Appeal details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 134536 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 6 month(s) 24 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
13-06-2023
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
D
Next Hearing Date
27-03-2023
Assessment Year
2006-2007
Appeal Filed On
19-11-2019
Judgement Text
आयकर अपीलीय अिधकरण, अहमदाबाद ᭠यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, ‘’ D’’ BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER And SHRI T.R SRNTHIL KUMAR, JUDICIAL MEMBER आयकर अपील सं./ITA Nos. 1738 to 1740/AHD/2019 िनधाᭅरण वषᭅ/Asstt. Years: (2006 to 2007 & 2008-2009) Rubamim Limited, 4 th Floor, ARK, Gorwa, 1 Krishna Industrial Estate, Vadodara-390016. PAN: AAACR8758H Vs. D.C.I.T, Central Circle-2, Vadodara. (Applicant) (Respondent) Assessee by : Shri Milin Mehta & Shri Bhavin Marfatia, A.Rs Revenue by : Shri Samir Sharmar, CIT. D.R with Shri Atul Pandey, Sr.D.R सुनवाई कᳱ तारीख/Date of Hearing : 28/03/2023 घोषणा कᳱ तारीख /Date of Pronouncement: 14/06/2023 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned three appeals have been filed at the instance of the Assessee against the common order of Learned Commissioner of Income Tax(Appeals)-12, Ahmedabad, dated 20/09/2019 arising in the matter of assessment order passed under s. 143(3)of the Income Tax Act, 1961 (here-in- ITA nos.1738 to 1740/AHD/2019 A.Ys. 2006-07 & 2008-09 2 after referred to as "the Act") relevant to the Assessment Years 2006-2007 to 2008-09. First, we take ITA up No. 1738/AHD/2019, an appeal by the assessee for the AY 2006-07 being lead year. 2. The assessee raised following grounds of appeal: 1. The learned Commissioner of Income Tax (Appeals) -12, Ahmedabad ["CIT(A)"] erred in fact and in law confirming the action of the Ld. Deputy Commissioner of Income-Tax (Transfer Pricing Officer-2), Ahmedabad ("the TPO") and the Deputy Commissioner of Income Tax, Central Circle-2, Vadodara ["the AO"] in making an upward adjustment of Rs. 28,33,393/- u/s. 92CA of the Income Tax Act, 1961 ("the Act"). 2. The learned CIT(A) erred in fact and in law confirming the action of the Id. TPO and the Id. AO in making adjustment of Rs. 28,33,393/- in determining Arm's Length Price ("ALP") of International Transactions in respect of loan advanced by the Appellant to its Associated Enterprise ("the AE"). 3.The learned CIT(A) erred in fact and in law confirming the action of the Ld. TPO and the Ld. AO in applying Comparable Uncontrolled Price ("CUP") method without rejecting Transaction Net Margin Method ("TNMM") selected by the Appellant as most appropriate method as per the provisions of section 92C of the Act read with Rule-10C of the Income Tax Rules, 1962 ("the Rules"). 4. The learned CIT(A) erred in fact and in law confirming the action of the Ld. TPO and the Ld. AO in applying the Arm's Length Principal on segregated transactions. 5.The learned CIT(A) erred in fact and in law confirming the action of the Ld. TPO and theLd. AO in determining ALP of interest on advance of loan applying the CUP method and considering LIBOR +2% as comparable rate. 6. The learned CIT(A) erred in fact and in law in confirming the action of Id. TPO and the ld. AO in applying CUP method and making adjustment of Rs. 28,33,393/- in determining ALP without providing appropriate adjustments in accordance with Rule 10B(1) of the Rules and thereby the making an adjustment which is bad in law and void. 7. The learned CIT(A) erred in fact and law in confirming the action of TPO and the AO in making adjustment of Rs. 28,33,393/- in determining ALP without considering the factors affecting comparability as per Rule 10B(2) and without considering Rule 10B(3) of the Rules and consequently not allowing appropriate adjustments in computing the ALP of the international transaction. 8. The learned CIT(A) erred in fact and in law confirming the action of the Ld. TPO and the Ld. AO in adopting an inconsistent approach in considering the comparable rate of interest for the same interest free loan advanced to the AE. ITA nos.1738 to 1740/AHD/2019 A.Ys. 2006-07 & 2008-09 3 9. The learned CIT(A) erred in fact and in law confirming the action of the Ld. TPO and the Ld. AO in not allowing the variation of 5% in calculating ALP for international transaction in respect of loan advanced as required u/s. 92C of the Act. Other Grounds: 10. The learned CIT(A) erred in fact and in law confirming the action of the Ld. AO in charging interest u/s. 234A of the Act. 11. The learned CIT(A) erred in fact and in law confirming the action of the Ld. AO in charging interest u/s. 234B of the Act. 12. The learned CIT(A) erred in fact and in law confirming the action of the Ld. AO in charging interest u/s. 234C of the Act. 13. The learned CIT(A) erred in fact and in law confirming the action of the Ld. AO in charging interest u/s. 234D of the Act. 14. The learned CIT(A) erred in fact and in law confirming the action of the Ld. AO in initiating penalty proceedings u/s, 271(1)(c) of the Act. 15. Your Appellant craves the right to add to or alter, amend, substitute, delete or modify all or any of the above grounds of appeal. 3. The only effective issue raised by the assessee is that the learned CIT(A) erred in confirming the upward adjustment in TP on account of interest free loan to AE for Rs. 28,33,393/- 4. Necessary facts are that the assessee company is engaged in the business of manufacturing of wide range of Cobalt, Nickel and Copper. The assessee is acquiring raw material of Cobalt from Democratic Republic of Congo (DRC). For the purpose of seamless supply of raw material, it has set up wholly owned subsidiary first in UAE Sharjah namely Rubamin FZE (here after RFZE) and indirect subsidiary in DRC i.e. subsidiary company of RFZC namely Rubamin SPRL and Rubaco SPRL. 4.1 The assessee has provided interest free loans & Advances to its AE RFZE for Rs. 14,08,51,672/- which was treated as international transaction by the TPO in the original assessment proceeding under section 143(3) r.w.s. section 92C of the Act and accordingly worked the arm length of interest at Rs. 28,33,393/- only. ITA nos.1738 to 1740/AHD/2019 A.Ys. 2006-07 & 2008-09 4 The issue reached to this Tribunal in ITA No. 664 & 665/Ahd/2012. The Hon’ble bench vide order dated 17 th February 2017 set aside the issue to file of the AO/TPO for de-novo adjudication. 4.2 The assessee in the set aside proceeding submitted that the loan transaction is in the nature of commercial expediency i.e. to help the operation of subsidiary so that the subsidiary would be able to make proper and assured supply of raw materials. Due to the impugned loan & advances, it has made arrangement of supply of raw material at lower price which is more beneficial than interest. The assessee also submitted for the purpose of providing interest free loans & advances to AE, it has taken specific approval from RBI. Therefore, no arm length price adjustment should be made applicable on the transaction of loans & advances to its AE. 4.3 The assessee further submitted that it has carried out various transactions with AE which are import of raw material, supply of consumables and capital goods, recovery of expenditure etc. As such the cost of loan transaction and the interest cost in such transaction/ purchases has already been inbuilt. Accordingly, the interest cost cannot be benchmarked independently, rather it should be aggregated with the purchases and other transactions carried out with the AE. It is because all the transactions are interlinked. Thus, in such a situation the TNMM method can be adopted for the purpose of benchmarking to work out the ALP. Thus, no adjustment is required to be made. 4.4 The assessee further contended that under the CUP method to determine the ALP, the adequate comparable are required which are not available in the market for this kind of transactions. Likewise, the bank rate cannot be taken as comparable for the reason that the banks operate under different facts and circumstances which cannot be compared with the activities of the assessee. ITA nos.1738 to 1740/AHD/2019 A.Ys. 2006-07 & 2008-09 5 4.5 However, the AO/TPO rejected the contention of the assessee and worked the arm length of interest at Rs. 28,33,393/- by observing as under: 10. Additionally, the Assessee has contended that it has used TNMM method for bench marking interest free loan given to its AR. However, it is clear that under the applicable transfer pricing regulations, under the TNMM method, the operating profit of the rested party has to be computed and while computing operating profit only operating costs and operating revenue are to be considered. Further, by definition operating costs and operating revenue does not include interest income expense unless Assessee’s principal business is of giving loans. 11. In the instant case, as submitted by Assessee its principal business is manufacturing of wide range of Cobalt, Nickel and Copper and not in giving loans. Hence, as interest income expenses would not form part of operating profit. Thus, TNMM method used to benchmark rate of interest on loan given to AE is without any basis. Further, Assessee has not submitted any evidence to substantiated that by not charging interest on loan given to AE. It was able to extract a better price for its supplies. 12. Accordingly, the action of the Assessee in not charging interest on loan given to its AE located in UAE is not in accordance with Transfer pricing provisions. Hence, based on the Libor plus rate taken while passing original transfer pricing order for AY 2006-07 in respect of interest free loan advanced to AE, and upward adjustment of Rs.28,33,393 is made to the total income of the Assessee for A.Y 2006-07. (Upward adjustment of Rs.28,33,393/-) 5. Aggrieved assessee preferred an appeal before the learned CIT(A) who confirmed the upward adjustment made by the AO/TPO by observing as under: 6.5 For A.Y. 2006-07 the primary contention raised by the appellant is that it was commercially expedient for it to advance interest free loan to its AE and since the appellant determined the ALP by TNMM, the ALP of interest free advance given to the subsidiary (AE) cannot be determined by applying CUP method as was done by the TPO. The Ld. CIT(A) held that the applicability of the transfer pricing provisions for determining ALP of interest free advances by an Indian company to its foreign AE has been dealt in detail in the decision of ITAT, Delhi in case of Perot Systems TSI (India) Ltd. reported in 37 SOT 358. In this case also the issue was commercial expediency to advance interest free loan to the 100% subsidiary AE and no interest was actually charged. It was held by the Hon'ble ITAT, Delhi that.... even if one was to accept that the said argument, there was no case for providing or charging any interest, if the assessee was coming to the rescue of the AES. There was no feature in the agreement to accept the contention of the assessee that loan was quasi capital. It was also not the case that there was any technical problem that loan could not have been contributed as capital originally if it was actually meant to be capital contribution. If the assessee's contention, that whenever interest free loan was granted to AEs, there should not be any adjustment was accepted, it would tantamount to taking out such transactions from the realm of section 92(1) and 92B. [Para 11]. From the provisions of section 92B it is clear that lending or borrowing money between two AEs comes within the ambit of international transactions and whether the same is at ALP has to be considered. The question of rate of interest on the borrowing loan is an integral part of ALP determination of this context. Thus clearly the assessee's contention sought to add text to the clear legal position as embodied in the statutes. Such an interpretation is not ITA nos.1738 to 1740/AHD/2019 A.Ys. 2006-07 & 2008-09 6 permissible, and when an interest free loan is given to the AEs, income or account of interest cannot be attributed from point of view of arms length consideration". [Para12]. This decision was also relied upon by ITAT, Delhi in the case of Aithent Technologies Pvt. Ltd. in ITA No.3647/Delhi/2007 dated 09/12/2011 wherein the question as to whether TNMM or CUP method should be adopted for the purpose of making TP studies in cases where assessee had advanced interest free loan to its AE was also involved. In this case the Hon'ble ITAT held that "in line with the reasoning in the aforesaid decision in Perot Systems TSI (India) Ltd. (supra), we are of the opinion that CUP method is the most appropriate method in order to ascertain ALP of the aforesaid international transaction by taking into account prices at which similar transaction with other unrelated parties. For that purpose assessment of the credit quality of the borrower and estimation of the credit rating, evaluation of terms of loan e.g. period of loan, the amount, the currency, interest rate basis, and any additional input such as convertibility and finally estimation of arms length terms for the loan based upon the key comparability factors and internal and/or external comparable transactions are relevant......... whether the funds are advance out of interest bearing funds or interest free advances or are commercially expedient for the assessee or not, is wholly irrelevant in the context............. Since in the instant case neither the assessee nor the TPO/ AO and the Ld. CIT(A) has examined the applicability of the CUP method as the most appropriate method in order to determined ALP or international transaction of interest free foreign currency loan to its subsidiary by the assessee, we considered it fair and appropriate to vacate the findings of the Ld. CIT(A) and restore the matter to the file of the AO for fresh adjudication with direction to re- compute the ALP of aforesaid international transaction in the light in our aforesaid observations, following CUP method, keeping in view various judicial pronouncement, including those refer to above and of course after allowing sufficient opportunity to the assessee. Since the onus is on the assessee to establish ALP of international transaction, the assessee shall also provide all necessary inputs for establishing ALP of the transaction in accordance with CUP method." 6.6 And accordingly the Ld. CIT(A) held that interest free advances made to AEs are subject matter of transfer pricing studies and the assessee is required to charge interest on such interest free loans and that the CUP method was the most appropriate method for the purpose of ALP. Accordingly the Ld. CIT(A) asked the appellant to file the rates of interest for the purpose. The Ld. CIT(A) noted that the TPO had charged LIBOR + 200 base points for such interest free advance and that the appellant had not provided any evidence to show that this rate was not appropriate. The said upward adjustment was accordingly upheld by the Ld. CIT(A). As to the ground of the appellant that the TPO should have allowed the variation of +/(-) 5% in calculating the ALP for international transaction in respect of loan advance as required u/s 92C, the Ld. CIT(A) rejected the same holding that the said variation of ALP is available only if the price is determined by taking arithmetical mean of more than one prices whereas in the case, the TPO has determined a single price of ALP. 6.7 In the above narrated background and for the purpose of ground related to upward adjustment of Rs.65,80,979/- the contentions of the appellant in its submission have been diligently considered. On careful reading of appellant's submissions and the background narrated before I do not find any basis to deviate from the decision of the Ld. CIT(A)-III, Baroda in the appellate order dated 23/01/2012 for A.Y. 2006-07 (in appeal No. CAB/(A)III-434/09-10) and in the appellate order dated 20/02/2013 for 2008-09 (in appeal No. CAB/III-229/2011-12). Accordingly the AO is directed to adopt LIBOR 0.75% rate for making adjustment on account of interest. The related grounds succeed partly. ITA nos.1738 to 1740/AHD/2019 A.Ys. 2006-07 & 2008-09 7 6. Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us. 7. The learned AR before us filed the written submissions vide letter dated 8 July 2022 wherein various contentions were raised against the finding of the lower authorities. Among all the contentions, one of the arguments of the assessee was that transaction of advancing the interest-free loan to the AE should not be in isolation rather such transaction should be aggregated with the other transactions carried out by the assessee with the foreign AE. As such, the assessee, by supplying the interest free loan to AE, was able to carry out other transactions without any hindrance and seamlessly. According to the learned AR, the transaction of interest free loan was inextricably linked with the main object of the assessee whereby the assessee was able to procure the raw materials from the AE. If such transaction is aggregated with the other transaction carried out by the assessee with the AE, no adjustment is required to be made. It is for the reason that other transactions were carried out and admitted by the revenue to be at the arm length price. 8. On the other hand, the learned DR before us vehemently supported the order of the authorities below. 9. We have heard the rival contentions of both the parties and perused the materials available on record. The dispute in the case on hand before us revolves whether the amount of interest free loans and advances provided to the associated enterprises should be subject to the adjustment under the transfer pricing provisions as provided under section 92C of the Act. The assessee in the case on hand has provided interest-free advances to its associated enterprises as discussed above. ITA nos.1738 to 1740/AHD/2019 A.Ys. 2006-07 & 2008-09 8 9.1 From the preceding discussion, we find that the assessee along with its associated enterprises has been carrying out transactions in wide range of Cobalt and Copper. As such, the assessee is importing cobalt from its AE and exporting consumables & capital goods to its AE and incurring expenses on behalf of the AE. The transaction carried out during the year with the AE stand as under: Transaction Name of the AE Amount Purchase of Cobalt concentrate Rubamin FZE UAE 18,30,09,720/- Export of spares and consumables Rubamin FZE UAE 58,20,092/- Reimbursement of various expenses Rubamin FZE UAE 1,02,38,122/- Reimbursement of various expenses Rubecco SPRL 3,89,184/- Interest free loan Rubamin FZE 14,08,51,672/- 9.2 On perusal of the transaction carried out by the assessee with its AE, it is revealed that there are different transactions, but all are interlinked. Once the activities of the assessee and its associated enterprises are so interrelated and interconnected then the transactions should be seen in aggregate for working out the ALP. In this regard we find Para 3.9 of OECD Transfer Pricing Guidelines which reiterates that though ideally the arm's length principles should be applied on a transaction-by-transaction basis, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. OECD provides a few illustrations to substantiate 'closely linked or continuous' test which are as detailed under: 1. Ongoing business relations such as a long-term supply contract 2. Right to use intangible property coupled with supply of components 3. Transactions in a range of closely-linked products: This includes business strategy to have a portfolio approach i.e. goods with low and high margins may be transacted together in order to offer a full range of products to customers (cars and spare parts, printers and cartridges etc.). 4. Routing of a transaction through another associated enterprise (AE). OECD ITA nos.1738 to 1740/AHD/2019 A.Ys. 2006-07 & 2008-09 9 TPG suggests that it may be more appropriate to consider the transaction (of which the routing is a part) in its entirety, rather than considering the individual parts of transaction on a separate basis. 9.3 We further find that the Para 3.13 of OECD Commentary also deals with the topic of Intentional set offs where it was mentioned that the Intentional set-offs generally occur between AEs in respect of controlled transactions wherein when one enterprise provides benefit to another enterprise within the group that is balanced to some degree by different benefits received from that enterprise in return. 9.4 This view is also considered in the judgment of Hon’ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India (P.) Ltd. vs. CIT reported in [2015] 55 taxmann.com 240 (Delhi) detailed as under: Bundled/Inter-Connected Transactions ■ Clubbing of closely linked transactions, which would include continuous transactions, may be permissible and not excluded. Aggregation of closely linked transactions or segregation by the assessee should be tested by the Assessing Officer/TPO on the benchmark and the exemplar; whether such aggregation/segregation by the assessee should be interfered in terms of the four clauses stipulated in section 92C(3), read with the rules. It would, among other aspects, refer to the method adopted and whether reliability and authenticity of the arm's length determination is affected or corrupted.[Para 82] 9.5 Now proceedings further, we find that the associated enterprise based in UAE purchasing cobalt concentrate for AE in DRC and supplying the assessee for its manufacturing activity. Thus, the question arises whether any adjustment is required under the transfer pricing provision on account of such interest erosion advances. The answer stands in negative because the assessee got such huge business from its associated enterprises, which would not have been possible until the assessee had not incorporated a company in UAE and DRC. In other words, the transaction for advancing the interest-free loans to the associated enterprises has to be seen in the context of the benefit received by it from such associated ITA nos.1738 to 1740/AHD/2019 A.Ys. 2006-07 & 2008-09 10 enterprises. As such the transaction of interest free loans/ advances viz a viz the benefit received by the assessee are intrinsic ably linked which has to be evaluated after aggregating both the transactions. The transaction of interest free advances cannot be viewed without considering the benefit derived by the assessee from the associated enterprises. On analyzing the notional interest added by the TPO under the transfer pricing adjustment with the benefit derived by the assessee, the interest cost appears to be negligible. The amount of interest cost stands at ₹ 28,33,393/- whereas the amount of gross import of material and export generated by the assessee is far more than the interest expenses after converting in India rupees. 9.6 In view of the above and after considering the facts in totality, we hold that no adjustment under the transfer pricing provisions is required to be made with respect to the interest free loans and advances by the assessee to its associated enterprises in the given facts and circumstances. Hence, the ground of appeal of the assessee is allowed. 10. The assessee, vide application dated 7 th January 2022 pleaded before us for the admission of the additional grounds of appeal which read as under: In addition to various grounds raised in appeal filed by the Appellant on 20-11-2019, your Appellant craves right to raise following ground, as additional grounds of appeal. This grounds of appeal like other grounds of appeal are without prejudice to the others and is independent of the other grounds of appeal. 1. The learned Deputy Commissioner of Income tax, Central Circle 2, Vadodara [the AO"] erred in fact and in law in passing order u/s 143(3) r.w.s. 254 which is barred by limitation and void-ab-initio. 2. The assessment order passed u/s 143(3) r.w.s. 254 is liable to be quashed. 3. The learned AO erred in fact and in law in passing the assessment order on 30.01.2019 despite the fact that the last date to pass the order was on 31.12.2018 and consequently assessment order passed u/s 143(3) r.w.s 254 is barred by limitation. 4. We request the Hon'ble Members to consider the above additional ground of appeal in addition to others while deciding the appeal. ITA nos.1738 to 1740/AHD/2019 A.Ys. 2006-07 & 2008-09 11 11. At the outset, we note that the learned AR for the assessee at the time of hearing before us submitted that he has been instructed by the assessee not to press the impugned additional ground of appeal. Hence the impugned additional ground of appeal of the assessee is hereby dismissed as not pressed. 11.1 In the result appeal of the assessee is hereby partly allowed. Coming to ITA No. 1739 & 1740 /AHD/2019 by the assessee for A.Y. 2007-08 and 2008-09. 12. At the outset, we note that the issues raised by the assessee in its grounds of appeal for the AY 2007-08 and 2008-09 are identical to the issue raised by the Revenue in ITA No. 1738/AHD/2019 for the assessment year 2006-07. Therefore, the findings given in ITA No. 1738/AHD/2019 shall also be applicable for the assessment years 2007-08 and 2008-09. The appeal of the assessee for the A.Y. 2006-07 has been decided by us vide paragraph No.9 of this order in favour of the assessee. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2006-07 shall also be applied for the assessment years 2007-08 and 2008-09. Hence, the ground of appeal filed by the assessee is hereby allowed. 13. Likewise, the assessee also in the captioned appeals filed additional grounds of appeal vide letter dated 7 th January 2022. However, the learned AR for the assessee submitted that he was instructed by the assessee not to press the issue raised through additional ground of appeal. Hence, the issues raised by the assessee through the additional grounds of appeal are dismissed as not pressed. 13.1 In the result, both the appeals of the assessee are partly allowed. ITA nos.1738 to 1740/AHD/2019 A.Ys. 2006-07 & 2008-09 12 14. In the combined result, all the three appeals of the assessee are partly allowed. Order pronounced in the Court on 14/06/2023 at Ahmedabad. Sd/- Sd/- (T.R SENTHIL KUMAR) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 14/06/2023 Manish
AI Insights
Rubamim Limited appealed against the orders of the Deputy Commissioner of Income Tax and the Transfer Pricing Officer, which had made upward adjustments to the assessee's income on account of interest-free loans provided to its associated enterprise (AE) in the UAE. The Tribunal examined whether these transactions should be viewed in isolation or in aggregation with other interrelated transactions. The Tribunal concluded that the transactions were interlinked and should be viewed in aggregate, leading to the decision that no transfer pricing adjustment was necessary. The Tribunal's decision was influenced by the OECD Transfer Pricing Guidelines and relevant judicial precedents, which support the aggregation of closely linked transactions for the purpose of determining the arm's length price (ALP).
