INCOME TAX OFFICER WARD - 1(1)(1), SURAT vs. V R SURAT PVT. LTD. FORMERLY KNOWN AS M/S DHANLAXMI INFRASTRUCTURE PVT. LTD., SURAT

Grounds of appeal raised by the Revenue are as follows: “(i) On the facts and circumstances of case and in law, the Ld. CIT(A) has erred in law and facts in deleting the upward adjustment of Rs. 2,81,77,494/- proposed by the TPO on account of interest payment on FCCDs. (ii) On the facts and circumstances of case and in law, the Ld. CIT(A) has erred in law and facts in not appreciating the findings of the TPO that the list of comparable companies selected by the assessee were different industries and not specific to real estate industry. (iii) On the facts and circumstances of case and in law, the Ld. CIT(A) has erred in law and facts is not appreciating the findings of the case that the assessee has done search on NDSL website and not considered BSE/NSE data and hence on this count the assessee's search is liable to be rejected. (iv) On the facts and circumstances of case and in law, the Ld. CIT(A) has erred in law and facts in not considering the facts of the case that the assessee- company has not brought on record any cogent, relevant and reliable evidence to prove that the data for FY 2011-12 revealed facts, which could have an influence on the determination of ALP. (v) On the facts and circumstances of case and in law, the Ld. CIT(A) has erred in law and facts in not considering the truth of the case that the assessee has only given general statements to substantiate its claim that the use of FY 2011-12 data affects the data for the year under consideration. The assessee-company has simply stated that, the FY 2011-12 data would affect the current and future decisions of the company. However, no documentary evidence for the same was brought on record. (vi) On the facts and circumstances of case and in law, the Ld. CIT(A) has erred in law and fact in not considering the facts of the case that Crisil Limited vide DHINLI/ 126712/BLR/031500468 dated 12.03.2015 has given CRISIL "A rating" to assessee-company. Crisil A rating means (Highly Safely). This rating is considered to have high degree of safety regarding timely servicing of financial obligations to investors are willing to accept a lower interest rate for purchasing of FCCD. (vii) On the facts and circumstances of case and in law, the Ld CIT(A) has erred in law and fact in not considering the facts of the case of that fully Compulsorily Convertible Debenture (FCDD) will be converted into the company's equity after a set period of time. That convertibility is a perceived advantage so investors are willing to accept a lower interest rate for purchasing fully compulsorily convertible debentures. Hence, the TPO has rightly justifying the issued by calculating rate of interest at the rate of 12.58% instead of 15 percent. Page | 2

Since an upward adjustment was made by TPO/assessing officer, to the income shown by the assessee of 2,81,77,794/-, therefore, aggrieved by the order of Assessing Officer/TPO, the assessee carried the matter in appeal before the Ld. CIT(A), who has deleted the addition made by the Assessing Officer. The ld CIT(A) observed that the list of 46 comparables based on which the TPO has arrived at a lower interest rate for such debentures, it is evident that he had selected many companies that are primarily in the field of financing (NBFCs) like Janlakshmi Finance Ltd., Karvi Financial Services Ltd, Kerala Financial Corporation, Kosamattam Finance Ltd, Manappuram Finance Ltd., Midland Micro Finance Ltd. & Muthoottu Mini Finance Ltd etc. Further, there are many cases where

Aggrieved by the order of Ld. CIT(A), the Revenue is in appeal before us and assessee also filed cross objection before us.

The Learned Departmental Representative (Ld. DR) for the Revenue argued that during the course of transfer pricing assessment proceedings, the TPO after carefully examining the facts of the case had issued show- cause notice to the assessee on 18.10.2018 incorporating that on perusal of transfer pricing documentation provided by the assessee-company for the purpose of benchmarking coupon interest rate of 15% on FCCDs issued to M/s Virtuous Retail Pte Limited, Singapore (AE), the assessee-company has adopted CUP method by doing search for debentures issued during financial year (FY) 2011-12 and arrived at mean interest rate of 16.83%.

On the other hand, ld Counsel for the assessee, vehemently argued that during the assessment proceedings/TPO proceedings, the assessee stated that the said international transaction of interest payment on FCCDs

We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. Though facts have been discussed in detail in the foregoing paragraphs, however in the succinct manner, the relevant facts and background are reiterated in order to appreciate the controversy and the issue for adjudication. The assessee under consideration, had issued FCCDs of Rs.188.5 crore in the financial year (FY) 2011-12, for business expansion purpose to a group entity, M/s Vassam Ltd or Cyprus. These debentures were later transferred in in financial year (FY).2013-14, on 28.03.2014, to another group entity M/s Virtuous Retail Pte Ltd., Singapore (AE) and held by this company for part period during the relevant Financial Year( FY) 2014-15. A copy of the board resolution in the form of MoM dated 14.03.2014, approving such transfer of FCCDs was filed. The coupon rate on such FCCDs was determined at 15% p.a for FY 2011-12, which was continued to be paid by the assessee, till its redemption (for that matter also the rate at which paid to Singapore AE). Accordingly, during the year under consideration, the company paid interest on such FCCDs of Rs.17.47 crore to its Singapore AE. A reference u/s 92CA(1) of the Act for the computation of Arm's length price in relation to International Transactions was made and the TPO passed an order under section 92CA(3) of the Act on 30.10.2018, and quantified an upward adjustment at Rs.2,81,77,494/- on ITA. 329/SRT/2022 & Co. 16/SRT/2022 V R Surat Pvt. Ltd. the international transactions entered into by the assessee. That is, an upward adjustment was made by TPO/assessing officer to the income shown by the assessee of Rs.2,81,77,794/- by reducing the interest rate shown @ 15% being paid to AE in Singapore for fully and compulsory convertible debentures (FCCDs) to 12.58% by rejecting the explanation by the assessee and doing his own analysis based on different set of data for finding the comparable.

During the appellate proceedings, the assessee submitted before ld CIT(A) that the said international transaction of interest payment on FCCDs at the rate of 15% p.a to the Cyprus company was accepted by the TPO in the TP Assessment for the AY.2013-14 to be at arm’s length and it adduced copy of the TPO order for reference. No similar adjustment was made. It laid emphasis on rule of consistency stating that the rate at 15% was accepted in AY.2013-14 in it’s own case and as there was no change in facts especially in the pricing mechanism for the interest paid on FCCDs other than the same debentures changing hands, the rate adopted in AY 2013-14 should be adopted for current year i.e. AY.2015-16 as well. It was stated that during FY 2014-15 (i.e. in November 2014), the Singapore AE had transferred all of these FCCDs to another concern, viz. J M Financial Institutional Securities Limited (a third party). A copy of Board resolution ratifying such transfer of FCCDs was also filed. It was pointed out that the coupon rate on such FCCDs remained unchanged at 15% p.a in the case of this third party. It also brought to notice, although this was not a TP matter for the balance period, as the new debenture holder was not an AE, the interest rate payment @ 15% to this third party was accepted by the assessing officer/TPO and for the corresponding part period no reduction of interest was made while assessing the case. Thus, it emphasized on the Internal CUP data available and application in this case. To substantiate the ITA. 329/SRT/2022 & Co. 16/SRT/2022 V R Surat Pvt. Ltd. arm’s length price nature of the interest payment and in compliance with Section 92D of the Act, r/w Rule 10D of the Income-tax Rules, 1962 (‘the Rules’), an external benchmark was claimed to have been undertaken by the company on data available on national Security Depository Limited (NSDL) website. In the said benchmarking exercise, the mean interest rate of comparable transactions was arrived at 16.83% p.a against 15% p.a. paid by the Company. This exercise was done for data related to FY 2011-12. Based on the same, the report concluded the international transaction of interest payment is consistent with arm’s length standard as required under the India TP regulations.

The ld CIT(A) observed that during the TP proceedings, the TPO contended that the assessee has not produced any evidences to prove that this data of NSDL which was for FY. 2011-12 could have an influence on the determination of ALP in the current financial year (FY). He rejected the ALP report which was based on search process conducted on NSDL after recording his reasons and proceeded to conduct fresh search from the available on the BSE and NSE website to arrive at comparable transactions. The TPO selected 46 comparable transactions from the data available and ascertained the arm’s length price for payment of interest on the FCCDs at mean interest rate of 12.58% p.a. instead of actual claimed of 15% and accordingly made downward adjustment of Rs.2,81,77,494/- to the value of international transaction for payment of interest. During the appellate proceedings, the assessee argued that as per Rule 10D(4) of the Rules it is provided that where an international transaction continues to have effect over more than one previous year, fresh documentation need not be maintained separately in respect of each previous year, unless there is any significant change in the nature of terms of the international transactions or in any other factor which could influence the transfer price. It was also ITA. 329/SRT/2022 & Co. 16/SRT/2022 V R Surat Pvt. Ltd. submitted that there is no change in the terms and conditions of the debenture’s agreement since its issuance (i.e. FY. 2011-12). Hence, it insisted that the payment of interest by it @ 15% to Singapore AE should be considered to be at arm’s length and said the TPOs rejection of it’s TP report based on FY 2011-12 data was not justified. With respect to the issue of the TPO conducting fresh study and using 46 comparables data from BSE/NSE website, the assessee claimed to have conducted search on NSDL website which is a larger database compared to the TPO selection of BSE and NSE website and it has followed a systematic approach to conduct the search for identifying the comparable transactions. Further, it was contended before ld CIT(A) that it is in real estate sector where the interest rates are higher being highly leveraged and illiquid as well as risky making it difficult to acquire credits. This leads to higher interest rates in the said industry. A copy of the search process and accept/reject matrix was submitted before the TPO.

The assessee, during the appellate proceedings, with respect to the selection of comparables by the TPO, submitted as follows: (i) The TPO had taken incomparable industries namely Banking NBFCs and finance companies in its search. (ii) Further, the assessee has pointed out that the TPO has compared the maturity limit of the loan taken having maturity of 15 years in comparison to loan taken for maturity for 1 to 3 years. It is specifically stated that in the search criteria of the TPO had selected Nobility Estate Private Limited which cannot be selected as comparable as the tenure of this security is for short term, i.e 3 years (date of issuance: 17/07/2014, date of maturity: 14/08/2017) against 15 years security issued by the assessee.

Therefore, we note that for AY.2013-14, the Assessing Officer had accepted the coupon rate of the same FCCDs. Only factual difference was in that year the same debentures were held by another AE located in Cyprus. It is a well settled legal position that factual matters which permeate through more than one assessment year, if the Revenue has accepted a particular's view or proposition in the past, it is not open for the Revenue to take a entirely contrary or different stand in a later year on the same issue, involving identical facts unless and until a cogent case is made out by the Assessing Officer on the basis of change in facts. For that we rely on the order of the Hon’ble Supreme Court in RadhasoamiSatsang vs. CIT 193 ITR 321 (SC), wherein it was held as follows: "We are aware of the fact that, strictly speaking, res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasoning, in the absence of any material change justifying the Revenue to take a different view of the matter - and, if there was no change, it was in support of the assessee – we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-tax in the earlier proceedings, a different and contradictory stand should have been taken."

It was also noted by ld CIT(A) that these same FCCDs were transferred by M/s Vassam Ltd., Cyprus to Virtuous Retail Pte Limited, Singapore on 28.03.2014 without changing the coupon rates and the assessee company accepting such transfer was found to be mentioned in the extracts of the MOM of Board of Directors. This is also verified that M/s Virtuous Retail Pte Limited, Singapore transferred the same FCCDs to a third party viz. J M Finance Institutional Securities Limited during this FY only and rate of interest remained unchanged @ 15%. In fact total interest paid on account of these debentures for the entire FY was Rs.20.57 crore out of which Rs.17.47 crore was paid to the AE and Rs.3.10 crore was paid to the third party for their respective holding periods. The assessing officer has not made any disallowance with respect to such payment of interest @ 15% to the third party. The ld CIT(A) also examined the list of 46 comparables based on which the TPO has arrived at a lower interest rate for such debentures, it was noted that TPO had selected many companies that are primarily in the field of financing (NCFCs) like Janlakshmi Finance Ltd., Manappuram Finance Ltd., Midland Micro Finance Ltd. & Muthoottu Mini Finance Ltd. Further, there are many cases where debentures issued were secured in nature. In the case of the assessee the debenture issued was unsecured. Hence, ld CIT(A) noted merit in the argument of the assessee to reject at least 39 of the 46 comparables selected. Furthermore, the contention of the assessee in the case of Nirmal Lifestyle Ltd, that the same is for a period of three years only and that the interest paid for the same is ITA. 329/SRT/2022 & Co. 16/SRT/2022 V R Surat Pvt. Ltd. 20.04% is acceptable. Also, in the case of Lodha Buildcon P. Ltd., it is seen that the 3.5% interest used by the assessee is for single quarter only. This is evidences by the internal rating rational by Brickwork Ratings which clearly shows the coupon rate as 3.5% per quarter. Based on these arguments, the assessee`s calculation of estimated mean coupon rate of 16.95% on the remaining six comparables, chosen from BSE/NSE appears to be closure. It was also observed by ld CIT(A) that the 15% coupon rate paid by the assessee on the FCCDs is close to the prevalent SBI prime lending rate of 14.75% as well. Considering these facts, ld CIT(A) held that the upward adjustment made by the TPO/assessing officer the total income of the assessee amounting to Rs.2,81,77,794/- by reducing the interest rate paid @ 15% to 12.58% was held to be not justified and therefore ld CIT(A) deleted the same. We have gone through the above findings of ld CIT(A) and observed that conclusion reached by ld CIT(A) is correct. That being so, we decline to interfere with the order of Id. CIT(A) in deleting the aforesaid additions. His order on this addition is, therefore, upheld and the grounds of appeal of the Revenue are dismissed.

Learned DR for the revenue submitted that during assessment proceedings, the assessee was specifically requested to furnish evidence explaining why computation of disallowance should not be made u/s 14A r.w.r. 8D. As such, the onus was on the assessee to prove that the expenses claimed by the assessee had no attributability to investments on which income not includible in total income was earned. Despite adequate opportunity, the assessee failed to discharge its onus and as such with reference to the accounts of the assessee the correctness of the claims of the assessee in respect of expenses incurred by it in relation to income which does not form part of the total income under this Act cannot be satisfactorily arrived at. Further, the contention of the assessee that it has sufficient interest free funds available with it in form of share capital and reserve and surplus. In this regard, it is pertinent to mention here that against the interest free funds available with it there was application of money was also there. Further, in this regard, it is pertinent to mention here that if the assessee would not have made investment in mutual fund, income from which is exempt than it would not have incurred such huge interest expenses.

We have heard both the parties. The ld Counsel submitted before us that assessee-company had sufficient amount of owned capital and the same was used for making the investments. We note that during the appellate proceedings, the assessee submitted that the issue is covered in favour of the assessee in it’s own case by the predecessor CIT(A) for AY 2012-13, AYs 2013-14 and 2014-15 deleted the disallowance u/s 14A of the Act in the hands of the company on the ground that sufficient non-interest funds were available with the company to meet the amount of investment. Further, as per the decision of jurisdictional High Court no disallowance under section 14A of the Act is warranted if the assessee had surplus fund for making investment:

We note that during the appellate proceedings, the ld CIT(A) noted that assessee has sufficient tax-free funds available with it, which is verifiable from the copy of balance sheet attached with the financial

In the result, ground No.8 raised by the Revenue, is dismissed.

Now, we shall take assessee’s Cross Objection (in CO No.16/SRT/2022), wherein grounds of appeal

In the result, cross objection filed by the assessee (in CO No.16/SRT/2022) is dismissed being infructuous.

In combined result, appeal filed by the Revenue is dismissed, whereas the cross objection filed by Assessee is also dismissed.