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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SMT. ASHA VIJAYARAGHAVAN & SHRI ABRAHAM P. GEORGE
Per Asha Vijayaraghavan, Judicial Member
This appeal by the assessee is directed against the order dated 20.09.2011 passed by the Assessing Officer u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [“the Act”] relating to assessment year 2007-08.
IT(TP)A No.1358/Bang/2011 Page 2 of 13
The assessee is an Indian multinational company engaged in the export of standardized herbal extracts, fine chemicals, specialty chemicals, cosmeceuticals, phytonutrients and probiotics, and carries on business from several units including two units which are 100% EOUs. It has several registered patents to its credit. It uses its own subsidiaries / associates for marketing its products abroad and also to provide value addition to the customers.
The return of income for the AY 2007-08 was filed by the assessee on 15.11.2007 declaring total income as NIL after claiming exemption u/s 10B. The draft assessment order was issued by the AO on 10.12.2010 making 3 adjustments aggregating to Rs.31,15,400 including transfer pricing adjustment of Rs. 11,69,820. The DRP upheld the draft order of the AO. Accordingly, the AO issued the final assessment order dated 29-09- 2011 and raised a demand of Rs.38,50,642/- including interest. In this order, the TP adjustment was reduced to Rs.10,65,962/- based on a rectification order passed by the TPO dated 17-06-2011 rectifying mistakes apparent on record in the order u/s 92CA of the Act dated 28-10-2010. Against this order, the assessee has filed an appeal before this Tribunal.
The first ground of appeal relates to adjustment of total turnover while allowing deduction u/s. 10B. For the AY 2007-08, the assessee had claimed exemption of Rs.14,39,90,733 in respect of the profits earned from its Nelamangala unit which is 100% EOU u/s. 10B of the Act. Since that IT(TP)A No.1358/Bang/2011 Page 3 of 13 unit was in the 8th year of its operations during the FY ended 31.3.2007, the Assessing Officer granted deduction after reducing certain expenses like freight and forwarding expenses of Rs.72,16,717 and insurance expenses of Rs.971,336, aggregating to Rs.81,88,053 in determining the export turnover from that unit, without making a corresponding deduction from the total turnover which resulted in reduction in the deduction u/s. 10B to the extent of Rs.19,45,581. In respect of the other EOU at Kunigal, no claim u/s. 10B was made as the 10 year period had already elapsed.
The ld. counsel for the assessee submitted that deduction u/s. 10B ought to have been computed by reducing the amount of freight and forwarding expenses and insurance expenses from the total turnover also, as one cannot include in the total turnover a part of the export turnover which has not been considered in the numerator. It was submitted that the computation done by the assessee is in accordance with the decisions of the Hon’ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd. (349 ITR 98) and CIT v. Samsung Electronics Co. Ltd. (350 ITR 65) wherein it was held that determination of total turnover should be by adopting the export turnover and adding the domestic or other turnover to it and expenses deducted in determination of export turnover cannot be added back while determining the total turnover. It was also held by the High Court that there should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A/10B is a beneficial
IT(TP)A No.1358/Bang/2011 Page 4 of 13 section intended to provide incentives to promote exports and the incentive is to exempt profits relatable to exports.
The ld. counsel for the assessee argued that when the statute prescribes a formula, and in the said formula “export turnover” is defined, and when the “total turnover” includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover.
We have heard both the parties. In light of the decisions in CIT v. Tata Elxsi Ltd., 349 ITR 98 and CIT v. Samsung Electronics Co. Ltd. (350 ITR 65), it is very clear that, the deduction claimed u/s 10B should not be restricted by not reducing the freight and forwarding and insurance from total turnover. Hence we direct the AO to follow the decision of the Karnataka High Court in Tata Elxsi Ltd., 349 ITR 98 and reduce the freight & forwarding and insurance expenses from total turnover.
The next ground relates to set-off of losses other than EOU against profits of EOU. The AO has reduced the loss incurred by non-EOU of the assessee company from the amount of profits of the EOU and restricted the deduction u/s.10B to the net amount. This has resulted in denying carry forward loss of Rs. 11,64,32,457/- and reduction in the deduction claimed u/s 10B to Rs.2,56,12,695/- as against Rs.14,39,90,733/- claimed by the assessee.
IT(TP)A No.1358/Bang/2011 Page 5 of 13
The ld. counsel for the assessee submitted that deduction u/s. 10B is in respect of an undertaking and loss of other undertakings cannot be netted off against the profits of the EOU for determination of deduction u/s. 10B as the deduction is attached to the profits of the undertaking and travels with the undertaking as mentioned in the section. The benefit provided to an assessee to whom section 10B is applicable is in the form of an exemption and this exemption is not considered as income in the course of arriving at the Gross Total Income.
It was submitted that deduction u/s. 10B is undertaking specific and hence is to be calculated on the basis of profits and gains derived by the respective EOU and not on the basis of profits and gains derived by the company from all its undertakings and businesses in the aggregate.
Reliance was placed upon the decision in CIT vs. Yokogawa India Limited (341 ITR 385) wherein the Hon’ble High Court of Karnataka held that the profits eligible for relief u/s. 10B of the Act is to be excluded in computing the income of the assessee. Hence the profit of the undertaking eligible for deduction u/s. 10B has to be computed prior to giving effect to the set off provisions under Sec 70 of the Act. The ld. counsel for the assessee submitted that the issue has been decided in favour of the assessee in assessee’s own case for AY 2005-06 and earlier years following the decision in the case of CIT vs. Yokogawa India Limited. (supra).
IT(TP)A No.1358/Bang/2011 Page 6 of 13
We have heard both the parties. The reliance placed by the AO on the decisions of the Hon’ble High Court of Karnataka in the case of Himatsingke Seide Ltd. reported in 286 ITR 255 for netting off loss of non- EOU undertakings from profit of EOU undertakings in determining the income is misplaced, as in that case, the Hon’ble High Court of Karnataka considered carried forward depreciation of the same EOU unit and not business loss and depreciation of any other undertakings located at different places as in the case of the assessee. The ITAT Bangalore Bench has also clearly made out this distinction in several cases and hence setting off business loss and unabsorbed depreciation of other undertakings against profits of the EOU undertakings for the purpose of determining the deduction u/s. 10B of the I.T. Act is erroneous. The Unit wise break up of Profit & Loss Account was filed before the AO during the course of the assessment proceedings. The Delhi Bench of the Tribunal in the case of ACIT v. M/s Keane India Limited, dated 20.5.2011 held as follows:-
“6. Learned counsel for the assessee in support of his proposition relied on the judgments of ITAT Bangalore Bench in the cases of GE India Exports (P) Ltd. Vs. DCIT, Yokogawa India Ltd. Vs. DCIT, AXA Business Services (P) Ltd. Vs. ACIT and ITO Vs. Aditi Technologies (P) Ltd. Learned counsel then relies on ITAT judgment in the case of Scientific Atlanta India Technology (P) Ltd. Vs. ACIT – 129 TTJ (Chennai)(SB)273. In this judgment, the Tribunal has held as under:- “27. Having held that the deduction under s. 10A is not an exemption but only a deduction under Chapter III of the IT Act and the provisions of s. 80AB of Chapter VI-A would not be applicable to such deduction under s. 10A, and also that the IT(TP)A No.1358/Bang/2011 Page 7 of 13 deduction under s. 10A is undertaking specific, we have to answer the question posed before us by holding that the business losses of a non-eligible unit, whose income is not eligible for deduction under s. 10A of the Act, cannot be set off against the profits of the undertaking eligible for deduction under s. 10A for the purpose of determining the allowable deduction under s. 10A of the Act. Of course, if there are more than one undertaking which are eligible for deduction under s. 10A and if some of the units have profit and other units have loss, it would be an entirely different case which is before us. Hence, the decision rendered in this appeal would not be applicable to such cases where there are more than one eligible undertaking claiming deduction under s. 10A. In this case, there is only one eligible unit claiming deduction under s. 10A and hence, the loss from non-eligible unit cannot be set off against the profits of the eligible unit while determining deduction under s. 10A.”
Therefore, following the decision of the Hon’ble jurisdictional High Court in the case of CIT v. Yokogawa India Ltd., 341 ITR 385, the addition made by the AO in this regard and upheld by the DRP is deleted.
The next issue is regarding the Transfer Pricing adjustment in respect of interest on loan given to subsidiary company. During the year, a sum of Rs.7,51,282 was received as interest on loan given to an Associated Enterprise (AE) viz., Sabinsa Australia Pty Ltd, Australia, which is a wholly owned subsidiary company and its marketing arm in Australasia region. The rate of interest charged was at LIBOR+25 basis points. The loan was given to this AE on account of commercial expediency in accordance with the norms of the Reserve Bank of India. The company documented the interest charged using the CUP method.
IT(TP)A No.1358/Bang/2011 Page 8 of 13
It was submitted by the assessee that the CUP method seeks to ascertain ALP by taking into account prices at which similar transactions have been entered into by the assessee with unrelated parties i.e. internal CUP. Since the transaction was of lending money in foreign currency to its foreign subsidiary, the comparable transaction is foreign currency loan availed from unrelated parties by the assessee.
It was further submitted that the assessee had obtained external commercial borrowings from banks at LIBOR plus 50 basis points for meeting its business requirements. Interest charged to AE was at LIBOR plus 25 basis points taking into account the fact that the company has substantial own funds and it is a mix of owned and borrowed funds which was used for lending to the subsidiary. Interest charged during the period is at LIBOR + 25 basis points, which worked out to an average rate of 6.07% p.a. for the FY 2006-07. Thus the assessee concluded that the international transaction in respect of interest received is at arm’s length and in compliance with the Transfer Pricing regulations in India. Disputes involved
The lower authorities did not accept the internal CUP method and concluded that the rate of interest prevailing in India for borrowing in rupees as applicable to five year BB rated bonds by making adjustments to the CRISIL average yield for BBB related bonds is appropriate bench mark for USD loan given to subsidiary. This completely ignored the internal
IT(TP)A No.1358/Bang/2011 Page 9 of 13 comparable that the assessee holding company has borrowed from SBI at LIBOR + 50 basis points and by comparing interest rates applicable to Rupee borrowings to those for borrowing in foreign currency. The TPO accordingly computed arm’s length interest at Rs.18,17,244 and after reducing Rs.7,51,282 already charged and added Rs.l0,65,962 as ALP adjustment which was followed by the AO and upheld by the DRP.
Before us, it was submitted by the ld. counsel for the assessee that on the given facts, it would be appropriate to accept internal CUP method i.e., the rate at which the assessee had actually resorted to foreign exchange borrowings from SBI as arm’s length price under CUP method. It cannot be anybody’s case that a wholly owned subsidiary has a credit rating that is different from the holding company.
It was also submitted that the rate of 14% arrived at by the TPO is higher than the rate applicable for even a Rupee loan and definitely not for lending in USD which is the currency used in the case of the assessee. The method of arriving at the said 14% by the TPO by arriving at 12.4% as LIBOR + 300 basis points and increasing this rate by a further 1.6% on the claim that unsecured loans warrant a higher rate is not conceivable by any extent of the prevailing practices or imagination. He submitted that the interest rate differences for a Rupee and a foreign currency loan as charged by Indian Public Sector Banks is substantial and hence the interest charged on a foreign currency loan which is comparable to the interest
IT(TP)A No.1358/Bang/2011 Page 10 of 13 being paid on its own foreign currency borrowings ought to have been found to be at arm’s length.
It was further submitted that this issue has been decided in assessee’s own case for AY 2008-09 wherein this Tribunal had decided that since loan given was in foreign currency, interest rate charged which is within +/- 5% of LIBOR is at arm’s length. The relevant observations of the Tribunal in IT(TP)A No.1197/Bang/2012 dated 8.5.2015 are as follows:-
“11. We have perused the orders and heard the rival contentions. TPO in his order dt. 30.10.2011, has noted that the interest of Rs.5,57,226/- received by the assessee from its subsidiary in Australia was on a loan of Rs.1,46,40,800. Equity share capital of assessee along with share capital money reserves and surplus by itself came to Rs.74,50,67,577/- as on 31.3.2008 and this was Rs.70,03,98,771/- as on 31.3.2007. Thus, obviously assessee had substantial own funds and even if we presume that the loan which was given to a subsidiary was from a common pool, we cannot say that any loan funds were used for such purpose. When own funds are more than the loans, an assessee can always take an argument that loan funds had gone from own funds. In any case, in the case of M/s. Siva Industries & Holdings Ltd. (supra), in which one of us was a party, it was held as under in para 11 of its order: “We have considered the rival submissions. A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0% optional convertible preferential shares. Thus it is noticed that the funds raised by the assessee company for giving the loan to India Telecom Holdings Ltd., Mauritius, which is its Associated Enterprises and which is the subsidiary company, is out of the funds of the assessee company. It is not borrowed funds. The assessee has given the loan to the Associated Enterprises in US dollars. The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard
IT(TP)A No.1358/Bang/2011 Page 11 of 13 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. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm’s length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1.4./2005 to 31.3.2006 is 4.42% and the assessee has charged interest at 6% which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted.” We are, therefore, of the opinion that assessee’s receipt of interest which was within + / - 5% of libor did not require any ALP adjustment. Addition of Rs.10,77,990/- made on this count stands deleted. ………..”
Respectfully following the decision of this Tribunal in assessee’s own case for the AY 2008-09, interest charged on loan given to Australian subsidiary is deleted.
The next issue that arises for consideration is with respect to relief u/s. 91 of the Act. During the year, the assessee had received a sum of Rs. 1,03,74,468 from its wholly owned subsidiaries, which included Rs.12,26,238 from M/s. Sabinsa Japan Corporation, being dividend on long term investment. This amount has been included as taxable income under the head “Income from Other Sources” by the assessee. The payee had deducted tax at source amounting to Rs. 1,12,613 on which assessee had claimed relief u/s 91. This relief has been shown in the Statement of Total
IT(TP)A No.1358/Bang/2011 Page 12 of 13 Income filed by the assessee. However, the Assessing Officer has not given credit for the same.
The ld. counsel for the assessee submitted that rectification letters dated 18th Jan 2011, 3 Nov 2011 and Dec 2011 have been filed with the AO, but no rectification has been done till date. It was also submitted that minutes of the Board of Directors of the Japanese subsidiary company declaring dividend and application for certification of tax payment by the Japanese Company for JPY 333,333/- (Annexures N & O of paperbook respectively) were filed during the course of assessment. It was thus prayed that the apparent error may be directed to be rectified.
We direct the Assessing Officer to consider this issue and pass appropriate orders on the rectification application filed by the assessee before him.
The last issue for consideration is regarding credit for GROUND V: Credit for Dividend Distribution Tax. It was submitted that Dividend Distribution Tax payable of Rs. 25,24,500 was paid by the assessee in the month of July 2007 and copies of the challan acknowledging payment and bank statements were submitted to the AO vide letters dated 18th Jan 2011, 3’ Nov 2011 and 7th Dec 2011 (Annexures P & M of the Paper book respectively). It was submitted that the AO has failed to give credit for the same though this is a mistake apparent from records. It was prayed that this omission which is an apparent error may be directed to be rectified.
IT(TP)A No.1358/Bang/2011 Page 13 of 13
We direct the Assessing Officer to consider this issue also and pass appropriate orders on the rectification application filed by the assessee before him.
In the result, the appeal by the assessee is partly allowed for statistical purposes.
Pronounced in the open court on this 4th day of December, 2015.