M/s. House of Pearl Fashions Limited, Gurgaon V. DCIT, New Delhi

ITA 1589/DEL/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3546 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-11-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 13-06-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 18-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Wholly owned subsidiary
• Section: 14A

Judgement Text

ITA NO. 1589/DEL/2014 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER & SHRI K.N. CHARY, JUDICIAL MEMBER ITA NO.-1589/DEL/2014 ( ASSESSMENT YEAR: 2009-10) HOUSE OF PEARL FASHIONS LIMITED PLOT NO. 446, UDYOG VIHAR, PHASE-V GURGAON AAACM0175F VS DCIT CIRCLE 12(1) NEW DELHI. ASSESSEE BY SH. PRADEEP DINODIA, CA SH. R.K. KAPOOR, CA REVENUE BY SH. AMRENDER KUMAR, CIT DR SH. PRANAV, SR. DR ORDER PER K. NARSIMHA CHARY, J.M. AGGRIEVED BY THE ASSESSMENT ORDER DATED 20.01.2013 (20.01.2014?) PURSUANT TO THE DIRECTIONS GIVEN BY T HE LD. DISPUTE RESOLUTION PANEL (DRP), VIDE ORDER DATED 19.12.2013 , ASSESSEE PREFERRED THIS APPEAL CHALLENGING THE ADDITION OF R S. 87,23,089/- MADE ON ACCOUNT OF THE INTERNATIONAL TRANSACTION IN THE NATURE OF INTEREST ON LOANS GRANTED TO ASSOCIATED ENTERPRISES (FOR SHORT AES) OF THE ASSESSEE, AND ENHANCING THE DISALLOWA NCE U/S 14A READ WITH RULE 8D OF THE I.T. RULES TO A TUNE OF RS . 29,03,632/-. DATE OF HEARING 31.08.2017 DATE OF PRONOUNCEMENT 08.11.2017 ITA NO. 1589/DEL/2014 2 2. BRIEFLY STATED RELEVANT FACTS ARE THAT THE ASSES SEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF REA DYMADE GARMENTS AND JOB WORK BESIDES INVOLVING IN THE ACTI VITIES MAINLY IN VARIOUS SUBSIDIARIES THROUGHOUT THE WORLD. PORTF OLIO OF THE ASSESSEE COMPRISES OF SHARES AND SECURITIES OF MANY GROUP COMPANIES AND ALSO OF NON GROUP COMPANIES. DURING THE RELEVANT YEAR THE ASSESSEE HAD UNDERTAKEN VARIOUS INTERNATIO NAL TRANSACTIONS WITH ITS AES AND, AMONG OTHER THINGS, HAD EXTENDED LOANS TO THREE OF ITS AES IN DOLLAR DENOMINATION. BESIDES THIS, THE ASSESSEE ALSO MADE INVESTMENT IN QUOTED SHARES TO A TUNE OF RS.1,68,50,16,186/- AND EARNED DIVIDEND INCOME OF RS.2,33,03,212/-. THEY HAVE FILED THEIR RETURN OF INCOME FOR THE AY 2009-10 ON 30.09.2009 DECLARING A TOTAL INCOME O F RS.6,43,63,397/- AND DURING THE SCRUTINY PROCEEDING S, IN VIEW OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH THE ASSOCIATED ENTERPRISES, AO REFERRED THE DETERMI NATION OF THE ARMS LENGTH PRICE (FOR SHORT REFERRED TO AS ALP) OF THE INTERNATIONAL TRANSACTION TO THE TPO. TPO VIDE ORD ER DATED 30.01.2013 DETERMINED THE ALP OF THE INTEREST TRANS ACTION WITH THE AES AT RS.87,23,089/- BY TAKING THE ALP OF THE INTEREST AT 16%, BASING ON THE SBI PLR FOR THE FY 2008-09 AT 12 .75% PLUS 350 BASIC POINTS. PURSUANT TO THE DRAFT ASSESSMENT ORDER ITA NO. 1589/DEL/2014 3 ASSESSEE CARRIED THE MATTER TO THE LD. DRP AND LD. DRP VIDE ORDER DATED 19.12.2013 APPROVED THE ACTION OF THE A SSESSING OFFICER (FOR SHORT AO) IN REJECTING THE RATE OF I NTEREST AT 6% OFFERED BY THE ASSESSEE IN RESPECT OF HOUSE OF PEARL FASHIO NS LIMITED, USA AND LEVYING DEEMED INTEREST OF MULTINATION TEX TILE GROUP LIMITED, MAURITIUS, AND DIRECTED THE AO TO DETERMIN E THE ALP BY CHARGING THE SBI BASE RATE AS ON 30 TH JUNE OF THE RELEVANT PREVIOUS YEAR PLUS 150 BASIC POINTS. HOWEVER, LD. AO PROCEEDED WITH THE MATTER AND BY WAY OF IMPUGNED ORDER MADE A N ADDITION OF RS. 87,23,089/- ON ACCOUNT OF THE ALP OF THE INT EREST COMPONENT AND RS. 26,87,332/- BY MAKING DISALLOWANC E U/S 14A OF THE INCOME TAX ACT, 1961 (FOR SHORT CALLED AS TH E ACT). HENCE, THE ASSESSEE IS BEFORE US IN THIS APPEAL. 3. IT IS THE ARGUMENT OF THE LD. AR THAT OUT OF TH E THREE AES WHO WERE EXTENDED LOANS, INTEREST AT 6% WAS OFFERED IN RESPECT OF NOR PEARL KNITWEAR LIMITED, BANGLADESH AND HOUSE OF PEARL FASHIONS LIMITED, USA, WHEREAS IN RESPECT OF THE MU LTINATION TEXTILE GROUP LIMITED, MAURITIUS LOAN WAS EXTENDED WITHOUT CHARGING ANY INTEREST BECAUSE THE SAID CONCERN IS T HE 100% SUBSIDIARY OF THE ASSESSEE AND WAS RUNNING INTO LOS SES, AS SUCH, OUT OF BUSINESS NEED OF THE ASSESSEE THEY EXTENDED THE HELP NOT IN ITA NO. 1589/DEL/2014 4 THE FORM OF CAPITAL, BECAUSE OF THE RISK OF RESOURC ES BEING STRUCK, BUT IN THE FORM OF LOAN SO THAT AS AND WHEN THE SUB SIDIARY COMES OUT OF FINANCIAL PROBLEMS THEY CAN RECOVER THE LOAN . ON THIS GROUND HE IS RESISTING THE DEEMED INTEREST IN RESPE CT OF MULTINATION TEXTILE GROUP LIMITED, MAURITIUS. 4. HIS FURTHER ARGUMENT IS THAT OUT OF THE TWO CONC ERNS NOR PEARL KNITWEAR LIMITED, BANGLADESH INTEREST AT THE RATE OF 6% PER ANNUM AND HOUSE OF PEARL FASHIONS LIMITED, USA @ IN TEREST RATE OF 6% PER ANNUM, TPO VIDE PARAGRAPH NO. 4.3 OF HIS ORDER ACCEPTED THE INTEREST DECLARED BY THE ASSESSEE AT 6 % IN RESPECT OF NOR PEARL KNITWEAR LIMITED, BANGLADESH STATING THAT THE AE OBTAINED LOAN FROM HSBC BANK AT BANGLADESH AT INTER EST RATE OF SIBOR + 3% P.A., WHEREAS THE SIBOR RATE FOR THE REL EVANT YEAR WAS 0.94% FOR 12 MONTHS. HOWEVER, HAVING ACCEPTED THIS IN CASE OF ONE CONCERN, TPO TOOK A PLEA THAT THE CURRENCY I N WHICH THE LOAN HAS ORIGINATED MUST BE CONSIDERED ALONG WITH T HE COUNTRY OF ORIGIN AND THE IMPORTANT CONSIDERATION WOULD BE THE INTEREST RATE EXPECTED BY THE LENDER WHICH WOULD BE THE INTEREST RATE, WHICH INSOFAR AS INDIA IS CONCERNED WOULD BE EITHER SBI P LR OR THE RATES OFFERED BY THE MUTUAL FUNDS ETC. ON THIS PREMISE H E TOOK THE ALP OF THE INTEREST AT 16% AND IN THAT PROCESS THE AO I GNORED THE ITA NO. 1589/DEL/2014 5 DIRECTION GIVEN BY THE DRP TO CONSIDER THE SBI RATE AS ON 30 TH JUNE OF THE RELEVANT PREVIOUS YEAR WHICH WAS ABOUT 8% AND INCLUDING THE 150 BASIC POINT THE RATE OF INTEREST WORKS OUT TO 9.50 AS AGAINST THE 16% CHARGED BY THE TPO. LD. AR SUBMITTED THAT WHEN THE FOREIGN AES COULD GET LOANS IN THEIR COUNTRIES, WHERE THE INTEREST CHARGED IS FAR LESS THAN 6%, IT IS TOTALLY UNJUSTIFIED ON THE PART OF THE AUTHORITIES BELOW NO T TO ACCEPT 6% OFFERED BY THE ASSESSEE. LD. DR VEHEMENTLY RELIED UPON THE ORDERS OF THE AUTHORITIES OF THE ASSESSING OFFICER. 5. WE HAVE CAREFULLY GONE THROUGH THE FACTS IN THE LIGHT OF THE CONTENTIONS RAISED ON EITHER SIDE. INSOFAR AS THE CONTENTIONS OF THE ASSESSEE ABOUT NON-CHARGEABILITY OF INTEREST IN RESPECT OF MULTINATION TEXTILE GROUP LIMITED, MAURITIUS IS CON CERNED, THE CONTENTION OF THE ASSESSEE IS THAT SUCH AE WAS RUNN ING INTO LOSSES, THEREBY NECESSITATED THE ASSESSEE IN THE CA PACITY OF A PARENT TO PUMP FUNDS, BUT IN VIEW OF THE LEGAL DIFF ICULTIES, INSTEAD OF EQUITY, FUNDS ARE GIVEN IN THE FORM OF LOAN SO T HAT IN FUTURE THEY COULD BE RECOVERED EASILY. ON THIS ASPECT LD. CIT (A) OBSERVED THAT THE PLEA TAKEN BY THE ASSESSEE BEFORE HIM WAS THAT IF THE INTEREST WOULD HAVE BEEN CHARGED THEN THE PR OFIT OF THE AE WOULD BE LESS AND AUTOMATICALLY THE DIVIDEND WHICH THE ASSESSEE HAD TO RECEIVE FROM THE AE WOULD ALSO BE LESS. ON A PERUSAL OF ITA NO. 1589/DEL/2014 6 THE FINANCIALS OF THE MULTINATION TEXTILE GROUP LIM ITED, LD. CIT (A) FOUND THAT THE CLAIM OF THE ASSESSEE WAS FACTUALLY INCORRECT, INASMUCH AS THE DIVIDEND PAYMENT FROM AE AT 10,20,0 00 USD IS MORE THAN THE PROFIT EARNED AT 9,78,780 USD MEANING THEREBY THAT THERE IS NO CORRELATION BETWEEN THE PROFIT AND THE AMOUNT OF DIVIDEND RECEIVED. FURTHER LD. TPO REJECTED THIS C ONTENTION OF THE ASSESSEE BY PLACING RELIANCE ON THE DECISIONS OF A COORDINATE BENCH OF THIS TRIBUNAL IN PEROT SYSTEMS TSI (INDIA) LTD. VS. DCIT (ITA NO. 2320, 2321, 2322/DEL/2008) AND VVF LTD. VS . DCIT (2010-TIOL-55-ITAT-MUM). LD. CIT (A) ALSO NOTED TH E DECISION OF MUMBAI TRIBUNAL IN TATA AUTOCOMP SYSTEMS LTD., MUMB AI VS. ACIT (ITA NO. 7354/MUM/2011 (AY 2007-08)). IN THES E DECISIONS THE CONTENTION OF THE ASSESSEE THAT THEY HAVE NOT E ARNED ANY INTEREST AND IT WAS COMMERCIALLY EXPEDITE TO EARN I NTEREST FREE LOANS WAS REJECTED HOLDING THAT INTERNATIONAL TRANSACTIONS CAN NOT BE EQUATED WITH ORDINARY BUSINESS TRANSACTIONS. IN PEROT SYSTEMS CASE (SUPRA) IT WAS HELD THAT, - THE QUESTION RELATES TO SCRUTINY OF INTERNATIONAL T RANSACTION TO DETERMINE WHETHER OR NOT THE SAME IT AS ARMS LENGT H. THE PRINCIPLE OF TRANSFER PRICING AIMS AT DETERMINING T HE PRICING IN THE SITUATIONS OF CROSS BORDER INTERNATIONAL TRANSACTIO NS, WHERE TWO ENTERPRISES WHICH ARE SUBJECT TO THE SAME CENTRE OR DIRECTION OR CONTROL (ASSOCIATED ENTERPRISE) MAINTAIN COMMERCIAL LY OR FINANCIALLY RELATIONS WITH OTHER. IN SUCH A SITUATION, THE POS SIBILITY EXISTS THAT BY WAY OF INTERVENTION FROM THE CENTRE OR OTHERWISE , BUSINESS CONDITIONS MUST BE ACCEPTED BY THE ACTING UNITS WHI CH DIFFERS FROM ITA NO. 1589/DEL/2014 7 THOSE WHICH IN THE SAME CIRCUMSTANCES WOULD HAVE AG REED UPON BETWEEN UN-RELATED PARTIES. THE AIM IS TO EXAMINE WHETHER THERE IS ANOMALY IN THE TRANSACTION WHICH ARISES OUT OF S PECIAL RELATIONSHIP BETWEEN THE CREDITOR AND THE DEBTOR. HENCE THE CONTENTION OF HAVING ACTUALLY NOT EARNED ANY INCOME CANNOT COME TO THE RESCUE OF THE ASSESSEE IN THIS SCENARIO. TH E CASE LAWS FROM THE APEX COURT CITED BY THE LD. COUNSEL OF THE ASSE SSEE ARE IN THE CONTEXT OF THE PROPOSITION THAT ONLY THE REAL INCOM E HAS TO BE TAXED AND INTEREST FREE ADVANCES CAN BE GIVEN BY COMPANIE S (DOMESTIC) TO THEIR SUBSIDIARIES ON THE GROUND OF COMMERCIAL E XPEDIENCY. BUT THESE DECISIONS ARE NOT IN THE CONTEXT OF CHAPTER-X OF THE IT ACT WHICH RELATES TO SPECIAL PROVISION RELATING TO COMP UTATION OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO AR MS LENGTH PRICE. OTHER CASE LAWS CITED BY THE ASSESSEE ARE NOT GERMA NE TO THE FACTS OF THIS CASE. HENCE IN OUR CONSIDERED OPINION THEY DO NOT HELP THE CASE OF THE ASSESSE. 6. THESE DECISIONS ARE APPLICABLE TO THE FACTS OF T HE CASE ON HAND AND HAVING REGARD TO THE FACTS AND CIRCUMSTANC ES OF THE CASE, WE DO NOT FIND ANY MERIT IN THE ARGUMENT THAT NO ALP INTEREST COULD BE ADDED ON ACCOUNT OF THE LOAN ADVA NCED TO MULTINATION TEXTILE GROUP LIMITED, MAURITIUS. 7. NOW COMING TO THE RATE OF INTEREST, ACCORDING TO THE ASSESSEE 6% OFFERED IN RESPECT OF HOUSE OF PEARL FASHIONS LI MITED, USA IS PROPER, WHEREAS IN RESPECT OF MULTINATION TEXTILE G ROUP LIMITED A NOMINAL INTEREST AT LIBOR PLUS 200 BASIC POINTS MAY BE CHARGED. HOWEVER, THE LD. AO CHARGED IT AT 16% REDUCED BY TH E LD. CIT (A) TO THE SBI BASE RATE AS ON 30 TH JUNE OF THE RELEVANT PREVIOUS YEAR PLUS 150 BASIC POINTS WHICH ACCORDING TO THE ASSESS EE COMES TO 9.5%. ON THIS ASPECT THE ORDER OF THE TPO AS NOTED EARLIER READS THAT INTEREST AT 6% P.A. WAS ACCEPTABLE IN CASE OF NOR PEARL ITA NO. 1589/DEL/2014 8 KNITWEAR LIMITED, BANGLADESH HOLDING THAT IN VIEW O F SUCH CONCERN OBTAINING LOAN AT INTEREST RATE OF SIBOR PL US 3% P.A. HOWEVER, WHEN THE MATTER CAME TO THE OTHER TWO CONC ERNS, HE HAD TAKEN A VIEW THAT THE ARMS LENGTH RATE OF INTE REST WOULD BE THE INTEREST RATE EXPECTED BY AN INDIAN LENDER EITH ER FROM BANK OR FROM ANY MUTUAL FUND ETC., AND ON THIS PREMISE HE H AD CHOSEN 16% TAKING CLUE FROM SBI PLR PLUS 350 POINTS. THER E IS AN INHERENT INCONSISTENCY IN THE VIEW TAKEN BY THE TPO BECAUSE, IF AT ALL THE ALP INTEREST IN SO FAR AS THE ASSESSEE IS C ONCERNED IS THE INTEREST RATE EXPECTED BY AN INDIAN LENDER, THEN IR RESPECTIVE OF THE FACT OF NOR PEARL KNITWEARD LIMITED, BANGLADESH OBT AINED LOAN AT BANGLADESH AT ANY RATE LESS THAN THIS EXPECTED RATE , HE SHOULD NOT HAVE ACCEPTED. THE TESTED PARTY IN THE CASE OF NOR PEARL KNITWEAR LIMITED, BANGLADESH AND IN THE CASE OF OTH ER TWO CONCERNS IS THE ASSESSEE ONLY. IN RESPECT OF THE S AME TESTED PARTY THE TPO CANNOT ADOPT TWO DIFFERENT YARDSTICKS. SHI FTING OF THE TESTING PARTIES IN THE SAME BREATH IS NOT PERMISSIB LE. WE, THEREFORE, IN THIS SET OF CIRCUMSTANCES AGREE WITH THE LD. AR THAT SINCE LOANS OR ADVANCES IN CASE OF THE TWO OTHER CO NCERNS ALSO IN FOREIGN CURRENCY, AND ALL THE THREE PERSONS STAND I N THE SAME FOOTING, AS SUCH, THE SAME TREATMENT HAS TO BE GIVE N TO THEM EQUALLY. WITH THIS VIEW OF THE MATTER, WE DIRECT T HE AO TO RE- ITA NO. 1589/DEL/2014 9 COMPUTE THE ALP OF THE INTEREST AT 6% IN RESPECT OF HOUSE OF PEARL FASHIONS LIMITED, USA AND MULTINATION TEXTILE GROUP LIMITED, MARITIUS ALSO. THESE GROUNDS OF APPEAL ARE ALLOWED IN PART ACCORDINGLY. 7. NOW COMING TO THE ADDITION MADE BY MAKING DISALL OWANCE U/S 14A READ WITH RULE 8D IS CONCERNED, THE ARGUMEN T OF THE LD. AR IS THAT THE AO DID NOT REACH ANY SATISFACTION AS TO THE SUFFICIENCY OR OTHERWISE OF THE SUO MOTO DISALLOWANCE MADE BY THE ASSESSEE, AS SUCH, FOR WANT OF RECORD OF REASONS TH E ADDITION IS BAD. HERE IN THIS MATTER, THE ASSESSMENT ORDER SPE AKS THAT ON LOOKING AT THE DIVIDEND EARNED AND THE DISALLOWANCE MADE WITHOUT VERIFYING ANY BOOKS OF ACCOUNTS OF THE ASSE SSEE TO FIND OUT WHETHER THERE IS ANY NEXUS BETWEEN THE DISALLOW ANCE MADE BY THE ASSESSEE AND THE EXPENDITURE ACTUALLY SPENT FOR EARNING THE EXEMPT INCOME, AO PROCEEDED TO APPLY RULE 8D OF THE RULES BY ISSUING A NOTICE TO THE ASSESSEE. LD. AR PLACED RE LIANCE ON THE DECISION REPORTED IN HT MEDIA LIMITED VS. PCIT 2017 -TIOL-1643- HC-DEL-IT AND A HOST OF DECISIONS, TO SAY THAT ANY APPLICATION OF SECTION 14A READ WITH RULE 8D OF THE RULES, WITHOUT FIRST AO RECORDING HIS SATISFACTION THAT THE DISALLOWANCE MA DE BY THE ASSESSEE IS INCORRECT WITH REFERENCE TO THE BOOKS O F ACCOUNT OF THE ITA NO. 1589/DEL/2014 10 ASSESSEE, ANY ADDITION IS BAD UNDER LAW. IN VIEW O F THIS ESTABLISH PRINCIPLE OF LAW LAID DOWN BY THE HONBLE JURISDICT IONAL HIGH COURT IN A NUMBER OF CASES INCLUDING HT MEDIA (SUPR A) AND ALSO THE DECISION OF THE HONBLE APEX COURT IN GODREJ & BOYCE MANUFACTURING COMPANY LIMITED VS. DCIT (2017) 394 I TR 449 (SC), WE FIND THAT THE ENHANCEMENT OF THE DISALLOWA NCE MADE BY THE AO BY INVOKING SECTION 14A READ WITH RULE 8D OF THE RULES IS BAD AND CANNOT BE SUSTAINED. WE, THEREFORE, DIRECT THE AO TO DELETE THE SAME. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON 08.11.2017 SD/- SD/- (N.K. SAINI) (K. NARSIMHA CHARY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 08.11.2017 *KAVITA ARORA COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT TRUE COPY ASSISTANT REGISTRAR ITAT NEW DELHI ITA NO. 1589/DEL/2014 11