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Income Tax Appellate Tribunal, DELHI BENCH: ‘I’ NEW DELHI
Before: SHRI N.K. SAINI & SHRI K.N. CHARY
ORDER PER K. NARSIMHA CHARY, J.M. Aggrieved by the assessment order dated 20.01.2013 (20.01.2014?) pursuant to the directions given by the Ld. Dispute Resolution Panel (DRP), vide order dated 19.12.2013, assessee preferred this appeal challenging the addition of Rs. 87,23,089/- made on account of the International Transaction in the nature of interest on loans granted to Associated Enterprises (for short ‘AEs’) of the assessee, and enhancing the disallowance u/s 14A read with Rule 8D of the I.T. Rules to a tune of Rs. 29,03,632/-.
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. During the relevant year the assessee had undertaken various International Transactions with its AEs and, among other things, had extended loans to three of its AEs in dollar denomination. Besides this, the assessee also made investment in quoted shares to a tune of Rs.1,68,50,16,186/- and earned dividend income of Rs.2,33,03,212/-. They have filed their return of income for the AY 2009-10 on 30.09.2009 declaring a total income of Rs.6,43,63,397/- 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 30.01.2013 determined the ALP of the interest transaction with the AEs at Rs.87,23,089/- by taking the ALP of the interest at 16%, basing on the SBI PLR for the FY 2008-09 at 12.75% PLUS 350 basic points. Pursuant to the draft assessment order 2
Ld. DRP and Ld. DRP vide order dated 19.12.2013 approved the action of the Assessing Officer (for short ‘AO’) in rejecting the rate of interest at 6% offered by the assessee in respect of House of Pearl Fashions Limited, USA and levying deemed interest of Multination Textile Group Limited, Mauritius, 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. However, Ld. AO proceeded with the matter and by way of impugned order made an addition of Rs. 87,23,089/- on account of the ALP of the interest component and Rs. 26,87,332/- by making disallowance u/s 14A of the Income Tax Act, 1961 (for short called as the ‘Act’). Hence, the assessee is before us in this appeal.
It is the argument of the Ld. AR that out of the three AEs who were extended loans, interest at 6% was offered in respect of Nor Pearl Knitwear Limited, Bangladesh and House of Pearl Fashions Limited, USA, whereas in respect of the Multination Textile Group Limited, Mauritius loan was extended without charging any interest because the said concern is the 100% subsidiary of the assessee and was running into losses, as such, out of business need of the assessee they extended the help not in the form of capital, because of the risk of resources being struck, but in the form of loan so that as and when the subsidiary comes out of financial problems they can recover the loan. On this ground he is resisting the deemed interest in respect of Multination Textile Group Limited, Mauritius.
His further argument is that out of the two concerns Nor Pearl Knitwear Limited, Bangladesh interest at the rate of 6% per annum and House of Pearl Fashions Limited, USA @ interest rate of 6% per annum, TPO vide paragraph no. 4.3 of his order accepted the interest declared by the assessee at 6% in respect of Nor Pearl Knitwear Limited, Bangladesh stating that the AE obtained loan from HSBC Bank at Bangladesh at interest rate of SIBOR + 3% p.a., whereas the SIBOR rate for the relevant year was 0.94% for 12 months. However, having accepted this in case of one concern, TPO took a plea that the currency in which the loan has originated must be considered along with the country of origin and the important consideration would be the interest rate expected by the lender which would be the interest rate, which insofar as India is concerned would be either SBI PLR or the rates offered by the mutual funds etc. On this premise he took the ALP of the interest at 16% and in that process the AO ignored the DRP to consider the SBI rate as on 30th June of the relevant previous year which was about 8% and including the 150 basic point the rate of interest works out to 9.50 as against the 16% charged by the TPO. Ld. AR submitted that when the foreign AEs could get loans in their countries, where the interest charged is far less than 6%, it is totally unjustified on the part of the authorities below not to accept 6% offered by the assessee. Ld. DR vehemently relied upon the orders of the authorities of the Assessing Officer.
We have carefully gone through the facts in the light of the contentions raised on either side. Insofar as the contentions of the assessee about non-chargeability of interest in respect of Multination Textile Group Limited, Mauritius is concerned, the contention of the assessee is that such AE was running into losses, thereby necessitated the assessee in the capacity of a parent to pump funds, but in view of the legal difficulties, instead of equity, funds are given in the form of loan so that in future they could be recovered easily. On this aspect Ld. CIT (A) observed that the plea taken by the assessee before him was that if the interest would have been charged then the profit of the AE would be less and automatically the dividend which the assessee had to receive from the AE would also be less. On a perusal of 5
Multination Textile Group Limited, Ld. CIT (A) found that the claim of the assessee was factually incorrect, inasmuch as the dividend payment from AE at 10,20,000 USD is more than the profit earned at 9,78,780 USD meaning thereby that there is no correlation between the profit and the amount of dividend received. Further Ld. TPO rejected this contention of the assessee by placing reliance on the decisions of a coordinate Bench of this Tribunal in Perot Systems TSI (India) Ltd. vs. DCIT (ITA No. 2320, 2321, 2322/DEL/2008) and VVF Ltd. vs. DCIT (2010-TIOL-55-ITAT-MUM). Ld. CIT (A) also noted the decision of Mumbai Tribunal in Tata Autocomp Systems Ltd., Mumbai vs. ACIT (ITA No. 7354/MUM/2011 (AY 2007-08)). In these decisions the contention of the assessee that they have not earned any interest and it was commercially expedite to earn interest free loans was rejected holding that international transactions can not be equated with ordinary business transactions. In Perot Systems case (supra) it was held that, -
The question relates to scrutiny of international transaction to determine whether or not the same it as arm’s length. The principle of transfer pricing aims at determining the pricing in the situations of cross border international transactions, where two enterprises which are subject to the same centre or direction or control (associated enterprise) maintain commercially or financially relations with other. In such a situation, the possibility exists that by way of intervention from the centre or otherwise, business conditions must be accepted by the acting units which differs from 6 those which in the same circumstances would have agreed upon between un-related parties. The aim is to examine whether there is anomaly in the transaction which arises out of special relationship between the creditor and the debtor. Hence the contention of having actually not earned any income cannot come to the rescue of the assessee in this scenario. The case laws from the Apex Court cited by the Ld. Counsel of the assessee are in the context of the proposition that only the real income has to be taxed and interest free advances can be given by companies (domestic) to their subsidiaries on the ground of commercial expediency. But these decisions are not in the context of Chapter-X of the IT Act which relates to special provision relating to computation of income from international transactions having regard to arm’s length price. Other case laws cited by the assessee are not germane to the facts of this case. Hence in our considered opinion they do not help the case of the assesse.
These decisions are applicable to the facts of the case on hand and having regard to the facts and circumstances of the case, we do not find any merit in the argument that no ALP interest could be added on account of the loan advanced to Multination Textile Group Limited, Mauritius.
Now coming to the rate of interest, according to the assessee 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 7
Knitwear Limited, Bangladesh holding that in view of such concern obtaining loan at interest rate of SIBOR 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 fund etc., and on this premise he had chosen 16% taking clue from SBI PLR 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 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- 8
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.
7. Now coming to the addition made by making disallowance u/s 14A read with Rule 8D is concerned, the argument of the Ld. AR is that the AO did not reach any satisfaction as to the sufficiency or otherwise of the suo moto disallowance made by the assessee, as such, for want of record of reasons the addition is bad. Here in this matter, the assessment order speaks that on looking at the dividend earned and the disallowance made without verifying any books of accounts of the assessee to find out whether there is any nexus between the disallowance made by the assessee and the expenditure actually spent for earning the exempt income, AO proceeded to apply Rule 8D of the Rules by issuing a notice to the assessee. Ld. AR placed reliance on the decision reported in HT Media Limited vs. PCIT 2017-TIOL-1643- HC-DEL-IT and a host of decisions, to say that any application of Section 14A read with Rule 8D of the Rules, without first AO recording his satisfaction that the disallowance made by the assessee is incorrect with reference to the books of account of the assessee, any addition is bad under law. In view of this establish principle of law laid down by the Hon’ble Jurisdictional High Court in a number of cases including HT Media (supra) and also the decision of the Hon’ble Apex Court in Godrej & Boyce Manufacturing Company Limited vs. DCIT (2017) 394 ITR 449 (SC), we find that the enhancement of the disallowance made by the AO by invoking Section 14A read with Rule 8D of the Rules is bad and cannot be sustained. We, therefore, direct the AO to delete the same.
In the result, the appeal of the assessee is allowed in part.
Order pronounced in the open court on 08.11.2017