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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
Before: Shri J. Sudhakar Reddy & Shri S.S. Viswanethra Ravi
For the Appellant : Dr. P. K. Srihari, CIT(DR) For the Respondent : Shri Ravi Tulsiyan, FCA Date of hearing : 23.07.2019 Date of pronouncement : 04.10.2019 ORDER PER Shri S.S. Viswanethra Ravi, JM:
This appeal filed by the Revenue against the order dated 16.10.2017 passed by the Commissioner of Income Tax (Appeals)- 22, Kolkata [‘CIT(A)’] for Assessment Year 2013-14.
2. The only issue to be decided is as to whether the CIT(A) is justified in deleting an upward adjustment of Rs.2,72,43,632/- made by the TPO in respect of payment of interest on loan in the facts and circumstances of the case.
The brief facts relating to the issue are that the assessee is engaged in the business of development of residential and commercial complex for the relevant Assessment Year. The assessee filed its return of income on 30.11.2013 declaring total income of RS.4,27,96,480/- . According to AO, the assessee entered into
M/s. A A Infraproperties Pvt. Ltd.
Specified Domestic Transaction i.e. interest payment @12.5% to M/s South City Projects (Kolkata) Ltd. for short “M/s SCPKL” hereafter is a holding company & 10.5% to Shri Jaideep Halwasiya who is a director of assessee company and related person within the meaning of person referred to in Section 40A(2)(b) of the Act. The AO referred matter to the Transfer Pricing Officer (TPO) u/s 92CA of the Act, for determination of Arm’s Length price in the aforesaid transactions. The TPO observed that the assessee had paid interest @ 9.5% to the party namely M/s Silver Cross Marketing Pvt. Ltd. and held the same to be the arm’s length price (ALP). Accordingly, he suggested an upward adjustment of Rs.2,72,43,632/-. The Assessing Officer on receipt of report on transfer pricing adjustments vide order dt: 29.12.2016 and assessed the total income of Rs.7,00,40,112/- u/s 144C r.w.s 143(3) of the Act against the returned income of Rs.4,27,96,480/- by making addition of Rs.2,72,43,632/- on account of transfer pricing adjustment.
Aggrieved by the assessment order passed by the Ld. A.O, the assessee had filed an appeal before the CIT(A). After considering the submission of the assessee, the CIT(A) deleted the addition made by the A.O for the reasons as under:
“1. I have carefully analyzed the action of the Ld. AO / TPO in making the impugned adjustments of Rs 2,72,43,632/- on account of Transfer Pricing related issued. The brief facts in the case are that the assessee-company is engaged in the business of development of residential and commercial complex, and it filed the return for the A.Y. 2013-14, 30.11.2013 by disclosing the total income at Rs. 4,27,96,480/-. It was noticed by the Ld. AO that in the relevant assessment year, the assessee-company entered into Specified Domestic Transaction (SDT) relating to interest payment @ 12.5% to M/s. South City Projects (Kolkata) Ltd. (“SCPKL”) & @ 10.5% to Shri Jaideep Halwasiya, being the holding company and the director of appellant company and accordingly the transactions were falling within the meaning of “person” referred to in Section 40A(2)(b) of the Act. The Ld. AO thereafter referred the impugned matter to the Ld. Transfer Pricing Officer (Ld. TPO) u/s 92CA of the Income Tax Act, 1961 Act, for determination of Arm’s Length Interest in the aforesaid transactions. The Ld. TPO observed that the assessee had paid interest @ 9.5% to the party namely M/s Silver Cross Marketing Pvt. Ltd. and held the same to be the arm's length price (ALP). Accordingly, the Ld TPO, as has been reproduced in the order supra suggested an upward adjustment of Rs.2,72,43,632/ -.
M/s. A A Infraproperties Pvt. Ltd.
The main contention of the appellant-company in this appeal is that while so doing, the Ld.TPO has overlooked and disregarded the fact that cost of funds to the subsidiary itself was 12.5% and therefore according to the appellant, it could not have lent funds to the assessee @ 9.5% as contended by the Ld. TPO/ AQ, I have carefully examined the action of the Ld, AO/ TPO as well as examined the various contentions of the appellant-company taken before the Ld. AO/TPO as well as in appeal.
3. In appeal, the main contention of the appellant is that the ALP in a loan transaction may be determined under the Cost Plus Method (CUP) and as the cost of funds to the lender was 12.5% the loan transaction with M/s SCPKL was at arm's length and hence no transfer pricing adjustment was warranted, In order to support such a contention, the appellant has brought to notice the sanction letter from SBI, the loan creditor of SCPKL, and it has been pointed out by the appellant-company that on examination of the same (at pages 63 to 70 of the Paper book filed in appeal) it would be evident that interest charged from M/s SCPKL was Base rate plus 2.75%. It has accordingly been contended that the base rate in 2012 was 9.5%, and therefore the interest @ 12.5% was paid to SBI during the year. Therefore, I find merit in the contention of the appellant that as the cost of funds to the holding company itself was 12.5%; and as a corollary there is adequate merit therefore that it cannot be expected to advance loans at a lower rate of interest. On an extended corollary, there is merit in the contention of the appellant that the interest rate of 12.5% can be held to be at arm's length. The appellant-company has taken further strength in bringing to notice that the interest rate of 12.5% was charged by a 3rd party, i.e. a bank [SBI], in the case at hand] from its unrelated borrower i.e. SCPKL, and therefore as a third party in an independent transaction has charged interest rate of 12.5% from its borrower it can safely be adopted as the ALP and benchmarked against the loan transaction between the assessee and its holding company. 4. Further, it has also been contended that several Hon'ble Courts have consistently held that if the loan transactions are denominated in a foreign currency then international rate of interest i.e. LIBOR plus rate may be adopted as an appropriate benchmark: a. The Delhi High Court in case of CIT Vs. Cotton Naturals (I) Pvt. Ltd. [276 CTR 475] b. Chennai Bench of Tribunal in case of Siva Industries & Holdings Ltd. Vs. ACIT [145 TTJ(Chennai) 497] c. The Mumbai Tribunal in case of Tata Autocomp System Ltd. Vs. ACIT [149 TTJ 233]. The said decision has been affirmed by the Hon'ble Bombay High Court in case of CIT Vs.Tata Autocomp System Ltd. (374 ITR 516) 5. However, for the case at hand it is observed that the loan transaction is denominated in Indian Currency and therefore there is much merit in the argument of the appellant-company / Ld. A.R that the domestic prime lending rate (PLR) may be used as a benchmark. The appellant has brought to notice, and it is noted that SBI PLR for the year 2012 shows .that interest rates in the given year was around 14.5%. The same is available in the historical data of the benchmark PRIME LENDING RATE available in the public websites, copies of which have also been submitted by the appellant in the Paper Book. Accordingly, there is merit in the contention of the appellant-company that the interest paid @ 12.5% to SKPCL & 10.5% to Shri Halwasiya was clearly at arm's length and does not warrant any TP Adjustment. It has also been argued by the appellant-company that it, the assessee-company has during the year has charged an interest of 16% p.a. from its wholly owned subsidiary Indocean Developers Pvt. Ltd, and this matter has not been disputed by the Ld.TPO. A sum of Rs.16,84,01,277/- has been offered to tax as "interest received" from its subsidiary in its return in the computation enclosed at page 16 of the Paper Book. This being the factual position, there is strength in the contention by the appellant that as the interest received @16% from its subsidiary has been accepted as ALP, the Ld. TPO/AO could not be permitted to adopt a different Arm's length interest rate for the purposes of interest paid to its holding company, and that therefore the interest rate of 16% can also be held to be the arms length price. 6. As regards, the interest paid @ 9.5% to M/s. Silver Cross Marketing Pvt. Ltd. (Silver Cross) treated as ALP by the Ld. TPO has been argued by the appellant-company that the said loan transaction pertains to a smaller principal of Rs.9.5 crores, as evidenced by the ledger, and therefore the same does not constitute an appropriate benchmark
M/s. A A Infraproperties Pvt. Ltd. against the loan from SCPKL which involves a much bigger principal of Rs. 115 crores. It has also been further argued that the loan from M/s Silver Cross was obtained in earlier FYs when the interest rates were lower. It was also argued that even the loan from SCPKL was obtained @ 9.5%,in earlier FY i.e. as per agreement dated June,2011, and that later on due to the rise in interest rates the interest rate was scaled up to 12,5olo w.e.f from April 2012. On similar lines it has been argued that the interest from loan from Shri Jaideep Halwasiya was @ 9.5% which was modified to 10.5% in FY 2011-12. In summary it has been contended by the appellant-assessee that the ALP of 9.5% adopted by the Ld. TPO pertains to a different time period when the interest rates were lower, and that therefore they ought not to be indicative of the appropriate benchmark, It has been further argued that on perusal of Audited Accounts of M/s SCPKL, it would be revealed that the said entity had a net worth of Rs.265 crores, whereas the assessee-company quite on the other hand had a net worth of Rs. 35.35 crores only. I find merit in the arguments of the appellant-company that in a situation where M/s SCPKL with higher creditworthiness could obtain a loan @ 12.5% only, it would not be correct to assume that the assessee-company could have obtained any loan at a lower interest rate. Overall, going by the sequential discussing made, supra, I am of the considered observation that the Ld. TPO was not justified in overlooking the fact that the cost of funds to the subsidiary itself was 12.5% and hence the assessee cannot have lent funds to the assessee @ 9.5% as contended by the Ld. TPO / AO. Therefore the action of the Ld. TPO in making the adjustments of Rs.2,72,43,632/- remains unjustified and the same is directed to be deleted. These grounds therefore stands allowed.
Heard both parties and perused the material evidence on record. It is observed that the rate of interest charged by the aforesaid two parties in the earlier Assessment Year 2012-13 was 9.5% as per the agreement placed at Page 31-34 and for Jaydeep Halwasiya at Page 36-39 of Paper Book. As per the terms of agreement, interest rate was amended as per the rate prevailing in the market through a letter which is at Page 34 and 39 of Paper Book. Thereafter the rate of interest was fixed at 12.5% p.a by M/s SCPKL and 10.5% p.a by Jaydeep Halwasiya. The assessee in order to determine the arm’s length price of the transaction had taken the interest rate charged by the State Bank of India from M/s SCKPL on the credit facility provided by the bank. Sri Ravi Tulsayan Ld.AR submits that during the year, M/s SCPKL had availed loans from State Bank of India (SBI) as is evident from the sanction letter placed at Page 67-74 of Paper Book. It is clear from the letter, that SBI was charging interest at base rate+ 2.75%. Admittedly the base rate during the year was 9.75% + 2.75%. which comes to interest @ 12.05% was paid to SBI during the year. Further, he argued that since the cost of fund to the M/s SCKPL (holding company) was itself 12.5% and it cannot advance loans at a lower rate of interest than 12.5%. He submits, the interest
M/s. A A Infraproperties Pvt. Ltd. charged @12.50% p.a. by M/s SCKPL against loan to assessee is to be considered at arm’s length.
In the present case, in our opinion, the rate charged by SBI is to be considered as the interest rate that was prevailing in the market and interest rate of 12.5% charged by SBI from M/s SCKPL can be used as comparable in the assessee’s case, since the loan received SBI was advanced to the assessee without any mark-up.
The provisions u/s 92C of the Act, the sub-section 1 explains that the arm’s length price of the specified domestic transaction shall be determined by applying the most appropriate methods contained therein having regards to the nature or class of transaction or class of associated enterprises or functions performed by it. Sub-section 2 mandates the most appropriate method as contemplated in sub- section 1 shall be applied for determination of arms length price.
The ld. AR submits that the CIT(A) held that the most appropriate method for determining the ALP method in the present case is cost plus method and in support of his contention referred to Page 1-3 of Paper Book, where, we note, the cost of funds to the lender i.e SCKPL was 12.5% and therefore, in our opinion the loan transaction with M/s SCPKL is liable to be taken as arm’s length price. For ready reference, the relevant portion of the CIT(A) is reproduced as under:
“3. In appeal, main contention of the appellant is that the ALP is a loan transaction may be determined under the Cost Plus Method and as the cost of funds to the lender was 12.5% the loan transaction with M/s SCPKL was as arm’s length and hence no transfer pricing adjustment was warranted. In order to support such a contention, the appellant has brought to notice the sanction letter from SBI, the loan creditor of SCPKL, and it has been pointed out by the appellant company that on examination of the same (at page 63 to 70 of the P.B filed in appeal) it would be evident that interest charged from M/s SCPKL was Base rate plus 2.75%. It has accordingly been contended that the base rate in 2012 was 9.75% and therefore the interest @12.5% was paid to SBI during the year. Therefore, I find merit in the contention of the appellant that as M/s. A A Infraproperties Pvt. Ltd. the cost of funds to the holding company itself was 12.5%; and as a corollary there is adequate merit therefore that it cannot be expected to advance loans at a lower rate of interest. On an extended corollary, there is merit in the contention of the appellant that the interest rate of 12.5% can be held to be at arm’s length. The appellant company has taken further strength in bringing to notice that the interest rate of 12.5% was charged by 3rd party i.e. a bank [SBI, in the case at hand] from its unrelated borrower i.e. SCPKL, and therefore as a third party in an independent transaction has charged interest rate of 12.5% from its borrower it can safely be adopted as the ALP and benchmarked against the loan transaction between the assessee and its holding company.”
A reading of aforementioned para clearly shows that M/s SCPKL had borrowed funds from SBI and paid interest @12.5% p.a and charged interest at the same rate without identifying any mark up, since the cost of fund to the related party was only 12.5%. had opined by the TPO and AO to grant loan at a rate below the rate of 12.5% i.e @ 9.5% then there would have been a loss of 3% interest to M/s SCPKL.
Coming to the comparable, i.e M/s Silver Cross Marketing Pvt. Ltd, the assessee availed loan from Silver Cross Marketing Pvt. Ltd. in earlier years and the rate of interest @ 9.5% was fixed in the year itself. We find the loan was Rs.9.5 crores which according to assessee is small as compared to loan in the present appeal is of Rs.115 crores, interest rate was not revised and continued to remain the same as per the terms of agreement. We find force in the arguments of Ld.AR, the loan from M/s SCPKL was linked to a floating rate loan taken by M/s SCKPL, is subjected to change based on the rate charged by the bank. Therefore, in our opinion, the comparable i.e M/s Silver Cross Marketing Pvt. Ltd, cannot be considered as a comparable for determination of arm’s length price in the present case.
In light of the aforesaid discussion made by us, we hold that the cost plus method is the most appropriate method for determination of arm’s length price of the interest on loan and we
M/s. A A Infraproperties Pvt. Ltd. find no infirmity in the order of CIT(A) and it is justified. Accordingly, we delete the addition on account of transfer pricing adjustment.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 04.10.2019.
Sd/- Sd/- [J. Sudhakar Reddy] [S.S. Viswanethra Ravi] Accountant Member Judicial Member Dated : 04.10.2019 Place : Kolkata RS, Sr.PS Copy of the order forwarded to:
1. 1. Appellant – DCIT, Circle-10(1), Kolkata 2 Respondent– M/s. A A Infraproperties Pvt. Ltd., 375, Prince Anwar Shah Road, Kolkata – 700068.
3. The CIT(A), Kolkata 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata