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Income Tax Appellate Tribunal, MUMBAI BENCHES, ‘B’ MUMBAI
Before: Shri Joginder Singh, & Shri Rajesh Kumar
आदेश / O R D E R Per Joginder Singh (Judicial Member) These two appeals are by the assessee against the impugned orders both dated 20/09/2013 for Assessment Year 2009-10 and 2010-11, of the Ld. First Appellate Authority, Mumbai. The first common ground raised by the assessee pertains to upholding the addition of Rs.7 lakh (Assessment Year 2009-10) and Rs.17,38,138/- made to the returned income u/s 2(22)(e) of the Income Tax Act, 1961 (hereinafter the Act).
During hearing, the crux of argument advanced on behalf of the assessee is that this issued is covered in favour of the assessee by the order of the Tribunal in order dated 16/09/2015. Our attention was invited to page-5 (para-4) of the order. This contention of the assessee was admitted to be correct by Shri T.A. Khan, Ld. DR. 2.1. We have considered the rival submissions and perused the material available on record. In view of the above, we are reproducing hereunder the relevant portion from the aforesaid order of the Tribunal for ready reference and analysis:-
“This appeal has been filed by the Revenue on following grounds:- 1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in deleting addition of Rs. 68,1.8,134/ - made u/s 2(22)(e) of the Act, by accepting assessee’s contention that it was not engaged in money lending business, without appreciating the fact that in the course of assessment proceedings the assessee had taken a contradictory stand and categorically stated that it is engaged in the business of Money Lending. Thus, the Ld. CIT(A) has accepted fresh evidence/ contention of the assessee without providing any opportunity to the AO to rebut the same as required under Rule 46Aof the I.T. Rules.
2. On the facts and in the circumstances of the case and in law, the Ld. C1T(A) is correct in deleting addition made u/s 2(22)(e) of the Act following the decision of Hon’ble Delhi High Court in the case of Arvindkumar Jain in 1TA No. 589 of 2011. dated 30.9.2011, without appreciating the fact that decision relied upon is distinguishable from the facts in assessee’s case as the amount received by the assessee company was not to give effect to a commercial transaction and considering the assessee's share holding of 46,33% in Euro Life Health care Pvt. Ltd. which was having accumulated profits, the transaction clearly came within the ambit of section 2(22)(e)
3. appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.”
2. Brief facts of the case, are that the source of income of the assessee company is from rent and income from other sources. The Assessing Officer made an addition of `.6818134/- u/s 2(22)(e) of the Income Tax Act, 1961. The matter carried before the CITA) in appeal and the CIT(A) after considering the detailed submission made before him, granted relief to the assessee by deleting the addition. Aggrieved by the decision of CIT(A), the Revenue is in appeal before us. The Ld. D.R. contended before us that the CIT(A) erred in deleting the addition of Rs. 68,18,134/- made u/s 2(22)(e) of the Act by accepting the assessee's contention. He submitted that the CIT(A) is not justified in deleting the addition which is violation of Rule 46A of the Income Tax Rules,. 1962, hence the order of the CIT(A) be set aside and that of the Assessing Officer be restored. On the other hand, the Ld. Counsel for the assessee strongly supported the order of the CIT(A).
Having considered the rival submission and material placed on record, we find that the Assessing Officer made the addition in question by observing that the assessee is a shareholder in M/s Eurolife Healthcare P. Ltd. having 139000 shares which is 46.33% of total shareholding. On perusal of the balance sheet of M/s. Eurolife Healthcare P. Ltd., the Assessing Officer observed that they have accumulated profit in the form of reserves and surplus of `.68,18,134/-. The Assessing Officer noted that during the year of accounting, the assessee has received loans/advances amounting to `1,05,47,185/- from M/s Eurolife Healthcare P. Ltd. hence, he applied the provisions of section 2(22)(e) of the Act on such advance and added the same to the income of the assessee as deemed dividend. The stand of the assessee is that the provisions of section 2(22)(e) of the Act are not applicable in its case as the said transactions were in the ordinary course of business of lending money. However, the Assessing Officer observed that the assessee has not disclosed any income from money lending in the year of accounting or even in the preceding assessment year. The assessee has, disclosed only income from rent and dividends. Finally, the Assessing Officer concluded that the provisions of section 2(22)(e) of the Act are applicable to the facts of the case. 3.1 Before the CIT(A), the assessee vide its letter dated 16.12.2010 explained that the sum of Rs. 1,05,47,185/- was received from MIs Eurolife Healthcare P. Ltd. with a view to sell the office premises No. 96 on the 9th floor in Free Press House, Free Press Journal Road, Nariman Point, Mumbai for a sum of Rs. 3,76,20,000/- which was agreed to be paid from time to time. As per the assessee's submission, the said premises were not vacant and was occupied by M/s Majmudar & Co as tenant It was the understanding that the balance amount will be paid on getting vacant, peaceful possession of the premises from the said tenant Since the seller UCIL Investments Ltd could not provide the vacant possession of the premises, the balance payment as not made. The copy of Memorandum of Undertaking (MOU) entered into between UCIL Investments Ltd.
& M/s Eurolife Healthcare P. Ltd was also filed before the Assessing Officer at the relevant point of time. But, the Assessing Officer did not accept this explanation of the assessee. The Assessing Officer was of the view that the MOLT is nothing but a self serving document entered into by the assessee with its, associate concern. He further observed that the MOU has not been even notarized and hence the date of the said document has no authenticity and according added the advances treating the same as deemed divided u/s 2(22)(e) of the Act. However, he restricted the same to the accumulated reserves available with the company ie. Rs. 68,18,134/-. The stand of the assessee has been consistently that the amount of Rs. 1,05,47,185/- received from M/s Eurolife Healthcare. P. Ltd. is not an advance or loan. According to the assessee, the said amount was received in accordance with the MOU entered into with the said party for sale of office premises in Free Press House as discussed above. In order to invoke the provisions of section 2(22)(e) of the Act, there should be a benefit arising to shareholder. It the starting point for invocation of section 2(22)(e) of the Act. However, in the case of the assessee there is no such benefit available hence, the provisions of section 2(22)(e) of the Act are not applicable. The assessee also filed copy of ledger account of M/s Eurolife Healthcare P. Ltd. in the books Of M/s UCIL. Investments Ltd. to suggest that the amounts were paid in the regular course of business with a view to -purchase the office premises owned by the assessee. The copy of MOU dated 28.12.2006 was also filed before the Assessing Officer in the assessment proceedings for record.
4. We find that the Assessing Officer treated the MOLT as a self serving document and it was an afterthought. The assessee has filed copy of the final accounts of M/s Eurolife Healthcare P. Ltd. for year ended 31-3-2008 during appeal proceedings wherein the entry of MOU with UCIL Investments P. Ltd. were mentioned in the Notes to Accounts. In such a situation, the Assessing Officer was not justified in rejecting the MOU executed on 23.12.2006 treating the same as an afterthought and a self serving document. The burden is On the Assessing Officer to prove that the case is strictly falling within the mischief of deeming provision which is required to be strictly construed. The Assessing Officer has not made any investigation and has not brought on record any material to suggest that the MOU was not existing during the assessment proceedings. The Assessing Officer has not made any effort to cross examine M/s Eurolife Healthcare P. Ltd. In this regard, this approach of the Assessing Officer is not justified in rejecting the MOU merely saying as a self serving document without any basis. Thus, taking into consideration all facts and circumstances of the cases are of the view that the CIT(A) was justified in holding that Assessing Officer was not justified in his action while rejecting the MOU merely saying as a self serving document without any basis or documents for such assertion. The trade advances which were in the nature of money transacted to give effect to a commercial transactions do not fall in the ambit of section 2(22)(e) of the Act. Accordingly, the CI'T(A) was justified in deleting the addition made by the Assessing Officer of Rs. 68,18.134/- u/s 2(22)(e) of the Act and we uphold the same.
In the result, appeal filed by the Revenue is dismissed.”
2.2. We find that in the aforesaid order for Assessment Year 2008-09, the Tribunal considered the factual matrix and on the applicability of provisions of section 2(22)(e) of the Act, wherein, the Ld. Assessing Officer treated the MOU as self serving document/ afterthought, dismissed the appeal of the Revenue by holding the Ld. Commissioner of Income Tax (Appeal) was justified in deleting the addition made by the Assessing Officer u/s 2(22)(e) of the Act. No contrary decision was brought to our notice by the Revenue. In the present appeal before us, the facts/issues are similar, therefore, following the order of the Tribunal, in the case of assessee itself, for Assessment Year 2008-09, we allow this ground in favour of the assessee.
3. The next ground agitated by the Ld. counsel for the assessee is with respect to dividend income. It was contended that the addition may be restricted to the dividend income earned by the assessee. The Ld. DR merely relied upon the order of the Ld. Commissioner of Income Tax (Appeal).
3.1. We have considered the rival submissions and perused the material available on record. We find that the case of the assessee is covered by the decision of the Tribunal in the case of Metropolitan Exim Chem Ltd. (ITA No.5749/Mum/2014) order dated 01/08/2017, which is reproduced hereunder:-
“1. The assessee is aggrieved by the impugned order dated 13/06/2014 of the Ld. First Appellate Authority, Mumbai. The only ground raised by the assessee pertains to adding the amount of Rs.13,46,717/- u/s 14A of the Income Tax Act, 1961 (hereinafter the Act).
2. During hearing, the crux of arguments advanced by Shri Satish R. Mody is that the assessee is in the business of manufacturing of chemical and exports by claiming that the dividend income earned by the assessee
is Rs.3,93,161/-, therefore, the disallowance cannot be more than the dividend income. It was also claimed that there is no direct investment and no disallowance was made in earlier and later years. Plea was also raised that in subsequent year i.e. 2011-12, the Ld. Commissioner of Income Tax (Appeal) deleted the addition against which no appeal was filed by the assessee. It was also claimed that the issue under hand is covered by the decision of the Tribunal in the case of Zoom Entertainment Network Ltd. (ITA No.3453/Mum/2016) order dated 21/04/2017. On the other hand, Shri T.A. Khan, ld. DR, though defended the addition but did not controvert the assertion made by the assessee.
2.1. We have considered the rival submissions and perused the material available on record. In the light of the above, before adverting further, we are reproducing hereunder the relevant portion from the aforesaid order of the Tribunal dated 21/04/2017 for ready reference and analysis:-
“The assessee is aggrieved by the impugned order dated 29/02/2016 of the First Appellate Authority, Mumbai, confirming the disallowance of Rs.27,19,404/- made u/s 14A(2) of the Income Tax Act, 1961 (hereinafter the Act) read with Rule-8D of the Rules.
2. During hearing, Shri S. Venkataraman, ld. counsel for the assessee, advanced arguments, which are identical to the ground raised. The ld. counsel also relied upon the decision in the case of M/s Daga Global Chemicals vs ACIT (ITA No.5592/Mum/2012), order dated 01/01/2015, Nimbus Communication Ltd. vs ACIT (ITA No.1424/Mum/2014), order dated 09/02/2016 and Tata Industries Ltd. vs ITO (ITA No.4894/Mum/2008), order dated 20/07/2016.
2.1. On the other hand, the ld. DR, Shri Rajesh Kumar Yadav, defended the addition and placed reliance upon the decision from Delhi
Bench of the Tribunal in the case of Baba Global Ltd. vs DCIT (ITA No.1086 to 1091/Del./2015) order dated 05/05/2016.
2.2. We have considered the rival submissions and perused the material available on record. The ld. DR mainly relied upon the decision from Delhi Bench of the Tribunal in the case of Baba Global Ltd. (Supra), therefore, before coming to any conclusion, we are reproducing hereunder the relevant portion of this order for ready reference and analysis:-
“These are six appeals filed by the assessee against the action of the learned DRP upholding the order passed by the AO under Section 153A read with section 144C of the Act for assessment years 2006-07 to 2010-11 and under section 143(3) for assessment year 2011-12 consequent to the direction issued by the learned Dispute Resolution Panel.
2. In the appeal filed for assessment years, 2006-07, 2007-08 and 2008-09, besides questioning the validity of assessment framed under section 153A of the Income-tax Act, 1961, the only issue is the addition of amount of the notional interest on foreign currency loan advanced by the assessee company to its wholly owned foreign subsidiaries. Whereas for assessment years 2009-10 to 2011-12, besides the above adjustment on account of the notional interest, the issue also is that of addition under Section 14A of the Income Tax Act.
3. The assessee company is engaged in manufacturing of flavoured chewing tobacco, kiwam, scented elaichi, etc. under the brand name ‘BABA’ and ‘TULSI’ and exported its 100% of production during the years under consideration.
The original assessments under section 143(3) were completed in respect of assessment years 2006-07, 2007-08 and 2008-09. Thereafter a search took place on 21st January, 2011.
5. The AO thereafter took up the assessment by issuing notice under section 153A. During the course of the assessment the AO referred the matter to the Transfer Pricing Officer. The learned TPO noted that the assessee company has extended loans to its subsidiary companies and held that the assessee ought to have charged interest in respect of such loans and accordingly the TPO recommend that interest as per the Prime Lending Rate of State Bank of India be added as income on account of adjustment of arm’s length price. Thereafter the AO passed the draft assessment order making additions as recommended by the TPO.
Aggrieved by the order of the TPO, the assessee filed objection before the Dispute Resolution Panel. It was contended by the assessee that since the money given as loan to its subsidiary companies was own money and hence no adjustment is required to be made. It was further submitted that the rate of interest charged cannot be the Prime Lending Rate of State Bank of India. This money has been advanced in foreign currency and as such interest is to be charged as per the interest rate in foreign currency i.e. LIBOR.
The learned DRP did not agree with the contention of the assessee. However, it gave a part relief by holding that the interest rate be charged be only base rate and further adjusted by 150 basis point in terms of Safe Harbour Rules. On the issue of addition under Section 14A, the learned DRP confirmed the action of the AO.
Aggrieved by the order of the learned DRP and the final assessment order passed by the AO the assessee is in appeal before us.
It was contended by the learned AR that the AO was not justified in tinkering with the assessment for assessment years
2006-07 to 2008-09 as these assessments have not abated consequent to the search. The search has taken place on 21st January, 2011. No incriminating material was found during the course of the search as is evident from the assessment order. It was contended that in the absence of any incriminating material, the AO should not have made an addition. In support thereof the learned AR relied upon the order of the jurisdictional Delhi High Court in the case CIT (Central) – III versus Kabul Chawla [2016] 380 ITR 573 (Del).
On the issue of the merit, it was contended by the learned AR that the additions are untenable as the assessee has paid the advances to its subsidiary companies out of EEFC accounts. The EEFC account even otherwise does not earn any interest. The advances given to the subsidiary companies were in the nature of quasi capital and were for business consideration. The main purpose of giving advances to its subsidiary companies was to promote its export business and to have foothold in these foreign countries.
In the alternative, it was contended by the learned AR that the rate of interest cannot be that of the Indian Rupees. The money has been advanced in foreign currency and interest rate to be charged has to be the interest rate of such foreign currency. If the money has been advanced in US Dollar it has to be LIBOR. In respect of advances in Euro the interest rate has to be EUR (LIBOR) and in respect of advances given in Swiss Franc the interest rate has to be that of CHF (LIBOR). In support of its contention the learned AR relied upon the judgment of the Coordinate Bench of the ITAT in the case of Cotton Natural India Pvt. Ltd. vs. DCIT, Circle 3(1), New Delhi 142 ITD (Del) 662 which has also been confirmed by the jurisdictional Delhi High Court. The learned AR also relied upon the following judgments of the ITAT:-
(i) Siva Industries & Holdings Limited Vs ACIT (2011) 59 DTR 0182 (ii) Tata Autocomp Systems Limited Vs ACIT (2012) 73 DTR 0220 (iii) Four Soft Ltd. Vs DCIT (2014) 106 DTR 0137(Hyd) (iv) Aurionpro Solutions Limited
It was further contended that the amount of loan outstanding to its subsidiary companies has been converted into share application money in the assessment year 2011-12. The said loan having become share application money, the TPO cannot change the characteristic of the transaction so as to treat the share application as loan money so as to charge interest thereon. In support thereof, the learned AR placed reliance on the judgment of the Coordinate Bench of the ITAT in the case of Bharti Airtel Limited vs ACIT, dated 11.03.2014. The learned AR also relied upon the following judgments:-
(i) Pan India Network Infravest Private Limited vs ACIT (ITA No. 7026 & 7025 /Mumbai/2013 dated 04.12.2015
(ii) CIT Vs EKL Appliances, and 1070/2011
(iii) Parle Buiscuits P Ltd Vs DCIT (ITA No. 9010/Mum/2010) dated 11.4.2014 ITAT Mumbai
(iv) All cargo Logistics Ltd Vs ACIT (2014) 150 ITD 0651 dated. 10.6.2014
On the issue of disallowance under section 14A made by the AO in assessment year 2009-10 to 2011-12, it was submitted by the learned AR that the disallowance has been made by the AO without recording any satisfaction. The AO has straightaway invoked the provisions of Rule 8D. In support there of the learned AR has placed reliance on the judgment of the jurisdictional Delhi High Court in the case of CIT vs. Taikisha Engineering India Ltd., (2015) 370 ITR 0338 (Del).
It was further submitted that in any case the disallowance under Section 14A cannot exceed the dividend income earned by the assessee company.
The learned DR, on the other hand, supported the order passed by the TPO as modified by the learned DRP. It was contended that the order passed by the TPO as well as the learned DRP on the issue of adjustment of interest is a speaking order. It was further contended that once the search has been initiated all the assessments get reopened consequent to the issue of notice under section 153A and as such the AO is entitled to make adjustment to the income as permissible under the law.
On the issue of rate of interest it was contended that the rate of interest has to be that of Indian Rupees as assessee would have earned the interest in Indian Rupees had it not advanced the money to its foreign subsidiary.
As regards conversion of the loan into share application money in assessment year 2011-12 it was contended that there is no difference between the loan and the share application money and hence interest has to be charged for that year also.
On the issue of disallowance under section 14A it was contended that the AO has invoked the provisions of Rule 8D and mere not recording of satisfaction will not make such disallowance untenable in the eye of law.
We have considered the rival submissions and perused the order passed by the authorities below. The first issue is addition
made by the AO in the assessment years which have not abated consequent to the search i.e. assessment years 2006- 07, 2007-08 and 2008-09. As per the facts on record, the search took place on 21.1.2011. Assessments for all these three years have been completed under section 143(3) of the Act. No incriminating material was found during the course of the search. As is evident from the assessment order the addition has been made consequent to the reference made by the AO to TPO. The issue which arises for consideration is whether the AO could have made addition in these assessment years without there being any incriminating material and in absence of the abatement of assessment orders already framed. This issue is now squarely covered by the judgment of the jurisdictional Delhi High Court in the case of CIT (Central) – III vs. Kabul Chawla (Supra) wherein the Hon’ble High Court has been pleased to hold as under:-
“37. On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under: i. Once a search takes place under Section 132 of the Act, notice under Section 153 A(1) will have to be mandatorily issued to the person searched requiring him to file returns for six AYs immediately preceding the previous year relevant to the AY in which the search takes place. ii. Assessments and reassessments pending on the date of the search shall abate. The total income for such AYs will have to be computed by the AOs as a fresh exercise. iii. The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the 'total income' of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs "in which both the disclosed and the undisclosed income would be brought to tax". iv. Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment "can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material." v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word 'assess' in Section 153 A is relatable to abated proceedings (i.e. those pending on the date of search) and the word 'reassess' to completed assessment proceedings. vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material existing or brought on the record of the AO. vii. Completed assessments can be interfered with by the AO while making the assessment under Section 153 A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment. Conclusion 38. The present appeals concern AYs, 2002-03, 2005-06 and 2006- 07.On the date of the search the said assessments already stood completed. Since no incriminating material was unearthed during the search, no additions could have been made to the income already assessed.
The question framed by the Court is answered in favour of the Assessee and against the Revenue.” The above view has been reiterated by the Hon’ble Delhi High Court in the case of CIT-7 vs. RRJ Securities Ltd. in [2016] 380 ITR 612 (Del) where the Hon’ble Court has been pleased to hold as under:- “In respect of such assessments which have abated, the AO would have the jurisdiction to proceed and make an assessment. However, in respect of concluded assessments, the AO would assume jurisdiction toreassess provided that the assets/documents received by the AO representor indicate any undisclosed income or possibility of any income that may have remained undisclosed in the relevant assessment years. This Court in Commissioner of Income Tax (Central)-III v. Kabul Chawla: ITA707/2014, decided on 28th August, 2015 has held that completed assessments could only be interfered with by the AO on the basis of an incriminating material unearthed during the course of the search or requisition of the documents. In absence of any incriminating material, the AO does not have any jurisdiction to interfere in concluded assessments. In the present case, as stated hereinabove, the addition has been made without there being any incriminating material and in absence of pendency of assessment. In the absence of any incriminating material, as held by the Hon’ble High Court, the addition cannot be made in an assessment under section 153A. Respectfully following the judgment of the jurisdictional Delhi High Court, we hold that the AO was not justified in making the addition and accordingly the addition made by the AO in the assessment years 2006-07, 2007-08 and 2008-09 are directed to be deleted. Consequently the appeals filed for these assessment years are allowed.
As regards assessment years 2009-10 and 2010-11 are concerned the learned DRP has confirmed the addition applying the base rate of State Bank ofIndia plus 150 basis points. It was the contention of the learned AR that no addition can be made as the advance made was out of the EEFC account which carries no interest. Further amount advanced was for promoting its business. On this issue we are not in agreement with the contention of the learned AR. The amount having been advanced to an Associated Enterprises, the same has to be evaluated by applying arm’s length price. Since it was a loan during the assessment years 2009-10 and 2010-11, the assessee company ought to have computed the arm’s length price in respect of such loan advanced to its subsidiary companies. However, as regards the interest rate we are in agreement with the contention of the learned AR that this cannot be the interest rate applicable to Indian Rupees. These advances having been made in the foreign currency, the rate of interest has to be with reference to the interest rate on loans and advances in respect of foreign currency. This issue is covered by the judgment of the jurisdictional Delhi High Court in the case of CIT vs. Cotton Naturals (P) P Ltd. (2015) 276 CTR 0445 (Del) wherein the Hon’ble High Court has been pleased to hold as under:-
“39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. 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. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lender‘s State or that in the borrower‘s is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B1. II 725 (1994), re. 1 § AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no ‗special relationship‘, this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6).For Art. 11(6), at least its wording, allows the authorities to ‗eliminate hypothetically‘ the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money. The aforesaid methodology recommended by Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply.”
Accordingly the applicable rate of interest shall be the rate of interest in respect of such foreign currency in which the loans have been advance. As per the details available on record during the assessment years 2009-10 and 2010- 11 assessee has advanced to its subsidiary companies as detailed below:-
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Taking into consideration of the above facts, the learned AO is directed to verify the above interest rate and recompute the adjustment on account of interest by applying the rate of interest of the relevant currency in the AY 2009-10 & 2010-11. Accordingly this ground of the assessee is partly allowed for AY 2009-10 & 2010-11.
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As regards the addition on this account in assessment year 2011-12, the advance given to its subsidiary companies stand converted into share application money. Once the loan has been converted into share application money, for the issue of the share capital, then such amount cannot be considered as loan. The TPO is not permitted under the law to re-characterize the transaction and accordingly we are of the view that no interest on such share application money can be charged. The above view is supported by the judgment of the Coordinate Bench of the ITAT in the case of Bharti Airtel Ltd. vs. ACIT, [2014] 161 TTJ 0283 (Del) wherein the ITAT has held as under:-
“47. We find that in the present case the TPO has not disputed that the impugned transactions were in the nature of payments for share application money, and thus, of capital contributions. The TPO has not made any adjustment with regard to the ALP of the capital contribution. He has, however, treated these transactions partly as of an interest free loan, for the period between the dates of payment till the date on which shares were actually allotted, and partly as capital contribution, i.e. after the subscribed shares were allotted by the subsidiaries in which capital contributions were made. No doubt, if these transactions are treated as in the nature of lending or borrowing, the transactions can be subjected to ALP adjustments, and the ALP so computed can be the basis of computing taxable business profits of the assessee, but the core issue before us is whether such a deeming fiction is envisaged under the scheme of the transfer pricing legislation or on the facts of this case. We donot find so. We donot find any provision in law enabling such deeming fiction. In view of the above facts and the judgment of coordinate bench, the AO is directed to verify the date of conversion of loan to share application money and not to make any adjustment on account of interest post conversion of loan to share application money and accordingly this ground of the assessee is allowed for statistical purpose. 23. As regards the disallowance under section 14A in respect of the expenditure incurred for earning exempt income is concerned, we note that the assessee has earned the following income in the assessment years 2009-10 to 2011- 12:-
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The contention of the assessee is that in the absence of any satisfaction being recoded disallowance under section 14A cannot be sustained. The alternative contention of the learned AR has been that the addition in any case cannot exceed the exempt income. As regards first contention that no satisfaction has been recorded we note from the assessment order that the AO has considered the explanation of the assessee and after taking into consideration the explanation he has invoked Rule 8D. Having done so, it cannot be said that the AO has not taken into consideration the explanation of the assessee.
However, as regards the second contention of the learned AR that the disallowance cannot exceed the exempt income, we are in agreement with this contention. This view is supported by the judgment of the Hon’ble jurisdictional Delhi High Court in the case of Joint Investments Pvt. Ltd. versus Commissioner of Income Tax [2015] 372 ITR 694 (Del). Accordingly we direct the AO to restrict the addition to the exempt income. Accordingly this ground is partly allowed in favour of the assessee.
In view of the above findings the assessee’s appeals for the A.Y. 2006-07 being A.Y. 2007-08 being ITA No. 1087/Del/2015, A.Y. 2008-09 being ITA No. 1088/Del/2015 are allowed, Appeal for A.Y. 2009-10 being ITA
No. 1089/Del/2015, A.Y. 2010-11 being and A.Y. 2011-12 being ITA No. 1091/Del/2015 are partly allowed.”
2.3. We find that in the present appeal, the issue relates to disallowance of Rs.27,19,404/- made u/s 14A(2) of the Act read with Rule-8D of the Rules. Considering the totality of facts, we are of the view that at best, if any disallowance could be made that cannot exceed the exempt income. The Tribunal in the case of Nimbus Communication Ltd. (supra) has made an elaborate discussion and thereafter reached to a particular conclusion, thus, the ratio laid down in the cases mentioned by the ld. Counsel for the assessee, clearly supports the case of the assessee. So far as, the case of Baba Global Ltd. vs DCIT (supra), relied upon by ld. DR is concerned, even in that case in para-26, there is categorical finding that the disallowance cannot exceed the exempt income. The ratio laid down in Joint Investment Pvt. Ltd. vs CIT (2015) 372 ITR 694 (Del.) clearly supports the case of the assessee, thus the case relied upon by ld. DR is of not much help to the Revenue. Thus, the appeal of the assessee is allowed.
Finally, the appeal of the assessee is allowed.
2.2. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, conclusion drawn in the aforesaid order of the Tribunal dated 21/04/2017, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, we note that the Hon'ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. 194 taxman 203 has clearly held that Rule -8D of the Rules is applicable from Assessment Year 2008-09. In the present appeal, the total dividend income earned by the assessee is Rs.3,93,161/-. Therefore, if any disallowance could be made that cannot exceed the exempt income. The Tribunal considering the decision of Nimbus Communication Ltd. has made an elaborate discussion in the aforesaid order dated 21/04/2017. The ratio laid down in Joint Investment Pvt. Ltd. vs CIT (2015) 372 ITR 694 (Del.) also supports the case of the assessee. As agreed by the Ld. counsel for the assessee that the disallowance cannot be more than the dividend income of Rs.3,93,161/-, we direct the Ld. Assessing Officer that at best the disallowance may be restricted to the dividend income earned by the assessee. The appeal of the assessee is accordingly disposed of in terms indicated hereinabove.
Finally, the appeal of the assessee is partly allowed.”
2.2. If the ratio laid down in the aforesaid order is kept in juxtaposition with the facts of the present issue before us, we note that the Ld. Commissioner of Income Tax (Appeal) upheld the disallowance u/s 14A of the Act amounting to Rs.8,83,323/-. The claim of the assessee is that the assessee did not incur any expenditure on the exempted income of Rs.2,14,457/-, being dividend income.
It is noted that Rule-8D was applied by the Assessing Officer. Considering the totality of facts, we are in agreement with the argument of the Ld. counsel for the assessee that the disallowance cannot be more than the dividend income. In the present appeal, the dividend income is Rs.2,14,547/-, therefore, the Ld. Assessing Officer is directed to restrict the disallowance to the extent of dividend income earned by the assessee. Thus, this ground of the assessee is partly allowed. No other ground was agitated by the ld. counsel for the assessee.
Finally, the appeals of the assessee are disposed off in terms indicated hereinabove.
This order was pronounced in the open court in the presence of the ld. representative from both sides at the conclusion of the hearing on 25/01/2018.