JCIT, (OSD), CIR-4(1), KOLKATA, Kolkata V. M/s M. K. Shah Exports Ltd., Kolkata

ITA 1274/KOL/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 2605 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-08-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 06-06-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAURABH KUMAR; SHRISANJAY PAUL
• Assessee Lawyers: S JHAJHARIA
• Keywords: Transfer pricing; Double taxation relief; International transaction; Earning of tax free income; Services rendered outside India; Advance ruling; Wholly owned subsidiary
• Section: 92C; 14A; 115JB; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C, BENCH KOLKATA BEFORE SHRI S. S. GODARA, JM &DR. A.L.SAINI, AM ./ITA NOS.506 & 507/KOL/2017 ( [ [ / ASSESSMENT YEARS: 2009-10& 2010-11) M/S. M. K. SHAH EXPORTS LTD. 2/2. JUSTICE DWARKANATH ROAD, KOLKATA 700 020. VS. D.C.I.T, CIRCLE-4, KOLKATA P-7, CHOWRINGHEE SQUARE, 8 TH FLOOR, KOLKATA 700 069. ./ ./PAN/GIR NO. : AACCM 0884 H (ASSESSEE) .. (RESPONDENT) & ./ITA NOS.1274 & 1275/KOL/2016 ( [ [ / ASSESSMENT YEARS: 2009-10 & 2010-11) J .C.I.T(OSD), CIRCLE-4(1), KOLKATA P-7, CHOWRINGHEE SQUARE, 8 TH FLOOR, KOLKATA 700 069. VS. M/S. M. K. SHAH EXPORTS LTD. 2/2. JUSTICE DWARKANATH ROAD, KOLKATA 700 020. ./ ./PAN/GIR NO. : AACCM 0884 H (RESPONDENT) .. (ASSESSEE) ASSESSEEBY :SHRI S. JHAJHARIA, AR REVENUE BY :SHRISANJAY PAUL & SAURABH KUMAR, ADDL. CIT (SR.DR) / DATE OF HEARING : 10/07/2018 /DATE OF PRONOUNCEMENT : 17/08/2018 / O R D E R PER DR. A. L. SAINI: THE CAPTIONED TWO APPEALS FILED BY THE ASSESSEE, PERTAINING TO ASSESSMENT YEARS 2009-10 & 2010-11AND TWO CROSS APPEALS FILED BY THE REVENUE PERTAINING TO ASSESSMENT YEARS 2009-10 & 2010-11 ARE DIRECTED AGAINST THE ORDERS PASSED BY M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 2 THE LD. COMMISSIONER OF INCOME TAX (APPEALS)- 22, KOLKATA, WHICH IN TURN ARISE OUT OF FAIR ORDERS OF ASSESSMENTS PASSED BY THE ASSESSING OFFICER U/S 143(3)/144C(2) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). 2.SINCE, THE ISSUES INVOLVED IN ALL THE APPEALS ARE COMMON AND IDENTICAL; THEREFORE, THESE HAVE BEEN CLUBBED AND HEARD TOGETHER AND A CONSOLIDATED ORDER IS BEING PASSED FOR THE SAKE OF CONVENIENCE AND BREVITY. 3. HOWEVER, IN THESE FOUR APPEALS, THE REVENUE AS WELL AS ASSESSEE HAVE RAISED A MULTIPLE GROUND OF APPEALS. FOR THE PURPOSE OF ADJUDICATION, WE SUMMARIZE THE COMMON GROUNDS AS FOLLOWS: (1) GROUNDS RELATING TO TRANSFER PRICING: GROUND NO.3 RAISED BY THE REVENUE IN ITA NO.1274/KOL/2016 FOR ASSESSMENT YEAR 2009-10, GROUND NO.3 RAISED BY THE REVENUE IN ITA NO.1275/KOL/2016, ASSESSMENT YEAR 2010-11, GROUNDS RAISED BY THE ASSESSEE IN ITA NO. 506/KOL/2016 FOR ASSESSMENT YEAR 2009-10 AND GROUNDS RAISED BY THE ASSESSEE IN ITA NO. 507/KOL/2016, FOR ASSESSMENT YEAR 2010-11 ARE COMMON AND IDENTICAL AND RELATE TO DETERMINING THE ARMS LENGTH PRICE OF INTEREST INCOME OF THE ASSESSEE AT 12 MONTH AVERAGE OF LIBOR + 5% AND ADDITIONS WERE DELETED BY CIT(A) OF RS.67,73,943/- FOR A.Y.2009-10, AND RS.1,02,25,098/- FOR A.Y. 2010-11, IN RESPECT OF UPWARD ADJUSTMENT OF PRICE OF INTEREST ON LOANS ADVANCED BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISE (AE) AT RUSSIA. (2) OTHER GROUNDS: (I). GROUND NO.1 RAISED BY THE REVENUE IN ITA NO.1274/KOL/2016, FOR ASSESSMENT YEAR 2009-10 AND GROUND NO.2 RAISED BY THE REVENUE IN ITA NO.1275/KOL/2016, FOR ASSESSMENT YEAR 2010-11 ARE IDENTICAL AND COMMON AND RELATES TO ADDITION OF RS.28,136/- FOR ASSESSMENT YEAR 2009-10 AND ADDITION OF RS.22,600/- FOR ASSESSMENT YEAR 2010-11 ON ACCOUNT OF DISALLOWANCE MADE U/S 14A TO THE BOOK PROFIT COMPUTED BY THE ASSESSEE. M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 3 (II). GROUND NO.2 RAISED BY THE REVENUE IN ITA NO.1274/KOL/2016, FOR ASSESSMENT YEAR 2009-10 RELATES TO ISSUE OF ADDITION OF RS.10,24,804/- ON ACCOUNT OF INCOME TAX REFUND AND MISCELLANEOUS INCOME. (III). GROUND NO.2 RAISED BY THE REVENUE IN ITA NO.1275/KOL/2016, FOR ASSESSMENT YEAR 2010-11, RELATES TO ADDITION OF RS.2,56,62,722/- ON ACCOUNT OF NON-DEDUCTION OF INCOME TAX AT SOURCE FROM COMMISSION PAYMENT TO NON-RESIDENT EXPENDITURE FOR SERVICE PROVIDED OUTSIDE INDIA. 4. WE SHALL FIRST TAKE-UP ADDITIONS CHALLENGED ON ACCOUNT OF TRANSFER PRICING ADJUSTMENTS. THE SUMMARIZED AND COMMON GROUND RELATING TO TRANSFER PRICING ISSUE, READS AS FOLLOWS: GROUND NO.3 RAISED BY THE REVENUE IN ITA NO.1274/KOL/2016 FOR ASSESSMENT YEAR 2009-10, GROUND NO.3 RAISED BY THE REVENUE IN ITA NO.1275/KOL/2016, ASSESSMENT YEAR 2010-11, GROUNDS RAISED BY THE ASSESSEE IN ITA NO. 506/KOL/2016 FOR ASSESSMENT YEAR 2009-10 AND GROUNDS RAISED BY THE ASSESSEE IN ITA NO. 507/KOL/2016, FOR ASSESSMENT YEAR 2010-11 ARE COMMON AND IDENTICAL AND RELATE TO DETERMINING THE ARMS LENGTH PRICE OF INTEREST INCOME OF THE ASSESSEE AT 12 MONTH AVERAGE OF LIBOR + 5% AND ADDITIONS WERE DELETED BY CIT(A) OF RS.67,73,943/- FOR A.Y.2009-10, AND RS.1,02,25,098/- FOR A.Y. 2010-11, IN RESPECT OF UPWARD ADJUSTMENT OF PRICE OF INTEREST ON LOANS ADVANCED BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISE (AE) AT RUSSIA. THE REVENUE`S APPEAL IN ITA NO.1275/KOL/2016, FOR ASSESSMENT YEAR 2010-11 IS TAKEN AS THE LEAD CASE TO ADJUDICATE VARIOUS ISSUES RAISED BY THE REVENUE AND ASSESSEE. 5.THE BRIEF FACTS QUA THE ISSUE OF TRANSFER PRICING ADJUSTMENTSARE THAT DURING THE ASSESSMENT YEAR 2010-11, THE RETURN IN FORM NO.3CEB WAS FILED BY THE ASSESSEE ALONG WITH ITS RETURN OF INCOME. ON REFERENCE FROM THE ASSESSING OFFICER U/S 92CA(1), THE CASE WAS TAKEN UP BY THE LD TPO FOR DETERMINATION OF ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CULTIVATION, MANUFACTURE, BLENDING, PACKINGAND SELLING, INCLUDING EXPORT OF TEA IN PACKETS AND M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 4 IN BULK. IT HAS A NUMBER OF TEA GARDENS FROMWHICH IT PRODUCES AND PROCESSES ITS OWN TEA. FURTHER, PROCESSED TEA IS ALSO BOUGHT FROM AUCTIONSIN GUWAHATI, SILIGURIAND KOLKATA. IT WAS OBSERVED THAT ONE OF THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSESSEE WAS IN THE FORM OF A LOAN ADVANCED BY IT TO ITS SUBSIDIARY ZAO CLASSIC IN RUSSIA. THE ASSESSEE HAS CHARGED INTEREST AT THE RATE OF 8% FOR THE PERIOD APRIL 1,2009 TO DECEMBER 2009(FROM 1 ST JANUARY 2010 TO MARCH 31, 2010, INTEREST WAS CHARGED @ 5% ON SAID LOAN). 6. THE ASSESSEE, IN ITS TRANSFER PRICING STUDY REPORT (TP REPORT), HAD MENTIONED THAT THE COMPARABLE UNCONTROLLED PRICE(CUP) METHOD IS THE MOST APPROPRIATE METHOD (MAM), AND THE ASSESSEE'S FOREIGN CURRENCY LOAN CAN BE COMPARED WITH ANY FOREIGNCURRENCY LOAN GIVEN TO AN INDIAN COMPANY. IT HAD STATED THAT FOR FOREIGN CURRENCY LOANS, THE FOREIGN COMPANIES MAY BE CHARGED BY THEIR INDIAN RELATED PARTY ON THE BASIS OF THE INTEREST RATE PREVAILING IN THE INTERNATIONAL MARKET. IT HAD FURTHER STATED THAT, GENERALLY THE RATE OF INTEREST CHARGED IS LINKED TO LIBOR WHICH IS THE RATE AT WHICH BANKS LEND AND BORROW FROM EACH OTHER.MONTHLY DATA FOR LIBOR FOR FINANCIAL YEAR 2009-10 HAD BEEN UTILIZED BY THE ASSESSEE TO ARRIVE AT AN AVERAGE L2- MONTH LIBOR (1.28%).ACCORDINGLY, THE ASSESSEE HAD CONCLUDED THAT THE PRICING OFITS INTERNATIONAL LOAN TO ITS SUBSIDIARY (AVERAGE7.59% P.A.) ISAT AN ARM'S LENGTH. IN AN EARLIER ASSESSMENT YEAR, (I.E. AY 2008-09), THE AVERAGE LIBOR, AS COMPUTED IN ITSTP STUDY REPORT FOR THAT YEAR WAS 5.89%. THE ASSESSEE'S TP REPORT FOR THAT YEAR MENTIONEDTHAT 'WE CAN ASSUME THAT THE INDIAN ENTITY GRANTING LOAN TO ITS SUBSIDIARY ABROAD MAY DO SO OUT OF ITS OWN ACCRUALS OR OUT OF THE BORROWED FUNDS. HERE, M.K. SHAH EXPORTS LIMITED HAS A SHORT TERM FOREIGN CURRENCY PACKING CREDIT @ 4.5%. IT FURTHER STATED THAT THE PACKING CREDIT INFOREIGN CURRENCY IS MUTUALLY AGREED UPON BETWEEN THE BANKER AND THE EXPORTER AND THE SPREADGENERALLY CONSISTS OF LIBOR PLUS A MINIMUM OF 1%. THIS IS GENERALLY FOR A SHORT PERIOD. IN THE CASE OF THE ASSESSEE, THE TP REPORT FURTHER STATED, THAT THE FOREIGN CURRENCY PACKING CREDIT LOAN CAN BETAKEN AS AN INTERNAL COMPARABLE FOR DETERMINING RATE TO BE CHARGED BY THE PARENT COMPANYTO ITSFOREIGN SUBSIDIARY. ON THE BASIS OF THIS ANALYSIS, THE ASSESSEE'S TP REPORT FOR THAT YEARCONCLUDED THAT THE LOAN HAD BEEN PRICED AT AN ARM'S LENGTH. M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 5 7. IT WAS NOTICED BY THE LD TPO THAT THROUGH AN AGREEMENT TITLED 'CREDIT AGREEMENT NO.2 DATED 08 DECEMBER, 2003, THE ASSESSEE HAD ADVANCED A LOAN OF USD 800,000 TO ITSSUBSIDIARY ZAO CLASSIC IN RUSSIA, A COMPANY INCORPORATED UNDER THE LAWS OF THAT COUNTRY. THE PRINCIPAL AMOUNT WAS INCREASED TO 15,00,000 USD BY AN AMENDMENT DATED 19.02.2004. THE RATE OF INTEREST CHARGED ON THE LOAN WAS INCREASED FROM 4% P.A. TO 8% P.A. THROUGH AN AMENDMENT DATED 02.04.2007, I.E. DURING THE FINANCIAL YEAR PERTAININGTO ASSESSMENT YEAR 2008-09. THIS AGREEMENT WAS EXTENDED FOR FURTHER 5 YEARS VIDE MINUTES OFMEETING OF BOARD OF DIRECTORS ON 23.11.2007 REGARDING 'LOAN TO WHOLLY OWNED SUBSIDIARY (WOS) ABROAD UNDER THE AUTOMATIC ROUTE' AND THE CEILING FOR THE LOAN AMOUNT WAS INCREASEDTO USD 25,00,000 (RATE OF INTEREST REMAINED UNALTERED). FURTHER, ON ACCOUNT OF THIS EXTENSION ANDUPWARD REVISION OF THE CEILING, ADDITIONAL USD 4,05,000 WERE ADVANCED DURING FY 2008-09. NETUSD 2,06,014 WAS ADVANCED IN FY 2009-10 ALSO.THE BASIC TERMS OF THE SAID AGREEMENT, ARE AS FOLLOWS: 8. DURING THE TPO PROCEEDINGS, THE ASSESSEE SUBMITTED THAT FOR THE FIRST TIME THE ASSESSEE COMPANY HAD ADVANCED FOREIGN CURRENCY LOAN IN THE FINANCIAL YEAR 2003-04 TO ITS SUBSIDIARY ZAO CLASSIC. THECOMPANY HAD TAKEN NO LOANS WHATSOEVER IN THE FINANCIAL YEAR 2003- 04. ALL ALONG THESE LOANSWERE ADVANCED OUT OF THE COMPANY'S OWN FUNDS. THIS FACT IS EVIDENT FROM THE ANNUAL ACCOUNTSOF THE COMPANY FOR THE FINANCIAL YEAR 2003-04. DURING THE FINANCIAL YEAR 2009-10, FURTHERFOREIGN CURRENCY LOAN OF US$ 2,06,014 WERE ADVANCEDTO ITS SUBSIDIARY, M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 6 AGAIN OUT OF ITS OWN FUNDS. THIS FACT IS EVIDENT FROM THE ANNUAL ACCOUNTS OF THE COMPANY FOR THE FINANCIAL YEAR 2009-10. THE FINANCIAL ACCOUNTS FOR THE FINANCIAL YEAR2009-10 SHOW NO FRESH INTEREST BEARING BORROWINGS IN FORM OF LONG TERM LOAN AND OTHER CREDIT FACILITIES. THERE WAS AN UNSECURED LOAN OF RS. L5,00,00,000BEARINGINTERESTOF3%FROMLCICIBANK AS AT MARCH 31, 2010. THIS LOAN WAS UTILIZED FOR THE COMPANY'S BUSINESS OTHER THANADVANCING OF LOAN TO ITS AE. IT WAS SUBMITTED THAT IN THE HANDS OF THE ASSESSEE COMPANY THE ENTIRE LOAN TO ITS SUBSIDIARY WAS A TRADE INVESTMENT IN FORM OF FOREIGN CURRENCY LOAN. THIS FINANCING HELPED THE COMPANY IN A BIG WAY TO ACHIEVE A ROBUST EXPORT TURNOVER OF RS.52,13,15,075 (ONLY TO ZAO CLASSIC) AND TO EARN A SIGNIFICANT MARGIN.THEREFORE, THE AMOUNT ADVANCED WAS NOT MERELY TO EARN INTEREST BUT TO RULE SUBSTANTIAL MARKETSHARE IN RUSSIA.FOREIGN CURRENCY LOANS ARE GIVEN BY BANKS GLOBALLY BEARING LIBOR BASED RATE.THE AVERAGE OF THE LONDON INTER BANK OFFER RATE (LIBOR) BASED RATE FOR THE PERIOD FROM1.4.2009 TO 31.3.2010 WAS 1.28483%. IT HAD BEEN COMPARED BY TAKING AVERAGE MONTHLY RATEFOR THE PERIOD FROM 1.04.2009 TO 31.03.2010. THE DATA SOURCED FROM THE SITE OF LIBOR( AVERAGE OF 12 MONTH`S LIBOR FOR THE FINANCIAL YEAR 2009-10) ARE AS FOLLOWS: MONTH 12 MONTH`S LIBOR APRIL,2009 1.9351 MAY, 2009 1.6791 JUNE, 2009 1.6776 JULY,2009 1.5000 AUGUST, 2009 1.4231 SEPTEMBER, 2009 1.2691 OCTOBER, 2009 1.2275 NOVEMBER, 2009 1.0844 DECEMBER, 2009 0.9993 JANUARY, 2010 0.8979 FEBRUARY, 2010 0.8516 MARCH,2010 0.8733 M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 7 AVERAGE OF 12-MONTH LIBOR FOR FINANCIAL YEAR 2009-10 1.2848 THE ASSESSEE COMPANY CHARGED INTEREST AT 8% ON LOAN GIVEN TO ZAO CLASSIC FOR THE PERIOD FROM01.04.2009 TO 31.12.2009 AND 5% FOR THE PERIOD FROM 01.01.2010 TO 31.03.2010. THE AMOUNT OF INTEREST FOR THE FINANCIAL YEAR 2009-10CHARGED BY THE ASSESSEE TO ZAO CLASSIC WAS EQUIVALENT TO RS.72,13,733/- [AT 8% OF RS.59,58,209 AND AT 5% OF RS.12,55,524]. 9. HOWEVER, THE LD TPO REJECTED THE CONTENTION OF THE ASSESSEE COMPANY AND NOTED THAT AS PER SECTION 92C(1) OF THE ACT, THE ARM`S LENGTH PRICE (ALP) OF THE LOAN ADVANCED BY ASSESSEE TO ITS ASSOCIATED ENTERPRISE (AE) ZAO IS REQUIRED TO BE DETERMINED USING CUP METHOD. THE LD TPO NOTED THAT THE ASSESSEE'S BASIS OF BENCHMARKING DONE TO ARRIVE AT THE COMPUTATION OF AN ARM'S LENGTH PRICE OF ITS LOAN TO ZAOWAS NOT IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92C OF THE ACT READ WITH RULE 10B OF THE RULES. THE LENDING OF MONEY BY THE ASSESSEE TO ITS FOREIGN (I.E. NON-RESIDENT) SUBSIDIARY CONSTITUTES AN INTERNATIONAL TRANSACTION AND ITS ARM'S LENGTH PRICE HAS TO BE COMPUTED BY THE MOST APPROPRIATE METHOD. FURTHER, IN THE CASE OF A LOAN TRANSACTION, THE CUP METHOD IS THE MOST APPROPRIATE METHOD. IN THIS METHOD, THE COMPARISON IS MADE BETWEEN THE PRICE CHARGED FOR GOODS OR SERVICES IN CASE OF A CONTROLLED TRANSACTION TO THAT CHARGED IN A COMPARABLE UNCONTROLLED TRANSACTION IN COMPARABLE CIRCUMSTANCES. THE ASSESSEE`S TRANSACTION AND ITS CIRCUMSTANCES WAS EXPLAINED BY LD TPO AS FOLLOWS: M.K. SHAH EXPORTS LTD. CURRENCY LOAN (USD) ZAO CLASSIC (ASSESSEE) LOCATED IN INDIA FIXED RATE OF 8%/5% (SUBSIDIARY OFTHE ASSESSEE) LOCATED IN RUSSIA WITH RESPECT TO THE ABOVE TRANSACTIONS, THE LD TPO NOTED AS FOLLOWS: (A) AN EXACTLY UNCONTROLLED TRANSACTION WOULD MEAN A LOAN TRANSACTION IN THE SAME FOREIGN CURRENCY BETWEEN TWO COMPANIES OF THE SAME TYPE AS THE ASSESSEE AND ZAO BUT WHICH ARE NOT ASSOCIATED ENTERPRISES, M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 8 (B) AN EXACTLY COMPARABLE TRANSACTION WOULD MEAN A LOAN TRANSACTION IN THE SAME FOREIGN CURRENCY BETWEEN TWO COMPANIES WHERE THE LENDER IS A DOMESTIC COMPANY OF THE TYPE OF THE ASSESSEE IN INDIA AND THE BORROWER IS A COMPANY OF THE TYPE OF ZAO LOCATED IN RUSSIA, AND C) EXACTLY COMPARABLE CIRCUMSTANCES WOULD GENERALLY RELATE TO THE TERMS AND CONDITIONS OF THE LOAN. THE LD TPO ALSO NOTED THAT EXACTLY COMPARABLE UNCONTROLLED TRANSACTIONS ARE DIFFICULT TO FIND AND THE DIFFERENCES BETWEEN THE COMPARABLE UNCONTROLLED TRANSACTIONS AND THE GIVEN CONTROLLED TRANSACTION ARE REMOVED BY MAKING APPROPRIATE ADJUSTMENTS. 10. THE TPO OBSERVED THAT IN THE PRESENT CASE, THE ARM'S LENGTH PRICE OF THE LOAN IS TO BE DETERMINED IN THE HANDS OF THE ASSESSEE, A COMPANY, AND NOT A BANK. IT FOLLOWS THAT IN ITS CASE, THE LIBOR, AS A BASE RATE, WOULD HAVE TO BE REPLACED, BY THE COST OF FUNDS INVOLVED IN THE HANDS OF THE COMPANY WHICH IS IN TURN THE FEE FOR RISK-FREE PROVISION OF CAPITAL OR ITS OWN 'BASE RATE'. ON THE OTHER HAND, THE CREDIT SPREAD WOULD HAVE TO BE DETERMINED ON THE BASIS OF AN ANALYSIS OF THE CREDITWORTHINESS OF THE BORROWER AND THE ATTACHED CONDITIONS OF THE LOAN ETC. IT EMERGES FROM THE DISCUSSION ABOVE THAT THE PRICE OF AN INTERNATIONAL LOAN HAS TWO COMPONENTS THE BASE RATE AND THE CREDIT SPREAD. THE BASE RATE IS THE RISK-FREE FEE FOR PROVISION OF CAPITAL. THIS IS DIFFERENT FOR BANKS AND CORPORATE. THE SECOND PART IS THE CREDIT SPREAD WHICH IS THE REMUNERATION FOR THE RISK TAKEN IN ADVANCING THE LOAN, WHICH IS BASED ON CREDIT RATING. BEFORE MAKING THE ACTUAL DETERMINATION OF THE COST OF FUNDS IN THE HANDS OF THE ASSESSEE FOR PROVIDING THE FOREIGN CURRENCY LOAN AND ESTIMATION OF THE SPREAD, IT WOULD BE A PRUDENT TO EXAMINE THE LEGAL ENVIRONMENT IN WHICH A DOMESTIC COMPANY IS ALLOWED TO ADVANCE FOREIGN CURRENCY LOANS TO ITS FOREIGN SUBSIDIARY. THE LD TPO NOTED THAT IN CASE OF A COMPANY ADVANCING A LOAN TO ANOTHER COMPANY, THE BASE RATE IS THE FEE FOR RISK-FREE PROVISION OF CAPITAL. IN FINANCIAL YEAR 2007-08 (THE FY WHEN THE PRICE AND TERM OF THE LOAN WAS REVISED), THIS BASE RATE WAS TO BE M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 9 ARRIVED AT BY TAKING INTO ACCOUNT ITS OWN COST OF FUNDS (WHETHER BY WAY OF A FOREX BORROWING OR RUPEE LOANS). FROM THE DETAILS SUPPLIED BY THE ASSESSEE, IT WAS NOTICED THAT STANDARD CHARTERED BANK, WITH WHICH THE ASSESSEE IS HAVING TERM LOAN FACILITY AND EXPORT PACKING/ OVERDRAFT/ BANK GUARANTEES/ FOREIGN LETTER OF CREDIT FACILITIES, HAVE VIDE LETTER DATED 14.09.2007 MENTIONED THE FOLLOWING RATES FOR ITS COST OF FUNDS: (I) 8.5% P.A. ON INR FOR EXPORT PACKING CREDIT ETC (II) LIBOR PLUS 100 BPS P.A. ON FOREIGN CURRENCY EXPORT PACKING CREDIT (III) 12% P.A. ON OVERDRAFT FACILITY (IV) 11 % P.A. ON TERM LOAN FACILITY AS THE EXPORT PACKING CREDIT FACILITIES ARE GENERALLY SHORT TERM FACILITIES, THE RATE OF 10% CAN SAFELY BE TAKEN AS THE BASE RATE OR FEE FOR RISK-FREE PROVISION OF CAPITAL IN THE CASE OF THE ASSESSEE. HOWEVER, THE ASSESSEE HAS ADVANCED USD FUNDS TO ZAO DURING FY 2008-09 ALSO (USD 5,05,000). IT WAS NOTICED THAT STANDARD CHARTERED BANK, WITH WHICH THE ASSESSEE IS HAVING TERM LOAN FACILITY, HAVE VIDE LETTER DATED 09.10.2008 MENTIONED THE FOLLOWING RATES FOR ITS COST OF FUNDS: CURRENT INTEREST RATE: 12% REVISED INTEREST RATE: 13% FRESH FACILITIES HAVE NOT BEEN TAKEN AGAIN BY THE ASSESSEE. ACCORDINGLY, FOR THE FUNDS ADVANCED DURING FY 2008-09, THE BASE RATE CAN SAFELY BE TAKEN AS 12% P.A. DURING FY 2009-10, THE SBI PLR WAS ON THE AVERAGE AROUND 12%. ACCORDINGLY, THE SAME WAS TAKEN AS THE BASE RATE IN THE CASE OF THE ASSESSEE FOR FURTHER LENDING TO ITS AE IN INDIA. THIS BASE RATE WILL HAVE TO BE TAKEN AS FIXED AND NOT LINKED TO A FLOATING RATE BECAUSE THE ASSESSEE ITSELF HAS CHARGED THE PRICE ON THE BASIS OF A FIXED RATE OF INTEREST AND HAS NOT LINKED IT TO A FLOATING BASE RATE. 11. REGARDING THE DETERMINATION OF THE CREDIT SPREAD BASED ON THE RISK PROFILE OF THE BORROWER, THE LD TPO NOTED THAT A 'LOAN CONNECTOR' TEAR-SHEET OF THOMSON REUTERS LPC SHOWS THAT A USD 175 MILLION FIXED RATE BOND ISSUED IN MAY 2006 BY THE GALLERY GROUP OF RUSSIA HAD CARRIED A FIXED INTEREST RATE OF 10.125%. THE S&P BANK LOAN RATING AND DEBT RATINGS WERE 'B. ALLOWING ADJUSTMENTS FOR THE SIZE OF LOAN AND YEAR, AND THE CREDIT RATING OF THE BORROWER, IT CAN BE SAFELY CONSIDERED THAT M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 10 THE COMPANY WITH A SIZE AND FUNCTIONS OF ZAO CLASSIC IN RUSSIA WOULD HAVE BEEN OFFERED A SPREAD SIZE OF AROUND 700 BPS (7%). AGAIN, A 'LOAN CONNECTOR' TEAR-SHEET OF THOMSON REUTERS LPC SHOWS THAT A USD 260 MILLION TRANCHE 1 AND SECURED TERM LOAN ISSUED TO FEDERAL HYDRELECTRIC POWER GENERATION CO (OAO HYDRO OGK) OF RUSSIA WAS ISSUED IN MARCH, 2010 BY A SYNDICATE OF BANKS AT THE PRICE OF LIBOR PLUS 700 BPS. THE S&P RATING OF THIS LOAN WAS 'BB+ BANK LOAN RATING AND DEBT RATINGS WERE 'B'. AFTER ALLOWING ADJUSTMENTS FOR THE SIZE OF LOAN, AND THE CREDIT RATING OF THE BORROWER, IT CAN BE SAFELY CONSIDERED THAT THE COMPANY WITH A SIZE AND FUNCTIONS OF ZAO CLASSIC IN RUSSIA WOULD HAVE BEEN OFFERED A SPREAD SIZE OF AROUND 700 BPS (7%). BASED ON THE ABOVE, THE ARM'S LENGTH PRICE OF THE LOAN ADVANCED BY THE ASSESSEE WAS COMPUTED TO BE AT 17% P.A. FOR THE LOAN OF USD 15,45,000 (OPENING BALANCE ON 01.04.2008) AND AT 19% FOR THE USD 5,05,000 OPENING BALANCE OF FY 2009- 10). SO FAR AS THE LOANS ADVANCED IN FY 2009-10 ARE CONCERNED, THE ARM'S LENGTH PRICE OF THE LOAN IS AGAIN DETERMINED AT 19% (L2% SBI PLR + 700 BPS). AS THE LOAN ISSUED BY THE ASSESSEE TO ITS AE WAS A FIXED RATE LOAN, THE ARM'S LENGTH PRICE OF THE LOAN WOULD ALSO HAVE TO BE COMPUTED BY TAKING A FIXED RATE OF INTEREST. THE ARM'S LENGTH PRICE OF THE LOAN WAS WORKED OUT AS UNDER: THE COMPUTATION OF THE ARM'S LENGTH PRICE OF THE LOAN, AS MENTIONED IN TABLE ABOVE,WAS TO THE TUNE OF RS.1,74,38,431/-. THE ARM'S LENGTH PRICE OF THE LOAN IN THE BOOKS OF THE ASSESSEE WAS AT RS. 72,13,333/-. THE MARGIN OF +/- 5% ON THIS AMOUNT WAS TO THE TUNE OF RS.3,60,687/-. THUS, THE ARM'S LENGTH PRICE OF THE LOAN COMPUTED UNDER SECTION 92CA(3) READ WITH SECTION 92C(3) IS BEYOND THIS MARGIN. M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 11 ACCORDINGLY, AN UPWARD ADJUSTMENT OF RS. 1,02,25,098/- (RS.1,74,38,431- 72,13,333) WAS MADE TO THE ARM'S LENGTH PRICE OF THE LOAN. 12. AGGRIEVED BY THE STAND SO TAKEN BY THE ASSESSING OFFICER/TPO, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) WHO HAS PARTLY DELETED THE UPWARD TRANSFER PRICING ADJUSTMENT. THE LD CIT(A) OBSERVED THAT THE TPO/AO'S ARGUMENT THAT L1BOR RATES WOULD NOT APPLY, DOES NOT FIND JUDICIAL SUPPORT. SINCE THE LOAN TO THE FOREIGN SUBSIDIARY IS IN US $, THEREFORE, L1BOR WOULD BE APPLICABLE AND CONSEQUENTLY, IT WAS HELD THAT THE TPO WAS INCORRECT IN ADOPTING THE RATE OF TERM LOAN FACILITY PROVIDED BY STANDARD CHARTERED BANK IN INDIA FOR THE BASIS OF WORKING OUT ARM'S LENGTH RATE ON THE LOAN . THE LD CIT(A) ALSO RELIED ON THE JUDGMENT OF THE HON`BLE TRIBUNAL OF CHENNAI IN THE CASE OF SIVA INDUSTRIES AND HOLDINGS LTD 59 DTR 182, WHEREIN IT WAS HELD THAT ONCE THE TRANSACTION BETWEEN THE ASSESSEE AND THE AES IS IN FOREIGN CURRENCY, THE TRANSACTION WOULD HAVE TO BE LOOKED UPON BY APPLYING COMMERCIAL PRINCIPLE IN REGARD TO INTERNATIONAL TRANSACTION. IF THIS IS SO, THEN THE DOMESTIC PRIME LENDING RATE WOULD HAVE NO APPLICABILITY AND THE INTERNATIONAL RATE FIXED BEING L1BOR WOULD COME INTO PLAY. THE LD CIT(A) ALSO NOTED THAT CONSIDERING THE LOW CREDIT RATINGS OF THE ASSESSEE AND THE SUBSIDIARY, A MARK-UP OF 5% IS CONSIDERED AS CREDIT SPREAD BASED ON THE SIZE OF THE LOAN AND FUNCTIONS OF THE ASSESSEE AND THE SUBSIDIARY. AS PER DOCUMENTS GIVEN BY THE ASSESSEE, THE AVERAGE LIBOR RATE FOR THE YEAR 2009-10 WAS 1.2848%. IF 5% IS TAKEN AS CREDIT SPREAD OVER AND ABOVE THE LIBOR, THE ARM'S LENGTH RATE WOULD BE 6.2848% WHICH IS LESS THAN THE RATE OF 8% AT WHICH THE LOAN WAS EXTENDED BY THE ASSESSEE TO ITS AE DURING THE PERIOD OF APRIL 2009 TO DECEMBER 2009. THE ASSESSEE HAS, HOWEVER, REDUCED THE RATE CHARGED ON LOAN TO ITS AE FROM 8% TO 5% FOR THE PERIOD JANUARY, 2010 TO MARCH, 2010. AS THE ARM'S LENGTH RATE OF LOAN HAS BEEN DETERMINED AT 6.2848% FOR THE YEAR 2009-10, THE RATE OF INTEREST FOR THE THREE MONTH PERIOD FROM JANUARY 2010 TO MARCH 2010 REQUIRES APPROPRIATE ADJUSTMENT. THEREFORE, LD CIT(A) DELETED THE UPWARD ADJUSTMENT FROM APRIL 1, 2009 TO 31 ST DECEMBER,2009 AND FURTHERHELD THAT THE ADJUSTMENT PRICE OF RS.1,02,25,098/-, WOULD BE SUBJECT TO THE ADJUSTMENT IN INTEREST RATE FOR THE PERIOD JANUARY 1,2010 TO 31 ST MARCH 2010. M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 12 13. AGGRIEVED BY THE ORDER OF LD CIT(A), THE ASSESSEE AS WELL AS REVENUE ARE IN APPEALS BEFORE US. 14. THE LD. DR FOR THE REVENUE HAS SUBMITTED BEFORE US THAT IN THE ASSESSEES CASE UNDER CONSIDERATION THE LIBOR RATE IS NOT APPROPRIATE FOR DETERMINATION OF ARM`S LENGTH PRICE OF FOREIGN CURRENCY LOAN. THE LD DR POINTED OUT THAT THE ARM'S LENGTH PRICE OF THE LOAN TO ZAO I.E., THE INTEREST CHARGED HAS TO BE WORKED OUT ON THE BASIS OF TAKING TWO PARTIES AS SEPARATE AND BENCH-MARKING THE PRICE OF LOAN ON THE BASIS OF WHAT AN INDEPENDENT THIRD PARTY WOULD CHARGE FROM ZAO CLASSIC, RUSSIAN FEDERATION BASED ON ITS ANALYSIS OF RISK ASSOCIATED WITH THE LOAN. THE LD DR STATED THAT THOUGH CUP METHOD IS THE MOST APPROPRIATE AS FOLLOWED BY THE ASSESSEE, BUT THE COMPUTATION OF ARM'S LENGTH PRICE OF ITS LOAN IS NOT IN ACCORDANCE WITH PROVISIONS OF SECTION 92C R.W. RULE 10B(1)(A) OF THE ACT, AS THE LOAN TRANSACTION IS TO BE CONSIDERED AS BETWEEN TWO INDEPENDENT PARTIES IN INTERNATIONAL LOAN MARKET. AS THE LOAN IS BETWEEN PRIVATE COMPANIES, AND NOT BETWEEN BANKS, THEREFORE, LIBOR RATES WOULD NOT APPLY AND LIBOR HAS TO BE REPLACED BY COST OF FUND TO THE ASSESSEE. THE LD DR ALSO POINTED OUT THAT THE CREDIT RATING OF THE SUBSIDIARY HAS TO BE TAKEN INTO ACCOUNT TO ARRIVE AT THE CREDIT SPREAD WHICH IS A FEE FOR INCURRING THE CREDIT RISK I.E, FEE FOR RISK FREE PROVISION OF CAPITAL. THE ASSESSEE HAS NOT SUBMITTED ANY RELIABLE EVIDENCE TO SHOW ITS CREDIT RATING BEFORE THE LOWER AUTHORITIES, THEREFORE, THE ASSESSEE`S CASE SHOULD BE REMITTED BACK TO THE FILE OF THE LD TPO/AO TO DETERMINE THE CREDIT RATING OF THE ASSESSEE. CREDIT RATING PLAYS AN IMPORTANT ROLE TO DETERMINE THE CREDIT SPREAD. THE LD ASSESSING OFFICER, HAS RIGHTLY REJECTED THE ARGUMENTS OF THE 'BUSINESS INTEREST' AS CIRCULAR ARGUMENT AND PROCEEDED TO CONSIDER THE AVERAGE INTEREST RATE OF 12% ON THE BASIS OF THE TERM LOAN FACILITY CHARGED BY THE ASSESSEE'S STANDARD CHARTERED BANK AND CREDIT SPREAD OF 700 BPS (7%) CONSIDERING THE S&P BANK LOAN RATING AND DEBT RATINGS OF RUSSIA AS 'B'. BASED ON THE ABOVE, THE ARM'S LENGTH PRICE OF THE LOAN WAS COMPUTED AT 17% FOR THE OPENING BALANCE AND 19 % FOR THE BALANCE PERIOD OF THE YEAR. THEREFORE, LD DR POINTED OUT THAT THE LIBOR RATE IS NOT APPLICABLE TO THE ASSESSEES CASE UNDER CONSIDERATION AS THE LIBOR RATE SHOW THAT THE BENCH MARKING OF INTER COMPANY INTERNATIONAL LOANS IS THE NOTIONAL RATE FOR COST OF FUNDS BETWEEN TWO BANKS PARTICIPATING IN THE FIXING OF THE LIBOR, WHEREAS THE INTERNATIONAL TRANSACTION UNDER CONSIDERATION PERTAINS TO A LOAN GIVEN BY A COMPANY IN ONE COUNTRY TO ANOTHER COMPANY IN A DIFFERENT COUNTRY IN A FOREIGN CURRENCY. THIS ASPECT WAS NOT BROUGHT TO THE NOTICE OF LD. TRIBUNAL M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 13 WHILE ADJUDICATING VARIOUS JUDGMENTS AND THUS HAS NOT BEEN CONSIDERED IN THE ORDERS AS SUCH ON WHICH THE ASSESSEE HAS PLACED RELIANCE. THUS, AN INTERNATIONAL BANK WOULD, IN PRINCIPLE, PRICE ITS LOAN ON THE BASIS OF ITS OWN COST OF UNSECURED FUNDS AND THE APPROPRIATE RETURN ON THE RISK TAKEN BY IT WHILE LENDING TO ANY SPECIFIC BORROWER. THIS INVOLVES THE MEASUREMENT OF THE RISK UNDERTAKEN WHILE LENDING MONEY TO A BORROWER. THEORETICALLY, THE MAIN COMPONENT OF SUCH MEASUREMENT CONSISTS OF EVALUATING THE PROBABILITY OF DEFAULT BY THE BORROWER. BANKS GENERALLY DO THE RISK PROFILING OF CLIENTS THEMSELVES. THUS, BASED ON THE RISK PROFILING OR CREDIT RATING OF A BORROWER, A BANK WILL PRICE ITS LOAN (I.E. CHARGE INTEREST ON IT) ON THE BASIS OF LIBOR, WHICH REPRESENTS ITS OWN COST OF UNSECURED FUNDS, AND ADDITIONAL 'BASIS POINTS'(100 BASIS POINTS OR 'BPS' EQUALS 1%), WHICH IN TURN QUANTIFIES THE CHARGE ON THE RISK UNDERTAKEN IN LENDING. THESE ADDITIONAL BASIS POINTS ARE DIRECTLY LINKED TO THE CREDIT RATING OF THE BORROWER: THE HIGHER THE CREDIT RATING, THE FEWER THE ADDITIONAL BASIS POINTS CHARGED. FURTHER, THE PERCEIVED RISK IS HIGHER WHEN THE TERM OF LOAN IS LONGER.IT IS ALWAYS DIFFICULT TO PREDICT THE BUSINESS ENVIRONMENT, ECONOMIC CONDITIONS, MARKET CONDITIONS, POLITICAL ENVIRONMENT OR THE FINANCIAL POSITION OF THE BORROWER IN THE LONG TERM. THEREFORE, IN THE ASSESSEE`S CASE UNDER CONSIDERATION CREDIT SPREAD HAS NOT BEEN DETERMINED TAKING INTO ACCOUNT THE RATING OF THE COMPANY. IN FACT THE ASSESSEE COMPANY HAS NOT OBTAINED CREDIT RATING FROM OUTSIDE AGENCIES, LIKE, S & P RATING ETC, HENCE IT IS DIFFICULT TO DETERMINE THE ADDITIONAL 'BASIS POINTS'( THAT IS,100 BASIS POINTS OR 'BPS' EQUALS 1%). THE CREDIT RATING IS NECESSARY TO DETERMINE THE CREDIT SPREAD, AND SINCE THE ASSESSEE HAS NOT UNDERTAKEN THIS EXERCISE THEREFORE, THIS ISSUE SHOULD BE REMITTED BACK TO THE FILE OF LD TPO/AO TO ADJUDICATE THIS ISSUE AFRESH AND NECESSARY INSTRUCTION SHOULD BE GIVEN TO THE ASSESSEE TO SUBMIT THE DOCUMENTS RELATING TO CREDIT SPREAD AND RATING. 15. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY FOR THEFIRST TIME ADVANCED FOREIGN CURRENCY LOAN IN THE FINANCIAL YEAR 2003-04 TO ITSSUBSIDIARY ZAO CLASSIC. THE COMPANY HAD TAKEN NO LOANS WHATSOEVER IN THE FINANCIALYEAR 2003-04. ALL ALONG THESE LOANS WERE ADVANCED OUT OF THE COMPANY'S OWNFUNDS. THIS FACT IS EVIDENT FROM THE ANNUAL ACCOUNTS OF THE COMPANY FOR THEFINANCIAL YEAR 2003-04. DURING THE FINANCIAL YEAR 2009-10, FURTHER FOREIGN CURRENCYLOAN OF US$ 2,06,014 [NET OF RECEIPTS] EQUIVALENT TO RS.92,99,472/- WERE ADVANCEDTO ITS SUBSIDIARY AGAIN OUT OF ITS OWN FUNDS. THIS FACT IS EVIDENT FROM THE ANNUALACCOUNTS OF THE COMPANY FOR THE FINANCIAL YEAR2009-10. M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 14 THE FINANCIAL ACCOUNTS FORTHE FINANCIAL YEAR 2009-10 SHOW NO FRESH INTEREST BEARING BORROWINGS IN FORM OFLONG TERM LOAN AND OTHER CREDIT FACILITIES. THERE WAS AN UNSECURED LOAN OFRS.15,00,00,000 BEARING INTEREST OF 3% FROM LCLCL BANK AS AT MARCH 31, 2010. THISLOAN WAS UTILIZED FOR THE COMPANY'S BUSINESS OTHER THAN ADVANCING OF LOAN TO ITS ASSOCIATE ENTERPRISE(AE).LN THE HANDS OF THE COMPANY THE ENTIRE LOAN TO ITS SUBSIDIARY WAS A TRADEINVESTMENT IN FORM OF FOREIGN CURRENCY LOAN. THIS FINANCING HELPED THE COMPANY IN ABIG WAY TO ACHIEVE A ROBUST EXPORT TURNOVER OF RS.52,13,15,075/- (ONLY TO ZAOCLASSIC) AND TO EARN A SIGNIFICANT MARGIN. THEREFORE, THE AMOUNT ADVANCED WAS NOTMERELY TO EARN INTEREST BUT TO RULE SUBSTANTIAL MARKET SHARE IN RUSSIA. FOREIGN CURRENCY LOANS ARE GIVEN BY BANKS GLOBALLY BEARING LIBOR BASED RATE. THE AVERAGE OF THE LONDON INTER BANK OFFER RATE (LIBOR) BASED RATE FOR THEPERIOD FROM 01.04.2009 TO 31.03.2010 WAS 1.28483%. LT HAD BEEN COMPARED BYTAKING AVERAGE MONTHLY RATE FOR THE PERIOD FROM 01.04.2009 TO 31.03.2010. THE LD COUNSEL ALSO SUBMITTED THAT T HE ASSESSEE COMPANY CHARGED INTEREST AT 8% ON LOAN GIVEN TO ZAO CLASSIC FOR THE PERIOD FROM 01.04.2009 TO 31.12.2009 AND 5% FOR THE PERIOD FROM 01.01.2010 TO 31.03.2010; THESE RATES WERE MUCH HIGHER THAN THE LIBOR RATE. THE AMOUNT OF INTEREST FOR THE FINANCIAL YEAR 2009-10 CHARGED BY THE ASSESSEE TO ZAO CLASSIC WAS EQUIVALENT TO RS. 72,13,733/-. [AT 8% - RS. 59,58,209/- AND AT 5% RS. 12,55,524/-]. THE LD COUNSEL STATED THAT LIBOR RATES ARE TO BE CONSIDERED FOR THE PURPOSES OF DETERMINING THE ARMS LENGTH PRICE OF THE LOAN. ONCE THE TRANSACTION BETWEEN THE ASSESSEE AND THE AES IS IN FOREIGN CURRENCY, THE TRANSACTION WOULD HAVE TO BE LOOKED UPON BY APPLYING COMMERCIAL PRINCIPLE IN REGARD TO INTERNATIONAL TRANSACTION. IF THIS IS SO, THEN THE DOMESTIC PRIME LENDING RATE WOULD HAVE NO APPLICABILITY AND THE INTERNATIONAL RATE FIXED BEING L1BOR WOULD APPLICABLE TO THE ASSESSEE. THE LD COUNSEL ALSO SUBMITTED THAT THE ARM'S LENGTH PRICE SO COMPUTED BY THE ASSESSE AND THE ADJUSTMENT SO MADE BY THE AO/TPO AND THE RELIEF GRANTED BY LD. CIT(A) IN VARIOUS ASSESSMENT YEARS ARE SUMMARIZED AS FOLLOWS:- ASSESSMENT YEARS . ASSESSEE CHARGED INTEREST @ A.D. CIT(A) 2009-10 8% 17-19% LIBOR + 500 BASIS POINT 2010-11 FOR 9 MONTHS AT 8 % AND FOR BALANCE 3 MONTHS AT 5% 17-19% LIBOR + 500 BASIS POINT 2011-12 5% 19% LIB OR 2012-13 5% 19% LIB OR M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 15 THE ASSESSEE PREFERRED CROSS APPEAL IN ASSESSMENT YEARS 2009-10 & 2010-11 SINCE THE LD. CIT (A) DID NOT PROVIDE ANY BASIS FOR CONSIDERING THE SPREAD AT 500 BASIS POINT ABOVE LIBOR. THE COUNSEL STATED THAT HON'BLE ITAT IN ITA NO. 2194/K/14 FOR A.Y 2008-09 IN ASSESSEE'S OWN CASE HAS CONSIDERED THE ARM'S LENGTH PRICE OF THE INTEREST AT LIBOR ONLY. FURTHER, THE REVENUE HAS NOT PREFERRED ANY APPEAL AGAINST THE ORDER OF THE HON'BLE ITAT, BEFORE JURISDICTIONAL HIGH COURT AND AS SUCH THE ISSUE OF ARM'S LENGTH PRICE OF THE INTEREST IN ASSESSEE'S CASE IS CRYSTALLIZED AT LIBOR ONLY. THE HON'BLE ITAT WHILE PASSING SUCH ORDER IN A.Y 2008-09 HAS RELIED UPON THE JUDGMENT OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. COTTON NATURALS INDIA LTD. 276 ITR 445 (DELHI). 16. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD, WE NOTE THAT THE ASSESSEE HAD ENTERED INTO CERTAIN INTERNATIONAL TRANSACTIONS WITHITS ASSOCIATED ENTERPRISE. THE ASSESSING OFFICER MADE A REFERENCE UNDER SECTION 92CA(1) OFTHE INCOME TAX ACT, 1961 TO THE LD TPO. THE LD TPO ANALYZED THE TRANSACTION WITH REFERENCE TOINTEREST CHARGED BY THE ASSESSEE ON LOAN GIVEN BY IT TO ITS SUBSIDIARY ZAO CLASSIC, RUSSIANFEDERATION. THE ASSESSEE HAD CHARGED INTEREST @ 8% P. A. FROM 01.04.2009 TO 31.12.2009ANDHAD CHARGED INTEREST @ 5%FROM 01.01.2010 TO 31.03.2010. THE LD TPO, AFTER A DETAILED DISCUSSION IN HIS ORDERDATED 24.01.2014, HELD THAT ARM'S LENGTH PRICE OF THE LOAN WOULD BE AT 17% ON THE OPENINGBALANCE OF LOAN AND AT 19% ON THE VARIOUS AMOUNT ADVANCED DURING THE PREVIOUS YEAR ENDED MARCH31, 2010, WHICH CAME TO RS.1,74,38,431/-. SINCE THE INTEREST SHOWN BY THE ASSESSEE WAS OF TO THE TUNE RS.72,13,333/-, THEREFORE, THE LD TPO SUGGESTED AN UPWARD ADJUSTMENT TO THE TUNE OF RS.1,02,25,098/- (RS.1,74,38,431-RS.72,13,333). 17.FIRST OF ALL, IN THE ASSESSEE`S CASE UNDER CONSIDERATION, WE WOULD LIKE TO TEST THE APPLICABILITY OF THE TRANSFER PRICING METHOD, TO DETERMINE THE ARM`S LENGTH PRICE (ALP) OF THE INTEREST ON LOAN BY USING A MOST APPROPRIATE METHOD (MAM). WE NOTE THAT THE ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION HAS TO BE DETERMINED BY ANY THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD: (A) COMPARABLE M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 16 UNCONTROLLED PRICE METHOD ( CUP METHOD); (B) RESALE PRICE METHOD ( RPM); (C) COST PLUS METHOD (CPM); (D) PROFIT SPLIT METHOD (PSM); (E) TRANSACTIONAL NET MARGIN METHOD (TNMM); AND (F) ANY OTHER METHOD PRESCRIBED BY THE BOARD (SO FAR AS AY 2010-11 IS CONCERNED, CBDT HAS NOT PRESCRIBED ANY OTHER METHOD FOR PRICING THE FOREIGN CURRENCY LOAN). FURTHER, SECTION 92C(2) MENTIONS THAT THE MOST APPROPRIATE METHOD SHALL BE APPLIED IN THE MANNER AS MAY BE PRESCRIBED. THE PRESCRIPTION, ACCORDINGLY, HAS BEEN PROVIDED IN RULE 10B OF IT RULES, 1962. IN GENERAL, THE CPM IS USED WHEN A PRODUCT IS SOLD BY A MANUFACTURER OR SERVICE PROVIDER, THE RPM IS USED IN CASE OF A PRODUCT OR SERVICE BEING SOLD BY A DISTRIBUTOR, THE TNMM IS GENERALLY USED WHEN DATA IS DIFFICULT TO FIND IN CASE OF COMPARABLES AT A GROSS PROFIT LEVEL OR WHERE A LESS STRICTER APPROACH TO FUNCTIONAL SIMILARITY IS TO BE TAKEN. THE PSM IS USED WHERE THE INCOME ARISING OUT OF ANY PARTICULAR TRANSACTION OR CLASS OF TRANSACTIONS IS TO BE SPLIT BETWEEN THE PARTIES TO THE TRANSACTION - GENERALLY THIS METHOD IS APPLIED WHERE INTANGIBLES ARE CONCERNED AND BOTH THE PARTIES TO THE TRANSACTION CONTRIBUTE TO THE CREATION OF THE INTANGIBLE(S). IN CASE OF FINANCIAL TRANSACTIONS, THE CUP METHOD IS PREFERRED AS THE MOST APPROPRIATE METHOD. RULE L0 B OF THE IT RULES, 1962 PRESCRIBES THE FOLLOWING WITH REGARD TO APPLICATION OF THE CUP METHOD: (I)(A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH, - (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUSE (II) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION;' THEREFORE, IN THE LIGHT OF THE ABOVE PROVISIONS, THE LD TPO HELD THAT ARM`S LENGTH PRICE (ALP) OF THE LOAN ADVANCED BY ASSESSEE TO ITS ASSOCIATED ENTERPRISE (AE) ZAO IS REQUIRED TO BE DETERMINED USING CUP METHOD. WE FIND NO ANY INFIRMITY IN M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 17 CHOOSING THE CUP METHOD BY THE LD TPO TO DETERMINE THE ARM`S LENGTH PRICE (ALP) OF THE LOAN. 18. WE NOTE THAT T HE ASSESSEE HAD ADVANCED LOAN TO THE SUBSIDIARY ZAO IN FOREIGN CURRENCY IN THE YEAR 2003-04 AND ALL ALONG IT WAS FROM ITS OWN FUND. EVEN DURING THE YEAR UNDER CONSIDERATION 2009-10, THE LOAN IS OUT OF ITS OWN FUND. THE AO HAS NOT DISPUTED THE FACT THAT THE COST OF FUNDS IN THE HANDS OF THE ASSESSEE IS LOWER THAN 8% OR 5% CHARGED FROM THE ASSOCIATE ENTERPRISE (AE). THE TPO HAS HOWEVER, ARGUED THAT THE ARM'S LENGTH PRICE OF THE LOAN TO ZAO I.E., THE INTEREST CHARGED HAS TO BE WORKED OUT ON THE BASIS OF TAKING TWO PARTIES AS SEPARATE AND BENCH-MARKING THE PRICE OF LOAN ON THE BASIS OF WHAT AN INDEPENDENT THIRD PARTY WOULD CHARGE FROM ZAO CLASSIC, RUSSIAN FEDERATION BASED ON ITS ANALYSIS OF RISK ASSOCIATED WITH THE LOAN. WITH RESPECT TO THE LIBOR RATES BEING USED AS A REFERENCE FOR DETERMINING THE ARM'S LENGTH, WE NOTE THAT THE AVERAGE OF LIBOR BASED RATE FOR THE YEAR UNDER CONSIDERATION WAS 1.2848%. THE LIBOR RATES ARE TO BE CONSIDERED FOR THE PURPOSES OF DETERMINING THE ARMS LENGTH PRICE OF THE LOAN AND FOR THAT WE RELY ON THE JUDGMENT OF THE COORDINATE BENCH, CHENNAI IN THE CASE OF SIVA INDUSTRIES AND HOLDINGS LTD, 59 DTR 182, WHEREIN IT WAS HELD THAT ONCE THE TRANSACTION BETWEEN THE ASSESSEE AND THE AES IS IN FOREIGN CURRENCY, THE TRANSACTION WOULD HAVE TO BE LOOKED UPON BY APPLYING COMMERCIAL PRINCIPLE IN REGARD TO INTERNATIONAL TRANSACTION. IF THIS IS SO, THEN THE DOMESTIC PRIME LENDING RATE WOULD HAVE NO APPLICABILITY AND THE INTERNATIONAL RATE FIXED BEING L1BOR WOULD COME INTO PLAY. THE HON'BLE DELHI HIGH COURT HAS NOW CONFIRMED THE ITAT DECISION IN THE CASE OF COTTON NATURALS (I) PVT. LTD REPORTED IN [ 2015] 55 TAXMANN.COM 523(DELHI) WHERE IT APPROVED THAT CUP METHOD IS THE MOST APPROPRIATE METHOD AND DOMESTIC PRIME LENDING RATE WOULD HAVE NO APPLICABILITY AND THE INTERNATIONAL RATE FIXED BEING L1BOR SHOULD BE TAKEN AS THE BENCHMARK RATE FOR INTERNATIONAL TRANSACTIONS. IN VIEW OF THE ABOVE DECISIONS, WE NOTE THAT THE AO'S ARGUMENT THAT L1BOR RATES WOULD NOT APPLY DOES NOT FIND JUDICIAL SUPPORT. SINCE THE LOAN TO THE FOREIGN SUBSIDIARY IS IN US$,( US DOLLER) THEREFORE, L1BOR WOULD BE APPLICABLE. HENCE THE TPO/AO WAS INCORRECT IN ADOPTING THE RATE OF TERM LOAN FACILITY PROVIDED BY STANDARD CHARTERED BANK IN INDIA FOR THE BASIS OF WORKING OUT ARM'S LENGTH RATE ON THE LOAN. 19.WE NOTE THAT CREDIT RATINGS ARE IMPORTANT FACTORS TO DETERMINE THE CREDIT SPREAD. IN THE ASSESSEE`S CASE UNDER CONSIDERATION, THE AO WHILE ANALYZING THE RISK PROFILE OF THE SUBSIDIARY, COMPLETELY REJECTED THE 'BUSINESS INTEREST' ARGUMENT OF THE ASSESSEE AND WHILE ASSESSING THE CREDIT RATING COMPLETELY IGNORED THE FACT THAT THE ASSESSEE ADVANCED LOAN OUT M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 18 OF ITS OWN FUND AND THE ENTIRE LOAN TO ITS SUBSIDIARY WAS IN THE FORM OF TRADE INVESTMENT WHICH ENABLED THE ASSESSEE TO ACHIEVE ROBUST EXPORT TURNOVER AND A SUBSTANTIAL MARKET SHARE IN RUSSIA. THE AO ALSO DID NOT USE COMPARATIVE DATA WITH REFERENCE TO THE YEAR IN WHICH THE LOAN WAS TAKEN. WITH RESPECT TO THE COMPARABLE RATES OF INTEREST FOR LOAN TO SUBSIDIARY IN FOREIGN CURRENCY, IT IS JUDICIALLY ACCEPTED THAT LIBOR RATE WOULD APPLY. THE QUESTION NOW REMAINS WHETHER IT WOULD BE ONLY THE LIBOR RATE OR THERE SHALL BE A MARK UP ADDED TO THE LIBOR RATE. WE NOTE THAT THAT THE CREDIT RATINGS OF THE PARTIES TO THE TRANSACTION ARE IMPORTANT FACTOR AND THE COORDINATE BENCH OF MUMBAI ITAT IN THE CASE OF AURIONPRO SOLUTION LTD. VS ADDL. CIT IN ITA NO.7872/MUM/2011, HAS OBSERVED THAT APPROPRIATE RATE WOULD BE LLBOR PLUS 2% AS THE LOAN HAS BEEN ADVANCED WITHOUT ANY SECURITY AND GUARANTEE. WE NOTE THAT IN THE ASSESSEE'S CASE ALSO, THE LOAN HAS BEEN WITHOUT SECURITY AND GUARANTEE. WE NOTE THAT CONSIDERING THE LOW CREDIT RATINGS OF THE ASSESSEE AND THE SUBSIDIARY, A MARK-UP OF 5% WAS CONSIDERED BY THE LD CIT(A), AS CREDIT SPREAD BASED ON THE SIZE OF THE LOAN AND FUNCTIONS OF THE ASSESSEE AND THE SUBSIDIARY. AS PER DOCUMENTS GIVEN BY THE ASSESSEE TO THE LOWER AUTHORITIES, THE AVERAGE LIBOR RATE FOR THE YEAR 2009-10 WAS 1.2848%. THE LD CIT(A) BASED ON THE DOCUMENTS SUBMITTED BY THE ASSESSEE, HAS TAKEN 5% AS CREDIT SPREAD OVER AND ABOVE THE LIBOR, AND THE ARM'S LENGTH RATE WAS COMPUTED AT 6.2848% WHICH WAS LESS THAN THE RATE OF 8% AT WHICH THE LOAN WAS EXTENDED BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISE(AE) DURING THE PERIOD OF APRIL 2009 TO DECEMBER 2009. SINCE THE 8% RATE OF INTEREST AT WHICH THE LOAN WAS EXTENDED BY THE ASSESSEE TO ITS AE IS MORE THAN 6.2848% THEREFORE, THE LD CIT(A) HELD THAT NO TRANSFER PRICING ADJUSTMENT IS REQUIRED FOR THE PERIOD APRIL 2009 TO DECEMBER 2009. 20.THE ASSESSEE HAS, HOWEVER, REDUCED THE RATE CHARGED ON LOAN TO ITS AE FROM 8% TO 5% FOR THE PERIOD 1 ST JANUARY, 2010 TO MARCH 31, 2010. AS THE ARM'S LENGTH RATE OF LOAN HAS BEEN DETERMINED AT 6.2848% FOR THE YEAR 2009-10, WHEREAS THE INTEREST CHARGED WAS AT THE RATE OF 5% WHICH IS LESSER THAN 6.2848%, THEREFORE, LD CIT(A) HAD RECOMMENDED TRANSFER PRICING ADJUSTMENT FOR THE THREE MONTHS PERIOD FROM JANUARY 2010 TO MARCH 2010. BEFORE WE ADJUDICATE THIS ISSUE, WE ARE OF THE VIEW THAT IT IS APPROPRIATE TO REFER THE PROVISO OF SECTION 92C OF THE INCOME TAX ACT, 1961, WHICH READS AS FOLLOWS: SECTION 92 C:COMPUTATION OF ARMS LENGTH PRICE. (1) THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE, NAMELY: (A) COMPARABLE UNCONTROLLED PRICE METHOD; M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 19 (B) RESALE PRICE METHOD; (C) COST PLUS METHOD; (D) PROFIT SPLIT METHOD; (E) TRANSACTIONAL NET MARGIN METHOD; (F) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB-SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, IN THE MANNER AS MAY BE PRESCRIBED: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARM'S LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARM'S LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN DOES NOT EXCEED SUCH PERCENTAGE NOT EXCEEDING THREE PERCENTAGE OF THE LATTER, AS MAY BE NOTIFIED BY THE CENTRAL GOVERNMENT IN THE OFFICIAL GAZETTE IN THIS BEHALF THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN SHALL BE DEEMED TO BE THE ARM'S LENGTH PRICE. WE NOTE THAT TOLERANCE LIMIT, THAT IS, +/- 5% VARIATION ALLOWED IN DETERMINING ARM`S LENGTH PRICE HAS BEEN CAPPED TO A LIMIT OF +/- 3% FROM APRIL 1, 2003, (SEE PROVISO TO SEC.92C OF THE ACT, AS MENTIONED ABOVE) AND IN THE ASSESSEE`S CASE THE ASSESSMENT YEAR 2010-11, IS UNDER CONSIDERATION THEREFORE +/- 5% TOLERANCE LIMIT WOULD BE APPLICABLE.WE NOTE THAT THE ASSESSEE HAS COMPUTED INTEREST AT THE RATE OF 5% FORTHE THREE MONTHS PERIOD FROM JANUARY 2010 TO MARCH 2010 TO THE TUNE OF RS. 12,55,524/- AND IF TOLERANCE LIMIT OF +/-5% IS APPLIED THEN THERE WOULD BE A MEAGRE, THAT IS, A VERY NEGLIGENT TRANSFER PRICING ADJUSTMENT WOULD COME. FOR THE PERIOD OF NINE MONTHS, (APRIL 1, 2009 TO DECEMBER 2009), THE LD CIT(A) HAD ALREADY DELETED THE TRANSFER PRICING ADJUSTMENT TAKING INTO ACCOUNT CREDIT SPREAD AT THE RATE OF 5% AND THEREFORE, FOR BALANCE THREE MONTHS THERE WOULD BE A HARDLY TRANSFER PRICING ADJUSTMENT AFTER APPLYING TOLERANCE LIMIT OF +/-5%, HENCE WE DO NOT SUGGEST ANY TRANSFER PRICING ADJUSTMENT IN THE ASSESSEE`S CASE UNDER CONSIDERATION. 21.NOW WE DEAL WITH THE GRIEVANCE OF LD DR FOR THE REVENUE, ABOUT THE CREDIT SPREAD. SO FAR CREDIT SPREAD IS CONCERNED, THE COUNSEL FOR THE ASSESSEE HAS SUBMITTED BEFORE THE BENCH, THE ARM'S LENGTH PRICE SO COMPUTED BY THE ASSESSES AND THE ADJUSTMENT SO MADE BY THE AO/TPO AND THE RELIEF GRANTED BY LD. CIT(A) IN VARIOUS ASSESSMENT YEARS, WHICH ARE SUMMARIZED AS FOLLOWS:- ASSESSMENT YEARS . ASSESSEE CHARGED INTEREST @ A.D. CIT(A) 2009-10 8% 17-19% LIBOR + 500 BASIS POINT M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 20 2010-11 FOR 9 MONTHS AT 8 % AND FOR BALANCE 3 MONTHS AT 5% 17-19% LIBOR + 500 BASIS POINT 2011-12 5% 19% LIB OR 2012-13 5% 19% LIB OR WE ARE TOLD BY THE LD COUNSEL, DURING THE COURSE OF HEARING THAT ASSESSEE HAS ADOPTED ONLY LIBOR RATE AND DID NOT ADD ANY BASIS OF POINTS-BPS.WE NOTE THAT THE COORDINATE BENCH OF DELHI IN THE CASE OF COTTON NATURALS 22 ITR 438 (TRIB-DELHI), HAS HELD THAT FINANCIAL POSITION AND CREDIT RATING OF THE SUBSIDIARY WOULD BE BROADLY SAME AS THE HOLDING COMPANY AND LIBOR SHOULD BE TAKEN AS BENCH-MARK WITHOUT GOING INTO ASPECTS LIKE FINANCIAL HEALTH OF THE SUBSIDIARY. WITH RESPECT TO THE COMPARABLE RATES OF INTEREST FOR LOAN TO SUBSIDIARY IN FOREIGN CURRENCY, IT IS JUDICIALLY ACCEPTED THAT LIBOR RATE WOULD APPLY. THE QUESTION NOW REMAINS WHETHER IT WOULD BE ONLY THE LIBOR RATE OR THERE SHALL BE A MARK UP ADDED TO THE LIBOR RATE. IT WAS HELD BY THE TRIBUNAL IN COTTON NATURALS (SUPRA) THAT THE CREDIT RATINGS OF THE PARTIES TO THE TRANSACTION ARE IMPORTANT FACTOR. IN THIS CONNECTION, IN ONE OF THE CITED CASES, VIZ. AURIONPRO SOLUTION LTD. VS ADDL. CIT IN ITA NO.7872/MUM/2011, THE COORDINATE BENCH OF MUMBAI, HAS OBSERVED THAT APPROPRIATE RATE WOULD BE LLBOR PLUS 2% AS THE LOAN HAS BEEN ADVANCED WITHOUT ANY SECURITY AND GUARANTEE. WE NOTE THAT IN THE ASSESSEE'S CASE ALSO, THE LOAN HAS BEEN ADVANCED WITHOUT SECURITY AND GUARANTEE.WE ALSO NOTE THAT COORDINATE BENCH OF ITAT KOLKATA IN ASSESSEE`S OWN CASE BEING ITA NO. 2194/KOL/2014, FOR A.Y. 2008-09 HAS HELD THAT ARM`S LENGTH PRICE OF THE INTEREST SHOULD BE COMPUTED BY APPLYING LIBOR RATE AND DOMESTIC INTEREST RATE WOULD NOT BE RELEVANT. THEREFORE, WE NOTE THAT AT THIS ANGLE ALSO THERE SHOULD NOT BE ANY TRANSFER PRICING ADJUSTMENT IN THE HANDS OF THE ASSESSEE, HENCE WE DELETE THE TRANSFER PRICING ADJUSTMENT CONFIRMED BY THE CIT(A) FOR THREE MONTHS, VIZ: JANUARY 1, 2010 TO MARCH 31, 2010.THEREFORE, CONSIDERING THE FACTUAL POSITION AND POSITION IN LAW AS EXPLAINED ABOVE, THE GROUNDS OF APPEAL OF THE REVENUE ( IN ITA NO.1274 & 1275/KOL/2017) ARE DISMISSED AND ASSESSEE`S APPEALS ( IN ITA NO. 506 & 507/KOL/2017)ARE ALLOWED. NOW WE ADJUDICATE OTHER GROUNDS RAISED BY THE REVENUE: 22. GROUND NO.1 RAISED BY THE REVENUE IN ITA NO.1274/KOL/2016, FOR ASSESSMENT YEAR 2009-10 AND GROUND NO.2 RAISED BY THE REVENUE IN ITA NO.1275/KOL/2016, FOR ASSESSMENT YEAR 2010-11 ARE IDENTICAL AND COMMON AND RELATES TO ADDITION OF M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 21 RS.28,136/- FOR ASSESSMENT YEAR 2009-10 AND ADDITION OF RS.22,600/- FOR ASSESSMENT YEAR 2010-11 ON ACCOUNT OF DISALLOWANCE MADE U/S 14A TO THE BOOK PROFIT COMPUTED BY THE ASSESSEE. 23. THE BRIEF FACTS QUA THE ISSUE( AS PER LEAD CASE INREVENUE`S APPEAL IN ITA NO.1275/KOL/2016) ARE THATT HE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS.19,400 AND CLAIMED IT EXEMPTED BUT DID NOT MAKE ANY PROVISION FOR DISALLOWANCE UNDER SECTION 14A FOR THE EXPENDITURE INCURRED TO EARN EXEMPT INCOME. THE TAX AUDIT REPORT, HOWEVER, INDICATES THAT A SUM OF RS.22,600 STATED AGAINST CLAUSE 16(1). SINCE THE ASSESSEE DID NOT MAKE ANY PROVISION FOR SUCH DISALLOWANCE UNDER SECTION 14A, THEREFORE, AO NOTED THAT SOME DISALLOWANCE UNDER SECTION 14A HAS TO BE MADE. IT WAS SUBMITTED BY THE ASSESSEE COMPANY THAT THE INVESTMENT HAS BEEN MADE OUT OF OWN FUNDS. HOWEVER, LD AO REJECTED THE CONTENTION OF THE ASSESSEE AND MADE ADDITION TO THE TUNE OF RS. 22,600/- 24. AGGRIEVED BY THE STAND SO TAKEN BY THE ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) WITH SUCCESS. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. THE LD. DR FOR THE REVENUE HAS PRIMARILY REITERATED THE STAND TAKEN BY THE ASSESSING OFFICER WHICH WE HAVE ALREADY NOTED IN OUR EARLIER PARA AND IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. ON THE OTHER HAND, LD COUNSEL FOR THE ASSESSEE HAS DEFENDED THE ORDER PASSED BY THE LD CIT(A). 25. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD, WE NOTE THAT T HE PROVISIONS RELATING TO ADJUSTMENTS BY WAY OF INCREASE AND DECREASE TO THE NET PROFIT SHOWN BY THEASSESSEE IN PROFIT & LOSS ACCOUNT, ARE VERY EXPLICIT IN SECTION 115JB OF THE ACT. THE ITEMS WHICH ARE TO BE ADDED TO THE NET PROFIT HAVE BEEN LISTED OUT IN EXPLANATION 1 TO THAT SECTION. THE LEARNED AO SHOULD ADHERE TO THAT LIST AND CANNOT TRAVEL BEYOND THESE ITEMS. SINCE THERE IS NO MENTION OF SECTION 14A IN THE SAID EXPLANATION 1 TO SECTION 115JB, THE SAME CANNOT BE ADDED TO RE-DETERMINE THE QUANTUM OF 'BOOK PROFIT'. THE PROVISIONS OF SECTION 115JB RELATING TO COMPUTATION OF BOOK PROFIT ARE AMPLY CLEAR AND UNAMBIGUOUS. THESE PROVISIONS DO NOT LEAVE ANY ROOM FOR ADJUSTMENT BY THE ASSESSING OFFICER OTHER THAN THOSE MENTIONED IN EXPLANATION 1 TO SECTION 115JB TO THE NET PROFIT REFLECTED IN THE ACCOUNTS OF ANY ASSESSEE AND ADJUSTMENT BY WAY OF DISALLOWANCE U/S 14A IS NOT INCLUDED IN THE SAID EXPLANATION. THEREFORE, SUCH UPWARD REVISION IN THE SUM OF RS.22,600/- TO THE BOOK-PROFIT BY MAKING DISALLOWANCE SECTION 14A READ WITH RULE 8D IS NOT PERMITTED, THAT BEING SO, WE DECLINE TO M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 22 INTERFERE WITH THE ORDER OF ID. CIT(A) DELETING THE AFORESAID ADDITION. HIS ORDER ON THIS ISSUE IS, THEREFORE, UPHELD AND THE GROUNDS OF APPEAL OF THE REVENUE ARE DISMISSED. 26.GROUND NO.2 RAISED BY THE REVENUE INITA NO.1274/KOL/2016, FOR ASSESSMENT YEAR 2009-10 RELATES TO ISSUE OF ADDITION OF RS.10,24,804/- ON ACCOUNT OF INCOME TAX REFUND AND MISCELLANEOUS INCOME. 27. THE BRIEF FACTS QUA THE ISSUE ARE THAT BASED ON ERRONEOUS PREMISE, THE LD AO ADDED BACK A SUM OF RS.10,24,804/- [ 60% OF RS.17,08,007 ( RS.15,97,105 +RS.1,10,902)]. BUT IT WAS NOTICED THAT THE ENTIRE INCOME OF RS.15,97,102/- REFLECTED UNDER MISCELLANEOUS INCOME AROSE ONLY FROM TEA ESTATE AND INTEREST ON INCOME TAX REFUND OF RS.1,10,902/- AROSE ALSO FROM TEA BUSINESS, SINCE THE ASSESSEE DID NOT HAVE ANY OTHER BUSINESS OTHER THEN TEA GROWING AND TEA EXPORTS. WE HAVE HEARD BOTH THE PARTIES AND NOTED THAT NATURE OF INCOME IS VERY MUCH RELATED TO THE TEA BUSINESS OF THE ASSESSEE, THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD CIT(A) AND HENCE WE DISMISS THE GROUND RAISED BY THE REVENUE. 28.GROUND NO.2 RAISED BY THE REVENUE IN ITA NO.1275/KOL/2016, FOR ASSESSMENT YEAR 2010-11, RELATES TO ADDITION OF RS.2,56,62,722/- ON ACCOUNT OF NON-DEDUCTION OF INCOME TAX AT SOURCE FROM COMMISSION PAYMENT TO NON-RESIDENT, EXPENDITURE FOR SERVICE PROVIDED OUTSIDE INDIA. 29. THE BRIEF FACTS QUA THE ISSUE ARE THAT THIS GROUND RELATES TO DISALLOWANCE OF RS. 2,56,62,722/- UNDER SECTION 40(A)(IA) OF THE ACT FOR COMMISSION PAYMENT TO A FOREIGN COMPANY FOR SERVICES PROVIDED OUTSIDE INDIA TO A NON-RESIDENT, EXPENDITURE WITHOUT DEDUCTION OF TAX AT SOURCE IN TERMS OF SECTION 195 OF THE ACT BY RELYING UPON THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI DATED 22.02.2012 IN A.A.R. NO. 983-984 OF 2010 IN THE CASE OF SKF BOILERS AND DRIERS PRIVATE LIMITED. 30. ON APPEAL, LD CIT(A) DELETED THE ADDITION. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 31. THELD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS GROWER, MANUFACTURER AND EXPORTER OF TEA. THE ASSESSEE NOT ONLY EXPORTS ITS OWN PRODUCE OF GARDEN BUT ALSO EXPORTS SUBSTANTIAL QUANTITY OF TEA BOUGHT FROM TEA AUCTIONS TO VARIOUS COUNTRIES. DURING THE PREVIOUS YEAR ENDED MARCH 31, 2010, CORRESPONDING TO THE ASSESSMENT YEAR 2010-11 M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 23 THE ASSESSEE, THROUGH ITS FOREIGN AGENT KINGDOM RICH CORPORATION LIMITED, HAVING ADDRESS AT 83, DES VOEUX ROAD, CENTRAL, HONG KONG, EXPORTED TEA WORTH RS. 25,66,27,220/- AND PAID COMMISSION THEREON EQUAL TO RS. 2,56,62,722/- TO VARIOUS CUSTOMERS ABROAD. THE RELEVANT COPY OF CONTRACT WITH THE FOREIGN AGENT AND THE DETAILED CALCULATIONS OF COMMISSION BASED ON ORDERS EXECUTED THROUGH THE FOREIGN AGENT IN RESPECT OF OVERSEAS CUSTOMERS WERE PRODUCED DURING THE COURSE OF ASSESSMENT PROCEEDINGS BEFORE THE LEARNED AO. THE COUNSEL SUBMITTED THAT THE NON-RESIDENT AGENT RENDERED SERVICES IN FOREIGN COUNTRY, OUTSIDE INDIA. THE COMMISSION WAS PAID TO THE AGENT OUTSIDE INDIA IN FOREIGN CURRENCY. THE ASSESSEE PAID COMMISSION WITHOUT DEDUCTION OF TAX AT SOURCE UNDER SECTION 195 OF THE ACT TO ITS NON-RESIDENT AGENT FOR SUPPLYING TEA TO VARIOUS CUSTOMERS IN FOREIGN COUNTRIES. THE AGENT DID NOT HAVE ANY BUSINESS CONNECTION OR PLACE OF BUSINESS IN INDIA. THE ASSESSEE RESERVES THE RIGHT OF EXECUTION OR CANCELLATION OF ORDER PROCURED BY THE AGENT.THE LEARNED AO INVOKED THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT, SOLELY RELYING UPON THE ORDER OF AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI DATED 22.02.2012 IN A.A.R. NO. 983-984 OF 2010 IN THE CASE OF SKF BOILERS AND DRIERS PRIVATE LTD. AND DISALLOWED A SUM OF RS. 2,56,62,722/-. IN VIEW OF SPECIFIC PROVISION OF SECTION 245S OF THE ACT REGARDING APPLICABILITY OF ADVANCE RULING, THE LEARNED AOS ACTION OF MAKING ADDITION OF RS. 2,56,62,722/- IN TERMS OF SECTION 40(A)(IA) OF THE ACT FOR PAYMENT OF COMMISSION OF FOREIGN AGENT FOR PROCURING BUSINESS OUTSIDE THE TERRITORY OF INDIA WITHOUT DEDUCTION OF INCOME TAX AT SOURCE SOLELY RELYING UPON THE ADVANCE RULING GIVEN BY AAR FOR SOME OTHER ASSESSEE IS UNWARRANTED. 32.ON THE OTHER HAND, THE LD. DR FOR THE REVENUE HAS PRIMARILY REITERATED THE STAND TAKEN BY THE ASSESSING OFFICER, WHICH WE HAVE ALREADY NOTED IN OUR EARLIER PARA AND IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. 33. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD, WE NOTE THAT THE AMOUNT OF COMMISSION PAID TO THE NON- RESIDENT AGENTS CANNOT BE CONSIDERED AS TAXABLE IN INDIA. THAT IS, THE PROVISIONS RELATING TO WITHHOLDING OF TAX U/S 195 READ WITH SECTION 40(A)(IA) OF THE ACT ARE NOT APPLICABLE IN CASE OF EXPORT COMMISSION PAID BY ASSESSEE, ESPECIALLY WHEN THE FOREIGN AGENT HAS RENDERED SERVICES OUTSIDE INDIA. FOR THAT WE RELY ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS TOSHOKU LIMITED (1980) 125 ITR 525 (SC), WHEREIN IT WAS HELD THAT SINCE THE COMMISSION INCOME EARNED BY THE FOREIGN AGENT FOR OPERATIONS CARRIED OUTSIDE THE TERRITORY OF INDIA CANNOT BE TAXED IN INDIA AND AS SUCH THE ASSESSEE IS NOT DUTY BOUND TO DEDUCT INCOME TAX AT SOURCE ON SUCH INCOME AND AS SUCH M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 24 SECTION 40(A)(IA) HAS NO APPLICABILITY IN THIS CASE. THE CONCLUDING PORTION OF THE SAID JUDGMENT IS REPRODUCED FOR REFERENCE- IN THE INSTANT CASE THE NON-RESIDENT ASSESSEE DID NOT CARRY ON ANY BUSINESS OPERATIONS IN THE TAXABLE TERRITORIES. THEY ACTED AS SELLING AGENTS OUTSIDE INDIA. THE RECEIPT IN INDIA OF THE SALE PROCEEDS OF TOBACCO REMITTED OR CAUSED TO BE REMITTED BY THE PURCHASERS FROM ABROAD DOES NOT AMOUNT TO AN OPERATION CARRIED OUT BY THE ASSESSEES IN INDIA AS CONTEMPLATED BY CLAUSE (A) OF THE EXPLANATION TO SECTION 9(1)(I) OF THE ACT. THE COMMISSION AMOUNTS WHICH WERE EARNED BY THE NON-RESIDENT ASSESSEES FOR SERVICES RENDERED OUTSIDE INDIA CANNOT, THEREFORE, BE DEEMED TO BE INCOMES WHICH HAVE EITHER ACCRUED OR ARISEN IN INDIA. WE NOTE THAT IT IS ALSO AN UNDISPUTED FACT THAT THE COMMISSION WAS PAID TO THE AGENTS OUTSIDE INDIA IN FOREIGN CURRENCY AND THE ASSESSEE RESERVES THE RIGHT OF EXECUTION OF CANCELLATION OF ORDER PROCURED BY THE AGENT. FURTHER, THE FACTS OF THE INSTANT CASE IS ALSO DISTINGUISHABLE WITH THE FACTS OF THE CASE OF SKF BOILERS (SUPRA) IN SO FAR AS THE COUNTRY WHERE THE AGENTS OF THE ASSESSEE RESIDES I.E., HONG KONG, DO NOT HAVE A DTAA WITH INDIA WHEREAS IN THE CASE OF SKF BOILERS, THE AGENTS WERE RESIDENTS OF PAKISTAN WHICH HAS A DTAA WITH INDIA AND THESE AGENTS WERE PAID IN INDIAN RUPEES. ON THE FACTS AND CIRCUMSTANCES OF THE ASSESSEE`S CASE, AND IN VIEW OF THE DISCUSSION AS ABOVE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER PASSED BY THE LD CIT(A), THEREFORE, WE CONFIRM THE ORDER PASSED BY THE LD CIT(A) ON THIS ISSUE AND DISMISS THE GROUND RAISED BY THE REVENUE. 34. IN THE RESULT, APPEAL FILED BY THE REVENUE IN ITA NO.1274 AND 1275/K/2016 ARE DISMISSED, WHEREAS THE APPEAL FILED BY THE ASSESSEE IN ITA NO.506 AND 507/K/2016, ARE ALLOWED. ORDER IS PRONOUNCED IN THE OPEN COURT ON 17.08.2018 SD/- ( S. S. GODARA ) SD/- (A.L.SAINI) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /KOLKATA; / DATE: 17/08/2018 (RS, SR.PS) / COPY OF THE ORDER FORWARDED TO : 1. /THE ASSESSEE- M/S. M. K. SHAH EXPORTS LTD. 2. / THE RESPONDENT- D.C.I.T, CIRCLE-4, KOLKATA 3. ( ) / THE CIT(A), M/S. M. K. SHAH EXPORTS LTD. REVENUE-ITA NOS.1274 & 1275/KOL/2016,ANDASSESSEE- 506 & 507/KOL/2016 ASSESSMENT YEARS: 2009-10 & 2010-11 PAGE | 25 TRUE COPY BY ORDER SENIOR PRIVATE SECRETARY, HEAD OF OFFICE/D.D.O, I.T.A.T, KOLKATA BENCHES, KOLKATA . 4. / CIT 5. , , / DR, ITAT, KOLKATA 6. [ / GUARD FILE.