of LIBOR +2% for bench marking. To the same effects are the decision of ITAT in other cases and Hon'ble Bombay High Court as referred in assessee’s submission above.
Further, the Revenue’s claim that the Revenue has now become wiser, as now more data are available, is not at all sustainable, as it has been duly submitted that AE has raised finance at LIBOR +350bps which has not been controverted by T.P.O. The DRP also has discussed and rejected the rate of loan taken by the assessee from SBI. But it has not dealt with assessee’s submission that AE itself has raised finance in foreign country on LIBOR+350 bps. Accordingly the rate adopted of LIBOR+400 bps in the present case is adequate on the fact and circumstance of the case and precedents referred above. The assessee succeeds on its alternative ground also. The DRP has given a direction that the period
TPO for application of interest on loan was to be verified and interest was to be computed for the actual period the loan was outstanding. The A.O./TPO has failed to address this issue. So the amount of adjustment made by the A.O./TPO being erroneous is not sustainable. In any case, this issue is of academic consequence since we have already upheld the rate adopted by the assessee. Hence, we set aside the orders of the authorities below and decide the issue in favour of the assessee.
Apropos ground relating to non grant of credit of dividend distribution tax of Rs.74,01,125/-.
The assessee’s submissions are as under:
3.1 The Appellant received a notice of demand under section 156 of the Act of Rs.1,30,75,990/- for the year under consideration. The said demand includes Rs.74,01,125/- being additional income tax payable on distributed profits. 3.2 In this connection, the appellant wishes to submit that MIL declared a dividend of Rs.456.23 Iakhs in the Annual General Meeting held on 27 September 2011 and paid tax of Rs.74,01,125/- under section 1150 of the Act on 28 September 2011., However, inadvertently the assessment year mentioned in the challan was AY 2011-12 instead of AY 2012-13. (Refer copy of challan at page no 241 to 244 of the paperbook). 3.3 In view of the above, we request your Honour to direct the AO to grant credit of dividend distribution tax of Rs.74,01,125/-.
Apropos additional ground relating to short grant of TDS credit of Rs.11,90,046/-
The assessee’s submissions are as under:
5.1 The A0 in the Income-tax Computation form issued along with notice under section 156 of the Act and the Assessment order dated 27 December 2016, had erroneously granted TDS credit amounting to Rs. 3343.423 as against Rs. 45,33,469 as claimed by the Appellant in return of income. 5.2 In view of the above, there has been short grant of credit of TDS amounting to Rs.11,90,046. TDS details of the Appellant for the year under consideration is as below: As claimed by Appellant In As per the credit granted by Short credit of TDS ROI A.O. Rs.45,33,469 Rs.33,43,423 Rs.11,90,046 5.3 In this regard, the Appellant respectfully submits that the learned A.O. be directed to grant TDS credit amounting to Rs.45,33,469/- as calimed by the Appellant in the return of income filed under section 139(1) of the Act as against Rs.33,43,423/- granted by the A.O.
We find that both the above grounds were not raised before the D.R.P. The issues raised cannot be made to be a part of appeal before the ITAT. Nevertheless on the touchstone of the Hon’ble Apex Court decision in the case of CIT v/s. Shelly Products 261 ITR 367, we direct that the A.O. may consider the issue raised as per law and factual verification.
12. In the result, this appeal by the assessee is allowed as above.
Order pronounced in the open court on 04.02.2019