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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’ : NEW DELHI
Before: SHRI N.K. SAINI & SHRI KULDIP SINGH
ASSESSEE BY : Shri Ved Jain, Advocate and Shri Ashish Goel, CA REVENUE BY : Shri T.M. Shiva Kumar, CIT DR Date of Hearing : 27.12.2016 Date of Order : 28.12.2016
O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : The Appellant, M/s. Baba Global Limited (hereinafter referred to as ‘the assessee company’) by filing the present appeal sought to set aside the impugned order dated 04.02.2015, passed by the AO under section 144C / 153A of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2005-06 in consonance with the orders passed by the ld. DRP/TPO on the grounds inter alia that :-
“1. On the facts and circumstances of the case, the order passed by the learned Assessing Officer (AO) under Section 143(3) read with Section 144C of the Act is bad both in the eye of law and on facts.
2. On the facts and circumstances of the case, the directions issued by the Hon'ble DRP are bad and liable to be quashed having been passed beyond the period of limitation prescribed under the statute.
3. Without prejudice to the above and in the alternative, the assessment order passed by the learned AO is barred by limitation having been passed beyond the statutory period prescribed under the Act.
4. On the facts and circumstances of the case, the order passed by the learned AO is bad in law and liable to be quashed as the same has been passed without issuance and service of statutory notice under Section 143(2) of the Act.
5. On the facts and circumstances of the case, the learned AO has erred both on facts and in law in framing the assessment under Section 153A of the Act despite the fact that the search on the basis of which assessment has been reopened itself is bad in law.
6. On the facts and circumstances of the case, the learned AOI has erred both on facts and in law in passing the order despite the proceedings initiated under Section 153A and the assessment framed under Section 153A/143(3) are in violation of the statutory conditions and the procedure prescribed under the law.
7. On the facts and circumstances of the case, the learned AO has erred both on facts and in law in going ahead with the assessment under Section 153A and in making the additions despite the fact that no incriminating material was found during the course of the search.
8. On the facts and circumstances of the case, the learned AO has erred both on facts and in law in making a reference to the TPO during assessment proceedings under Section 153A despite the fact that there was no incriminating material found during the course of the search.
On the facts and circumstances of the case, the learned AO has erred both on facts and in law in reviewing its order passed under Section 143(3) of the Act after due application of mind.
10. On the facts and circumstances of the case, the learned AO has erred both on facts and in law in making assessment at income of Rs.1,47,01,367/- as against loss of Rs.64,05,101/- declared by the assessee.
11. On the facts and circumstances of the case, the learned AO has erred both on facts an in law in making addition of Rs.2,11,06,468/- as difference in arm's length price determined by the Transfer Pricing Officer (TPO) in pursuance of DRP's order.
12. On the, facts and circumstances of the case, the learned AO has erred both on facts and in law in making the addition of an amount of Rs.2,11,06,468/- on account of difference in arm's length price on the transaction of interest on loan given to the subsidiary.
13. On the facts and circumstances of the case, the learned TPO has erred both on facts and in law in making the said adjustment despite the fact that the said transaction does not come under the ambit of 'international transaction'.
14. That the assessing officer erred on facts and in law in making an adjustment of Rs.2,11,06,468 to the arm's length price of the 'international transactions' of interest received from loan advanced to associated enterprise, on the basis of the order passed under section 92CA(3) of the Income-tax Act, 1961 ("the Act") by the TPO.
15. That the assessing officer/ TPO erred on facts and in law in imputing interest at the rate of 10.25% p.a. on the interest free loan advanced by the assessee to its wholly owned subsidiary out of its surplus funds kept at Exchange Earners Foreign Currency (EEFC) account.
16. That the assessing officer/TPO erred on facts and in law in n at appreciating that the loan advanced by the assessee is for expanding its business in new horizons and having regard to the economic substance of the transaction, the said transaction shall be considered in the nature of quasi equity and accordingly shall not be bench marked applying rates applicable on commercial loan/loans provided by banks.
17. The assessing officer/DRP erred on facts and in law in not appreciating that the loans were advanced by the assessee out of its own surplus funds kept in the foreign denominated EEFC account, and since the transaction of issue of loan has no bearing on the cost or profits of the assessee, it cannot be considered as an international transaction in term of section 928 of the Act.
18. The assessing officer/DRP erred on facts and in law in not appreciating that the loans were issued by the assessee out of EEFC account which is not entitled for any interest income, and since the transaction of advance of loan has no bearing on the income of the assessee, it cannot be considered as an international transaction under section 928 of the Act.
19. Without prejudice, the assessing officer/DRP erred on facts and in law in disregarding the fact that the loan was advanced by the assessee to its associated enterprise in foreign denominated currency and accordingly, loan available in the international market with interest rate computed considering LIBOR shall be applied for benchmarking.
20. On the facts and circumstances of the case, the Hon'ble DRP has erred both on facts and in law in holding that Prime Lending Rate (PLR) of SBI as on 30th June of relevant previous year be applied without appreciating that such rate is applicable on loan availed in India in domestic currency.
On the facts and circumstances of the case, the Hon'ble DRP has erred both on facts and in law in applying the Safe Harbour Rule while determining the aforesaid rate of interest despite the fact that the said Rules are not applicable to the relevant assessment year.
22c. That the appellant craves leave to add, amend or alter any of the grounds of appeal.”
Briefly stated the facts of this case are : initially return of income was filed by the assessee on 26.10.2005 declaring NIL income which was processed u/s 143 (1) of the Income-tax Act, 1961 (for short ‘the Act’) on 11.02.2006 but subsequently assessee has revised its return of income on 27.07.2006 and assessment was completed u/s 143 (3) of the Act vide order dated 05.10.2007 determining NIL income by allowing carry forward of the business loss of Rs.64,05,101/- and long term capital loss of Rs.80,57,197/-.
Thereafter, a search and seizure operation u/s 132 of the Act was conducted in case of assessee company being part of DS Group on 21.01.2011 and consequently notice u/s 153A was issued on 09.01.2012 requiring the assessee to file return of income within 16 days of the receipt of notice. In response to the notice, assessee filed return declaring business loss of Rs.64,05,101/- and long term capital loss of Rs.80,57,197/- on 24.01.2012.
Notice u/s 142 (1) along with questionnaire was served upon the assessee and in response thereto, Shri Ashok Singhal, CA/AR of the assessee attended proceedings from time to time. Assessee company is into manufacturing of flavoured chewing tobacco, kiwam, scented elaichi and tulsi mix under the brand name ‘BABA’ and ‘TULSI’ and exported its 100% production during the year under assessment.
During the assessment proceedings, the assessee was found to be engaged in international transactions with its Associated Enterprises (AEs), for which it was called upon to produce copy of Form No.3 CEB for the previous year 2004-05, relevant to assessment year under consideration. During the year under assessment, the assessee reported two international transactions i.e. (i) Baba Global (UK) Ltd. of Rs.39,64,813/-; and (ii) Baba Global (UK) Ltd. for Rs.2,83,43,030/-.
Assessee also advanced foreign currency loan to its subsidiary as under :-
Associated Enterprises Amounts of Rate of interest on loan Loan Baba Global Co (FZC) 233429180 Interest free loan UAE Baba Global Co (BD) Ltd. 4118559 Interest free loan Baba Global AG 0 Interest free loan
Consequent upon the reference made u/s 92CA(1), the TPO passed order dated 23.12.2013 proposing an adjustment of Rs.2,96,33,034/- on account of Arms Length Price (ALP) by determining interest income in respect of interest free deemed loan advanced by the assessee company during the FY 2004-05 to its AE. Then draft assessment order was passed. Pursuant to the order passed by the TPO, total income of the assessee assessed at Rs.2,32,27,933/-.
Assessee filed objections u/s 144C before the Dispute Resolution Panel (DRP) who has disposed of the objections vide order dated 24.12.2014. In accordance with the directions issued by DRP, cumulative adjustment has been made u/s 92CA at Rs.2,11,06,468/- and the TPO has calculated the interest on loan advanced to the AE as under :
“PLR of SBI as on 30.06.2004 – 10.25% (i) Account : Baba Global Co. FZC – Loan Account
Date Balance in INR Days Interest on loan @ 10.25% 01.04.2004 19,06,17,000.00 Dr 193 10331180 11.10.2004 21,37,02,000.00 Dr 92 5521123 11.01.2005 23,38,79,500.00 Dr 79 5188601 31.03.2005 23,34,29,180.00 Dr 1 65552 Total 265 21106456 (ii) Account : Baba Global (BD) Ltd. – Loan Account
Date Balance in INR Days Interest on loan @ 10.25% 31.03.2005 41,307.00 Dr 1 12
Grand Total (i) + (ii) 21106468” 9. Consequently, addition on account of transfer pricing adjustment at Rs.2,11,06,468/- on account of intra group loan is made and added to the total income of the assessee company and income of the assessee company is computed as NIL.
Feeling aggrieved with the assessment order passed pursuant to the directions issued by the TPO/DRP, assessee company has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
The ld. AR for the assessee challenging the impugned order passed by AO/TPO contended inter alia that the assessment order as well as reference made to TPO by AO is not sustainable as no incriminating material has come on record during search and seizure operation conducted on 21.01.2011; that on the basis of search and seizure operation conducted on 21.01.2011, the AO has passed order for six block assessment years by making common addition on account of notional interest on the values of the loans lent to its subsidiaries but the appeal for AYs 2006-07, 2007-08 and 2008-09 have already been decided in favour of the assessee by deleting the addition by following the decision rendered by Hon’ble Delhi High Court in case of CIT (Central) vs. Kabul Chawla – (2016) 380 ITR 573 (Del.).
However, on the other hand, ld. DR in order to repel the argument addressed by ld. AR contended that since the assessee has not filed the Form 3CEB during the first round of assessment proceedings, the assessee company is barred from raising plea of non-availability of incriminating materials; that ground relating to presence or absence of incriminating material was never raised before the DRP nor before the AO which are mixed question of fact and law and relied upon the case of Yash Jewellery P. Ltd. vs. DCIT (ITA No.915/Mum/2015 decided on 15.02.2016).
Undisputed facts are inter alia that initially return of income was filed by the assessee qua AY 2006-07 declaring loss of Rs.23,61,299/- on 08.11.2006, which was processed u/s 143 (1) and thereafter assessment was completed u/s 143(3) vide order dated 14.03.2008 determining a loss of Rs.23,61,299/-; that thereafter search and seizure operation was conducted u/s 132 in case of assessee company as part of DS Group on 21.01.2011 and in response to the notice issued u/s 153A, assessee filed return declaring loss of Rs.23,61,299/- on 24.01.2012; that assessee entered into two international transactions with its AE during the period under assessment; that assessee has lent foreign currency loans to its subsidiaries, namely, (i) Baba Global Company (FZC)
UAE to the tune of Rs.23,67,52,340/- and (ii) Baba Global Co (BD) Ltd. to the tune of Rs.15,60,495/-; that no new loan has been advanced by the assessee company to its AE during the year under assessment; that addition made for AY 2006-07, 2007-08 and 2008-09 on the basis of search and seizure operation carried on 21.01.2011 have already been deleted by the Tribunal and the said decisions have already been affirmed by the Hon’ble Delhi High Court vide order dated December 14, 2016 passed in ITA 821 & 822 / 2016.
In the backdrop of the aforesaid undisputed facts, the first question arises for determination in this case is, “as to whether the AO is justified to complete the assessment u/s 153A by making an addition of Rs.2,11,06,468/- for AY 2005-06 on account of intra group loan even in the absence of any incriminating material deemed found during the search conducted u/s 132 of the Act?”
Identical issue has come up before the Hon’ble jurisdictional High Court in the case cited as CIT vs. Kabul Chawla - 380 ITR 173 (Del.) wherein all the earlier decisions delivered by the Hon’ble High Courts have been considered and legal position decided by the Hon’ble jurisdictional High Court is summarized for ready reference 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.
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.”
First of all, the first contention raised by ld. DR that “the issue as to the absence of incriminating material during the search and seizure operation was never raised before the ld. DRP nor before AO” is not tenable in the face of the fact that assessee company filed submissions dated 04.01.2013, available at pages 107 & 108 of the paper book, before AO, categorically raised the issue that no incriminating documents/loose papers suggesting any undisclosed income for the year under assessment has been found during the search and seizure operation and as such, reassessment is bad.
When undisputedly complete details of income along with books of account and audited balance sheet have been filed by the assessee company during the assessment proceedings completed u/s 143 (3), no addition can be made in the absence of incriminating material, if any, unearthed during the search only.
The contention of the ld. DR that non-furnishing of Form 3CEB by the assessee company during normal assessment proceedings is enough for reassessment of the case is not tenable because when all the transactions entered into by the assessee company with its AE supported with books of account and audited balance sheets have been brought on record during assessment proceedings completed u/s 143(3) it was for AO/TPO to apply their mind to make assessment accordingly. More so, it is not case of the revenue that the assessee has suppressed the international transaction with its AE during the assessment proceedings concluded u/s 143(3) of the Act.
Even otherwise, the issue in controversy has already been decided in favour of the assessee for AYs 2006-07 and 2007-08 wherein reassessment was made u/s 153A consequent upon the search and seizure operation conducted on 21.01.2011. Vide order dated 14.12.2016 (supra), Hon’ble jurisdictional High Court held, in assessee’s own case for AYs 2006-07 and 2007-08 by following the law laid down in Kabul Chawla (supra), that completed assessment u/s 143(3) of the Act interfered with by AO/TPO u/s 153A is not tenable in the eyes of law.
In view of what has been discussed above, we are of the considered view that without entering into the merits of this case, the addition made in this case u/s 153A/144C of the Act is not sustainable in the eyes of law, hence deleted. Consequently, the appeal filed by the assessee is hereby allowed. Order pronounced in open court on this 28th day of December, 2016.