ITO Corporate Ward 1(4) , CHENNAI V. DSM Soft Pvt Ltd. , CHENNAI

ITA 1850/CHNY/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5619 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 31-07-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B SAGADEVAN IRS
• Assessee Lawyers: HEMALATHA K
• Keywords: Related party transaction; Commercial expediency; Reason to believe

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C (SMC) BENCH : CHENNAI . , ! [BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMB ER ] ./I.T.A. NO.1850/MDS/2017 / ASSESSMENT YEAR : 2011-2012. THE INCOME TAX OFFICER. CORPORATE WARD 1(4) CHENNAI 600 034 VS. M/S. DSM SOFT PVT. LTD, NEW NO.1, 15 TH CROSS STREET, SHASTRI NAGAR, ADYAR, CHENNAI 600 020. [PAN AAACD 3149A] ( '# / APPELLANT) ( $%'# /RESPONDENT) / APPELLANT BY : SHRI. B.SAGADEVAN, IRS, JCIT. /RESPONDENT BY : MS. HEMALATHA. K. C.A. /DATE OF HEARING : 14-12-2017 ! /DATE OF PRONOUNCEMENT : 19-12-2017 & / O R D E R IN THIS APPEAL FILED BY THE REVENUE , WHICH IS DIRECTED AGAINST AN ORDER DATED 29.05.2017 OF THE LD. COMMISSIONER O F INCOME TAX (APPEALS)-1, CHENNAI, IT IS AGGRIEVED THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) DELETED THE DISALLOWANCE U/S.3 6(1) (III) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). ITA NO.1850/MDS/2017. :- 2 -: 2. LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT INTE REST OF RS.46,44,877/- DISALLOWED BY THE LD. ASSESSING OFF ICER RELATED TO INTEREST FREE LOANS GIVEN BY THE ASSESSEE TO ITS S UBSIDIARIES AND ITS AFFILIATES. AS PER THE LD. DEPARTMENTAL REPRESENT ATIVE, ASSESSEE HAD PAID SUCH INTEREST TO ITS DIRECTORS AND CERTAIN OTH ER PARTIES FROM WHOM IT HAD RAISED LOANS. THUS, ACCORDING TO HIM, DISAL LOWANCE WAS RIGHTLY MADE. 3. PER CONTRA, LD. AUTHORISED REPRESENTATIVE STRONGLY SUPPORTING THE ORDERS OF THE AUTHORITIES BELOW SUBMITTED THAT IDENTICAL ISSUE HAD COME UP BEFORE THIS TRIBUNAL IN ASSESSEES OWN CAS E FOR ASSESSMENT YEAR 2010-2011 IN ITA NO.863/MDS/2016. AS PER THE LD. AUTHORISED REPRESENTATIVE, THE TRIBUNAL HAD IN ITS ORDER DATED 01.09.2016 FOLLOWED ITS OWN DECISIONS FOR ASSESSMENT YEARS 200 4-05, 2005-06, 2008-09 & 2009-2010 IN ITA NOS.11 & 12/MDS/2010, A ND ITA NOS.2059 & 2062/MDS/2015, DATED 11.06.2010 & 30.03 .2016 RESPECTIVELY, WERE ALSO SIMILAR ISSUE WAS CONSIDERE D. 4. I HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW. IT IS TRUE THAT A SSESSEE HAD GIVEN INTEREST FREE LOANS TO ITS SUBSIDIARIES /AFFILIATES AND ALSO MADE INVESTMENTS IN GROUP CONCERNS INCLUDING DSM GEO DAT A LTD ITA NO.1850/MDS/2017. :- 3 -: RS.5,29,14,596/-, DSB INFOSYSTEMS P LTD RS.2,10,44 ,032/- AND DCS BPO P LTD RS.69,15,597/-. LD. ASSESSING OFFICER HAD FOUND THAT ASSESSEE HAD PAID INTEREST OF RS.46,44,877/- ON LO ANS BORROWED FROM DIRECTORS/OTHERS. HE HAD APPLIED SEC.36(1) (III) O F THE ACT. LD. COMMISSIONER OF INCOME TAX (APPEALS) HAD FOLLOWED T HE ORDER THE CO- ORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2010-2011. IT IS ADMITTED POSITION THAT INTER EST FREE LOANS GIVEN BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR W ERE ALSO TO THE SAME VERY SUBSIDIARIES AND ITS AFFILIATES, AS I N THE EARLIER YEARS. THIS IS CLEAR FROM THE ORDER DATED 30.03.2016 FOR ASSESS MENT YEARS 2008-09 AND 2009-2010 IN ITA NOS.2059 & 2062/MDS/2015. PAR A 3 OF THE SAID DECISION IS REPRODUCED HEREUNDER:- 3.THE BRIEF FACTS OF THE CASE ARE THE ASSESSEE I S IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND EXPORT AND FIL ED RETURN OF INCOME FOR THE ASSESSMENT YEAR 2008-2009 ON 30.0 9.2008 DECLARING LOSS OF 57,15,918/- AND WAS PROCESSED U/S.143(1) OF THE ACT. SUBSEQUENTLY NOTICE U/S.148 WAS ISSUED FOR REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSMENT. IN COMPLIANCE TO NOTICE, THE LD. AUTHORISED REPRESENTA TIVE OF THE ASSESSEE APPEARED ON VARIOUS DATES AND FILED DETAIL S. THE ASSESSING OFFICER ON PERUSAL OF THE FINANCIAL STATE MENTS OF THE COMPANY FOUND THAT ASSESSEE BORROWED SECURED LOANS FROM BANKS AND UNSECURED LOANS FROM DIRECTORS AND OTHERS PAID VARYING INTEREST RATES. AS PER BALANCE SHEET THE AS SESSEE IS HAVING SECURED LOANS OF 15,73,90,542/- AND UNSECURED LOANS AND ASSESSEE ALSO PAYING INTEREST ON ABOVE LOANS AS PER PAGE 2 OF ASSESSING OFFICER ORDER AS UNDER:- ON BANK LOANS 1,46,15,759/- ON OTHER LOANS 27,88,064/- ITA NO.1850/MDS/2017. :- 4 -: AS PER THE INFORMATION, THE ASSESSEE HAS GIVEN INTE REST FREE LOANS TO SUBSIDIARIES AND ALSO INVESTED IN GROUP CO NCERNS AS UNDER:- DSM GEODATA LTD. 5,55,69,765/- (LOAN/ADVANCE) DSM INFOSYSTEMS P. LT 2,21,72,376/- (LOAN/ADVANCE) DCS BPO PVT. LTD 1,79,45,150/- (LOAN/ADVANCE) DCS BPO PVT. LTD 49,58,877/- (INVESTMENT) THE LD. AUTHORISED REPRESENTATIVE EXPLAINED THAT TH E ASSESSEE COMPANY MADE INVESTMENT IN SUBSIDIARY COMP ANY DSM GEODATA LTD SCOTLAND 2,52,85,072/-. ON PERUSAL OF THE TRANSACTION WITH RELATED PARTIES, THE ASSESSEE HAS NOT RECEIVED ANY INTEREST FROM ASSOCIATE COMPANIES. ON FURTHER VERIFICATION IT WAS FOUND THAT INTEREST OF 22,70,805/- WAS RECEIVED FROM SUBSIDIARY COMPANY FROM DCS GEODATA L TD WHICH HAS WORKED OUT TO 4.26% INTEREST RATE ON AMOUNT OUTSTANDING BALANCE AND INTEREST OF 1,59,252/- FROM D.S.M. INFOSYSTEMS P. LTD WORKED OUT 0.76% ON THE OUTSTAND ING BALANCE AND THERE WAS NO INCOME FROM OTHER GROUP C ONCERNS. THE ASSESSING OFFICER HAS MADE A COMPARISON THAT TH E ASSESSEE COMPANY IS PAYING INTEREST AT A HIGHER R ATE THAN THE INTEREST RECEIVED FROM ITS GROUP CONCERNS. SO W ITH THESE PARAMETERS OF APPLICATION OF LOAN FUNDS FROM GROUP CONCERNS AND ALSO NOT CHARGING INTEREST MADE IN SUBSIDIARY C ONCERNS. THE ASSESSING OFFICER ANALYZED BASED ON THE FINANCI AL STATEMENTS THAT THE ASSESSEE COMPANY HAS OBTAINED L OANS FROM BANK, DIRECTORS, SHAREHOLDERS AND OTHERS AND P AYING HIGHER RATE OF INTEREST WEREAS NO INTEREST INCOME WAS RECEIVED FROM SUBSIDIARIES EXCEPT CONCESSIONAL R ATE OF INTEREST RECEIPT FROM DSM GEODATA LTD AND DSM INFO SYSTEMS P. LTD AND ISSUED SHOW CAUSE NOTICE TO THE ASSESSE E COMPANY FOR PROPORTIONATE DISALLOWANCE OF INTEREST ON BORROWED FUNDS. IN RESPONSE TO SHOW CAUSE NOTICE, THE LD. AUTHORISED REPRESENTATIVE FILED DETAILED SUBMISSION S AND ALSO RELIED ON THE DECISION OF CO-ORDINATE BENCH TRIBUNA L IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2004-05 AND 2005-06 WERE THE TRIBUNAL HAS ACCEPTED THE CONTENTI ON THAT THE LOANS AND ADVANCE TO THE GROUP CONCERNS OR SUBS IDIARIES IS FOR COMMERCIAL EXPEDIENCY AND NO INTEREST DISALLOWA NCE IS WARRANTED ON SUCH INVESTMENTS IN SUBSIDIARIES. THE LD. ASSESSING OFFICER PERUSED THE TRIBUNAL ORDER AND FO UND THE DEPARTMENT HAS NOT ACCEPTED THE DECISION OF THE TRI BUNAL AND CONTESTING AT HIGHER FORUM IN HIGH COURT. THE LD. ASSESSING OFFICER HAS NOT RELIED ON THE DECISION AND CALCULAT ED PROPORTIONATE DISALLOWANCE OF INTEREST ON THE ADVAN CE MADE TO GROUP CONCERNS AND WORKED OUT THE CALCULATION OF IN TEREST COMPONENT IN IS ORDER AND DISALLOWED 58,87,623/-. AGGRIEVED ITA NO.1850/MDS/2017. :- 5 -: BY THE ORDER, THE ASSESSEE FILED AN APPEAL BEFORE T HE COMMISSIONER OF INCOME TAX (APPEALS). SINCE FACT SITUATION IS SIMILAR, I AM OF THE OPINIO N THAT LD. CIT(A) WAS JUSTIFIED IN RELYING ON THE DECISION OF CO-ORDINATE BENCH IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2010-2011 (ITA NO.863/ MDS/2016, DATED 01.09.2016) WHICH HAD FOLLOWED THE EARLIER TRIBUNAL ORDER FOR ASSESSMENT YEARS 2008-09 AND 2009-2010. THE DECISI ON OF THE TRIBUNAL IN ITA NOS.2059 & 2062/MDS/2015 (SUPRA) WH ICH APPEARS AT PARA 7 OF SUCH ORDER IS REPRODUCED HEREUNDER:- 7. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD AND JUDICIAL DECISIONS CITED. T HE LD. DEPARTMENTAL REPRESENTATIVE CONTESTED THE ISSUES THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS NOT CONSIDERED THE FACTS ON THE BORROWED CAPITAL AND INVESTMENT IN EQUITY OF SUBSIDIARY COMPANIES AND APPLIED THE DECISION OF APEX COURT AND ALSO TRIBUNAL DECISION WHICH HAS NOT ATTAINED FINALITY FOR EARLIER ASSESSMENT YEARS AS DEPARTMENT HAS CONTESTED THE ISSUE AT HIGHER FORUM. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT MER E PENDENCY OF APPEAL BEFORE THE HIGHER FORUM CANNOT BE A REASON TO TAKE A DIFFERENT VIEW. SO RESPECTFU LLY FOLLOWING THE DECISION IN ASSESSEES OWN IN ITA NOS.11 & 12/MDS/2010 AND ITA NOS.366 & 367/MDS/2010 UPHELD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) AND DISMISS THE GROUND OF THE REVENUE. ITA NO.1850/MDS/2017. :- 6 -: I AM OF THE OPINION THAT THE ISSUE AS ON DATE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE. I DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEAL S). 5. IN THE RESULT, APPEAL OF THE REVENUE STANDS DISMISS ED. ORDER PRONOUNCED ON TUESDAY, THE 19TH DAY OF DEC EMBER, 2017, AT CHENNAI. SD/- ( . ) (ABRAHAM P. GEORGE) / ACCOUNTANT MEMBER '# / CHENNAI $% / DATED: 19TH DECEMBER, 2017 KV %& '()( / COPY TO: 1 . / APPELLANT 3. *+, / CIT(A) 5. (-. / / DR 2. / RESPONDENT 4. * / CIT 6. .01 / GF