DCIT-1(2)1, MUMBAI, MUMBAI V. BOMBAY RAYON HOLDINGS LIMITED, MUMBAI

ITA 5604/MUM/2024

AI Insights

The case involves four appeals by the Revenue against Bombay Rayon Holdings Ltd. concerning penalties levied for the assessment years 2010-11 to 2014-15 under section 271(1)(c) of the Income-tax Act. The penalties were based on transfer pricing adjustments made by the Transfer Pricing Officer (TPO) regarding notional interest on interest-free loans given to an associated enterprise. The CIT(A) had deleted these penalties, a decision which the Revenue challenged in the Tribunal. The Tribunal's decision to uphold the CIT(A)'s deletion of the penalties was influenced by the fact that the issue was pending before the High Court and was considered debatable, thus not meeting the criteria for imposing penalties under section 271(1)(c).

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 37601 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Other Referred Cases: Nayan Builders & Developers v. DCIT, DCIT LTU v. Reliance Industries Ltd, Kamal Kumar Saharia v. ITO
• Laws Referred To: Income-tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: WAY OF TP ADJUSTMENT; THERE BEING NO REAL INCOME
• Keywords: Condonation of delay; Transfer pricing; International transaction; Question of law; Commercial expediency; Notional interest; Wholly owned subsidiary
• Section: 271(1)(c); 133A

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH MUMBAI BEFORE SHRI SAKTIJIT DEY, HON’BLE VICE PRESIDENT AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA Nos. 5603 to 5606/MUM/2024 Assessment Years: 2014-15, 2013-14, 2011-12 and 2010-11 Deputy Commissioner of Income-Tax – 1(2)1, Mumbai Vs Bombay Rayon Holdings Ltd., DLH, Above Jack n Jones Showroom, Mangal Murti Building, Near Arya Samaj Mandir, Linking Road, Santacruz West, Mumbai – 400 054 (PAN : AADCB1263A) (Appellant) (Respondent) Present for: Assessee : None Revenue : Shri Kailash C, Kanojiya, CIT DR Date of Hearing : 12.12.2024 Date of Pronouncement : 27.02.2025 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: These four appeals filed by the Revenue are against the orders of Ld. CIT(A), National Faceless Appeal Centre (NFAC), vide order nos.- i) ITBA/NFAC/S/250/2024-25/1067868349(1), dated 22.08.2024, passed against the penalty order passed by National Faceless Assessment Centre, Delhi, u/s. 271(1)(c) of the Income-tax Act (hereinafter referred to as the “Act”), dated 03.03.2022 for Assessment Year 2014-15. ii) ITBA/NFAC/S/250/2024-25/1067868221(1), dated 22.08.2024, passed against the penalty order passed by National Faceless Assessment Centre, Delhi, u/s. 271(1)(c) of the Act, dated 04.03.2022 for Assessment Year 2013-14. 2 ITA Nos.5603 and ors/MUM/2024 Bombay Rayon Holdings Ltd., AYs 2014-15, 2013-14, 2011-12 and 2010-11 iii) ITBA/NFAC/S/250/2024-25/1067868009(1), dated 22.08.2024, passed against the penalty order passed by National Faceless Assessment Centre, Delhi, u/s. 271(1)(c) of the Act, dated 15.03.2022 for Assessment Year 2011-12. iv) ITBA/NFAC/S/250/2024-25/1067867894(1), dated 22.08.2024, passed against the penalty order passed by National Faceless Assessment Centre, Delhi, u/s. 271(1)(c) of the Act, dated 15.03.2022 for Assessment Year 2010-11. 2. There is a delay of 7 days noted by Registry in filing the present appeals before the Tribunal for which petition for condonation of delay is placed on record. We have considered the petition for condonation of the said delay. Upon perusal of the same and hearing both sides, we deem it fit to condone the delay on the ground that there was sufficient cause for the said delay. Accordingly, we condone the delay to take up the matter for adjudication. 3. This is a set of four appeals by the Revenue having identical set of factual matrix with common ground challenging deletion of penalty levied under section 271(1)(c). Since ground raised is common, we adjudicate all the four appeals by passing a consolidated order with facts drawn from the appeal for Assessment Year 2010-11 in ITA No. 5606/Mum/2024. 4. Assessee is a wholly owned subsidiary of Bombay Rayon Fashions Ltd. (BRFL). Assessee filed its return of income on 08.09.2010, reporting total income at nil. A survey under section 133A of the Act had taken place in the case of BRFL wherein a statement of its Managing Director, Shri Prashant Agarwal was recorded. Managing Director had offered interest income in his statement so recorded. 3 ITA Nos.5603 and ors/MUM/2024 Bombay Rayon Holdings Ltd., AYs 2014-15, 2013-14, 2011-12 and 2010-11 Pursuant to this statement, case of the assessee was reopened by issuing notice under section 148, dated 29.03.2016. Assessee had received interest free advances from its holding company i.e. BRFL. Assessee had advanced interest free loans to its wholly owned subsidiary, i.e. BRFL Italia SRL out of the advances so received by it from BFRL. Assessee had also given share application money during the year. 4.1. Assessment order dated 28.09.2018 was passed under section 143(3) rws 147 with total assessed income at ₹42,47,76,154/- by making transfer pricing adjustment of this stated amount towards charging of interest at SBI PLR @ 300 bps on the advances given and LIBOR + 200 bps on the share application money given. Matter was carried to DRP – 1, Mumbai and addition made by the Ld. Assessing Officer were confirmed by DRP vide its order dated 22.12.2017. In its order, DRP gave a direction that transfer pricing adjustment on share application money should also be done at SBI PLR @ 300 bps. 4.2. Assessee contested the transfer pricing adjustment in appeal before the Coordinate Bench of ITAT Mumbai whereby transfer pricing adjustment was restricted on both, advances and share application money given at LIBOR + 200 bps as against SBI PLR rate. Relevant portion of the order of Coordinate Bench in ITA No. 5991/Mum/2018 dated 06.01.2020 is reproduced below: “24. As regards the issue on merits, we note that assessee is a wholly owned subsidiary company of M/s. Bombay Rayon Fashions Ltd. The assessee has granted funds to its 100% subsidiary in Italy. The purpose was to take over the retail business of Jam Session Holding SRL which owned a brand name \"GURU\". The assessee has given funds during the F.Y.2008-09 to 2013-14 to the said subsidiary company and no interest has been charged on the loans so provided. During the search action, M/s. Bombay Rayon Fashions Ltd., Managing Director Mr. Prashant Agarwal had agreed that assessee should have charged interest on loan advance to the AE@ LIBOR +2%. He had also offered for taxing the said sums in the hands of the assessee for respective financial 4 ITA Nos.5603 and ors/MUM/2024 Bombay Rayon Holdings Ltd., AYs 2014-15, 2013-14, 2011-12 and 2010-11 years. In this context, the assessment was reopened. The assessee has not charged any interest on the loan advanced to the AE. The Transfer Pricing Officer has noted that lending and borrowing is not the main business of the assessee. It was also noted that assessee had given loans to its AE without any arm's length compensation even when the loan is unsecured one and subsidiary has not offered any security for the same. No written agreement concerning the loan has been filed with any of the authorities. No other document is on record fortifying the claim of the assessee. Hence, assessee justification of granting interest free loan is simply ipse-dixit. Assessee's plea is that interest was not charged on loan provided to AE as the sums were received from the holding company on which, no interest has been paid. This has rightly been rejected by the authorities below. The authorities below have also rejected the assessee's contention that there is no transfer of profits from the assessee to the AEs that the AE is into losses and hence, there is no shifting of profits. That assessee had provided loans to business expediency, that loan provided was converted into share capital in the subsequent year that loan profit to written off in the subsequent years. In this regard, we note that interest free loans given to the AE have been categorically held to be international transaction calling for the adjustment of ALP in catena of case laws. The assessee' s plea that it was for business expediency and that it was out of own funds have been correctly rejected by the authorities below. In this regard, the decision of ITAT Delhi Bench in the case of Perot Systems TSI (India) Ltd. [2010] 37 SOT 358 (Delhi) is relevant. In that case, the ITAT did not accept the arguments of commercial expediency as well as the reliance on the Hon'ble Supreme Court in the case of SA Builders. Similar view has been taken in other decisions referred above including Tata Autocomp systems Ltd 21 taxmann.com 6 (Mum.) vide order dated 30/04/2012. This decision was affirmed by Bombay High Court in 56 Taxman.com 206…….. ……29. We followed the above said case law and accordingly, hold that the arm's length price computed by adopting the lending rate of banks in India is not sustainable. In this regard, we agree with the alternative submission of the assessee that the interest should be charged at LIBOR+200 bps. Such charging of interest has been approved by Hon'ble Jurisdictional High Court in several other case laws. We direct accordingly. It may not be out of place to mention that revenue's insistence on application of bank rates in India will throw open the issue of assessee not incurring any expenditure on the funds for advancing the loan. As we have already held this issue is not to be considered for the computation of arm's length price for an international transaction here.” 4.3. On giving effect to the above referred order of coordinate bench, transfer pricing adjustment was recomputed at ₹8,76,33,900/-. Thereafter, impugned penalty order was passed on 15.03.2022 levying penalty of ₹2,97,86,762/- under section 271(1)(c) for furnishing inaccurate particulars of income. Aggrieved, assessee went in appeal before CIT(A) who deleted the penalty so levied. Against this, Revenue is in appeal before the Tribunal. 5 ITA Nos.5603 and ors/MUM/2024 Bombay Rayon Holdings Ltd., AYs 2014-15, 2013-14, 2011-12 and 2010-11 4.4. According to the assessee, issue of notional interest on interest free loans given to associated enterprise is highly debatable issue, more particularly when appeal by the assessee against the aforesaid order of Coordinate Bench has been admitted by the Hon’ble High Court of Bombay on substantial question of law and is pending for disposal. Assessee contends that mere transfer pricing adjustment does not amount to furnishing of inaccurate particulars of income. What has been added in the hands of the assessee is a notional interest computed by ld. Transfer Pricing Officer (TPO). Assessee had acted in good faith and had given the interest free advances to its associated enterprise for the business of the group and to get global presence in the textile industry in the European market. The adjustment made on this account is a matter of opinion since rate of notional interest is subject to many criteria including SBI PLR, LIBOR, EUROBOR, etc. as well as business expediency relating to the nature of transaction. Thus, according to the assessee, where two views are possible, penalty in such cases cannot be levied. 5. We have heard both the parties and perused the orders of the authorities below. In this case, upward adjustment was made by ld. TPO at SBI PLR which was confirmed by the ld. DRP but was restricted to LIBOR + 200 bps by the Coordinate Bench on appeal by the assessee. Facts of the case are undisputed. We note that although Ld. Assessing Officer has levied penalty for furnishing of inaccurate particulars of income, fact of the matter is that assessee had disclosed necessary facts required for computation of total income in the return of income filed for the year. 6 ITA Nos.5603 and ors/MUM/2024 Bombay Rayon Holdings Ltd., AYs 2014-15, 2013-14, 2011-12 and 2010-11 5.1. It is also a fact on record that appeal by the assessee before the Hon’ble High Court of Bombay on the quantum assessment has been admitted on substantial question of law and is pending for disposal. Admission of appeal by the Hon'ble High Court indicates that the question is an arguable point in law on which two views are possible. Therefore, we are of the considered view that it is not a case for penalty under section 271(1)(c). When the issue is debatable and two views are possible, then on such issue, penalty under section 271(1)(c) cannot be levied by charging the assessee with the charge of furnishing inaccurate particulars of income. 5.2. For giving the above finding, we draw force from the decision of Hon’ble jurisdictional High Court of Bombay in the case of Nayan Builders & Developers 368 ITR 722 (Bom) who held that where the quantum appeal is pending before the Hon’ble High Court, penalty under section 271(1)(c) is not leviable. Similarly, before the coordinate bench of ITAT Mumbai in the case of DCIT LTU v. Reliance Industries Ltd in ITA Nos. 6267-6269/Mum/2018 who after considering plethora of judicial precedents including that of Nayan Builders & Developers (supra) deleted the penalty imposed. 6. Ld. Sr. DR placed reliance on the decision of coordinate bench of ITAT Gauhati in the case of Kamal Kumar Saharia v. ITO [1991] 391 ITD 301 (Gau). In this case, setting aside the order of penalty was declined on the ground of it being premature though a reference was made to the Hon'ble High Court against the quantum addition confirmed by the Tribunal. Present case of the assessee is on account of TP adjustment towards notional interest by applying a different rate basis as compared to what assessee applied. Ultimately, it is the notional interest which is attempted to be brought to tax in the hands 7 ITA Nos.5603 and ors/MUM/2024 Bombay Rayon Holdings Ltd., AYs 2014-15, 2013-14, 2011-12 and 2010-11 of the assessee by way of TP adjustment, there being no real income earned on this account. Thus, reliance placed by ld. Sr. DR on the case of Kamal Kumar Saharia (supra) is distinguishable. 7. Accordingly, considering the facts on record, pendency of appeal by the assessee before the Hon’ble High Court on quantum addition which forms the basis for levy of penalty by admitting substantial question of law as well as judicial precedents referred above, we hold that penalty under section 271(1)(c) is not leviable. We do not find any reason to interfere with the findings arrived at by Ld. CIT(A) for deleting the penalty so imposed by the Ld. Assessing Officer of ₹2,97,86,762/-. Thus, grounds raised by the Revenue are dismissed. 8. In the result, all the four appeals by the Revenue having common ground are dismissed. Order is pronounced in the open court on 27 February, 2025 Sd/- Sd/- (Saktijit Dey) (Girish Agrawal) Vice President Accountant Member Dated: 27 February, 2025 MP, Sr.P.S. Copy to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. 5. Guard File CIT BY ORDER, (Dy./Asstt.Registrar) ITAT, Mumbai "