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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI J P BOAZ & SHRI AMIT SHUKLA
ORDER अिमत शु�ला : �या. स.: PER AMIT SHUKLA, JM: The aforesaid appeal has been filed by the assessee against impugned Final Assessment Order dated 27th November, 2014 passed under section 143(3) r.w.s. 144C(13) by Deputy Commissioner of Income-tax, Circle -3(2)(1), Mumbai in pursuance of direction given by Dispute Resolution Panel –I, Mumbai (DRP) under section 144C(5), vide order dated 16.10.2014. In the various grounds of appeal, the assessee has mainly challenged following issues:
(i) Ground No.I -Transfer Pricing Adjustment of Rs.48,53,19,133/- in respect of interest expenses
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 2 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 incurred on account of Compulsory Convertible Debentures (CCDs) issued by the assessee to its AE; (ii) Ground No.II –Disallowance under section 14A for sum of Rs.2,15,71,424/- after invoking Rule 8D;
(iii) Ground No.III -Addition of Rs.33,73,86,850/- on account of interest accrued in respect of Non- Performing Assets (“NPAs”);
(iv) Ground No.IV -Levy of interest under section 234A.
(v) Ground No.V -Levy of interest under section 234B and 234D of the Act.
The brief facts qua the first issue of Transfer Pricing Adjustment are that, the assessee, that is, India Debt Management Pvt. Ltd. (IDM) is a company incorporated in India on 16th August, 2005 as a non-banking finance company (NBFC). It is subsidiary of Mauritius Debt Management Ltd. (MDM) which holds 75% of equity share capital in IDM. The assessee is primarily engaged in the business of identifying investment opportunities in financially distressed companies which otherwise have an inherently viable business proposition. Its business strategy is to acquire and invest in medium sized enterprises that are either very high risk investments or are in financial distress which makes the investment as a very “high-risk” venture and therefore, its credit rating was also quite low. The funding of these investments are primarily through intra-group financing, wherein IDM raises money through debt instruments from group companies in the form of Compulsory Convertible Debentures (CCDs) and uses these funds to carry out its investment activities. Since this money through debt from group companies/AEs raised in the form of CCDs is an international transaction, therefore, the interest payment thereon by the assessee to its overseas AEs was required to be benchmarked under the Transfer Pricing Regulations. The CCDs issued by the assessee to its AE can be divided into two
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 3 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 parts, first, issuance of such debentures prior to June, 2007 bearing a fixed-interest-charge of 7%; and second, issuance of debentures post June, 2007 bearing annual resettable interest rate, which varied from 9.75% to 14%. Accordingly, the average interest rate on the above CCDs issued by the assessee was determined @ 11.30%. In the Transfer Pricing Study Report (TPSR), the assessee in order to benchmark the Arm’s length price of interest rate on the inter-company-credit facility (i.e., on CCDs), adopted “Comparable Un-controlled Price Method” (CUP) as a most appropriate method (MAM). Since there was no Internal CUP, that is, no borrowings from the third party, the assessee analyzed the External Market Data in order to find external CUP. But before that, in order to estimate the stand alone credit rating of the assessee, the assessee first of all carried out credit estimation exercise by using Standard and Poor’s (S&P) Corporate Rating Criteria, whereby the assessee identified itself rating of BBB(-) from a global perspective. Thereafter a search was carried out for the comparable transaction for the financial year 2009-10 to seek external comparables from databases of Thomson Reuters’ DealScan, and Bloomberg Databases. Since the assessee had issued CCDs in terms of INR (Indian Rupees) and interest was also payable in terms of INR as India being the borrowing region, therefore, no comparables were thrown in the search for Indian region as INR denomination for loans/bonds. The search accordingly, was expanded to include other geographical regions or currencies. After identifying various comparables transactions, various qualitative adjustments were made to factor-in the differences in the risk profiles of the comparables viz., currency of the loan; borrower’s region; and tenor (i.e., time factor). After carrying out such adjustments, 14 transactions were identified whereby the Arm’s length interest rate of 14.50% was arrived at by the assessee, as against average interest rate of 11.3% paid by the assessee. Alternative, the assessee also carried out corroborative search process using Bombay Stock Exchange (BSE) data on INR
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 4 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 denominated debt issuances. After various qualitative analysis and keep into consideration the credit rating of the borrower and the time of issuance, two comparable transactions were identified and after carrying out tenor adjustment to factor-in long term nature of the tested transaction, an arm’s length interest paid of 15.01% was arrived at. The details of these two comparables were as under:-
S. Data Issuer Coupon Tenor All in Rate after No. Source rate Adjustment Adjustments (bps) (bps) 1 BSE Starlight Systems Private Limited 15% 0.97% 15.97% 2 BSE Share Microfin Limited 13.75% 0.30% 15.01% Not only that, the assessee in its TP Study Report to justify its payment of interest @ of 11.30% also assimilated information on the cost of borrowing for the assessee assuming a case, where it had to take loan from the lenders in the Indian market. For this purpose, interest rates quoted by various public sector banks on their websites as per there external credit ratings scale were consolidated. Data from the banks like, Bank of India; Canara Bank; Punjab National Bank; Syndicate Bank; Uco Bank and; United Bank of India were taken, whereby, the average rate offered to (BBB) rated entities or below with a loan amount of > Rs.10 crores was reflected at 14.96% as on May-2013. Since, pre dated data in the websites was not available, the assessee made tenor adjustment for a difference in the time period, by taking into consideration the relevant difference between the Prime Lending Rate prevalent during the FY 2009-10 and after such an post adjustment, average interest rate of 12.13% was arrived and was contended that, assessee’s average interest rate of 11.30% given to its AEs were at Arm’s length from all the angles. Thus, from all the transfer pricing perspective, assessee tried to justify its ALP of interest rate paid/payable to its AEs.
The Ld. TPO noted that, assessee had made payment of interest on fully convertible debentures of Rs.99,06,92,142/-
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 5 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 which was in the realm of international transaction with the AE. The payment of interest earned on fully convertible debentures for the financial year 2009-10 have been incorporated in para 5.1 of the TPO’s order and from such details, he noted the interest rate have been charged from 9.75% to 14% in most of the debenture from 01.08.2009. In response to the show cause notice, to explain the reasons for such an increase in interest charge from earlier year at 7% to 14%, the assessee submitted that the portfolio of IDM deteriorated substantially during financial year 2009-10 and there was huge increase in NPA which is evident from the fact that from INR 1603.44 millions in the earlier years, the NPA during the financial year 2009-10 had increased to INR 5248.9 million. Such a sharp increase in NPAs would have substantially increased the IDM’s default risk, thereby necessitating increase in interest rate offered on its borrowings with its AEs.
After analyzing the method and the manner in which the assessee had carried out its benchmarking of the interest rate, first of all, the Ld. TPO rejected the entire methodology adopted by the assessee mainly on the ground that, assessee had not pointed out anywhere in its TP Study report, whether it has taken assessee as a “tested party” or AE as a “tested party”. If the assessee is taken as a “tested party”, then it could have used the rate at which external commercial borrowings are available in India and if the AE is taken as a “tested party”, then, assessee should have used geographical data where AE is located and the external data of AEs’ location could have been used for benchmarking of the interest rate. The assessee has neither look for comparable companies in India or the comparables from the region where AE is located. The assessee has taken the data for the bond rates used in different geographical locations, other than the AE and thereafter has made various adjustments which give skewed results. As regards the reliance of data available from BSE site for identifying the comparable transactions which had issued debt instruments
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 6 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 (in INR), he observed that, there are hardly any company which has a credit rating below “A”. Further, the company has identified two companies namely, Straight System Private Limited and Share Microfin Limited; however, no data for these two comparable were available on the website for the financial year 2009-10.
After rejecting the assessee’s benchmarking of the interest rate paid to the AE, he proceeded to analyse the arm’s length price of the interest paid/payable to the AE. First of all, he observed that, if the assessee is treated as a “tested party” then the benchmarking of the interest rate should be done by using LIBOR rate by benchmarking loan transaction. The prevailing rate of interest for foreign currency loan extended in India for companies with similar credit rating as that of the AE on a standalone basis has to be taken into account. In India, many banks extend loan in foreign currency (i.e., FCNR) and from the sites of various banks like Bank of Baroda, he noted that the credit rating of ‘AAA’ rated customers it is 500 bps over three months USD LIBOR and for ‘AA’ rated customers it is 550 bps and for ‘A’ rated customers it is 600 bps. He further held that RBI master circular provides for ceiling of LIBOR +500 basis points for ECB of maturity of 5 years. He also took note of data from newspaper report regarding certain companies raising $50 million via ECBs @5% and $1 billion at an average @ 8.5%. After details analysis, he held that ALP rate of interest should be 8.5%. The working has been illustrated at pages 11 and 12 of the TPO’s order.
Thereafter, TPO proceeded with the presumption by treating AE as a “tested party”. He straight away held that AE would have earned interest based on USD Corporate Bond Rates for FY 2009- 10. He then took the data of USD Corporate Bond rates and held that, the ALP rate of interest would be at 5.68%. The data has been reproduced by him at pages 12 & 13 and his final conclusion is as under:-
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 7 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 “The average LIBOR rate during the year was less than 1% therefore companies with credit rating BBB- have borrowed at a rate of LIBOR plus 308 basis points (1% plus 308 basis points), which comes to 4.08%. Even by taking the rating of the AE 3 notches lower than BBB- i.e. BB- the arm length rate would be LIBOR+4.68% if the AE had given loan to a company with credit rating of B-. It would have earned interest @1% plus 4.68% that is 5.68%. The rate charged by the AE from the assessee @ 14% is not at arm’s length”
Finally, he benchmarked the transactions after adopting Arm’s length interest rate of 5.68% as per working given at page 13 para 11 and thereby made a huge adjustment of Rs.48,53,19,133/-.
Before the DRP, assessee after explaining the entire process as to how the benchmarking of the transaction of interest payment has been done vis-a-vis, the external comparables taken from Thomson Reuters’ DealScan, and Bloomberg Database and also from the website of Bombay-Stock-Exchange, submitted that looking to the high risk investment in which assessee is involved and being a Schedule BBB(-) rating company, the payment of average interest rate 11.30% on CCDs issued is fully justified and is ALP. Thereafter, the assessee explained the rationale behind the need for economic adjustments while arriving at arm’s length rate to weed out the differences in external comparable sets and the tested transaction on account of currency risk, country risk, tenor risk and credit rating of the borrower. Further, the tested transaction is in INR denominated debt with a fixed coupon rate, therefore, benchmarking with the foreign currency bonds rates or ECBs rate on FCNR loans cannot be made applicable. The base rate on which interest rate depends is directly related to the currency of denomination of the issuance. A debt i.e. denominated in a specific currency should be compared to a debt that is, denominated in the same currency. Supply and demand for funds
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 8 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 in a specific currency affects the price, that is, the interest rate. Accordingly, the reference rate used for NIR denominated debt should be taken into account considering market conditions prevailing in India and not LIBOR or USD Bond rate.
Regarding bench marking carried out by the TPO, the assessee submitted that, the same is incorrect on two grounds viz. firstly, the TPO has assumed that AE’s credit standing is BB (-) without giving any basis for the same and secondly, he has considered the lenders creditworthiness to determine the arm’s length rate whereas all the interest rates for bonds or loans are based on borrowers’ creditworthiness. No economic adjustment have been done by the TPO to factor-in the differences in the currency of the comparable bond data and the tested transaction, because while the former is in USD and later is in INR. The two currencies have completely different risk profiles. In any debt scenario, the borrower's credit standing determines the interest rates on the debt. Further, various other clarifications and objections on the TPO’s order were raised which have been discussed and incorporated in detail by the DRP from pages 12 to 19 of the impugned order.
The Ld. DRP after discussing the entire gamut of facts, reasoning given by the TPO and the arguments/objections raised by the assessee, reiterated the same reasoning of the TPO for benchmarking of the international transaction of interest payment. It also proceeded with the premise that there should be first, identification of the “tested party” and based on such tested party’s geographical locations, economic conditions and comparability factors benchmarking can be done. Here in this case, DRP observed that it is not clear, whether the assessee is the tested party or the AE. To arrive at this conclusion that selection of the tested party is a condition precedent for carrying out transfer pricing analysis of the ALP; the DRP referred to the OECD
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 9 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 guidelines as well as UN Practice Manual guidelines on transfer pricing and has even incorporated relevant paragraphs of such guidelines at pages 21 to 23 of the order. Thereafter, the DRP observed that the TPSR of the assessee is very sketchy to prove that international transactions are at arm’s length and even FAR analysis has not been carried out. Further, the assessee was charging interest from its investments @ 9.75% whereas, the revised interest rates claim for its AE are 14%. It further noted that there are no comparables available in the Indian domain which has identical or similar facts as that of the assessee. Regarding external CUP used by assessee for using external data like Thomson Reuters’ DealScan and Bloomberg data base for comparable transactions, the DRP held that, since number of adjustments have been carried out, therefore, the resultant comparable figures cannot be said to be free from defects and it could not be said that final determination of the ALP of comparables was the ideal figure, specifically when the assessee himself admitted that no comparables were available in Indian domain in the aforesaid databases. Regarding data obtained from BSE also, the DRP observed that the data was not available for FY 2009-10 and the assessee selected the comparables from the data of the year 2013 from which it has made adjustments of time of issuance and tenor. Such an analysis also is not free from defects and will result into incorrect determination of the ALP. Lastly, benchmarking of interest rate by determining the cost of borrowing where it had to take loan from the Indian market and adopting the rates quoted by various public sector on their websites, is also devoid of merits as the transactions undertaken by the assessee is different, because assessee’s borrowing is not from the Indian market albeit from AE which is located abroad.
The DRP further added that, if benchmarking is done by treating assessee itself as a “tested party” then also it would not be the best of methodology for benchmarking the international
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 10 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 transaction. In the present case AE should be taken as a “tested party” for the purpose of benchmarking as it would make the computation of the ALP very simple as held by the TPO, because reliable data and fewest adjustments here in this is available for AE. It further held that, if the information from the same market is not available an uncontrolled comparable derived from different geographic market may be considered if adjustments are made to account for differences between the two markets. However, if the information permit adjustments for such differences are not available then, information derived from uncontrolled comparables in the most similar market for which the reliable data is available may be used. Thereafter, referring to Delhi ITAT decision in Ranbaxy Laboratories Ltd. (110 ITD 428) and other decisions on the concept of “tested party” and reiterating the reasoning of the TPO, Ld. DRP upheld the arm’s length rate of 5.68% and thereby the quantum of adjustment made by the TPO as per the discussion appearing from pages 25 to 29 of the impugned order.
Before us on behalf of the assessee, Ld. Senior Counsel, Shri J.D. Mistry submitted that, the assessee is involved in a very high risk business whereby it identifies the midcap companies for making the investment which are financially distress companies and because of such business profile it has been rated as BBB (-) as a credit rating. As a primary source of funding for its operations, the assessee issues compulsory convertible debentures in INR and given the circumstance where funding from outside is difficult such debentures have been taken up by the associated enterprises. Considering the various debentures series issued, the effective rate of interest paid (in INR) by the assessee to its AE during the year 2010-11 was 11.30%. The main issue here is, whether in such a highly risky investment where the assessee being BBB (-) rating company, can in India anybody will give loan or subscribe to debenture for less than 11%. He submitted that, it would not be possible at least in the Indian scenario. Though, here
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 11 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 the assessee has tried to benchmark the interest rate by using external CUP method, however, the only dispute between the assessee and the Department is arm’s length rate of interest paid by the assessee to the AE and not the method as such, that is, CUP is the accepted MAM. The TPO in his order has rejected the entire TP exercise of the assessee including selection of the external comparables and has tried to benchmark firstly, by using external commercial borrowings data as per RBI circular and websites of banks giving ECBs on LIBOR plus certain bps points, whereby he arrived at arm’s length rate of 8.5% and secondly, by adopting US Bond Rate and arrived at an average arm’s length rate of 5.68%. The whole exercise done by the TPO is incorrect, because what is required to be benchmarked is the interest rate applicable in India that to be in INR and not in terms of any foreign currency, which makes the entire finding erroneous. This fallacy permeates in his entire approach and finally in making the adjustments. If one goes by the rate of 8.5% arrived at by the TPO, it is net of withholding tax and if same is considered on gross basis rate then it would be approximately 11% and in such a situation again, the assessee’s average rate of 11.30% would be at arm’s length. The second premise on which TPO and DRP had rejected the assessee’s benchmarking and entire TPSR is that, the assessee has not identified any tested party and under the given facts AE should have been treated as a tested party. In support, certain excerpts of OECD and UN Manual have been quoted by the DRP, however, the DRP have completely misdirected themselves for not quoting the other relevant parts of OECD and UN Manual, wherein, it has been clearly provided that the concept of “tested party” will apply only when ‘cost plus’ (CPM) or ‘resale price’ (RPM) or ‘transaction net margin method’ (TNMM) is applied. Under the CUP only the transactions has to be seen and not who is the tested party. This has been clearly provided both in the OECD and under the UN Manual in the same paragraphs which has been referred by the DRP. Accordingly, the entire premises on which the TPO and DRP
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 12 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 have based their orders are erroneous. There is another fallacy in the approach of TPO and DRP is that the starting point of their benchmarking analysis is based on external commercial borrowing rate and US Corporate bond rate which cannot be held to be applicable at all, because such a data have no nexus whatsoever to India especially when transaction of payment of interest by an Indian borrower is on the basis of INR denominated debt. What needs to be considered is the INR lending data to a borrower in India having same or similar credit rating. In support of his contention, he strongly relied upon the decision of Hon’ble Delhi High Court in the case of CIT vs Cotton Naturals India (P) Ltd, reported in [2015] 55 Taxman.com wherein, the Hon’ble High Court held that arm’s length interest rate should be computed based on market determinant interest rate applicable to a currency in which loan has to be repaid. Thus, USD Corporate Bond rate and LIBOR rates on ECBs cannot be applied herein this case, because currency here is in INR.
He further submitted that, if assessee’s benchmarking with the external data from Thomson Reuters’ DealScan, and Bloomberg Databases are not accepted then assessee’s benchmarking by analyzing the BSE listed companies should be accepted. The assessee has identified two comparables based on B+ and BB rating in its TP Study report which gives the average rate of interest of more than 15% and hence in such a situation, the assessee’s benchmarking of payment of rate of interest at 11.30% has to be treated at arm’s length price. He further filed a copy of public issue of secured & non-secured debentures issued by Shriram Transport Finance Co. Ltd. and Tata Capital Ltd. in the year 2009, wherein for AA and AA+ credit rating, the average yield of interest is ranging from 11% to 12%. Thus, assessee being BBB (-), the average rate of interest 11.30% is definitely far within the range of arm’s length. Thus, no TP adjustment at all is required in the case of the assessee.
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 13 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014
On the other hand, the Ld. CIT DR submitted that it is not a case of plain vanilla loan, but of compulsory convertible debentures. Earlier the rate of interest paid by the assessee was around 7%. The reset of interest in this year was @ 9.75% which within the same year as swelled to 14%. Thus, there is a huge difference of interest rate in the same financial year itself from 9.75% to 14%., which is an increase of around 43% in one year. Once there is no fresh borrowing in this year then how in the course of one year there has been such a huge increase. This factum itself shows that the interest rate paid by the assessee to its AE was not arm’s length rate or price. Under transfer pricing analysis, one has to see whether in the third party situation such a huge increase and variation could have been justified or not. He further submitted that, under the CUP method strict comparability and least adjustments is required. If the USD corporate bond rates is not applicable especially now in the wake of Delhi High Court decision in the case of Cotton Naturals (supra) but at the same time, the assessee’s benchmarking of the comparables based on data of year 2013 also cannot be accepted. Further, the two comparable transactions which has been sought to be given at the time of hearing before the Tribunal in the case of Shriram Transport Company Ltd. and Tata Capital Ltd. again has not been considered by the TPO as well as by the DRP therefore, in the interest of justice and in all fitness, the matter should be restored back to the TPO to carry out proper analysis under CUP after considering the Indian databases.
We have carefully considered the rival submissions, perused the relevant finding given in the impugned orders as well as material placed on record. To succinctly recapitulate the relevant facts, the assessee as its business strategy acquires and makes investments in midsized enterprises which are financially distress companies but otherwise have potential or viable business
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 14 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 proposition. Such an investment merits the assessee company a highly risk undertaking enterprise and because of such a risky operations of investments it has been rated as BBB (-). The funding of these investments is primarily through intra-group financing wherein, it raises money through debt in the form of series of compulsory convertible debentures (CCDs) which in turn uses these funds to carry out investment activities. These CCDs are raised in terms of Indian Rupee (INR) and even the interest paid on such debt is also in terms of INR only. Since these debts have been taken up by the AE, therefore, the payment of interest on these debts amounting to Rs.99,06,92,142/- is the subject matter of Transfer Pricing. During the year, the payment of rate of interest has been varied from 9.75% to 14% due to reset clause and the average rate of interest paid on most of the debentures from 01.08.2009 was around 11.30%. Such a reset of interest rate was mainly on account of increase of non-performing assets (NPA) during the year which has risen from INR 1603.44 million to INR 5249 million. This increase in default risk has necessitated the reset of interest rate which has been offered on the borrowings. In its transfer pricing study report, the assessee, applied CUP method (external) to benchmark the transaction in line with the international practices. For this purpose, it first analyzed itself by way of credit estimation exercise of the borrowing entity by using S&P Corporate Rating criteria. Based on such rating, it carried out external comparable of transactions from international data from Thomson Reuters’ DealScan, and Bloomberg Databases to identify comparable transactions with the debt of the assessee. Since no INR denominated debt were available on these databases, the assessee shortlisted some of comparable transactions and after making qualitative analysis, certain adjustments on account of country risk, currency risk and tenor adjustment was made. After such an exercise arm’s length interest rate of 14.51% was arrived at. The second analysis was done by undertaking comparable debt issuances from BSE data which resulted into two comparable
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 15 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 transaction with the rating of BB or B (+) companies with an average rate of interest of 15.01%. Since, the data of these two comparables were available for the year 2013, therefore, after making tenor adjustment the effective rate arrived was more than 11.3% and hence it was reported that assessee’s rate of interest is much within the arm’s length margin. It had also undertaken an analysis of interest rates offered by Indian banks to the borrowers during the TP proceedings which showed the average rate of 12.13%. On the basis of such analysis, it was reported that, the assessee’s average rate of interest of 11.30% is at ALP. The entire exercise has been rejected by the TRP as well as by the DRP on the reasons discussed above. After rejecting the entire benchmarking analysis of the assessee, the TPO and DRP have arrived at arm’s length price of 5.68% which is based on USD Corporate Bond Rate even though the entire debt in the form of CCDs were in terms of INR and also of interest was also in the terms of INR. There was another manner of benchmarking done by the TPO which was based on LIBOR rate of external commercial borrowings wherein he has arrived at an average interest rate of 8.5%, however, the said rate has not been applied finally for benchmarking the assessee’s transaction. The whole premise on which the assessee’s analysis has been rejected both by the TPO as well as by the DRP is that, the assessee has not identified the “tested party” for benchmarking the international transaction. Without identifying the tested party, the whole transfer pricing analysis conducted by the assessee is erroneous as per the TP provisions. As per the TPO, if the assessee is being treated as a tested party, then it should have used the rate at which ECBs as available in India and if AE is taken as tested party then geographical data where AEs is located should have been used for benchmarking the interest. The DRP has quoted certain paragraphs of United Nations Practical Manual on Transfer Pricing as given in Chapter V and also OECDs Transfer Pricing Guidelines in Chapter III. The relevant portions have been incorporated at page 21 to 22 of the DRP’s order.
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 16 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014
In wake of this background, the first and foremost issue for our adjudication is whether, while applying the CUP Method, it is necessary to identify the “tested party”. Although Indian TP regulation does not laid down any specific procedure or guidelines for choice of “tested party”, however, OECD provides that, as a general rule, tested party should be the one to which transfer pricing method can be applied in most reliable manner and for which most reliable comparables can be found. In other words, the tested party ought to be the enterprise that offers high degree of comparability and requires least amount of adjustment. It should be, most often the one that has least complex functional analysis. Under CUP method, what is required to be seen is the price at which a controlled transaction is carried out as compared to the price obtained in a comparable uncontrolled transaction under similar conditions. Thus, it is a direct method for determination of Arm’s length price. Product Comparability is the main ‘key factor’. Whereas, in the other methods, like Cost Plus, Resale Price or Transactional Net Margin Method, financial indicators like mark- up on costs, gross margin or net profit indicator is tested and analyzed with an appropriate base. Thus, under these methods, the choice of the “tested party” becomes far more imperative. That is why, in United Nations Practice Manual on Transfer Pricing, in chapter V, paragraph 5.3.3 dealing with provision of “tested party” clearly envisages that the choice of the tested party should be done while applying these methods. There is no reference of tested party under CUP method. The relevant paragraph 5.3.3 of UN Manual reads as under:
“When applying the Cost Plus Method, Resale Price Method or Transactional Net Margin Method (see further Chapter 6) it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 17 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 be consistent with the functional analysis of the controlled transaction. Attributes controlled transaction(s) will influence the selection of the tested party (where needed). The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for comparability is available. It may be the local or the foreign party. If a taxpayer wishes to select the foreign associated enterprise as the testes party, it must ensure that the necessary relevant information about it and sufficient data on comparables is furnished to the tax administration and vice versa in order for the latter to be able to verify the selection and application of the transfer pricing method”. Similarly in OECD guidelines also the concept of “tested party” has been stressed under CPM, RPM and TNMM, which is evident from para 3.18, reproduced hereunder:- “When applying a cost plus, resale price or transactional net margin method is described in Chapter II, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the less complex functional analysis”
From the above, it can be clearly inferred that identification of the tested party is far more imperative while applying CPM, RPM or TNMM and not while applying CUP. Here one important aspect which is to be bear in mind while deciding the concept of “tested party” is that, the transaction which is being benchmarked is interest payment by assessee to its AE, that is, transaction undertaken by the assessee and not vice-versa. Had it been the transaction undertaken by AE, then perhaps, similar transaction by AE with the third party or independent similar transaction in the place of AE could have been analyzed to come to an ALP. The इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 18 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 DRP while incorporating the same paragraphs from these guidelines has grievously omitted to incorporate the operating three lines of the same paragraph. Thus, there is no support of the premise or conclusion arrived by the TRP as well as by the DRP in holding that entire transfer pricing and benchmarking analysis done by the assessee is vitiated simply because the assessee has not identified the “tested party”. Accordingly, we are unable to subscribe to the views and the reasoning given by the TPO as well as by the DRP qua the selection of “tested party” and thereby conducting benchmarking analysis based on external country data or foreign currency bond/interest rates.
Now coming to the issue, whether the arm’s length interest rate arrived at by the TPO and endorsed by the DRP by adopting USD Corporate Bond Rate and LIBOR interest rate based on external commercial borrowing is justified in the present case or not. First of all, as stated in the foregoing paragraphs and reiterated several times that the CCDs have been issued in INR denominated debt and the interest paid / payable is also in terms of INR. Once the tested transaction is in INR denominated debt, then interest rate must necessarily be based on economic and market factors affecting Indian currency and data available for debt issuances in India or INR denominated rather than foreign currency rate or external data. The base rate on which interest rate depends is directly related to the currency or denomination of issuance and, therefore, it should be taken into account according to the market conditions prevalent in the country of such currency, here in this case India. The market conditions capable of capturing best of the rates do not depend much on any place but rather on currency concern, because the supply and demands of funds in a specific currency the price/interest rates for funds denominated in that currency. Hence, cost of borrowing funds denominated in INR or lending rates based on INR loans/debt instrument issuances is इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 19 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 more reliable and ideal base for benchmarking similar transactions undertaken by the companies or entities with similar ratings.
The TPO and DRP in our opinion have committed a fallacy, firstly, by considering the AE as a “tested party” and secondly, relying upon USD Corporate Bond Rates to benchmark the ALP of the interest rate because the interest rates for bonds or loan has to be seen from the point of view of borrowers creditworthiness and not the lender’s creditworthiness. Thus, the entire approach of the TPO/DRP in applying USD Corporate bond rates to benchmark the interest transaction in a blanket manner is not correct. As pointed out by Ld. Senior counsel, now, Hon’ble Delhi High Court in the case of Cotton Naturals P Ltd. (supra) have held that, arm’s length interest rate should be computed based on market determined interest rate applicable to currency in which loan has to be repaid. The relevant observation of the Hon’ble High Court in this regard reads as under:-
“39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 20 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- x x x x x x x x x x x x x x x x x x x x x x x … 40. The aforesaid methodology recommended by Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply”.
If we apply the same ratio, then arm’s length interest rate should be based on INR in which CCDs has been issued and the currency in which interest is being paid and not on any foreign currency lending rate. Thus, respectfully following the aforesaid ratio, we reject the TPO’s application of USD Corporate Bonds Rate as well as the LIBOR rate for benchmarking the interest transaction in this case.
The last leg of the controversy is, whether the benchmarking analysis done by the assessee is correct or not and whether the average rate of interest of 11.30% paid by the assessee to its AE is at ALP or not. So far as the assessee’s benchmarking analysis as done in TP Study report based on external data using Thomson Reuters’ DealScan, and Bloomberg Database, we find that such an approach is not correct, firstly, there are no INR denominated debt
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 21 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 issuance available on such databases and; secondly, in absence of such a data the assessee has to carry out huge adjustments on account of country risk, currency risk and tenor risk. With all these factors of adjustments, it would be difficult to arrive at an appropriate arm’s length range of price; therefore, in our opinion such an approach of the assessee for benchmarking the arm’s length interest rate may not be correct. However, as regards the search undertaken for comparable debt issuances in BSE data, we find that the assessee has shortlisted two comparables namely; Starlight Systems Private Limited and Share Microfin Limited which have a coupon rate of 15% and 13.75%. Since these data belong to year 2013, the assessee had made minor tenor adjustment to factor the time period to arrive at interest rate of 15.97% and 14.05% giving a mean rate of 15.01%. Though the assessee was required to benchmark its transaction by taking the financial year data for year 2009-10, but, if such a data were not available then it cannot be held that such a tenor adjustment for taking into time period cannot be made under CUP, if it has been made quite accurately taking into account the material factors relating to time of the transaction affecting the price. We though agree that, a high degree of comparability is required under CUP, but in absence of such a comparable data, a minor adjustment can be made to eliminate the material effect of time difference for arriving at a comparable uncontrolled price. Now before us, the assessee had filed two comparable transactions for the year 2009, that is, for the same financial year in the case of Shriram Transport Financial Company Ltd. and Tata Capital Ltd., wherein, for credit rating of AA Enterprises the coupon rate of interest per annum was between 11% to 12% for a tenor of 60 months. The yield on redemption is also around 11.25% to 12%. If for a credit rating company AA or AA(+) the interest rate is ranging between 11% to 12%, then in the case of the assessee which is admittedly BBB(-) credit rating company, 11.30% interest paid by the assessee to its AE is much within the arm’s length rate. This data/
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 22 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 document from public domain now made available before us is worth relying to benchmark and analyze the current transaction of coupon rate of interest paid/payable on CCDs issued by the assessee. Accordingly, we hold that 11.30% interest rate is at arm’s length price. Thus, in our conclusion, the transfer pricing adjustment made by the TPO and as confirmed by the DRP at Rs.48,53,19,310/-stands deleted and consequently ground no. 1 is allowed.
The next issue raised vide ground no.2 relates to disallowance of Rs.2,15,71,424/- made under section 14A r.w. Rule 8D.
The brief facts qua the said issue is that, the AO noted that assessee has made investments of Rs.470,40,12,316/-, however, no dividend income or any exempt income has been received by the assessee during the year. Since assessee had not made any suo motto disallowance of expenditure under section 14A, the AO held that in view of the decision of Hon’’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd., reported in 328 ITR 81, disallowance has to be made under Rule 8D r.w.s. 14A and accordingly, he computed the disallowance in the following manner:- Disallowance under Rule 8D(2)(i) Rs. Nil Disallowance under Rule 8D(2)(ii) Rs.2,04,97,799/- Disallowance under Rule 8D(2)(iii) Rs. 10,73,625/- Total disallowance Rs.2,15,71,424/- =============== 18. Before the DRP, the assessee’s case was that, firstly, since assessee had not earned any exempt income, therefore, no disallowance should be made u/s 14A and; secondly, the investment in shares has been made as part of the regular business activity since it is primarily engaged in making investment in distress companies where there is remote or no इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 23 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 chance of earning any dividend income. However, the DRP after detailed discussion upheld the said disallowance.
Before us, Mr. J D Mistry submitted that, now in view of the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs CIT, reported in [2015] 378 ITR 33 (Del), no disallowance should be made once there is no exempt income and therefore, the disallowance as made by the AO should be deleted.
Ld. DR, strongly relying upon the order of the DRP submitted that, what is required to be looking into whether such investments are capable of earning exempt income or not; if they are then, needless to say that, disallowance under section 14A should be made.
After considering the rival submissions and on perusal of the impugned order, we find that, it is an admitted fact that assessee has not earned any exempt income. Once that is so, now in the wake of decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. (supra), no disallowance under section 14A can be made. This decision of Hon’ble Delhi High Court is being followed in various cases by this Tribunal. Moreover, in this case, it has been submitted before us that, investee companies are loss making entities incapable of declaring dividend and, therefore, there is no possibility of earning of any dividend income in the future also. Thus, respectfully following the ratio of Hon’ble Delhi High Court decision in the case of Cheminvest Ltd (supra) we hold that no disallowance under section 14A is warranted in the present case of the assessee and accordingly, disallowance of Rs.2,15,71,424/- is hereby deleted.
In ground no. 3, the assessee has challenged the addition on account of interest accrued in respect of non-performing assets (NPAs) for sum of Rs.33,73,86,850/-.
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 24 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 23. Brief facts qua the issue are that, the AO during the course of the assessment proceedings noted that there was mismatch of TDS amount as per the return of income filed and TDS claimed under section 26AS. The differential amount of interest income which as per the AO had accrued to the assessee from four parties on mercantile basis for sums aggregating to Rs.33,73,86,850/- should have been declared in the return of income. Such a difference of interest amount has been elaborated by the AO in the following manner: Sr Name of TDS claimed TDS Differences Remarks No borrower in ROI by reflected in 26AS form 26AS 1 Kitply Industries Nil 41,20,200 41,20,000 4,12,00,000 Limited 2 Brandhouse Nil 86,73,470 86,73,470 8,67,34,700 Retails Limited 3 Sanghi Industries 1,95,52,535 3,37,88,771 1,42,36,176 14,23,61,760 Limited 4 Ganesh Benzoplast 1,83,04,565 2,50,13,604 67,09,039 6,70,90,390 Limited Total 3,37,38,685 33,73,86,850 In response to the show cause notice, the assessee’s reply was in the following manner: Sr Name of TDS claimed TDS Differences Remarks No borrower in ROI by reflected in 26AS form 26AS 1 Kitply Industries IDM did not receive Nil 41,20,200 41,20,000 any interest from Limited this borrower and no TDS was claimed against the same. Although borrower did not pay any interest to IDM, it deposited TDS there- on in AY 2011-12 2 Brandhouse IDM has booked Nil 86,73,470 86,73,470 income on these Retails Limited loans/debt 3 Sanghi Industries instruments based 1,95,52,535 3,37,88,771 1,42,36,176 Limited on regulatory norms 4 Ganesh Benzoplast 1,83,04,565 2,50,13,604 67,09,039 prescribed by the Limited reserve bank of India and offered the same to tax accordingly. The income was Offered to tax in the previous year 2010-11. However, the payers have provided for the interest in financial year 2009-10 and इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 25 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 have deducted tax in that year. Given this, the difference is merely a timing difference that gets reversed in the previous year 2010-11 Thus, in sum and substance, the assessee’s submission was that the income on these loan/debt instruments were booked in financial year 2010-11 due to regulatory norms prescribed by RBI and accordingly, were offered to tax in that year but these parties had provided for the interest in the financial year 2009-10 and deducted the tax accordingly. Thus the difference is mainly a timing difference that gets reversed in the previous year 2010-11. Moreover as per RBI directions income/interest on NPA shall be recognized only when it is realized and not earlier.However, the AO held that in a mercantile system of accounting, the revenues are to be recognized on accrual basis and hence, postponement of revenue recognition is not justified. The interest income has to be accounted for during year under consideration following the matching principles since the related expenses have been claimed during the year under consideration. Accordingly, he taxed the entire interest income of Rs.33,73,86,850/-.
The assessee’s case before the DRP was that in the notes of accounts in the financial statements for the financial year 2009-10 it was duly reported/stated as under: “Interest income is accounted on an accrual basis. Income on the NPAs is accounted for on a “realization” basis in accordance with the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 issued by the Reserve Bank of India”
Accordingly, the interest in relation to the three portfolios (out of four) which were classified as NPA has been recognized on realization basis. The assessee has classified the loans and advances as NPA in accordance with the RBI directions. The इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 26 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 relevant extract of which has been incorporated in the DRPs’ order from pages 41 to 43. The DRP after considering the entire submissions, however, rejected the assessee’s submission and upheld the action of the AO after observing and holding as under:-
“7.3 We have considered the above submissions of the assessee and the facts of the case. It is seen that the interest income from i) Kitply Industries Ltd has not been declared by the assessee in the return of income simply because the assessee had not received such interest. Since the assessee is following mercantile system of accounting, actual receipt of interest income is of no consequence and the income has to be taxed on accrual basis, as rightly held by the AO. In respect of the other three parties namely ii) Brandhouse Retails Ltd, iii) Sanghi Industries Ltd and iv) Ganesh Benzoplast Ltd, it is stated by the assessee that the income on the loans advanced/debt instruments has been booked in succeeding financial year i.e. FY 2010-11, due to regulatory norms prescribed by the RBI and accordingly offered to tax in that year. However, it is also seen that these parties had provided for the interest in the current financial year 2009-10 and deducted tax accordingly. Thus, the income from the other three parties has also accrued in the current year and is accordingly taxable in the current year on mercantile basis. The assessee's argument that this income (from the other three parties) has been offered in the succeeding year and hence the difference is merely a timing difference that gets reversed in the succeeding year cannot be accepted. The AO has rightly held that in mercantile system, the revenues are to be recognized on accrual basis and postponement of revenue recognition is not correct. The interest income has to be accounted for during the year under consideration following the matching principle, since the related expenses are claimed during the year under consideration. The basic argument of the assessee that interest pertains to NPAs is itself fallacious as the assessee has itself declared the same in the 1 succeeding year in respect of three parties and in respect of the other party i.e. Kitply Industries Ltd, the assessee has not demonstrated as to how its investment can be said to be NPA. In view of these facts therefore, these decisions cited by the assessee
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 27 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 will not apply to the issue at hand. Therefore, we uphold the action of the AO to tax the interest income on mercantile basis at Rs.33,73,86.850/-. The objection No. 4 is accordingly rejected”.
Before us, Mr. J D Mistry submitted that the interest on NPA has been offered to tax on receipt basis as per the RBI Prudential norms which assessee is bound to follow being a NBFC. Now there are umpteen numbers of decisions including that of Hon’ble jurisdictional High Court that, interest of NPA is to be offered to tax in the year of receipt. Two such decisions relied upon by him are as under:- a) CIT vs. KEC Holdings Ltd, Income-tax Appeal No.221 of 2012 judgment and order dated 11th June, 2014 (Bombay High Court); and b) CIT vs. Vasisth Chay Vyapar Ltd., reported in [2011] 330 ITR 440 (Delhi High Court).
On the other hand, the Ld.CIT DR strongly relied upon the order of the DRP as well as the AO.
After considering the relevant finding given in impugned orders and submissions made by the parties, it is seen that AO has taxed the amount of interest on the ground that assessee should have shown the interest income on accrual basis as per the mercantile system of accounting and not on receipt basis as done by the assessee. The assessee’s contention has been that this income specifically from the three parties has been offered in the succeeding year on the basis of year of receipt which is in consonance with the guidelines issued by the RBI Prudential Norms which is binding on the assessee being a NBFC. It is admitted facts that, the interest in relation to the three parties were classified as NPA which has been recognized by the assessee on realization basis. The RBI norms, as applicable to the NBFCs in this regard read as under:
- With effect from March 31, 2003, 'non-performing asset' (referred to in these directions "NPA") means:
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 28 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 - An asset, in respect of which, interest has remained overdue for a period of six months or more; - A term loan inclusive of unpaid interest, when the installment is overdue for a period of six months or more or on which interest amount remained overdue for a Period of six months or more; - A demand or call loan, which remained overdue for a period of six months or more from the date of demand or call or on which interest amount remained overdue for a period of six months or more; - A bill which remains overdue for a period of six months or more - The interest in respect of a debt or the income on receivables under the head 'other current assets' in the nature of short term loans/advances, which facility remained overdue for a. period of six months or more; - Any dues on account of sale of assets or services rendered or reimbursement of expenses incurred, which remained overdue for a period of six months or more;"
Para 3(2) of the Master Circular on 'Non Banking Financial Companies - Prudential Norms (Reserve Bank) Directions, 1998 reads as under: -
"Income including interest / discount or any other charges on NPA shall be recognized only when it is actually realized. Any such income recognized before the asset became non- performing and remaining unrealized shall be reversed." (Effective from May 12, 1998)
Thus, the assessee has recognized the revenue of interest on NPA as per the RBI guidelines which envisages for on realization basis. Now this aspect of the matter has been dealt by the Hon’ble jurisdictional High Court in the case of CIT vs KEC Holdings Ltd. (supra), wherein their Lordships have relied upon the decision of Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra). In the case before the Hon’ble Bombay High Court, the substantial question of law related to same issue that is, addition of accrued interest on non-performing-assets. The Tribunal in that case has held that same has to be taxed on realization basis even if the interest income is shown on accrual basis after it is not realized, because the banking institutions or NBFC following mercantile system of accounting are permitted to treat the same income as doubtful and they are permitted to keep the same in Suspense
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 29 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 Account and it is not necessary that it is brought to Profit & Loss Account of the assessee. After detailed discussion, the Hon’ble High Court concluded in the following manner:-
“91. We do not find that the Tribunal has either misdirected itself in law or its order can be termed as perverse warranting interference in our appellate jurisdiction. We find that the view taken by the Tribunal accords with the Reserve Bank of India guidelines and which are not in any way in conflict with the Income Tax Act, 1961, the Hon’ble Supreme Court has held in the case of UCO Bank that the interest income would have been brought to the Profit and Loss Account provided it was actually realized, that in case of Nationalized Bank it treated something which is doubtful, and therefore, kept it in a suspense account, was held to be a permissible exercise. In respect of the loans which are advanced, recovery of some of them if considered doubtful, then, even the interest on the loans advanced may not be realized. That is how the amount is not brought to the profit and loss account because they are not likely to be realized by the bank or a NBFC as well. It is permissible therefore to disclose or to show them as income in assessment year in which either the interest amount or part of it is recovered. The Tribunal in this case, namely, of the assessee before us, has precisely followed this course. We do not find that the course permitted and upheld by the Tribunal is in any way in conflict with any legal provisions or the settled principles. Rather as held by us, it is in accordance with the same. Once the view taken by the Tribunal was possible and in the given facts and circumstances the income has not been realized by the assessee, the addition was rightly deleted. We, therefore, do not find that the appeal raised any substantial question of law. It is accordingly dismissed. No costs”.
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 30 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 Thus, respectfully following the ratio of Hon’ble jurisdictional High Court which in turn has relied upon the Hon’ble Delhi High Court, we hold that there is no infirmity in treating the interest income on NPAs on realization basis by the assessee qua the three parties, which is in conformity with the RBI guidelines. It is also admitted fact that assessee has shown this income in the subsequent year, hence the dispute is only with regard to timing.
As regards interest component, on account of Kitply Industries Ltd, (fourth party) the assessee had submitted that the said portfolio was sold at a huge loss whereby the recovery was only Rs.1 crores as against principal of sum of Rs. 120 crores in financial year 2012-13, that is, in subsequent financial years. If such a contention of the assessee is correct then no interest income can be taxed simply on the basis of accrual. On this account also the above ratio laid down by Hon’ble Bombay High Court and also the RBI guidelines will apply. Since, this aspect of the matter has not been considered either by the AO or by the DRP, therefore, same needs verification from the end of the AO to see whether the contention of the assessee is correct that the portfolio was sold at a huge loss in the financial year 2012-13 and no interest has been recovered. Thus, in view of our finding the decision of the AO in compliance with the direction of the DRP is reversed and the ground No. 3 as raised by the assessee is treated as partly allowed for statistical purposes in the manner indicated above.
So far as grounds relating to levy of interest under sections 234A, 234B and 234D, no argument have been raised before us. Accordingly, the same is treated as dismissed as not pressed. Accordingly, ground no. 4 & 5 are treated as dismissed.
इं�डया डै�ट मैनेजम�ट �ाइवेट �ल�मटेड 31 India Debt Management Pvt Ltd IT(TP)A No.7518/M/2014 28. In the result, appeal of the assessee is partly allowed. Order pronounced in the open court on 10th March, 2016.
Sd/- Sd/- (जे पी बोस) (अिमत शु�ला) लेखा सद�य �याईक सद�य (J P BOAZ) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 10th March, 2016 ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT(A) -6, Mumbai. 4) The Commissioner of Income Tax- 2/concerned___, Mumbai. 5) िवभागीय �ितिनिध “के”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “K” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File. आदेशानुसार/By Order / / True Copy / /