Uniparts India Ltd., New Delhi V. DCIT, New Delhi

ITA 1216/DEL/2014

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 4788 (ITAT-DELHI)
• Duration Of Justice: 7 year(s) 6 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Assessment Year: 2009-2010
• Appeal Filed On: 04-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Transfer pricing; Wholly owned subsidiary; Corroborative evidences; Commercial expediency
• Section: 144C; 13; 22

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I-1 B ENCH, NEW DELHI (THROUGH VIDEO CONFERENCING] BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI LALIET KUMAR, JUDICIAL MEMBER ITA NO. 1216/DEL/2014 [A.Y 2009-10] M/S UNIPARTS INDIA LTD. VS. THE DY. C.I.T. BLOCK 5, C -6 & 7, GRIPWELL HOUSE, CIRCLE - 18 (1) LSC, VASANT KUNJ, NEW DELHI NEW DELHI PAN : AAACU0454 D [APPELLANT] [RESPONDENT] DATE OF HEARING : 27.09.2021 DATE OF PRONOUNCEMENT : 30.09.2021 ASSESSEE BY : SHRI TARANDEEP SINGH, ADV. SHRI PULKIT VERMA, ADV REVENUE BY : SHRI SURENDERPAL, SR. DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST OR DER DATED 27.12.2017 FRAMED U/S 144C(4) OF THE INCOME-TAX ACT , 1961 [HEREINAFTER REFERRED TO AS 'THE ACT'] PERTAINING TO A.Y. 2009-10. 2 2. THE GRIEVANCES OF THE ASSESSEE READ AS UNDER: 1. THAT THE ORDER OF THE LEARNED APPELLATE AUTHORI TY IS ARBITRARY AND AGAINST LAW AND FACTS OF THE CASE. 2. THAT THE LEARNED ASSESSING OFFICER (LD. AO) ER RED IN PASSING THE IMPUGNED ASSESSMENT ORDER AND THE LEARN ED DISPUTE RESOLUTION PANEL (LD. DRP) ERRED IN PASSING DIREC TIONS UNDER SECTION 144C OF THE INCOME TAX ACT, 1961 (THE ACT ) CONFIRMING THE DRAFT ASSESSMENT ORDER. ON THE FACTS AND CIRCUM STANCES OF THE CASE AND IN LAW, THE LEARNED AO ERRED IN ASSESS ING THE INCOME OF THE APPELLANT AT RS. 15,32,52,150/- AS AGAINST T HE RETURNED INCOME OF RS. 13,76,59,264/-. 3. THAT ON THE FACTS AND IN CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED ASSESSING OFFICER/LEARNED TRANSFER PRICING OFFICER AND LEARNED DRP HAS GROSSLY ERRED IN MAKING AN ADDITION OF RS. 26,23,286 ON ACCOUNT OF THE INTEREST RECEIVED B Y ASSESSEE ON LOANS EXTENDED TO ITS ASSOCIATED ENTERPRISES (AES ) AND IN DOING SO THE LD. DRP HAS ERRED IN: A. NOT CONSIDERING THE ECONOMIC ANALYSIS PERFORMED BY THE ASSESSEE FOR BENCHMARKING SUCH INTEREST RATES; AND B. PROPOSING THE ADDITION BASED ON ARBITRARY SELECTIO N OF ARM'S LENGTH INTEREST RATE WITHOUT ANY BASIS. 3 4. THAT ON THE FACTS AND IN CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED ASSESSING OFFICER AND LEARNED DRP HAS GROSSLY ERRED IN DISALLOWING A SUM OF RS 72,23,773/- OUT OF TOTAL INTEREST EXPENSES OF RS. 10.78 CRORES ON ACCOUNT OF LOWER IN TEREST CHARGED @ 6% INSTEAD OF 16% FROM ITS WHOLLY OWNED SUBSIDIAR Y COMPANY WHEREAS THE APPELLANT COMPANY HAD ACTUALLY PAID INT EREST ON BORROWED FUNDS AT MUCH LOWER RATES. 5. THE LEARNED ASSESSING OFFICER AND LEARNED DRP H AS WRONGLY, ARBITRARILY AND WITHOUT APPRECIATING THE F ACTS OF THE CASE, ERRED IN DISALLOWING 5% OF EXPENSES AMOUNTING TO RS 57,45,825/- ON ADHOC / ESTIMATED BASIS OUT OF CLAIM OF DEDUCTIO N UNDER THE HEAD OCEAN, AIR FREIGHT AND MARINE INSURANCE AMOU NTING TO RS. 11,49,16,489/- ON ACCOUNT OF EXPENSES ACTUALLY INCU RRED / PAID IN TERMS OF SALES CONTRACTS AGAINST GOODS TO BE SUPPLI ED ON CIF BASIS AND IN SPITE OF THE FACT THAT ALL THE NECESSARY BIL LS, VOUCHERS AND OTHER SUPPORTING EVIDENCES WERE FILED / PROVIDED DU RING THE COURSE OF ASSESSMENT PROCEEDINGS. 6. THAT THE APPELLANT RESERVES ITS RIGHT TO WITHDRA W, ALTER, AMEND, VARY AND MAKE FURTHER ADDITIONS TO GROUNDS O F APPEAL. 3. THE REPRESENTATIVES OF BOTH THE SIDES WERE HEARD AT LENGTH, THE CASE RECORDS CAREFULLY PERUSED AND WITH THE ASSISTA NCE OF THE LD. COUNSEL, WE HAVE CONSIDERED THE DOCUMENTARY EVIDENC ES BROUGHT ON RECORD IN THE FORM OF PAPER BOOK IN LIGHT OF RULE 1 8(6) OF ITAT RULES. 4 4. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE APPELLANT COMPANY IS ENGAGED IN THE MANUFACTURING AND SALE OF TRACTOR IMPLEMENTS, LINKAGE PARTS, SYSTEMS AND FORGINGS. IN TERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT ARE AS U NDER: NATURE OF TRANSACTION METHOD AMOUNT (IN RS.) PURCHASE OF RAW MATERIALS TNMM 5,978,127 SALE OF FINISHED GOODS TNMM 467,651,837 DRAWING MAKING CHARGES TNMM 285,546 REIMBURSEMENT OF EXPENSES CUP 1,443,426 OTHER RECEIPTS CUP 1,429,548 INTEREST RECEIVED CUP 18,646,325 REIMBURSEMENT OF GUARANTEE CHARGE CUP 1,877,114 5. DURING THE COURSE OF TRANSFER PRICING ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS ADV ANCED TWO LOANS TO ITS ASSOCIATED ENTERPRISES [AES]. FIRST LOAN HAS BE EN ADVANCED TO ONE SUBSIDIARY UNIPARTS USA LTD [UUL]. INTEREST RECEIVE D ON THIS LOAN IS 8%. THE SECOND LOAN IS ADVANCED TO ANOTHER AE, UNIPARTS EUROPE BV NETHERLANDS [UBV]. THE RATE OF INTEREST CHARGED ON THIS LOAN IS 6.138%. 5 THE BENCH MARKING HAS BEEN GIVEN BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY REPORT. 6. AFTER PERUSING THE TRANSFER PRICING ANALYSIS AND THE DETAILED SUBMISSIONS MADE BY THE ASSESSEE IN ITS TP APPROACH , THE TPO OBSERVED THAT THE ASSESSEE HAS LENT MONEY TO AN ENTITY THAT DOES NOT HAVE REASONABLE CREDIT RATING. AFTER DISCUSSING THE RELA TED FINANCIAL RISK, THE TPO OBSERVED AS UNDER: 13.2 AS DISCUSSED ABOVE, THE INTEREST RATE FOR THE LOAN GIVEN IN DIFFERENT CURRENCIES IS NOT THE SAME AND FOR THE PU RPOSE OF TRANSFER PRICING, THE INTEREST RATE ON A LOAN IN A PARTICULAR CURRENCY SHOULD BE BENCHMARKED AGAINST THE PREVAILING INTERE ST RATE FOR LOAN DENOMINATED IN' THAT CURRENCY ONLY AND NOT AG AINST THAT FOR LOAN DENOMINATED IN OTHER CURRENCIES I.E., THE INTE REST RATE FOR DOLLAR LOAN SHOULD BENCH MARKED AGAIN THE PREVAILIN G INTEREST RATE FOR DOLLAR LOANS SUCH AS LIBOR OR EURIBOR FOR US DO LLAR LOAN AND NOT AGAINST THE INTEREST RATES FOR RUPEE LOAN. EVEN THE INDIA PUBLIC SECTOR BANKS CHARGE DIFFERENT INTEREST RATE FOR FOR EIGN CURRENCY LOANS AND PEG THE INTEREST RATES ON SUCH LOANS TO L IBOR OR EURIBOR, I.E., CHARGE INTEREST RATE OF 2.5% TO 5% A BOVE LIBOR/EURIBOR DEPENDING UPON THE TENURE AND CREDIT RATING OF THE BORROWER ETC. THE CONTENTION OF THE ASSESSEE IS ACCEPTED THAT THE US LIBOR WILL BE TAKEN FOR CALCULATING THE RATE OF INTEREST CHARGED BY THE ASSESSEE ON LOANS ADVANCED TO THE AE . 6 13.2 13.213.2 13.2 THEREFORE IN LIGHT OF THE ABOVE FACTS EACH FOREIGN CURRENCY LOAN WILL BE BENCHMARKED USING LIBOR/EURIBOR RATE A ND AS THE LOAN IS FIXED AND NOT FLOATING, THE RATE OF LIBOR/EURIBOR W ILL BE THE RATE ON THE DAY THE LOAN WAS TAKEN BY THE ASSESSES. ADDITIO NAL MARKUP OF 4% SHALL BE ADDED AS THE CREDIT RATING OF THE LOAN GIVEN BY THE ASSESSEE TO ITS SUBSIDIARY HAS BEEN CONSIDERED AS BB. 7. AFTER GIVING SPECIFIC REASONS FOR ADOPTING CREDI T RATING BB, THE TPO PROCEEDED AS UNDER: LIBOR RATE DURING THE PERIOD UNDER ANALYSIS WAS 4.8 2 MARKET RATE FOR LOANS IN US DOLLAR DENOMINATION (FOR CREDIT RATING OF BB) LIBOR + 4% ARM'S LENGTH WILL BE 4.82+4=8.82% INTEREST CHARGED BY ASSESSEE= 8% DIFFERENCE IN INTEREST RATE= 8.82-8= 0.82% B. B.B. B. (LOAN EXTENDED TO UNIPARTS USA LTD (THE CONVERSIO N RATE OF THE DOLLAR IS ADOPTED AT RS.50.72) NOVEMBER 2008 2850732.75 0.82 1948 DECEMBER 2008 2850732.75 0.82 1948 JANUARY 2009 2850732.75 0.82 1948 FEBRUARY 2009 2850732.75 0.82 1948 MARCH 2009 2850732.75 0.82 1948 TOTAL 33522.99 MONTH ENDING(A) CLOSING BALANCE (B)(USD) DIFFERENCE IN INTEREST RATE(C) DIFFERENCE IN I NTEREST(LN USD) APRIL 2008 6675732.75 082 .4561.75 MAY 2008 6325732.75 0.82 4(322.58 JUNE 2008 5925732.75 0.82 4(?49.25 JULY 2008 5575732.75 0.82 3.8:1,0.08 AUGUST 2008 5250732.75 0.82 3588 SEPTEMBER 4950732.75 0.82 3383 OCTOBER 2008 2950732.75 0.82 2016.33 7 EXCHANGE RATE AT THAT TIME 50.72 RS PER USD ARM'S LENGTH INTEREST THAT SHOULD HAVE BEEN RECEIVE D BY THE ASSESSEE IS 33522.99$ EXCESS INTEREST THAT SHOULD HAVE BEEN RECEIVED BY T HE ASSESSEE IN INR= 17,00,286 RS. BASED ON THE CALCULATION ABOVE, THE ARMS LENGTH IN TEREST IS DETERMINED AS RS.1,85,24,054. THIS IS AS AGAINST TH E INTEREST OF RS.1,68,23,768 CHARGED BY YOU. ACCORDINGLY, THE DIF FERENCE OF RS.17,00.286 IS THE PROPOSED ADJUSTMENT U/S 92CA. 8. THE ASSESSEE RAISED OBJECTIONS BEFORE THE DRP BU T COULD NOT SUCCEED. 9. A PERUSAL OF THE TP ANALYSIS DONE BY THE TPO SHO WS THAT THE ENTIRE FINDINGS ARE BASED UPON CREDIT RATING BB. IN SO FAR AS THE FIRST LOAN IS CONCERNED, WHICH IS GIVEN TO UUL, THE ASSES SEE HAS CHARGED INTEREST @ 8% WHEREAS, ACCORDING TO THE TPO, INTERE ST RATE IS 8.82%, WHICH MAKES THE QUARREL RESTRICTED TO 0.82%. 10. IN SO FAR AS THE SECOND LOAN GIVEN TO UBV IS CO NCERNED, THE ASSESSEE HAS CHARGED INTEREST @ 6.138%, WHEREAS THE TPO HAS CHARGED INTEREST @ 8.138% AND QUARREL IS RESTRICTED TO 2%. 8 11. THE LD. COUNSEL FOR THE ASSESSEE HAS HEAVILY R ELIED UPON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CAS E OF BHARTI AIRTEL ITA NO. 606 OF 2014. THE FOLLOWING OBSERVATIONS OF THE HON'BLE HIGH COURT WOULD MAKE THE FACTS OF THE CASE UNDER CONSIDERATIO N TOTALLY DISTINGUISHABLE: 8. THE ITAT HAS ALSO TAKEN NOTE OF THE FACT THAT T WO SPECIFIC COMPARABLES OF USD BORROWINGS I.E. L&T AND SERI INF RASTRUCTURE, ON THE INTEREST RATE OF LIBOR HAD BEEN TAKEN INTO C ONSIDERATION. THERE IS NO MATERIAL WHATSOEVER, SAVE AND EXCEPT FO R VAGUE OBSERVATIONS ABOUT WEAK FINANCIALS OF THE SUBSIDIAR IES - WHICH ARE NOT SUPPORTED BY ANY SPECIFIC FACTS AND PROCEED ON SWEEPING GENERALIZATIONS AND ASSUMPTIONS, TO REJECT THE COMP ARABLES TAKEN BY THE ASSESSEE. WHEN A TRANSFER PRICING OFFICER RE JECTS COMPARABLES TAKEN BY THE ASSESSEE, HE HAS TO SET OU T SPECIFIC, COGENT AND LEGALLY SUSTAINABLE REASONS FOR DOING SO . ON THIS POINT, THEREFORE, THE STAND OF THE ASSESSING OFFICER CANNO T BE ACCEPTED. 12. IT CAN BE SEEN FROM THE ABOVE THAT THE HON'BLE HIGH COURT HAS NOT ACCEPTED THE CONTENTION OF THE REVENUE BECAUSE NO S UPPORTING FACTS HAVE BEEN GIVEN FOR ASSUMPTION OF WEAK FINANCIALS O F THE SUBSIDIARIES, WHEREAS, IN THE CASE IN HAND, THE TPO HAS GIVEN SPE CIFIC REASONS FOR 9 ADOPTING CREDIT RATING OF BB, WHICH PROMPTED HIM TO ADOPT THE LIBOR RATE WITH ADD ON OF 400 BASIS POINTS. 13. A PERUSAL OF THE LOAN AGREEMENT BETWEEN THE APP ELLANT AND UUL SHOW THE FOLLOWING CLAUSES: 1. INTEREST THE BORROWER SHALL PAY TO UIL INTEREST ON THE PRINC IPAL AMOUNT OF THE LOAN OUTSTANDING FORM TIME TO TIME QUARTERLY IN EACH YEAR. THE RATE OF INTEREST SHALL BE AT THE RATE OF 8% P.A. IN TEREST SHALL ACCRUE FROM DAY TO DAY AND SHALL BE COMPUTED ON THE BASIS OF 360 DAYS A YEAR AND THE ACTUAL NUMBER OF DAYS ELAPSED. HOWEVER, LENDER AGREES THAT IN CASE OF NONPAYMENT OF INTERES T BY BORROWER, THE SAME SHALL BE ACCUMULATED AND BE ADDED IN ITS P RINCIPAL AMOUNT ANNUALLY. 2. REPAYMENT NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THE LOAN AGREEMENT, THE UIL AGREES THAT THE LOAN SHALL BE RE PAYABLE BY THE BORROWER WHEN SUFFICIENT FUNDS ARE AVAILABLE WITH T HE BORROWER. IN NO EVENT UIL SHALL FORCE TO THE BORROWER TO PAY THE LOAN AMOUNT. THE LOAN AMOUNT SHALL BE TREATED AS SUBORDINATE TO ANY LOAN, EXISTING OR FUTURE, TAKEN BY THE BORROWER FROM ANY BANK OR FINANCIAL INSTITUTIONS. 3. CONVERSION OF LOAN 10 NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THE LOAN AGREEMENT, THE UUL AGREES THAT THE OUTSTANDING LOAN (TOGETHER WITH ACCUMULATED INTEREST/IF ANY) MAY BE CONVERTED INTO COMMON STOCK OR PREFERRED STOCK OF THE UUL AT ANY POINT OF TIME WITH THE MUTUAL CONSENT OF BOTH THE PARTIES. 4. SECURITY FOR THE LOAN UIL AGREES THAT THE LOAN TOGETHER WITH ALL INTEREST STIPULATED IN OR PAYABLE UNDER THE LOAN AGREEMENT SHALL BE FREE FROM SECURITY. THE LENDER AGREES THAT BORROWER SHALL NOT BE REQUIRED T O GIVE ANY KIND OF SECURITY FOR THE ABOVE LOAN. 13. A PERUSAL OF THE ABOVE SHOW THAT UUL AGREED TO REPAY THE LOAN AS AND WHEN SUFFICIENT FUNDS ARE AVAILABLE WITH IT AND IF NOT REPAID, THEN AGREED THAT THE OUTSTANDING LOANS, TOGETHER WITH AC CUMULATED INTEREST, TO BE CONVERTED INTO COMMON STOCK OR PREFERRED STOC K OF UUL AT ANY POINT OF TIME. 14. WE ARE OF THE CONSIDERED VIEW THAT THESE CLAUSE S IN THE LOAN AGREEMENT ARE NOTHING BUT EYE-WASH AS THE APPELLANT COMPANY IS THE HOLDING COMPANY OF THE BORROWER AND HAVE SANCTIONED LOAN FOR UNSECURED JUNIOR DEBT LOAN UPTO US$ 7 MILLION. THE ABOVE FACTS HAVE TO BE CONSIDERED ALONGWITH THE FACT THAT UUL HAS ITS R EGISTERED OFFICE IN 11 THE STATE OF THE DELAWARE, USA AND IN ITS FOURTH YE AR OF OPERATIONS, IT EMPLOYED FOUR EMPLOYEES FOR MANAGING ITS WAREHOUSIN G OPERATIONS. 15. RELEVANT CLAUSES OF THE AGREEMENT WITH UBV ARE AS UNDER: 1. AMOUNT THE BORROWER AGREES TO BORROW FROM UIL AND UIL AGRE ES TO LEND TO THE BORROWER FOR THE PURPOSE OF OPERATIONAL NEED S (THE PURPOSE), A JUNIOR DEBT FUNDING NOT EXCEEDING 7 ,10,000/- ('THE LOAN'). THE BORROWER SHALL NOT USE THE LOAN PROVIDE D UNDER THE AGREEMENT FOR ANY ILLEGAL PURPOSES. 2. INTEREST THE BORROWER SHALL PAY TO UIL INTEREST ON THE PRINC IPAL AMOUNT OF DIE LOAN OUTSTANDING FORM TIME TO TIME QUARTERLY IN EACH YEAR. THE RATE OF INTEREST SHALL BE EURIBOR PLUS 2.00 BPS PA. INTEREST SHALL ACCRUE FROM DAY TO DAY AND SHALL BE COMPUTED ON THE BASIS OF 365 DAYS YEAR AND THE ACTUAL NUMBER OF DAYS ELAPSED. HO WEVER, LENDER AGREES THAT IN CASE OF NON-PAYMENT MEREST BY BORROW ER, THE SAME SHALL BE ACCUMULATED AND BE ADDED IN ITS PRINCIPLE AMOUNT. 3. REPAYMENT NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THE LOAN AGREEMENT, THE UIL AGREES MAT THE LOAN SHALL BE REP AYABLE BY THE BORROWER WHEN SUFFICIENT FUNDS ARE AVAILABLE WITH T HE BORROWER. IN NO EVENT UIL SHALL FORCE TO THE BORROWER TO PAY THE LOAN AMOUNT. 12 THE LOAN AMOUNT SHALL BE TREATED AS SUBORDINATE TO ANY LOAN, EXISTING OR FUTURE, TAKEN BY THE BORROWER FROM ANY BANK OR FINANCIAL INSTITUTIONS. 4. CONVERSION OF LOAN NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THE LOAN AGREEMENT, THE UEBV AGREES THAT THE OUTSTANDING LOA N (TOGETHER WITH ACCUMULATED INTEREST, IF ANY) MAY BE : DIVERTE D INTO COMMON STOCK OR PREFERRED STOCK OF THE UEBV AT ANY POINT O F TIME. 5. SECURITY FORTHE LOAN UIL AGREES THAT THE LOAN TOGETHER WITH ALL INTEREST STIPULATED IN OR PAYABLE UNDER THE LOAN AGREEMENT SHALL BE FREE FROM SECURITY. THE LENDER AGREES THAT BORROWER SHALL NOT BE REQUIRED T O GIVE ANY KIND OF SECURITY FOR THE ABOVE LOAN. 16. A PERUSAL OF THE ABOVE CLAUSES SHOWS THAT THE U NDERLYING FACTS ARE IDENTICAL TO THE FACTS OF GIVING LOAN TO UUL. A S MENTIONED ELSEWHERE, THE FACTS OF THE CASE ARE CLEARLY DISTIN GUISHABLE FROM THE FACTS OF THE DECISION OF THE HON'BLE HIGH COURT OF DELHI [SUPRA] RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE. IN ALL OT HER DECISIONS OF THE COORDINATE BENCHES, RELIED UPON BY THE LD. AR, THE BENCHES HAVE FOLLOWED THE DECISION OF THE HON'BLE HIGH COURT OF DELHI [SUPRA], THEREFORE, THEY ARE ALSO DISTINGUISHABLE FROM THE F ACTS OF THE CASE. 13 17. FURTHER, RELIANCE WAS PLACED ON THE DECISION OF THE COORDINATE BENCH IN THE CASE OF AURIONPRO SOLUTIONS 27 ITR [T] 276 MUMBAI WHEREIN THE COORDINATE BENCH, USING ITS DISCRETION, APPLIED LIBOR + 2% WHEREAS THE TPO TOOK THE ALP LIBOR +3%. IN OUR CON SIDERED VIEW, THE COORDINATE BENCH, IN ITS WISDOM AND DISCRETION, TOO K A PARTICULAR VIEW ON THE FACTS OF THAT CASE IN HAND. 18. CONSIDERING THE FACTS OF THE CASE IN HAND IN LI GHT OF THE TWO LOAN AGREEMENTS MENTIONED ELSEWHERE, AND CONSIDERING THE FACT THAT THE ASSESSEE ITSELF HAS CHARGED INTEREST @ 8% IN THE CA SE OF UUL AND 6.138% IN THE CASE OF UBV, WE DO NOT FIND ANY ERROR OR INF IRMITY IN THE TRANSFER PRICING APPROACH OF THE TPO UPHELD BY THE DRP. GROU ND NO. 3 WITH ALL ITS SUB-GROUNDS IS DISMISSED. 19. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS TAKEN LOAN FR OM BANKS AT AN INTEREST @14 TO 16% PER ANNUM AND PAID OF RS.10.78 CRORES TO THE BANKS. THE ASSESSING OFFICER FURTHER FOUND THAT THE ASSESSEE HAS GIVEN LOAN TO ITS WHOLLY OWNED SUBSIDIARY COMPANY M/S UNI LINK ENGINEERING 14 COMPANY PVT LTD @ 6% ONLY AND TOTAL INTEREST RECOVE RED FROM SUBSIDIARY COMPANY WAS RS. 43,34, 264/. 20. WHEN THE ASSESSEE WAS ASKED TO EXPLAIN WHY COMM ERCIAL INTEREST RATE WAS CHARGED FROM SUBSIDIARY COMPANY, THE ASSES SEE STATED THAT SINCE THE SUBSIDIARY COMPANY WAS INCURRING LOSSES, THE MANAGEMENT DECIDED TO CHARGE LESSER RATE OF INTEREST. 21. THE ASSESSING OFFICER WAS NOT CONVINCED WITH TH IS EXPLANATION OF THE ASSESSEE AND MADE ADDITION OF RS. 72,23,773 OUT OF INTEREST EXPENSES OF RS.10.78 CRORES BEING SHORTAGE IN INTER EST RECOVERED FROM SUBSIDIARY. 22. OBJECTIONS WERE RAISED BEFORE THE DRP AND THE F OLLOWING SUBMISSIONS WERE MADE: M/S UNILINK ENGINEERING PVT. LTD. IS A WHOLLY OWNE D SUBSIDIARY OF THE ASSESEEE COMPANY WHICH IS HOLDING 100% EQUITY SHARES OF M/S UNILINK ENGINEERING PVT. LTD. AND BOTH THE COMPANIES ARE ENGAGED IN THE SAME BUSINESS OF MANUFACTURING OF TRACTOR PARTS AND ACCESSORIES. 15 M/S UNILINK ENGINEERING PVT. LTD IS CONTINUOUSLY RU NNING INTO LOSSES DUE TO HEAVY CAPITALIZATION IN MACHINERIES E QUIPMENTS ETC. AND IT WAS IN NEED OF MONEY TO MEET ITS DAY TO DAY REQUIREMENTS. SINCE, M/S UNILINK ENGINEERING PVT. LTD WAS NOT ABL E TO GET THE REQUIRED BANK LOANS THE ASSESSEE COMPANY BEING THE OWNERS OF 100% EQUITY CAPITA! OF M/S UNILINK ENGINEERING PVT LTD WAS MIORALLY BOUND TO HELP M/S UNILINK ENGINEERING PVT LTD IN TH E SITUATION OF FINANCIAL CRISES AND ACCORDINGLY EXTENDED THE LOANS . AS THE FINANCIAL CONDITIONS OF M/S UNILINK ENGINEE RING PVT. LTD WAS NOT VERY POSITIVE AND IT WAS INCURRING CONTINUOUS O PERATING LOSSES, THE ASSESSEE COMPANY HAS DECIDED TO CHARGE THE INTE REST @ 6% PER ANNUM TO AVOID FURTHER INCREASE IN OPERATING LO SSES OF M/S UNILINK ENGINEERING PVT. LTD. IN THIS REGARD THE AP EX COURT IN THE CASE OF S.A. BUILDERS LTD VS. CIT (A) (2007) 288 IT R 1,9 (SC) HAS HELD AS UNDER: 'INTEREST ON MONEY BORROWED FROM BANK AND LENT TO S ISTER CONCERN WITHOUT CHARGING INTEREST HELD ADMISSIBLE O F MADE AS A MEASURE OF COMMERCIAL EXPEDIENCY' THE ASSESSEE COMPANY HAS PAID A TOTAL AMOUNT OF RS . 9,65,99,996/- AS INTEREST TO VARIOUS BANKS ON 'CRED IT FACILITIES' ENJOYED DURING THE F.Y. 2008-09 AND THE TOTAL OUTST ANDING BALANCE OF VARIOUS SECURED LOANS AS ON 31 ST MARCH, 2009 WAS OF RS. 16 1,45,98,11,345/-. CONSIDERING THE RATIO OF INTEREST THE DIVIDED BY THE AMOUNT OF LOAN THE PERCENTAGE OF INTEREST COMES -OUT TO 6.61% WHICH IS VERY MUCH CLOSE TO 6% RATE OF INTEREST CHA RGED FROM M/S UNILINK ENGINEERING PVT LTD. THAT THE ASSESSEE COMPANY IS CHARGING INTEREST ON L OAN EXTENDED TO ITS WHOLLY OWNED SUBSIDIARY, M/S UNILINK ENGINEERIN G PVT. LTD FOR THE LAST MANY YEARS AND THE SAME HAS BEEN ALLOWED A ND NO ADDITION HAS BEEN MADE ON THIS ACCOUNT IN ANY OF EARLIER YEA RS ASSESSMENTS. THAT THE PAID-UP CAPITAL OF THE ASSESSEE COMPANY WA S RS. 1412.73 LACS AND ACCUMULATED PROFITS AS ON 31 ST MARCH, 2008 WERE OF RS. 11349.65 LACS. IT MAY BE PRESUMED THAT THE LOAN AMO UNTING TO RS. 1191.56 LACS TO ITS WHOLLY OWNED SUBSIDIARY, M/S UN IIINK ENGINEERING BVT. LTD. HAS BEEN EXTENDED OUT OF THE PAID- UP CAP ITAL AND FREE RESERVES OF THE COMPANY WHICH ARE AVAILABLE TO THE ASSESSEE 'OMPANY FREE OF INTEREST. 23. AFTER CONSIDERING THE SUBMISSIONS MADE BY THE A SSESSEE, THE DRP DISPOSED OF THE OBJECTIONS AS UNDER: WE HAVE CONSIDERED THAT FACTS OF THE CASE. SUBMISS ION OF THE ASSESSEE HAS ALSO BEEN ONE THROUGH. THE ARGUMENTS O F ASSESSEE THAT IN EARLIER YEARS NO DISALLOWANCE HAS BEEN MADE OUT OF INTEREST EXPENSES ON CHARGING INTEREST FROM SUBSIDIARY AT LO WER RATE IS NOT RELEVANT AS PRINCIPLE OF RES-JUDI-CATA IS NOT APPLI CABLE TO INCOME TAX 17 PROCEEDINGS. AS REGARDS ASSESSEE'S ARGUMENT THAT TH E LOAN ADVANCED TO M/S UNILINK ENGEERING PVT. LTD. CAN BE PRESUMED OUT OF ACCUMULATED PROFITS AND RESERVES IS ALSO NOT ACCEPT ABLE AS THE ACCUMULATED PROFITS AND RESERVES HAS ALREADY BEEN I NVESTED IN THE FORM OF OTHER ASSETS. THE ASSESSEE ARGUMENTS THAT E FFECTIVE RATE OF PAYMENT OF INTEREST BY IT COMES TO 6.61% IS MATH EMATICAL STATEMENT ONLY WHICH CANNOT CHANGE THE FACT THAT IT IS PAYING INTEREST TO BANK @ 15-16% WHICH HAS NOT BEEN DISPUTED. AS REGARDS ASSESSES JUSTIFICATION FOR CHARGING SUBSTANTIALLY L OWER RATE OF INTEREST FROM M/S UNILINK ENGINEERING PVT. LTD. BEI NG ITS WHOLLY SUBSIDIARY WHICH IS ENGAGED IN SAME BUSINESS IS NOT ACCEPTABLE AGAIN AS THE ASSESSEE AND IT WHOLLY SUBSIDIARY ARE TWO DIFFERENT AND DISTINCT ASSESSABLE: ENTITIES. THEREFORE, ASSES SEE HAS TO JUSTIFY THE EXPENSES CLAIMED BY IT AND ALLOWABILITY THEREOF AS PER PROVISIONS OF INCOME TAX ACT. AS REGARDS ASSESSEE'S CLAIM OF APPLICABILITY OR DECISION .OF THE/APEX COURT IN THE CASE OF S.A. BUILDERS LTD. (SUPRA) WE ARE OF THE OPINION THAT CO MMERCIAL EXPEDIENCY OF ASSESSEE IN ADVANCING LOAN TO ITS SUB SIDIARY AT LOWER RATE COULD NOT BE ESTABLISHED BY THE ASSESSEE EITHE R BEFORE AO OR BEFORE DRP. WE ARE THEREFORE OF THE OPINION THAT AO HAS RIGHTLY - PROPOSED THIS DISALLOWANCE. THE SAME IS, THEREFORE, UPHELD AND THIS OBJECTION OF THE ASSESSEE IS REJECTED. 24. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE EXP LAINED THE COMMERCIAL EXPEDIENCY OF GIVING LOAN TO M/S UNILINK ENGINEERING PVT LTD @ 6% AND DREW OUR ATTENTION TO THE FINANCIALS O F M/S UNILINK 18 ENGINEERING PVT LTD AND POINTED OUT THAT THERE WAS PART REPAYMENT OF LOAN BY M/S UNILINK ENGINEERING PVT LTD AND THE ASS ESSEE GAVE FURTHER LOAN OF RS.9.92 CRORES. IT IS THE SAY OF THE LEARNE D COUNSEL THAT THIS LOAN IS BROUGHT FORWARD FROM EARLIER ASSESSMENT YEA R WHEREIN NO SUCH DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER. IT IS FURTHER CONTENDED THAT THE ASSESSEE HAS ADVANCED MONEY TO M /S UNILINK ENGINEERING PVT LTD OUT OF ITS OWN FUNDS AND NOT OU T OF BORROWED FUNDS. 25. THE LD. DR STRONGLY SUPPORTED THE FINDINGS OF T HE AO/DRP. 26. A PERUSAL OF THE FACTS SHOW THAT ON RECEIVING F INANCIAL ASSISTANCE FROM THE ASSESSEE, REVENUE FROM SALES OF M/S UNILIN K ENGINEERING PVT LTD INCREASED FROM RS. 94.73 LAKHS FROM F.Y 200506 TO RS. 26.12 CRORES IN F.Y 200809. WE FURTHER FIND THAT OWN FUNDS OF THE ASSESSEE AS ON 31.03.2007 WERE AT RS.33.35 CRORES WHICH JUMPED TO RS. 127.62CRORES AS ON 31.03 2009 AND TP RS.139.17 CRORES AS ON 31.0 3.2009. 27. IT IS TRUE THAT THE LOAN WAS GIVEN IN EARLIER F .Y AND THE ASSESSEE HAD SUFFICIENT OWN FUNDS TO GIVE THE LOAN. IT IS EQ UALLY TRUE THAT NO DISALLOWANCE WAS MADE IN THE EARLIER ASSESSMENT YEA R THOUGH THE DRP 19 HAS OBSERVED THAT REST JUDICATA IS NOT APPLICABLE U NDER INCOME TAX PROCEEDINGS BUT, IN OUR CONSIDERED OPINION, WHEN TH E FACTS ARE SAME, AND THE LAW HAS NOT CHANGED, THEN THE RULE OF CONSI STENCY OUGHT TO HAVE BEEN FOLLOWED. CONSIDERING THE FACTS OF THE CA SE IN TOTALITY, WE DO NOT FIND ANY MERIT IN THE ADDITION OF RS. 72,23, 773/- MADE BY THE ASSESSING OFFICER. WE, ACCORDINGLY, DIRECT THE ASSE SSING OFFICER TO DELETE THE SAME. GROUND NO. 4 IS, ACCORDINGLY, ALLO WED. 28. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ON VERIFICATION OF PROFIT AND LOSS ACCOUNT, THE ASSESSING OFFICER FOUN D THAT AN AMOUNT OF RS. 1149.16 LAKHS WAS CLAIMED DURING THE YEAR AS AG AINST RS. 488.74 LAKHS CLAIMED LAST YEAR UNDER THE HEAD OCEAN/AIRFRE IGHT AND MARINE INSURANCE. 29. ON COMPARING THE FINANCIALS OF FY 200708 AND F Y 200809, THE ASSESSING OFFICER WAS OF THE OPINION THAT AIR/OCEAN FREIGHT CHARGES ARE HIGHLY UNREASONABLE COMPARED TO THE PERFORMANCE OF THE COMPANY. THE ASSESSEE WAS ASKED TO JUSTIFY THE INCREASE IN A IR/OCEAN FREIGHT AND MARINE INSURANCE. 20 30. ON RECEIVING NO PLAUSIBLE REPLY, THE ASSESSING OFFICER MADE ADHOC DISALLOWANCE OF 10% AMOUNTING TO RS.1,14,91,649/. 31. OBJECTIONS WERE RAISED BEFORE THE DRP AND BEFOR E THE DRP, THE ASSESSEE FURNISHED DOCUMENTARY EVIDENCES. 32. THE DRP CALLED FOR REPORT FROM THE ASSESSING OF FICER WHO, IN HIS REPORT DATED 18.11.2013 MENTIONED THAT THE DETAILS OF OCEAN/AIR FREIGHT MARINE INSURANCE WITH COPIES OF AIR FREIGHT BILLS HAVE BEEN FILED BUT NO JUSTIFICATION FOR INCREASE IN EXPENSES WAS G IVEN. 33. THE REPORT WAS FORWARDED TO THE ASSESSEE AND IN ITS REJOINDER, THE ASSESSEE EXPLAINED THAT IT IS RECEIVING EXPORT ORDERS FROM ALMOST ALL OF ITS CUSTOMERS ON THE CIF AT PORT OF DELIVERY. IT WAS EXPLAINED THAT THE COST OF FREIGHT AS PER TERMS OF DELIVERY WAS SO LE RESPONSIBILITY AND LIABILITY OF THE ASSESSEE COMPANY. 21 34. ONCE AGAIN, A REPORT WAS CALLED FROM THE ASSESS ING OFFICER BY THE DRP AND IN HIS REPORT, THE ASSESSING OFFICER MENTIO NED THAT THE ASSESSEE HAS NOT FURNISHED ANY DOCUMENTARY EVIDENCE TO SUBSTANTIATE THE CLAIM ABOUT TEETHING PROBLEMS FACED BY IT OR TH E SHIFTING OF PRODUCTION FACILITY FROM VISAKHAPATNAM TO NOIDA ON ACCOUNT OF NON- AVAILABILITY OF CASTINGS, ETC. 35. AFTER CAREFULLY PERUSING THE SUBMISSIONS, REJOI NDER AND REPORT FROM THE AO, THE DRP WAS OF THE VIEW THAT SINCE THE ASSESSEE IS ABLE TO JUSTIFY THE INCREASE IN EXPENSES TO A LARGE EXTENT, IT RESTRICTED THE DISALLOWANCE TO 5% AS AGAINST 10% ESTIMATED BY THE ASSESSING OFFICER THEREBY RESTRICTING THE DISALLOWANCE TO RS. 57,45,8 25/. 36. BEFORE US, THE LD COUNSEL FOR THE ASSESSEE REIT ERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. IT IS THE SAY OF THE LD AR THAT BOTH THE ASSESSING OFFICER AND THE DRP HAVE NOT PRO PERLY APPRECIATED THE FACT THAT THESE EXPENSES WERE INCURRED ON CIF B ASIS. THE LD. COUNSEL FOR THE ASSESSEE VEHEMENTLY STATED THAT THE DISALLOWANCE HAS BEEN MADE PURELY ON ADHOC BASIS. 22 37. PER CONTRA, THE LD. DR STRONGLY SUPPORTED THE F INDINGS OF THE DRP. IT IS THE SAY OF THE LD. DR THAT LOOKING INTO THE F ACTS OF THE CASE, DRP HAS GIVEN SUBSTANTIAL RELIEF. 38. WE HAVE CAREFULLY PERUSED THE UNDERLYING FACTS IN ISSUE. IT IS TRUE THAT THE ASSESSEE WAS SPECIFICALLY ASKED TO JUSTIFY THE INCREASE IN EXPENSES INCURRED ON AIR/OCEAN FREIGHT AND MARINE I NSURANCE. IT IS EQUALLY TRUE THAT BEFORE THE DRP THE ASSESSEE EXPLA INED THE INCREASE BY FILING DOCUMENTARY EVIDENCES SHOWING THAT THESE EXPENSES WERE INCURRED ON CIF BASIS. WE FIND THAT THE ASSESSING O FFICER HIMSELF HAS ADMITTED IN HIS SECOND REMAND REPORT THAT THE ASSES SEE WAS ABLE TO JUSTIFY THE INCREASE OF EXPENSES UNDER THIS HEAD. W E ARE OF THE CONSIDERED VIEW THAT UNLESS THERE IS A LIMITATION P UT BY LAW ON THE AMOUNT OF EXPENDITURE, A LESSER AMOUNT EXPENDED CAN NOT BE ALLOWED MERELY BECAUSE THE ASSESSING AUTHORITY THINKS THAT THE ASSESSEE COULD HAVE MANAGED BY PAYING LESSER AMOUNT AS A PRUDENT B USINESS MAN. 39. THE HON'BLE SUPREME COURT IN THE CASE OF WALCHA ND & CO. PVT LTD 65 ITR 381 HAS HELD THAT THE TEST OF PRUDENCE BY SU BSTITUTING ITS OWN VIEW IN PLACE OF BUSINESS MANS IS NOT ACCEPTABLE. CONSIDERING THE FACT 23 THAT DISALLOWANCE MADE BY THE ASSESSEE WAS PURELY O N ADHOC BASIS AND RESTRICTING THE DISALLOWANCE BY THE DRP IS ALSO ON ADHOC BASIS. WE, THEREFORE, DO NOT FIND ANY MERIT IN THE IMPUGNED AD DITION. THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITIO N OF RS.57,45,825/-. GROUND NO. 4 IS ACCORDINGLY ALLOWED. 40. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO . 1216/DEL/2014 IS PARTLY ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 30.09. 2021. SD/- SD/- [LALIET KUMAR] [N.K. BIL LAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 30 TH SEPTEMBER, 2021 VL/ 24 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE DATE ON WHICH THE APPROVED DRAFT COMES TO THE DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DATE ON WHICH THE FAIR ORDER COMES BACK TO THE DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT DATE OF DISPATCH OF THE ORDER