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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद", राजे" के अनुसार/ PER Rajendra A.M.- Challenging the order of the Assessing Officer (AO), dated 29/12/2014, passed u/s. 143(3)r.w.s.144C (5)of the Act in pursuance of the directions of the Dispute Resolution Panel (DRP),the assessee has filed the present appeal.The AO has challenged the directions of the DRP.
2.Assessee-company,engaged in the business of manufacturing of studded jewellery and trading of cut and polished diamond, filed its return of income on 11/10/2010, declaring total income of Rs. 99.60 lakhs.During the assessment proceedings, the AO found that the assessee had entered into International Transactions (IT.s).He made a reference to the Transfer Pricing Officer(TPO) to determine the ALP of such transactions.Vide his order,dated 08/01/2014,the TPO made an upward adjustment of Rs. 2.48 Crores in relation to the IT.s. Accordingly, the AO passed a draft assessment order.The assessee filed its objections before the DRP with regard to the proposed adjustments.The AO finalised the assessment,as directed by the DRP and determined the income of the assessee at Rs.3.60 Crores 2.1.First effective ground of appeal is about addition of Rs. 1.91 Crores in Arm’s Length Price (ALP).During the TP proceedings,the TPO found that the assessee had provided loan in foreign currency to its AE based in Mauritius namely S B &T Holdings Ltd.(SBT HL) as per 1054 & 1152/M/15-SB&T Intl. Ltd. the loan-agreement, dated 01/12/2004, that the terms of loan agreement were revised on 01/04/2008, that as per the revised terms no interest was payable on the loan extended by the assessee to its AE, that the loan was repayable on demand, that it had not reported the loans advanced as IT in the form 3CEB. He held that provision of interest free advance to a non- resident AE was against the arm’s length principle,that in an uncontrolled situation, and independent party would not have placed those deposits with any third-party without charging and interest, that LIBOR could not be considered is comparable interest rate for benchmarking the transaction is the loan was provided in Indian currency, that the internal cost of borrowing of the assessee worked out at 12.56%. He adopted the said rate as an internal comparable for benchmarking the IT. An additional rate of 3% to cover risk was also adopted by him. Finally,an adjustment of Rs.2.48 Crores was proposed. After receiving the order of the TPO,the AO included the upward adjustment of Rs.2,48,34,277/- in his draft order.
2.2.Before the DRP,the assessee argued that the TPO had erred in comparing the interest rate on loans even in Indian currency in India with loans given to an overseas entity in foreign currency in Mauritius, that interest rate varied from country to country due to geographical difference in pricing and cost, loan given in India could not be compared with a loan given in Mauritius, that the TPO was not right in law to benchmark the loan provided by the assessee to its overseas AE with the assessee is internal cost of borrowing, that the loan extended to the AE was in US dollars, that USD LIBOR would be the most appropriate rate for benchmarking the IT of provision of loan, that the TPO had wrongly made an adopted addition of 3% to the ALP rate of interest. It relied upon the case of Cotton Naturals (I) Private Ltd. (ITA/5855/Del/2012).
2.3.After considering the submission of the assessee and the orders passed by the TPO and the AO the DRP held that the assessee’s borrowings from the bank had increased from Rs. 12.78 Crores at the beginning of the year two Rs. 23.56 Crores at the end of the year, that interest expenditure of Rs.4.01 Crores was appearing in the profit and loss account of the assessee,that it was not in the business of lending, that the loan had been outstanding as interest-free loan for last two years without any payment of interest,that for the TP purposes it had to be seen how and what and independent enterprise would price the transaction if it was with an unrelated party, that an independent party would certainly not advance interest-free loan while incurring interest cost on borrowings, that if the said principle was accepted it 2 1054 & 1152/M/15-SB&T Intl. Ltd. would result in incurring a loss by the domestic entity, that it would be a clear case of profit shifting and erosion tax base, that TPO/AO were justified in making the adjustment.
2.4.As regards the argument that LIBOR plus service margin must be considered as CUP in contrast to local lending/borrowing rates,that the DRP held that the tested entity was the Indian company, that the AE was borrowing in effect in Rupees though it needed it abroad, that the assessee had not borrowed in foreign currency outside India,that the AE had borrowed from Indian parent which had Rupee resources,that the reference to domestic rate was not justifiable,that each year was a different year and there was no rational in assessee’s argument that the rate considered in earlier years must be treated as CUP, that what was relevant was the prices prevailing in current comparable period,that the risk estimation at the rate of 3% was not justified, that the TPO had merely mentioned that markup of 3% was necessary to cover various risk without giving sufficient detail to support his argument. Finally,the DRP directed to adopt PLR of State Bank of India prevailing the period under consideration to work out the adjustment without any markup.
3.During the course of hearing before us,the Authorised Representative (AR) argued that while deciding the appeals for the earlier to AY.s and subsequent AY.,the Tribunal had held that LIBOR +2% would be the fair rate of interest for the IT.s entered into by the assessee with its AE.The Departmental Representative (DR) supported the directions of the DRP.
4.We have heard the rival submissions and perused the material available on record.We find that while deciding the appeals for the earlier years, the Tribunal has observed as under: “ 8. We have considered the submissions of the parties and perused the material available on record. Undisputedly, during the relevant previous year, assessee had not advanced any interest free loans to the A.E., which is admitted by the Transfer Pricing Officer in his order. In other words, the interest free loans continued from the preceding assessment year. It is noticed that in the assessment year 2009–10, the Tribunal, while considering identical issue relating to rate of interest applicable to interest free loan advanced to A.E., held that LIBOR plus 2% is the appropriate arm's length interest for bench marking the transactions for providing interest free loan to the A.E. Again, in assessee’s own case for the assessment year 2008–09, the Tribunal, while deciding similar issue followed its earlier order for the assessment year 2009–10, and held that LIBOR plus 2% is the appropriate rate of interest for the interest free loan transactions with A.E. The learned Departmental Representative has not brought to our notice any material change in the facts and circumstances in the impugned assessment year to deviate from the view expressed by the Tribunal in assessee’s own case for the preceding assessment year. Therefore, applying the rule of consistency, we respectfully follow the order of the co–ordinate bench in assessee’s own case, as referred to above, and direct the Assessing Officer / Transfer Pricing Officer to compute the arm's length price of the interest charged on interest free loan to A.E. at LIBOR plus 2%. The ground raised by the assessee is disposed off accordingly.” Respectfully,following the above order, we direct the AO to follow the orders for the earlier years.First ground of appeal is allowed in favour of the assessee, in part. 3 1054 & 1152/M/15-SB&T Intl. Ltd. 5.Second ground of appeal pertains to disallowance of Rs. 69.44 lakhs,made u/s.14 A of the Act.The AO noted that the assessee had made investment of Rs. 25.73 Crores as on 31/ 03/ 2010, that it had not attributed any expenditure is incurred for earning tax exempt income. He was of the view that income from investments could not we aren’t without systematic management, that the term expenditure appearing in section 14A included not only direct expenditure but also all form of indirection expenditure.Accordingly he made a disallowance of Rs.69,44,795/-.
5.1.Aggrieved by the order of the AO, the assessee filed objections before the DRP and argued that provisions of section 14A were not applicable, that the assessee did not earn any exempt income during the year under consideration, that it had made investment out of its own funds and not out of any interest bearing borrowed funds, that the AO had not followed the decision of the Tribunal in its own case for AY. 2005-06 on that issue.
5.2.After considering the available material, the DRP held that a fresh investment of Rs.1,00,25,000/-was made by the assessee in acquiring shares, that the AO had only computed expenditure apportion able to investment which gave rise to exempt income by applying Rule 8D of the Income Tax Rules, 1962 (Rules), that even if there was no exempt income in the year under consideration it would not necessarily imply that all expenditure incurred was only towards taxable income for the current year. The DRP referred to cases of Bellwether Micro Finance Funds Private Ltd. (108 DTR-Trib-389) and Cheminvest Ltd. (121 ITD 318) and upheld the proposed addition. It was also observed that assessee had for not furnished the copy of the order of the Tribunal before the AO despite calling for it.
6.Before us,the AR argued that while deciding the appeal for the AY. 2011 – 12, the Tribunal had held that no disallowance u/s. 14 A could be made if the assessee had not earned exempt income,that the investment made by the assessee was in the subsidiary companies,that the facts of the case for the year under consideration were similar to the facts for the AY.2011- 12.The DR referred to the case of Maxopp Investment Ltd.(347 ITR 272) and RP Modi (115 ITR 59).
7.We have heard the rival submissions.We find that the Tribunal had adjudicated the issue while deciding the appeal for the AY.2011-12 in the following manner: 4 1054 & 1152/M/15-SB&T Intl. Ltd.
13. We have considered the submissions of the parties and perused the material available on record. As is evident, the Assessing Officer in the draft assessment order, has made disallowance under section 14A r/w rule 8D, on the plea that assessee has made investment in assets giving rise to exempt income which was also confirmed by the DRP. However, contention of the assessee is two fold. Firstly, it has been submitted that investments are in overseas subsidiary, hence, the dividend earned from such companies are not exempt; the second contention of the assessee is, during the relevant previous year, assessee has not earned any exempt income. As far as first contention is concerned, it is observed, the Tribunal in assessee’s own case for assessment year 2008–09 in ITA no.6929/Mum./2012, dated 20th January 2016, after considering similar claim made by the assessee, directed the Assessing Officer to examine and not to disallow any expenditure under section 14A if it is found that investment is made in foreign subsidiary. As far as the second contention of the assessee is concerned, the Hon'ble Delhi High Court in Cheminvest Ltd. v/s CIT, [2015] 61 Taxmann.com 118 (Del.), while reversing the Special Bench decision of the Tribunal in case of the same assessee held that if in a particular assessment year, assessee has not earned any exempt income, no disallowance under section 14A can be made. It is further observed, while coming to the aforesaid conclusion, the Hon'ble Delhi High Court took note of the decision of the Hon'ble Supreme Court in Rajendra Prasad Moody (supra) and observed that the ratio laid down therein was in the context of allowability of deduction under section 57(iii), where the expression used is “for the purpose of making or earning such income , whereas under section 14A, the expression used is “in relation to income which does not form part of the total income”. Thus, the principle emerging from the judicial pronouncements referred to above is, if the investments are made in foreign subsidiary, dividend income from which are not exempt and secondly if no exempt income is earned during the relevant previous year, no disallowance under section 14A can be made. As the Departmental Authorities have not properly examined the aforesaid aspects of the issue, we are inclined to set aside this issue to the file of the Assessing Officer for deciding afresh keeping in view the observations made herein above and only after providing due opportunity of being heard to the assessee. Ground no.4, is allowed for statistical purposes.” 7.1.We observe that facts of the AY.2011-12 are identical to the facts for the year under appeal.Therefore,respectfully following the above order,we decide the second ground in favour of the assessee.In our opinion,cases relied upon by the DR have no relevance to decide the issue before us, as the facts of both the cases different.
7.2.The only issue raised by the AO is about deleting 3% risk premium added to cost of internal borrowing while arriving at ALP of interest rate to compute interest on interest-free advance given by the assessee to its AE. While deciding the first ground of appeal filed by the assessee we have discussed the facts of the issue under consideration. In our opinion,the AO was not justified in adding 3% risk premium to the cost of borrowing, as held by the DRP. We decide the effective ground of appeal against the AO. As a result,appeal filed by the assessee stands partly allowed and the appeal of the AO is dismissed. फलतः िनधा"रती क" गई अपील अंशतः मंजूर क" जाती है और िनधा"रती अिधकारी क" अपील नामंजूर क" जाती है. Order pronounced in the open court on 16th November, 2016. आदेश क" घोषणा खुले "यायालय म" "दनांक 16 नवंबर, 2016 को क" गई । (शि"जीत डे शि"जीत डे शि"जीत डे / Saktijit Dey) (राजे"" / Rajendra) शि"जीत डे "याियक सद"य / JUDICIAL MEMBER लेखा लेखा लेखा सद"य लेखा सद"य सद"य / ACCOUNTANT MEMBER सद"य मुंबई Mumbai; "दनांकDated : 16 . 11.2016. Jv.Sr.PS.