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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI RAMIT KOCHAR
सुनवाई क" तार"ख /Date of Hearing : 14-02-2017 घोषणा क" तार"ख /Date of Pronouncement : 27-02-2017 आदेश / O R D E R
PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the assessee, being 19th December, 2013 passed by learned Commissioner of Income Tax (Appeals)- 15, Mumbai (hereinafter called “the CIT(A)”), for the assessment year 2009-10, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 4th January, 2013 passed by learned Assessing Officer ( hereinafter called “ the AO”) u/s 143(3) r.w.s. 144C(3)(a) of the Income-tax Act,1961 (Hereinafter called “the Act”).
ITA 1234/Mum/2014 2
The grounds of appeal raised by the assessee in memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:-
“l. The LD CIT (A) -15 has erred in confirming the upward adjustment of Rs. 15,50,59,824/- on account of interest on transactions of loans and share application money given by the appellant company to its associates enterprises. Whereas, it is merely based on the own calculations and assumptions and applied the Fixed Deposit rate of interest @ 8.90%. The interest rate applied by the TPO is prejudicial to appellant and against the natural justice.
2. The LD CIT(A)-15 has erred in ignoring the facts and circumstances of the case in law that during the A.Y. 2008-09, his 'predecessor CIT (A)-15 has given the verdict based on the benchmarking of the transaction of loan with RBI guidelines on external commercial borrowings by applying 6 months LIBOR+ 150 basis points for a period of 3 years and 6 months LIBOR + 250 basis points for a period of more than 5 years.”
Brief facts of the case are that the assessee is engaged in the business of software development consultancy and online trading. A reference u/s 92CA(1) of the Act was made by the A.O. to the TPO for determination of arm’s length price (ALP) with respect to the interest on loan and share capital advanced by the assessee to Associated Enterprises (AEs) , wherein the TPO noted that the company had advanced loans and share application money to AEs. The details of these investments are as under:- 1 Investment in Geodesic Technology Solutions Ltd. 313884711 form of share Hong Kong application Investment in Geodesic Holding Ltd., 3687059838 form of share Mauritius application Total 400,09,44,549 2 Unsecured loan Geodesic Technology Solutions Ltd. 341844483 and & advances Hong Kong Unsecured loan Geodesic Information Systems Inc., 594860 and & advances USA Unsecured loan Geodesic Hong Kong Limited 1081603 and & advances (Engage Solutions Ltd.) Reimbursement of expenses 1211966 ITA 1234/Mum/2014 3 TOTAL 34,47,32,912 It was observed by the TPO that the assessee company has not charged any interest on these investments except on loan to Geodesic Hong Kong Ltd. (formerly known as Engage Solutions Limited) wherein the assessee had charged interest at the rate of 5% on loans advanced to Geodesic Hong Kong Ltd. and the basis of charging interest @ 5% was stated to be on the basis of LIBOR plus 200 basis point rate. It was further stated that the assessee company did not charge any interest on loan to Geodesic Technology Solutions Ltd., Hong Kong (GTSL) because the GTSL(AE) markets the products of assessee company all over the world, thus, for funding the capital requirement of GTSL, interest free loan was given.
The assessee company was asked as to why interest @ 20.72% should not be charged in this year , as was charged on loan and share application money in assessment year 2008-09 . The assessee company in reply submitted as under:-
“a) The company had raised zero-coupon bonds during the year amounting to 125 million (Rs. 489 crores). These funds were placed in foreign currency, in bank accounts in UK and Singapore. The share application money was invested out of these funds which was the prerequisite for use of these funds. The term-sheet states that the proceeds from the issue of the bonds will be utilized primarily for strategic acquisitions and strategic alliances outside India and for capital expenditure. The company therefore invested share application money in various associated enterprises as per details given in letter dated 18.01.2012. The assessee submitted that the source of the funds is FDI, the funds were raised abroad and placed in foreign banks. It was also pleaded that no interest was payable on the Zero Coupon Bonds, as these bonds were convertible after 5 years into share capital and assessee has not paid any interest, therefore the assessee did not charge any interest from the AE.
ITA 1234/Mum/2014 4 b) The assessee submitted that Hon’ble ITATs have held that London Interbank Offer Rate (LIBOR) Plus Rate should be used for determining arm length price for foreign currency loans. He cited judgment of ITAT in the case of Foursoft Ltd 20l2 16 ITR (Trib) 73 Hyderabad (volume TP/35/2011 dated 06.10.2011), wherein ITAT has held that the ALP as regards foreign currency loan is to be determined on international loan and not for the domestic loan and hence corporate bonds cannot be taken for comparability. ITAT further held that LIBOR is an internationally well recognized rate for benchmarking loans denominated in foreign currency. The Tribunal relied on the case of Shiva Industries and Holding Ltd (ITA No. 2148/Madras/2010). The assessee also relied upon ITAT, Mumbai decision in the case of Tech Mahindra Vs. DCIT (ITA No.1176/Mum/2010) wherein the ITAT held that "Once the transaction between the assessee and the AE is in foreign currency and the transaction is international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. ITAT confirmed the order of CIT(A) wherein transfer pricing adjustment for extended credit period to its US AE on the basis of US Dollar LIBOR Plus mark of 2% was confirmed, as compared to 10% by the AO. The assessee submitted that in the case of Engage Solution Ltd. (AE), the assessee company has charged 5% interest which is LIBOR Plus 2%. He submitted that the LIBOR Plus method should be used for determining ALP in other transactions also. c) The assessee also submitted that even the RBI has issued instructions for calculating interest rate on export credit in foreign currency on LIBOR Plus basis. The assessee also submitted that the TPO had issued show cause notice dated 22.07.2011 with respect to applying rate of LIBOR Plus 300 basis point, the reply for which was given by the assessee. However the TPO applied CRISIL rated bonds rating as per the show cause given on 06.09.2011 by rating the assessee AE as 'B' category and interest rate of 20.76% was applied, which is not acceptable to the assessee. d) It was stated that the assessee company had raised zero coupon bonds, on which notional interest of 6.60% p.a. was chargeable, if the bonds are not converted into equity after period of 5 years. It was further stated that the assessee had provided for accrual of notional interest in the balance sheet. The assessee also submitted that during the year, there was partial buyback of ITA 1234/Mum/2014 5 FCCB Bonds amounting and there was profit of Rs.23,60,94,195/- and an amount of Rs.2,60,63,445/- pertaining to notional interest debited in earlier year was written back. The assessee submitted that when the assessee company has not paid any interest but earned profit on Zero Coupon Bonds, then the Assessing Officer should not apply interest rate, which is more than the notional rate 6.60% charged to FCCB Bonds. e) It was submitted that the assessee company had raised these funds with the specific purpose of investing in share capitals in AE's abroad. The purpose is clearly written in the Term Agreement. The Assessing Officer should have ascertained the credit rating of the assessee company who has raised these funds and not taken the credit rating of the AE. The AE never raised the funds, therefore rating the AE as 'B' by the Assessing Officer was not correct. Assessing Officer has not given any reasons of how he has given the rating as 'B'. f) The assessee also submitted that the credit rating should change every year as the financials of the company as well as that of the AE are changing. The credit rating of the company comes to 'A', as this is amongst the top 15 computer software companies and company has its own funds of more than Rs.600 crores. The assessee company has unsecured loans of Rs.640 crores and that too of Zero Coupon Bonds which are convertible to share capital. The assessee pleaded that applying rate of 20.72% will not be judicious. He submitted that the assessee has made inroads in Hong Kong, where Chinese companies are getting financial support from China and getting funds at very cheap rate. By applying interest rate of 20.72% it would be prohibitive for Indian companies to compete in global market. He requested that the LIBOR rate may be applied on the above transaction.”
After considering the above submissions of the assessee, the TPO observed that the assessee has raised Rs.640 crores by Zero Coupon Convertible Bonds which are convertible into shares after 5 years. The lender had option to get interest @ 6.60% on the amount given to the assessee company, if the bonds were not converted to equity. The assessee was therefore accruing interest @ 6.60% in the balance sheet. The LIBOR+ rate is one of the various methods for determining ALP of the international transaction in foreign currency. The TPO observed that LIBOR + 200 basis points comes to 5% but , however, he ITA 1234/Mum/2014 6 also observed that the assessee is liable to pay 6.6% after maturity of 5 years and held that , therefore , applying LIBOR plus rate will not be correct in the case of the assessee. The TPO after considering various rates applicable found it appropriate to apply net interest margin rate of 2.3% on the interest rate of 6.6% for which provision has been made by the assessee in the balance sheet to compute ALP w.r.t. to interest-free loans and share application money advanced by the assessee to its AEs. Thus, the ALP of the loans and funds invested in the AEs as per TPO comes to 8.9% and TPO held that the assessee should have charged interest rate of 8.9% from the AEs, vide orders of the TPO dated 28.06.2012 passed u/s 92CA(3) of the Act, wherein TP adjustment of Rs. 15,50,59,8224/- towards interest on loans and share application money advanced by the assessee to its AE was proposed by TPO. The rate of interest of 8.9% applied by the TPO on loans and share application money advanced by the assessee to its AE’s for determination of ALP was approved by the A.O vide assessment order dated 04-01-2013 passed by the AO u/s 143(3) r.w.s. 144C(3)(a) of the Act.
Aggrieved by the assessment order dated order dated 04-01-2013 passed by the AO u/s 143(3) r.w.s. 144C(3)(a) of the Act. , the assessee went into appeal before the ld. CIT(A) who upheld the assessment order of the A.O. vide appellate order dated 19-12-2013 passed by learned CIT(A) . The learned CIT(A) relied upon the decision of ITAT, Delhi in the case of Perot Systems TSI(India) Limited v. DCIT (2010-TIOL-ITAT-DEL).
Aggrieved by the appellate order passed by the learned CIT(A) , the assessee filed an appeal before the tribunal.
None appeared on behalf of the assessee, hence, we proceed to dispose of the appeal after hearing the ld. CIT-D.R. and material placed on record.
ITA 1234/Mum/2014 7
The ld. CIT-D.R. relied upon the orders of the authorities below and submitted that the assessee had entered into international transactions with AEs , whereby loans and share applications were granted by the assessee to its AEs wherein no interest was charged by the assessee, hence, the authorities have rightly applied interest rate of 8.9% keeping in view spread of net interest margin of 2.3% on borrowing cost of the assessee of 6.6.% on zero coupen bonds raised by the assessee, to work out ALP of international transactions of the assessee with its AEs wherein upward TP adjustment to the tune of Rs. 15,50,59,824/- was upheld by learned CIT(A).The learned CIT- DR relied upon the appellate order of learned CIT(A).
We have heard ld. CIT-D.R. and also perused the orders of the authorities below. We have observed that the assessee has borrowed funds of Rs. 640 crores by issuing Zero Coupon convertible bonds which are convertible into shares after five years. The lender had an option to get interest @6.6% in case the bonds are not converted into equity shares . The assessee has made provision of interest @6.6% on these Bonds in its Balance Sheet. The assessee has advanced interest-free loans and share application money to its AE’s out of proceeds of the afore-stated zero coupen convertible bonds on which no interest has been charged by the assessee from its AE’s. The TPO proposed upward TP adjustment of Rs.15,50,59,824/- to determine ALP of international transaction of interest-free loans and share application advanced by the assessee to its AE by applying net margin of 2.3% on the interest cost on bonds of 6.6% , wherein interest determined to be chargeable to compute ALP for TP additions was worked out by TPO @8.9% on interest- free loans and share application money advanced by assessee to its AE’s, which was accepted by the AO . The learned CIT(A) dismissed the first appeal filed by the assessee by confirming the assessment order passed by the AO. We have observed that the Hon’ble Bombay High Court in the case of CIT v.
ITA 1234/Mum/2014 8 Tata Autocomp Systems Limited (2015) 56 taxmann.com 206(Bom.) has held that in case the tax-payer advances loans to its AE in Germany , then rate of interest for TP purposes shall be applied based upon the rates prevailing in the Germany where loans are consumed. The relevant operative part of the decision of Hon’ble Bombay High Court in the case of Tata Autocomp Systems Limited (supra) is reproduced as under:-
7. We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. v. Dy. CIT [IT Appeal No. 673 (Mum.) of 2006] and Dy. CIT v. Tech Mahindra Ltd. [2011] 12 taxmann.com 132/46 SOT 141 (Mum.) (URO) to reach the conclusion that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr. Suresh Kumar the learned counsel for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra) on the above issue. No reason has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). The Revenue not having filed any appeal, has in fact accepted the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra).
Thus, Respectfully following the views taken by the Hon’ble Bombay High Court in the case of Tata Autocomp Systems Limited (supra) which is binding on us, we hold that the rates applied by the authorities below based on net margin on borrowing costs of the assessee to compute ALP of international transactions of the assessee in granting interest-free loans and share application money cannot be sustained and the matter is set aside and restored back to the file of the A.O. for de-novo determination of the ALP of international transaction of assessee with AE on merits w.r.t. to loans and share application money advanced by the assessee to its AE in light of ratio of aforesaid decision of Hon’ble Bombay High Court in 56 taxmann.com 206. The assessee is directed to produce all necessary and relevant evidences and explanations before the A.O. to substantiate its claim in its defense which shall be admitted by the AO in the interest of justice . Needless to say that proper and adequate opportunity of being heard shall be provided by the A.O.
ITA 1234/Mum/2014 9 to the assessee in accordance with principles of natural justice in accordance with law.
In the result, appeal filed by the assessee in 2009-10 is allowed for statistical purposes as indicated above.