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Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Shri M.Balaganesh, AM]
ORDER
Per N.V.Vasudevan, JM
This is an appeal by the Revenue against the order dated 15.09.2014 of C.I.T.(A)-VI, Kolkata relating to A.Y.2008-09.
Grounds of appeal
raised by the revenue read as follows :-
1. That on the facts and circumstances of the case, the Ld. CIT(A) erred in law as well as on facts in holding that addition on account of adjustment of interest of Rs.40,32,011 charged to the subsidiary company ZAO classic Russia was not warranted, ignoring the fact that the addition was made on the Arms Length Price determined by the TPO u/s 92(CA)(1). 2 That on the facts and in circumstances of the case, the CIT(A) erred in law as well as on facts in holding that cess on green leaf of RS.1 ,44,03,221/- is an allowable expenditure, ignoring the fact that it is directly attributable to core agriculture activities which is taxable under state agriculture income tax, beyond the purview of Central Income Tax and on the same issue SLP is pending in the case of AFT Industries. 3 That the appellant craves for leave to add, delete or modify any of the grounds of appeal before or at the time of hearing.
3. When the appeal was called for hearing today there was an application for adjournment filed on behalf of the revenue on the ground that Sr.,DR, ITAT Kolkata
2 M/s. M.K.Shah Exports Ltd. A.Yr.2008-09 Benches Mr. Rajat Kureel was transferred to CCIT (CCA) Charge, Delhi by order of CBDT dt 24.04.2017 and therefore the hearing of the appeal may be adjourned. Such request was made in the earlier week also. The revenue has not made any alternate arrangements to represent its case before the Tribunal. In majority of the cases listed for today’s hearing similar requests have been made. This bench has granted adjournment wherever issues are contested. In this appeal however, we find that the issue raised by the revenue is no longer res integra and has been decided in several decisions rendered by various benches of the tribunal as well as Hon’ble high courts. In these circumstances, the request for an adjournment was rejected. The ld. Counsel for the assessee made submissions on the issues raised by the revenue in the appeal.
As far as ground no.1 raised by the revenue is concerned the facts are as follows :- The Assessee is a company engaged in the business of growing and manufacturing of tea and are also blenders, packers and exporters of tea. The assessee entered into international transaction of giving of loans to its subsidiary AZO classic Russia. It is not in dispute that the transaction of giving loan to a subsidiary was an international taxation and the rate of interest that has to be charged by the assessee on such loan has to confirm to the arms length test laid down in section 92 of the Income Tax Act, 1961 (Act). It is not in dispute that the loan in question was given in foreign currency i.e., US$ and the rate of interest that was charged was at 4% p.a. which was increased to 8% on 02.04.2007. The basic details of the loan agreement were as follows :- “Under an Agreement titled 'Credit Agreement No.2' dated 08 December, 2003, the assessee had advanced a loan of USD 800,000 to its subsidiary ZAO Classic in Russia. The principal amount was increased to 1,500,000 USD by an amendment dated 19,02.2004. the rate of interest charged on the loan was increased from 4% p.a. to 8% p.a. through an amendment dated 02.04.2007, i.e. during the financial year pertaining to assessment year 2008-09. The basic terms of this Agreement were as follows: Sl.No. Description Details 1. Loan Amount/currency 800 000/USD(original agreement); amended on 19.02.2004 to 15,00,000 USD 2
3 M/s. M.K.Shah Exports Ltd. A.Yr.2008-09 2. Term of the loan 5 years (as per the original agreement); 3. Purpose of loan To expand operations, purchase of goods 4. Borrower’s Country Russia 5. Year of Loan 8 December, 2003 6. Rate 4% p.a. (original agreement); increased to 8% on 02.04.2008 7. Put or Call option Both options 8. Security unsecured 9. Seniority N.A. 10. Any other condition n.a.
The Transfer Pricing Officer (TPO) examined the rate of interest charged on the loan by the assesee in the light of mandate laid down in section 92 of the Act that the rate of interest on such loans must be at arms length i.e. rate at which similar loan would be given or taken by unrelated parties.
The plea of the assessee before the AO was that the loan to the subsidiary ZAO Classic was a trade investment in form of foreign currency loan which in turn provides benefit to the parent company i.e. the assessee in the form of increased market share. It was submitted by the assessee that borrowings in the hands of ZAO Classic was External Commercial Borrowing (ECBs) and the range of rates of interest vary between LIBOR plus 100 bps to 200 bps. The European Central Bank has recommended rates ranging from 2.00% to 5.25% on ECBs. Foreign Currency Loans are given by Banks globally bearing LIBOR based Rate. The average of the LIBOR based Rate for the period from 01.4.2007 10 3l.03.2008 was 4.68 %. It has been compared by taking average monthly opening and closing rate for the period from 01.04.2007 to 31.03.2008. The Assessee enclosed a copy of data sourced from Global-rates .com in support of its plea. The assessee pointed out that it had charged 8% on the Loan given to Zao Classic for 01.04.2007 to 31.03.2008 which was higher than the USD Libor Rate. The assessee placed reliance on the decision of Hon’ble ITAT Chennai (2011) 46 SOT 2 (Chennai) (URO)/] 1 taxman. Com 404 (Siva Industries & Holdings Limited vs.
4 M/s. M.K.Shah Exports Ltd. A.Yr.2008-09 The Assistant Commissioner of Income Tax, Company Circle - VI (4), Chennai) wherein it was held that where loan is given to the associated enterprises in US dollars then the transaction would have to be looked upon the applying the commercial principles in regard to international transaction. If that was so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR rate had to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the associated enterprises. The assessee claimed that the facts of its case fairly and squarely match with that of the case decided by ITAT, Chennai and considering the interest rate of 8% charged on loan given to subsidiary Zao Classic, the provisions relating to arm's length transaction have no applicability.
The TPO was of the view that the rate of interest has been charged by the assessee on the loan to its subsidiary keeping in mind the arms length rate would be 14.12% and he accordingly suggested an adjustment of Rs.40,32,011/- and the said sum should be added to the total income of the assessee by way of adjustment to ALP. Consequently a sum of Rs.40,32,011/- was added to the total income of the assessee.
On appeal by the assessee the CIT(A) deleted the addition made by the AO by following the decision of ITAT Chennai in the case of Siva Industries & Holdings Limited vs. The Assistant Commissioner of Income Tax (supra) . The following were the relevant observations of CIT(A): “4.2. I have considered the facts of the case. The appellant had advanced a loan in foreign currency to its subsidiary ZAO Classic, Russia on which it was charged interest at the rate of 8% p.a. The TPO was of the view that price of the loan i.e. the interest charged has to be worked out on the basis of taking two parties as separate and bench-marking the price of the loan on the basis of what an independent third party would charge from ZAO Classic, Russia based on its analysis of risk associated with the loan. The appellant stated in reply to show cause notice issued by the TPO, that foreign currency loans are given by banks bearing UBOR based rate as a global practice. The average of LIBOR based rate for the year under 4
5 M/s. M.K.Shah Exports Ltd. A.Yr.2008-09 consideration was 4.68%. Thus the rate of 8% charged by the appellant was higher than the LIBOR rate. The appellant also relied upon a number of decisions, in particular the decision of ITAT, Chennai in the case of Siva Industries and Holdings Ltd vs ACIT, Central Circle-6(1) Chennai 46 SOT 112. In the appellate proceedings the appellant has cited some more decisions such as Four Soft Ltd vs DC IT in ITA No. 1495/Hyd 12010, Cotton Natural (I) Pvt Ltd. vs DCIT in ITA No. 5855/De1/2012. In the case of Siva Industries and Holdings Ltd. (supra), it has been held by the Hon'ble tribunal that once the transaction is between the assessee and the AEs is in foreign currency, the transaction would have to be looked upon by applying commercial principle in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. Same view was taken by tribunal in the case of Four Soft Ltd (supra) and some other cases cited by the appellant. Further, it has been held in the decision in the case of Cotton Natural (I) Pvt Ltd. (supra), that financial position and credit rating of the subsidiary would be broadly same as the holding company and LIBOR should be taken as bench-mark without going into aspects like financial health of subsidiary. In one of the cited cases, viz. Aurionpro Solution Ltd. vs Addl. CIT in ITA NO.7872/Mum/2011, Hon'ble tribunal has observed that appropriate rate would be LIBOR plus 2%. In the appellant's case, the TPO has not countered the decision in the case of Siva Industries and Holdings Ltd (supra) cited by the appellant before him, nor cited any authority in support of his view. The ratio given by the Hon'ble tribunal in the cases cited by the appellant is, that in the foreign currency lending, rate of interest to be adopted is to be based on LIBOR and at the most LIBOR plus 2%. As per documents given by the appellant, the average LlBOR rate for the previous year was 4.68%. Even if a mark up of 2% is given, the rate would be 6.68% whereas the appellant has charged 8% on the loan given to its AEs. It is also not in dispute that the cost of funds in the hands of the appellant is lower than 8% charged from the AE. Considering the facts and circumstances of the case and respectfully following the ratio given by the various benches of Hon'ble tribunal, the adjustment price of Rs.40,32,011/- is deleted.”
Aggrieved by the order of CIT(A) the revenue has raised ground no.1 before the Tribunal.
After hearing the submissions of the ld. Counsel for the assessee we are of the view that there is no merit in ground no.1 raised by the revenue. It has been consistently held in several decisions by the tribunal that wherever the transaction of loan between
6 M/s. M.K.Shah Exports Ltd. A.Yr.2008-09 the associated enterprises is in foreign currency then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. Therefore the domestic prime lending rate would have no applicability and the international rate LIBOR would come into play. It has therefore been held that LIBOR rate has to be considered while determining the arms length rate of interest in respect of transactions of loan in foreign currency between the associated enterprises. This view has also been accepted by the Hon’ble Delhi High Court in the case of CIT vs Cotton Naturals (I) Ltd. 276 CTR 445 (Delhi) and by the Hon’ble Bombay High Court in the case of Tata Auto Comp System Ltd approving the decision of ITAT in the case of Tata Auto Comp Vol.52 SOT 48 (Mum). In view of the above settled legal position we find no merits in ground no.1 and dismiss the same.
As far as ground no.2 raised by the revenue is concerned Income from growing, manufacturing and sale of tea would be Composite income, which means it comprises agricultural income to the extent of growing tea, which is not chargeable to tax and non- agricultural income to the extent it comprises of income from manufacture and sale of tea, which income is chargeable to tax. Rule 8 of the Income Tax Rules, 1962 provides method of computation for composite income from manufacture of tea. Under Rule 8 (1) of the Income Tax Rules, 1962 (Rules) income derived from sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business, and forty per cent of such income shall be deemed to be income liable to tax. According to the AO Cess on green leaf was an expenditure which was attributable to the activity of growing of tea and would therefore be not allowable as deduction while computing income from manufacture and sale of tea. The plea of the Assessee was that the entire green leaf cess had to be allowed as deduction first and only on the loss or profit arrived at after such deduction Rule 8(1) of the Rules have to be applied and 40% of such sum has to be considered as income or loss from the business of manufacture and sale of tea. 6
7 M/s. M.K.Shah Exports Ltd. A.Yr.2008-09 12. On appeal by the Assessee, the CIT(A) deleted the disallowance made by the AO by following the order of the Hon'ble Calcutta High Court in the case of AFT Industries Ltd. vs CIT (270 ITR167) wherein it was held that Green Leaf Cess has to be allowed as deduction before applying Rule 8(1) of the rules and only thereafter 40% of such income has to be brought to tax.
Aggrieved by the order of the CIT(A), the revenue has raised Gr.No.2 before the Tribunal. The ld.counsel for the assessee relied on the orders of the ld. CIT(A).
After hearing the submissions of the learned counsel for the assessee and on careful perusal of the materials available on record, keeping in view of the fact that the issue is concluded by the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs AFT Industries Ltd. 270 ITR 167 (Cal) where the amount paid as cess was held as eligible for deduction in computing the composite income under Rule 8 of I.T. Rules. This issue is, therefore, decided in favour of the assessee and against the Revenue by upholding the order of the C.I.T.(A) who has allowed the deduction of payment of cess on green leaves in computing the composite income from tea business of the assessee under rule 8 of the I.T. Rules. The fact that the SLP is pending before the Hon'ble Supreme Court against the decision of the Hon'ble Calcutta High Court in respect of AFT Industries Ltd. vs CIT (270 ITR 167) will not have any effect since the Hon'ble Apex Court has neither set aside the orders of the Calcutta High Court nor granted any stay. The learned counsel for the Assessee also brought to our notice the decision of the Hon’ble Supreme Court in the case of CIT Vs. M/S.Apeejay Tea Co. Ltd. Civil appeal No.3168 of 2006 dated 6.8.2015 wherein the Hon’ble Supreme Court has upheld view as was taken by the Hon’ble Calcutta High Court in the case of AFT Industries Ltd. (supra). In view of the above, Ground No.2 raised by the revenue is dismissed.
Order pronounced in the Court on 12.05.2017.