ACIT, CIRCLE-4(1), KOLKATA, KOLKATA vs. M/S. M. K. SHAH EXPORTS LTD,, KOLKATA

Per Dr. A. L. Saini: The captioned two appeals filed by the Revenue, pertaining to Assessment Years2011-12&2012-13, are directed against the orders passed by the Ld. Commissioner of Income Tax (Appeals)- 22, Kolkata, which in turn arise out of assessment orders passed by the Assessing Officer u/s 143(3)/92CA(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’). 2. Since, these two appeals filed by the Revenue relate to same assessee, different Assessment Years, common and identical issues are involved, therefore, these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. 3. The grounds of appeal raised by the Revenue in Assessment Year 2011-12are as follows:

1. "Whether on the facts and in the circumstances of the case, the Ld. CIT(A)has erred inallowing the ground taken against the upward adjustment under arm's length on loanadvance in foreign currency to its 100% foreign subsidiary (AE)." 2. "Whether on the facts and in the circumstances of the case, the Ld.CIT(A) has justified inholding that company had advanced a loan in foreign currency to its subsidiary on which itcharged interest @5% which is well above the LIBOR rate without considering the otherissues e.g, credit rating of the debtor, loan term to maturity, purpose of loan, the currencyin which the issued loan is denominated, the security provided, the country in which thedebtor is located the industry in which the debtor operate, business of the creditor." Page | 2 M/s. M. K. Shah Exports Ltd. & 978/Kol/2017 Assessment Years: 2011-12 & 2012-13 3. "Whether on the facts and in the circumstances of the case, the Ld.CIT(A) has justified indeleting the upward adjustment made in the order of Rs.67,83,169/- on account ofadvanced a loan in foreign currency to its foreign subsidiary (AE)." 4. "Whether on the facts and in the circumstances of the case, the Ld.CIT(A) has justifiedwhile referring the case Siva Industries and holdings Ltd (supra), wherein it was held thatonce the transaction is between the assessee and the AEs is in foreign currency, thetransaction would have to be looked upon by applying commercial principal in regard tointernational transaction without defining "Commercial Principal" 5. "Whether on the facts and in the circumstances of the case, the Ld.CIT(A) has justifiedwhile referring the Aurionpro Solutions Limited Vs. Additional Commissioner of Income Tax in ITA No.7872/Mum/2011 wherein it was observed that appropriate rate would be LIBOR plus 2% and the Ld.CIT(A) was also observed the assessee has charged 5% on the loangiven to its AEs without considering the case is not related to Bank or NBFC." 6. "Whether on the facts and in the circumstances of the case, the Ld.CIT(A) has justified inholding that method used i.e., TNMN to determine ALP was appropriate." 7. "Whether on the facts and in the circumstances of the case the Ld.CIT(A) has justified inholding that if interest determined by the assessee under ALP is more than 2% above ofLIBOR then no upward adjustment is necessary." 8. "That on the facts and in the circumstances of the case, the Ld.CIT(A) has erred in deletingthe addition of Rs.16,26,43,864/- made by the AO on account of delayed deposit of employees’ contribution toward PF without considering Section 2(24)(x) read with Section 36(1)(va)." 9. "That on the facts and in the circumstances of the case, the Ld.CIT(A) has erred in allowingthe ground taken against disallowance made to the tune of Rs.1,11,600/- U/s.14A read withRule 8D." 10. "That on the facts and in the circumstances of the case, the Ld.CIT(A) has erred in allowingthe ground taken against disallowance made U/s.144 without considering Circular No.5/2014 issued by the Board.” 11. “That the assessee craves for leave to add, delete, amend or modify any ground before or at the time of assessee proceedings.”

5. We note that in these two appeals, the Revenue has raised a multiple grounds of appeal, as mentioned above, but at the time of hearing the main grievance of Revenue has been summarized issue-wise as follows:

(i) Ground Nos.1 to 5 raised by the Revenue in Assessment Year 2011-12 and Ground Nos.1 to 7 raised by the Revenue in for Assessment Year 2012-13, relate to the issue about upward adjustment made in the arm’s length price on account of loan advanced in foreign currency to its foreign subsidiary companies.

(ii) Ground Nos. 6 & 7 raised by the Revenue in Assessment Year 2011-12 and Ground Nos.9 and 10 raised by the Revenue in ITA

M/s. M. K. Shah Exports Ltd. & 978/Kol/2017 Assessment Years: 2011-12 & 2012-13 No.978/Kol/2017, for Assessment Year 2012-13, relate to disallowance made u/s 14A r.w.r. 8D of the I.T. Rules.

(iii) Ground No.8 raised by the Revenue in for Assessment Year 2012-13, relates to addition of Rs.16,26,43,864/- made by the Assessing Officer on account of delayed deposit of employees’ contribution toward PF without considering section 2(24)(x) r.w.s 36(1)(va).

6. Now, we shall take issue No. raised by the Revenue, which reads as follows:

(i)Ground Nos.1 to 5 raised by the Revenue in Assessment Year 2011-12 and Ground Nos.1 to 7 raised by the Revenue in for Assessment Year 2012-13, relate to the issue about upward adjustment made in the arm’s length price on account of loan advanced in foreign currency to its foreign subsidiary companies.

7. The facts of the issue which can be stated quite shortly are as follows: The assessee is having eleven tea estates in Assam and exports tea to customers including to its subsidiary “Zao Classic” in Russian Federation. On examination of the details available in the Form No. 3CEB and TP Study Report for the assessment year 2012-13, it was noted by TPO that the assessee company has disclosed receipt of interest on loan advanced to it's subsidiary Zao Classic in Russia. On perusal of the A.Y. 2011-12, it was noted that the assessee had charged interest @5% on the loan from 01/01/2010 onwards. The loan was reported in the Form No.3CEB for the A.Y.2011-12 and CUP method was used as a most appropriate method. As per details available no fresh loan was advanced during the F.Y. 2011-12. It was seen by TPO that through an agreement titled 'Credit Agreement No. 2' dated 08 December, 2003, the assessee had advanced a loan of USD 800,000 to its subsidiary ZAO Classic in Russia, a company incorporated under the laws of that country. The principal amount was increased to 1,500,000 USD by an amendment dated 19.02.2004. The rate of interest charged on the loan was increased from 4% p.a. to 8% p.a. through an amendment dated 02.04.2007, i.e. during the financial year pertaining to assessment year 2008-09. This agreement was extended for further 5 years vide Minutes of Meeting of Board of Directors on 23.11.2007 regarding "Loan to Wholly Owned Subsidiary (WOS) Abroad Under the Automatic Route" and the ceiling for the loan amount was increased to USD 25,00,000 (rate of interest remained unaltered), Page | 4

M/s. M. K. Shah Exports Ltd. & 978/Kol/2017 Assessment Years: 2011-12 & 2012-13 Further, on account of this extension and upward revision of the ceiling, additional USD 4,05,000 were advanced during F.Y. 2008-09. Net USD 206014 was advanced in F.Y. 2009-10 also. The basic terms of this Agreement, can be construed as follows:

Sl. No. Description Details 1 Loan Amount/currency 800,000/USD (original agreement); ceiling revised on 19.02.2004 to 15,00,000 USD; ceiling furtherrevised on23.11.2007 to 25,00,000 USD. Net USD 2,06,014 advanced in F.Y. 2009-10 also. 2 Term of the loan 5 years (as per original agreement); extended tofurther 5 years on 23.11.2007.

3 Purpose of loan To expand operations, purchase of goods 4 Borrower’s country Russia 5 Year of loan FY 2003-04; however, the critical condition ofpricing of the loan, i.e., the rate of interest was revised in FY 2007-08, along with furtherextension of term for 5 years. 6 Rate 4% pa (original agreement); increased to 8% on02.04.2007; reduced to 5% from 01.01.2010 7 Put or call option Both options 8 Security Unsecured 9 Seniority N.A. 10 Any other condition N.A The loan was advanced in the earlier assessment years and no fresh loan was advanced in the F.Y. 2011-12 pertaining to A.Y. 2012-13 under consideration therefore in absence of any disbursement of fresh loan during the F.Y. 2011-12 no fresh benchmarking of the interest on such loan was warranted. The ld TPO noted that the TP proceedings for the A.Y. 2010-11 & 2011-12, the issue of loan was duly examined by the TPO and arm's length interest on such loan was determined at 19% p.a.

M/s. M. K. Shah Exports Ltd. & 978/Kol/2017 Assessment Years: 2011-12 & 2012-13 Courts and passed order under section 92CA(3) and re-worked the rate of interest of 19% on the opening balance of the loan advanced to the assessee's subsidiary during the previous year ended 31.03.2012 as "arm's length price" aggregating to rupee equivalent to Rs.1,30,51,586 and recommended an upward adjustment to the tune of Rs. 1,06,04,974 [Rs.1,30,51,586 minus Rs.24,46,612]. Subsequently, the learned TPO rectified his order dated 31.12.2015 through his order dated 14.03.2016 under section 154 read with section 92CA(3) of the Act recommending the upward adjustment of Rs,67,83,169/- from earlier upward adjustment of Rs.1,06,04,974/.

9. Aggrieved by the stand of theld TPO/AO, assessee carried the matter in appeal before the CIT(A) with success. The ld CIT(A) after considering the various precedents cited by the assessee noted that in the foreign currency loan the rate of interest is to be adopted on LIBOR and at the most LIBOR plus 2%. The average LIBOR rate for the previous year was 0.89821667% and taking into account mark up of 2%, the rate would be 2.89826667% whereas the assessee charged 5% on the loan given to Associate Enterprise (AE), therefore, ld CIT(A) deleted the upward TP adjustment to the tune of Rs.67,83,169/-.

10. The Revenue is not satisfied and is in further appeal before this Tribunal.

M/s. M. K. Shah Exports Ltd. & 978/Kol/2017 Assessment Years: 2011-12 & 2012-13 “4. As far as ground no.1 raised by the revenue is concerned the facts are as follows :- The Assessee is a company engaged in the business of growing and manufacturing of tea and are also blenders, packers and exporters of tea. The assessee entered into international transaction of giving of loans to its subsidiary AZO classic Russia. It is not in dispute that the transaction of giving loan to a subsidiary was an international taxation and the rate of interest that has to be charged by the assessee on such loan has to confirm to the arms length test laid down in section 92 of the Income Tax Act, 1961 (Act). It is not in dispute that the loan in question was given in foreign currency i.e., US$ and the rate of interest that was charged was at 4% p.a. which was increased to 8% on 02.04.2007. The basic details of the loan agreement were as follows :- "Under an Agreement titled 'Credit Agreement No.2' dated 08 December, 2003, the assessee had advanced a loan of USD 800,000 to its subsidiary ZAO Classic in Russia. The principal amount was increased to 1,500,000 USD by an amendment dated 19,02.2004. the rate of interest charged on the loan was increased from 4% p.a. to 8% p.a. through an amendment dated 02.04.2007, i.e. during the financial year pertaining to assessment year 2008-09. The basic terms of this Agreement were as follows: S.No. Description Details 1. Loan mount/currency 800 000/USD(original agreement); amended on 19.02.2004 to 15,00,000 USD 2. Term of the loan 5 years (as per the original agreement); 3. Purpose of loan To expand operations, purchase of goods 4. Borrower's Country Russia 5 Year of Loan 8 December, 2003 6. Rate 4% p.a. (original agreement); increased to 8% on 02.04.2008 7. Put or Call option Both options 8. Security unsecured 9. Seniority N.A.

10. Any other condition n.a.

8. On appeal by the assessee the CIT(A) deleted the addition made by the AO by following the decision of ITAT Chennai in the case of Siva Industries & Holdings Limited vs. The Assistant Commissioner of Income Tax (supra) . The following were the relevant observations of CIT(A): "4.2. I have considered the facts of the case. The assessee had advanced a loan in foreign currency to its subsidiary ZAO Classic, Russia on which it was charged interest at the rate of 8% p.a. The TPO was of the view that price of the loan i.e. the interest charged has to be worked out on the basis of taking two parties as separate and bench-marking the price of the loan on the basis of what an independent third party would charge from ZAO Classic, Russia based on its analysis of risk associated with the loan. The assessee stated in reply to show cause notice issued by the TPO, that foreign currency loans are given by banks bearing UBOR based rate as a global practice. The average of LIBOR based rate for the year under consideration was 4.68%. Thus the rate of 8% charged by the assessee was higher than the LIBOR rate. The assessee also relied upon a number of decisions, in particular the decision of ITAT, Chennai in the case of Siva Industries and Holdings Ltd vs ACIT, Central Circle-6(1) Chennai 46 SOT 112. In the appellate proceedings the assessee has cited some more decisions such as Four Soft Ltd vs DCIT in ITA No. 1495/Hyd 12010, Cotton Natural (I) Pvt Ltd. vs DCIT in ITA No. 5855/De1/2012. In the case of Siva Industries and Holdings Ltd. (supra), it has been held by the Hon'ble tribunal that once the transaction is between the assessee and the AEs is in foreign currency, the transaction would have to be looked upon by applying commercial principle in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. Same view was taken by tribunal in the case of Four Soft Ltd (supra) and some other cases cited by the assessee. Further, it has been held in the decision in the case of Cotton Natural (I) Pvt Ltd. (supra), that financial position and credit rating of the subsidiary would be broadly same as the holding company and LIBOR should be taken as bench- mark without going into aspects like financial health of subsidiary. In one of the cited cases, viz. Aurionpro Solution Ltd. vs Addl. CIT in ITA NO.7872/Mum/2011, Hon'ble tribunal has observed that appropriate rate would be LIBOR plus 2%. In the assessee's case, the TPO has not countered the decision in the case of Siva Industries and Holdings Ltd (supra) cited by the assessee before him, nor cited any authority in support of his view. The ratio given by the Hon'ble tribunal in the cases cited by the assessee is, that in the foreign currency lending, rate of interest to be adopted is to be based on LIBOR and at the most LIBOR plus 2%. As per documents given by the assessee, the average LlBOR rate for the previous year was 4.68%. Even if a mark up of 2% is given, the rate would be 6.68% whereas the assessee has charged 8% on the loan given to its AEs. It is also not in dispute that the cost of funds in the hands of the assessee is lower than 8% charged from the AE. Considering the facts and circumstances of the case and respectfully following the ratio given by the various benches of Hon'ble tribunal, the adjustment price of Rs.40,32,011/- is deleted."

M/s. M. K. Shah Exports Ltd. & 978/Kol/2017 Assessment Years: 2011-12 & 2012-13 Ltd approving the decision of ITAT in the case of Tata Auto Comp Vol.52 SOT 48 (Mum). In view of the above settled legal position we find no merits in ground no.1 and dismiss the same.

14.Respectfully following the above binding precedent, we uphold the contention of the assessee, since the issue is squarely covered in favour of the assessee by the decision of the Coordinate Bench in for Assessment Year 2008-09 (supra) and there is no change in facts and law and the Revenue is unable to produce any material to controvert the aforesaid findings and the ld. CIT(A) has allowed the appeal of the assessee. We find no reason to interfere in the said order of the ld. CIT(A) and the same is hereby upheld. Therefore, this ground of appeal of Revenue is dismissed.

15. The next Ground Nos. 6 & 7 raised by the Revenue in Assessment Year 2011-12 and Ground Nos.9 & 10 raised by the Revenue in for Assessment Year 2012-13, relate to disallowance made u/s 14A r.w.r. 8D of the I.T. Rules.

16. At the outset itself, the ld. Counsel for the assessee has submitted that the issue under consideration in respect of disallowance u/s 14A r.w.r. 8D is fully covered by the judgment of the Hon’ble ITAT in the case of DCIT vs. Ashis Jhunjhunwala in for Assessment Year 2009-10. Based on the judgment of the Coordinate Bench of ITAT, Kolkata, the ld. CIT(A) held as follows:

“1.I have carefully considered the action of the ld. Assessing Officer in making an addition of Rs.70,301/- further and in addition to the suomotu disallowance made by the assessee-company. There appears to be no dispute that there was no additional expenditure incurred by the assessee in order to earn the tax free income. I find that the ld. Assessing Officer has not mentioned any cogent reasons in his order while making the assessment of the assessee and routinely applied the provisions of section 14A read with rule 8D. 2.I find that the case of the assessee is fully covered by the decision of the Hon’ble ITAT “A” Bench, Kolkata in for Assessment Year 2009-10 in the case of Deputy Commissioner of Income Tax, Central Circle – XXVII, Kolkata vs. Ashish Jhunjhunwala. In view of non-speaking order, the disallowance u/s 14A is restricted to Rs.22,980/- that is the amount of disallowance made by the assessee company in its return of income. The ground of appeal is therefore adjudicated all allowed in favour of the assessee-assessee.”

M/s. M. K. Shah Exports Ltd. & 978/Kol/2017 Assessment Years: 2011-12 & 2012-13 17. As the issue is squarely covered in favour of the assessee by the decision of the Coordinate Bench in ITA No.1809/Kol/2012 for Assessment Year 2009-10 (supra) and there is no change in facts and law and the Revenue is unable to produce any material to controvert the aforesaid findings and the ld. CIT(A) has allowed the appeal of the assessee by following the decision of the Tribunal on identical issues.We find no reason to interfere in the said order of the ld. CIT(A) and the same is hereby upheld. Therefore, this ground of appeal of Revenue is dismissed.

18. Ground No.8 raised by the Revenue in for Assessment Year 2012-13 relates to addition of Rs.16,26,43,864/- made by the Assessing Officer on account of delayed deposit of employees’ contribution toward PF without considering section 2(24)(x) r.w. Section 36(1)(va).

19. At the outset itself, the ld. Counsel for the assessee has submitted that this issue is also no more res integra and it has already decided in favour of the assessee by several judgments of High Courts and ITAT. The decision of the Hon’ble Rajasthan High Court in the case of ITO vs. Jaipur Vidyut Vitran Nigam Ltd. in Income Tax Appeal No.278/2011and the judgment of the Hon’ble Kolkata High Court in the case of CIT Vs. Vijay Shree Limited ITAT No.245 of 2011, GA No.2607 of 2011, decided on 06.09.2011, in relation to the Assessment Year 2006- 07. Therefore, based on these judgments, the ld. CIT(A) allowed the claim of the assessee, as the issue involved is about the employees` contribution towards PF, paid within due date of submission of return of income filed by the assessee u/s 139(1) of the Act. Therefore, it was held that since the payment has been made by the assessee within the due date of furnishing return of income u/s 139(1) of the Act. Therefore, no disallowance is attracted u/s 36(1)(va) r.w.s. 2(24)(x) of the Act.

M/s. M. K. Shah Exports Ltd. & 978/Kol/2017 Assessment Years: 2011-12 & 2012-13 disallowance. Since the ld. CIT(A) has allowed the appeal of the assessee by following the ratio laid down in the judgments of Hon`ble Calcutta High Court,in the case of CIT Vs. Vijay Shree Limited ITAT No.245 of 2011, GA No.2607 of 2011, decided on 06.09.2011, therefore, respectfully following the judgment of the jurisdictional Kolkata High Court in the case of CIT vs. Vijay Shree Ltd. in ITA No.245 of 2011 dated 06.09.2011, we allow the claim of the assessee and do not find any infirmity in the order passed by the ld. CIT(A), his order on this issue is hereby upheld and the grounds raised by the Revenue is dismissed.

Order is pronounced in the open court on 17.08.2018.