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Income Tax Appellate Tribunal, DELHI BENCHES : I-1 : NEW DELHI
Before: SHRI R.S. SYAL & SMT. BEENA A. PILLAI
Date of Hearing : 19.07.2018 Date of Pronouncement : 23.07.2018 ORDER PER R.S. SYAL, VP: This appeal filed by the assessee is directed against the final assessment order dated 20.02.2015 passed by the Assessing Officer (A.O.) u/s 254/143(3) read with section 144C of the Income-tax Act, 1961
(hereinafter also called ‘the Act’) in relation to the assessment year 2002- 03.
The first issue raised in this appeal is against the transfer pricing addition on account of interest free loan given by the assessee to its subsidiary company. Briefly stated, the facts of the case are that the assessee advanced US$ 15,15,000 (corresponding to Indian Rs.7,39,16,850/-) as interest free loan to its associated enterprise (AE). The Transfer Pricing Officer (TPO) treated this transaction of advancing interest free loan to its AE as an international transaction. He adopted 10% as benchmark rate of interest which the assessee ought to have charged. This resulted into a transfer pricing addition of Rs.31,51,259/-. The matter finally came up for consideration before the Tribunal. Vide order dated 09.12.2011 in the Tribunal restored the matter to the authorities below by holding that the Comparable Uncontrolled Price Method (CUP method) should be applied as the most appropriate method for determining the ALP of the international transaction of interest free foreign currency loan given by the assessee to its subsidiary. It further held that: ‘the comparable transaction, therefore, should be of foreign currency 2
lending by unrelated parties.’ The assessee was directed to: ‘provide all necessary relevant inputs for establishing the ALP of the transaction in accordance with the CUP method.’ Pursuant to the order passed by the Tribunal, the TPO took up the proceedings afresh. He noticed that CRISIL is a leading credit rating agency in India and the instruments issued are categorized in different ratings starting from AAA to D. In the absence of the assessee supplying any material to determine the credit rating of the AE, the TPO held that credit rating of the AE would fall somewhere between BB and D. He considered BB rating as a starting point for determining the ALP of the international transaction. In this manner, he held that as per the information supplied by CRISIL, the annual average yield for BB rated bonds for five years or more term will be at least LIBOR + 5%. This is how, he computed the amount of transfer pricing adjustment at Rs.24,60,774/-, which got added to the total income in the impugned order. The assessee is aggrieved against such addition.
We have heard both the sides and perused the relevant material on record. The Tribunal in its order in the first round remitted the matter to the Assessing Officer/TPO for a fresh determination of ALP of the 3
AE by directing to apply the CUP as the most appropriate method and : ‘by taking into account prices at which similar transaction with unrelated parties.’ It is an undisputed fact that such order passed by the Tribunal has attained finality.
Thus, the prescription of the Tribunal order in the first round, which became conclusive and set out a road map for the instant proceedings, is graphically clear, as per which the TPO was to find out an uncontrolled comparable transaction under the CUP method for benchmarking the assessee’s international transaction of interest on the interest free loans given to its AE. Here, it is important to mention that the loan was advanced by the assessee in US Dollars and the ld. AR admitted that it was also to be repaid in US Dollars. The Hon'ble jurisdictional High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 0445 (Del) has held that 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. The verdict given by the Tribunal on this count, thus, accords with the view expressed by the Hon’ble jurisdictional High Court.
Adverting to the facts of the instant case, we find that the TPO adopted bonds having BB rated risk assigned by CRISIL and, thereafter, added 500 basis points to LIBOR. It has been mentioned in the order that the mark up of 5% was added to LIBOR in respect of BB rated bonds: ‘on the basis of information supplied by CRISIL.’ The ld. AR submitted that no such data was confronted to the assessee. Be that as it may, it is apparent that the TPO transgressed the boundaries set up by the Tribunal in its order in the first round. Since the said order has attained finality, it was incumbent upon the authorities to abide by the direction given in the order, which was limited to applying the CUP as the most appropriate method and finding out some comparable uncontrolled transaction. As the action of the TPO in determining the ALP of the international transaction of interest on loan given to AE is in contravention of the mandate given by the Tribunal in its order, we cannot countenance the same. In such circumstances, we set aside the impugned order and remit the matter to the file of A.O./TPO for deciding this issue afresh strictly in accordance with the directions given by the Tribunal in the first round.
The only other issue raised in this appeal is against the reduction in the amount of deduction u/s 10B of the Act. The factual matrix of this ground is that the assessee claimed deduction u/s 10B of the Act on its entire business income in the original return. However, in the revised return, such claim was enhanced by considering the profits earned by eligible units on standalone basis and ignoring the losses suffered in the other eligible units. The A.O. did not accept the assessee’s claim.
We have heard both the sides and gone through the relevant material on record. It is found that the issue raised herein is no more res integra in view of the judgment of the Hon'ble Supreme Court in the case of CIT & Anr vs. Yokogawa India Ltd (2017) 391 ITR 274 (SC), in which it has been held that the deduction contemplated is qua the eligible undertaking standing on its own and without reference to the other eligible or non- eligible units or undertakings of the assessee. It has further been held that the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. Thus, it is explicit that for the purposes of claiming deduction u/s 10A/10B etc., there is no 6
requirement to set off business loss from the eligible units against the business income from the eligible units and then claim deduction on net income. Such deduction has to be allowed on standalone basis in respect of income earned by the eligible units alone. We, therefore, overturn the impugned order on this score and order to grant the deduction u/s 10B on the basis claimed by the assessee in the revised return on standalone basis.
In the result, the appeal is partly allowed.
The order pronounced in the open court on 23.07.2018.