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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’, NEW DELHI
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I-1’, NEW DELHI Before Sh. N. K. Saini, AM and Smt. Beena Pillai, JM ITA No. 373/Del/2016 : Asstt. Year : 2011-12 M/s Brahma Center Development Vs Income Tax Officer, Pvt. Ltd., Flat No. B-8, Cabin No. Ward-5(2), 11, Ansal Tower, 38, Nehru Place, New Delhi-110002 New Delhi-110019 (APPELLANT) (RESPONDENT) PAN No. AAECB1294N Assessee by : Sh. Rahul K. Mitra & Atul Jain, CAs, Revenue by : Sh. Amrendra Kumar, CIT DR Date of Hearing : 02.05.2016 Date of Pronouncement : 29.07.2016 ORDER Per N. K. Saini, AM:
This is an appeal by the assessee against the order dated 28.12.2015 passed by the AO u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as the Act).
Following grounds have been raised in this appeal:
“1. The assessment order U/s 143(3) r.w.s. 144C passed by the Assessing Officer ('AO') and disallowance made by the AO is illegal, bad in law, on the basis of wrong facts and without jurisdiction.
ITA No. 373/Del/2016 2 Brahma Center Development Pvt. Ltd. 2. The additions/ disallowances made are illegal, unjust, and highly excessive. The total income of the Appellant has been wrongly and illegally computed by the Assessing Officer at Rs. 7,68,52,550/- as against loss declared at Rs. 12,46,029/-thereby making total addition/ disallowance of Rs. 7,80,98,582/-. 3. The reference made by the AO to the Transfer Pricing Officer (TPO) suffers from jurisdictional error as the AO has not recorded any reasons in respect of an international transaction prior to making such references order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the Transfer Pricing Officer ('TPO') for computation of the arm's length price ('ALP'), as required under section 92CA(1) of the Income Tax Act, 1961 ('Act'). 4. The AO/ DRP/ TPO have erred on facts and in law in disallowing the part of interest paid by the appellant on the ground that the interest @ 12% paid by him on Compulsory Convertible Debenture during the year do not satisfy the arm's length principle envisaged under the Act and is excessive. 5. That the AO/ DRP/ TPO has erred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Income-tax Act, 1961 ('Act') read with the Income Tax Rules, 1962, and conducting a fresh economic analysis to determine the arm's length price in contravention of Rule 10B(1)(a) r/w Rule 10B(2).
ITA No. 373/Del/2016 3 Brahma Center Development Pvt. Ltd. 6. That the AO/ DRP/ TPO has erred, in law and in facts, in arbitrarily disregarding the actual transaction undertaken and structured by the appellant without fully appreciating the business and economic reasons of such transaction. 7. The AO/DRP/TPO has erred on facts and in law in applying L1BOR rate considering the rupee denominated Compulsorily Convertible Debentures (CCDs) as External Commercial Borrowings (ECBs) instead of rupee denominated CCDs. The DRP failed to appreciate that borrowings were made in the Indian currency and therefore interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has been taken. 8. Without prejudice, the AO/DRP/TPO has erred on facts and in law in not allowing the benefit of risk factor and other expenses like commitment fees, prepayment fees, foreign currency risk hedging cost, withholding taxes etc. 9. Without prejudice to the above grounds, the AO has erred on the facts and in law, in adding the disallowance of Rs, 7,68,52,550/- in the total income of the appellant. The AO has erred in law and on facts in disregarding the fact that interest expense is debited to WIP and same is required to be reduced from WIP. 10. The Assessing Officer has erred in not providing proper and adequate opportunity of hearing to the Appellant to place the
ITA No. 373/Del/2016 4 Brahma Center Development Pvt. Ltd. evidence/details on record to substantiate its claim during the assessment proceedings. 11 .The additions made and the observations made are unjust, unlawful and based on mere surmises and conjunctures. The additions made cannot be justified by any material on record and also excessive. 12. The explanation given in the evidence produced, material placed that has been made available on record has not been properly considered and judicially interpreted and the same do not justify the additions/ allowances made. 13. The AO has erred in charging of interest u/s 234B and 234D of the Act and withdrawn of interest U/s 244A. 14. The AO has erred in initiation of proceedings u/s 271(1)(c) and 271G of the Act.” 3. Ground Nos. 1 & 2 are general in nature, Ground No. 14 is pre-mature and Ground No. 3 was not pressed so these grounds do not require any adjudication on our part.
The grievance of the assessee in this appeal vide Ground Nos. 4 to 9 relates to the disallowance of part of the interest paid by the assessee, on the ground that the interest paid on Compulsory Convertible Debenture did not satisfy the arm’s length principle and application of LIBOR rate
ITA No. 373/Del/2016 5 Brahma Center Development Pvt. Ltd. considering the rupee denominated Compulsory Convertible Debenture as External Commercial Borrowings instead of rupee denominated Compulsory Convertible Debentures. The assessee vide Ground Nos. 10 to 12 has stated that the evidence produced had not been properly considered and judicially interpreted and that the opportunity of being heard to place the evidence/details on record to substantiate its claim was not provided during the course of assessment proceedings.
The facts of the case in brief are that the assessee company was incorporated on 28.5.2010 and during the year under consideration was engaged in the business of promotion, construction and development of the commercial complexes comprising of retail and commercial office complex. The assessee e-filed return of income on 30.11.2011, declaring Nil Income. During the course of assessment proceedings, the AO noticed that the assessee had undertaken the following international transactions: Name of AE Nature of Value(Rs.) Method Transaction Brahma Opportunities Allotment of Share 9999850 CUP D. Ltd. Brahma Opportunities Receipt of Share 619999800 CUP D. Ltd. Capital Money subsequently allotted as Equity
ITA No. 373/Del/2016 6 Brahma Center Development Pvt. Ltd. Share Capital during FY 2011-12 JM Asian Cyprus B. Allotment of 12% 70866571 CUP Ltd. compulsory convertible debenture Neptune Asian Cyprus Allotment of 12% 45698476 CUP A Ltd. compulsory convertible debenture 6. The AO referred the matter to the Transfer Pricing Officer u/s 92CA of the Act. The TPO passed the order dated 28.01.2015 and proposed the adjustment of Rs.8,29,55,458/- on account of Arm’s Length Price. In the present case, the assessee during the year under consideration had issued INR denominated compulsory convertible debenture (CCDs) amounting to Rs.2,19,76,50,630/- to its AEs – i) JM Asian Cyprus B. Ltd. and ii) Neptune Cyprus A Ltd. The CCDs bear an annual coupon rate of 12% and the assessee had paid interest of Rs.11,65,65,047/- to its AEs on the CCDs. The international transaction of payment of CCDs was benchmarked in the TP documentation maintained by the assessee applying the CUP method, the interest paid to the AEs along with other operating expenses were transferred to the project work-in-progress and carried forward to the next year. There was no sale of inventory during the year, therefore, the international transaction of payment of interest on CCDs had an impact on the closing value of inventory.
ITA No. 373/Del/2016 7 Brahma Center Development Pvt. Ltd. The TPO made an adjustment of Rs.7,80,98,582/- on account of Arm’s Length Price. The TPO also treated INR denominated CCDs as External Commercial Borrowings (ECB) and by considering 6 months LIBOR + 300 bps i.e. 3.46% as an arm’s length interest rate arrived at an Arm’s Length Price of Rs.3,36,09,589. Consequently, the TPO made an adjustment u/s 92CA of the Act of Rs.8,29,55,458/-. The assessee raised the objection before the ld. DRP who upheld the approach of the TPO in treating the CCDs as External Commercial Borrowings and directed the AO/TPO to make an adjustment, considering 6 months LIBOR + 300 bps i.e. 3.96% as the ALP. Accordingly, the adjustment was restricted to Rs.7,80,98,582/-. On the direction of the DRP, the AO passed the impugned assessment order.
Now the assessee is in appeal. The ld. Counsel for the assessee submitted that the TPO did not express any reservation against the benchmarking analysis carried out by the assessee in the transfer pricing documentation, he neither indicated his intention to reject the benchmarking approach of the assessee nor he proposed to introduce any fresh benchmarking approach of his own. It was further submitted that the transaction of payment of interest to AEs was shown an international transaction as the assessee had lent interest-
ITA No. 373/Del/2016 8 Brahma Center Development Pvt. Ltd. free loan to its AEs. He drew our attention towards page no. 10 of the PTO’s order wherein it has been noted as under:
“Indian companies go for External Commercial Borrowings as the interest rates on ECB loans are generally cheaper than the prevailing interest rates in the domestic market. Thus as can be seen from above, while borrowing money by X (in India) from Y (outside India), the interest rates are benchmarked with LIBOR and the interest rate above LIBOR is decided by the stand alone credit rating of X. On the contrary, no company in India would like to invest in the form of loan outside India and that also without security as the interest returns in India would be higher than those prevailing in developed markets. Thus while lending money by X (in India) to Y (outside India), the interest rates would be bench marked against those prevailing in India for investing in corporate bonds (which are without security). Thus the benchmarking rate for lending would be different from that of borrowing.” 8. The ld. Counsel for the assessee submitted that the TPO himself stated in his order that prevailing market conditions, volatility, period, forward premium, period of loan, USD/INR forward premium/discount, availability of foreign currency, cost of rupee resource, credit rating etc. were important factors which needed appropriate adjustments while determining the ALP and that the basic principle to be followed is that the currency in which the loan has originated must be considered, however, he used LIBOR base rate to
ITA No. 373/Del/2016 9 Brahma Center Development Pvt. Ltd. benchmark INR denominated CCDs. A reference was made to page no. 12 of the TPO’s order. It was further submitted that the ld. DRP upheld approach followed by the TPO and re- characterized the transaction of INDR denominated CCD’s as ECB. It was contended that as per FIPB, RBI and FEMA guidelines, CCD’s issued by an Indian company forms part of FDI but the ld. DRT and the TPO were factually incorrect by treating them as ECB. It was further submitted that to benchmark inbound loans, the basic principle to be followed was that the currency in which the loan had originated must be considered. Therefore, the assessee selected CUP as the most appropriate method for the purpose of benchmarking. However, the ld. DRP completely ignored the fact i.e. CCDs were denominated in Indian currency and merely upheld the approach of the TPO. It was submitted that the TPO wrongly treated the issuance of CCDs as ECB ignoring this fact that the loans is debt in nature whereas a CCD is hybrid in nature and exhibits features of both debt as well as equity. It was further submitted that a loan is covered as External Commercial Borrowings whereas a compulsorily convertible debentures are taken as FDI which is clear from RBI Circular No. 74(RBI/2006-2007/435) (copy of which is placed at page no. 351 to 352 of the assessee’s paper book). It was contended that in the “Consolidated Policy” effective from
ITA No. 373/Del/2016 10 Brahma Center Development Pvt. Ltd. 01.04.2010 issued by the Department of Industrial Policy and promotion (DIPP), RBI guidelines and FEMA regulations, the issuance of the CCD is part of FDI being quasi-equity (hybrid) in nature and considering it as ECB would be completely against the regulations laid by DIPP, RBI and FEMA. It was emphasized that the issue of CCDs was denominated in INR and not foreign currency. Therefore, the TPO erred in considering LIBOR as a benchmark rate, which is in complete contradiction to the facts of the case. It was contended that RBI Circular No. 09/2011 dated 01.07.2011 permits use of LIBOR rates within permissible range for issue of ECB not for INR denominated borrowings and there is judicial precedents supporting the interest rates to be considered for currency in which loan has originated. The reliance was placed on the following case laws:
� India Debt Management Pvt. Ltd., IT(TP)A No. 7518/Mum/2014 � CIT Vs Cotton Naturals (I) Ltd., ITA No. 233/2014 (Del. HC) � CIT Vs Tata Autocomp Systems Ltd., ITA No. 1320/2012 (Mum. HC) � Bharti Airtel Ltd., ITA No. 5816/Del/2012 (ITAT- Del) � M/s Aithent Technologies Pvt. Ltd. Vs ITO, ITA No. 3647/Del/2007 (ITAT Del)
ITA No. 373/Del/2016 11 Brahma Center Development Pvt. Ltd. 9. It was contended that the adjustment had been proposed in violations of the law and thus, ought to be deleted. It was contended that the assessee has also carried out analysis on BSE database, which provides the details of comparable instruments. The assessee requested to admit the same as an additional/supplementary analysis vide letter dated 27.04.2016. The said analysis indicated that the average coupon rate of comparable instruments issued in Real Estate Industry is 14.50% as compared to the average coupon rate of 12.39% of all the instruments issued during the year. A reference was made to Annexure 1 of the letter dated 27.04.2016. It was further submitted that the assessee produced the details of interest rate offered by nationalized banks in India for the borrowers having similar credit rating as of the assessee and the average lending was computed at 13.66%, which again support and substantiate the arm’s length nature of the international transaction of payment of interest on CCD entered into by the assessee from an Indian Transfer Pricing perspective. A reference was made to page no. 4 of the letter dated 27.04.2016 moved by the assessee for admission of the additional evidences. It was accordingly contended that the payment of interest on CCD @ 12% entered into by the assessee meets the arm’s length standard
ITA No. 373/Del/2016 12 Brahma Center Development Pvt. Ltd. from an India Transfer Pricing perspective. Accordingly, a request was made to admit the additional evidences. 10. It was further submitted even, if at all, a LIBOR based rate was to be used appropriate adjustments should have been allowed. It was also submitted that the TPO did not take cognizance of the Rule 10B(1)(a) and Rule 10B(2) which stipulate that for a comparability analysis, the price charged under a comparable uncontrolled transactions must be identified and such price must be adjusted to account for differences in the international transactions and comparable uncontrolled transaction. It was stated that even if the LIBOR rates were to be used for the purpose of benchmarking INR denominated CCDs, adjustment should have been made by keeping in view the following factors for computing the return from an instrument: “a) nature of security b) foreign exchange risk hedging c) withholding tax d) floating rate to fixed rate e) tenor of the security f) commitment fee, prepayment fee, exit charge, etc.” 11. It was contended that based on the weightage, the average indicative cost of CCD was computed at 16.32%. A reference was made to Annexure 3 of the letter dated 27.04.2016. It was accordingly submitted that the
ITA No. 373/Del/2016 13 Brahma Center Development Pvt. Ltd. international transaction of payment of interest on CCD entered into by the assessee clearly meets the arm’s length standard from an Indian Transfer Pricing prospective and even there could not have been any adjustment because the assessee had not claimed any deduction of the interest paid on issuance of the CCDs in its return of income. A reference was made to page nos. 682 to 684 of the assessee’s paper book, which is the copy of return of income.
In his rival submissions the ld. CIT DR reiterated the observations made by the TPO and the DRP in their respective orders and further submitted that the international transactions were not at arm’s length, therefore, the AO rightly made the adjustment which was recommended by the TPO. It was also submitted that the ld. DRP has considered all the objections of the assessee and only thereafter directed the AO to make the adjustment on account of ALP.
We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, the assessee had furnished the additional evidences for the first time before this bench of the Tribunal, those were not available at the time of proceedings before the TPO/AO/DRP. The new evidence now
ITA No. 373/Del/2016 14 Brahma Center Development Pvt. Ltd. furnished by the assessee, go to the root of the matter and are very much relevant to resolve the present controversy i.e. as to whether the borrowing was the External Commercial Borrowings or not, it is also not clear as to whether the assessee claimed the deduction of the interest paid on issuance of Compulsorily Convertible Debenture in its return of income. In the present case, the assessee carried out analysis on BSE database which provides the details of the comparable instruments and submitted the same as additional/supplementary analysis vide letter dated 27.04.2016 which indicated that the average coupon rate of comparable instruments issued in Real Estate Industry was 14.50% as compared to the average coupon rate of 12.39% of all the instruments issued during the year, which is evident from Annexure 1 attached with the letter dated 27.04.2016. The assessee had also claimed to have collected the details of interest rate offered by nationalized banks in India to the borrowers having similar credit rating as that of the assessee vide Annexure 4 of the letter dated 27.04.2016, first time before this bench of the Tribunal and as per the said document the average lending rate was computed at 13.66%, the assessee claimed that the international transaction of payment of interest on CCD’s entered into by it was at arm’s length. Since the aforesaid documents furnished by the
ITA No. 373/Del/2016 15 Brahma Center Development Pvt. Ltd. assessee first time before the Tribunal are relevant to resolve the present controversy and the assessee had reasonable cause not to furnish the same before the authorities below because those were not available at the time of framing the assessment or the proceedings before the DRP/TPO. Therefore, the additional evidences furnished by the assessee are admitted. However, these documents are to be considered by the authorities below. In that view of the matter, we deem it appropriate to set aside this case back to the file of the AO/TPO to be decided afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee and by considering the additional evidences furnished by the assessee.
In the result, the appeal of the assessee is allowed for statistical purposes. (Order Pronounced in the Court on 29/07/2016)
Sd/- Sd/- (Beena Pillai) (N. K. Saini) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 29/07/2016 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR