ITO 13(3)(4), MUMBAI V. TOPSGROUP ELECTRONIC SYSTEMS LTD, MUMBAI

ITA 205/MUM/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 3898 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 10-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DEBASHISH CHANDA
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Notional interest
• Section: 143(3); 205

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH J MUMBAI BEFORE SHRI SAKTIJIT DEY (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 205 /MUM/201 7 ASSESSMENT YEAR: 2011 - 12 ITO - 13(3)(4), R. NO. 216B, AAYAKAR BHAVAN, MUMBAI. VS. M/S TOPSGROUP ELECTRONIC SYSTEMS LTD. 5, ROYAL PALMS & GOLF & COUNTRY CLUB, SURVEY NO. 169, AAREY MILK ROAD, GOREGAON EAST, MUMBAI - 400065. PAN NO. AAACT3291K APPELLANT RESPONDENT REVENUE BY : MR. DEBASHISH CHAN DA , DR ASSESSEE BY : MR. RUSHABH MEHTA , AR DATE OF HEARING : 28/01 /201 9 DATE OF PRONOUNCEMENT: 31/01/2019 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE REVENUE . THE RELEVANT ASSESSMENT YEAR IS 2011 - 1 2 . THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - 58, MUMBAI [IN SHORT CIT(A)] AND ARISES OUT OF THE ASSESSMENT COMPLETED U/S 143(3) R.W.S. 144C OF THE INCOME TAX ACT 1961, (THE ACT). 2. THE GROUNDS OF APPEAL FILED BY THE REVENUE READ AS UNDER: 1. WHETHER ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) IS RIGHT IN DELETING THE ADDITION ON ACCOUNT OF NATIONAL INTEREST AMOUNT ING TO M/S TOPSGROUP ELECTRONIC ITA NO. 205/MUM/2017 2 RS.18, 62, 62, 539 / - IGNORING THE FACT THAT THE SAME IS THE OPPORTUNITY COST OF THE EXCESS MONEY INVESTED AND HENCE, IS THE AMOUNT THAT WOULD HAVE BEEN RECOVERED IN AN UNCONTROLLED TRANSACTION. 2. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE G ROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 3. BRIEFLY STATED, THE ASSESSEE - COMPANY, THE WHOLLY OWNED SUBSIDIARY OF THE TOPS SECURITIES LTD. (TSL) IS ENGAGED IN THE BUSINESS OF PROVIDING SECURITY SERVICES. FOR THE ASSESSMENT YEAR (A Y) 2011 - 12, THE ASSESSEE FILED ITS RETURN OF INCOME ON 25.09.2012 DECLARING TOTAL INCOME OF RS.19,64,460/ - . THE ASSESSING OFFICER (AO) MADE A REFERENCE U/S 92CA OF THE A CT TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) O F THE REPORTED INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (AE), AFTER OBTAINING THE APPROVAL OF THE COMMISSIONER OF INCOME TAX - 8, MUMBAI. THE TPO PASSED AN ORDER U/S 92CA OF THE ACT DATED 19.01.2015 PROPOSING AN ADJUSTMENT OF RS.18,93,42,665/ - TOWARDS ALP OF THE INTERNATIONAL TRANSACTIONS, THE ASSESSEE HAD ENTERED INTO WITH ITS AES IN THE RELEVANT PERIOD WHICH INCLUDES INTER ALIA NOTIONAL INTEREST OF RS.18,62,62,539/ - WHICH IS IN DISPUTE BEFORE US. THE TPO HELD T HAT SINCE THE LOAN HAD BEEN CONVERTED INTO FOREIGN CURRENCY FROM INDIAN RUPEE BEFORE ADVANCING THE LOANS, DOMESTIC INTEREST RATES ARE TO BE ADOPTED FOR BENCHMARKING THE RATE OF INTEREST REQUIRED TO BE CHARGED FROM THE AE. THE TPO HAD ALSO OBSERVED THAT THE LOANS WERE UNSECURED AND THE INTEREST HAD NOT BEEN CHARGED BASED ON THE CREDIT CAPABILITIES OF THE AE. THEREFORE, THE TPO PROCEEDED TO LEVY AN ADDITIONAL MARK UP OF 2% ON THE RATE OF INTEREST PAID BY THE ASSESSEE TO ITS HOLDING COMPANY. THE AO, M/S TOPSGROUP ELECTRONIC ITA NO. 205/MUM/2017 3 FOLLOWING THE ORDER OF THE TPO , COMPLETED THE ASSESSMENT U/S 143(3) R.W.S. 144C DATED 26.03.2015 BY MAKING AN ADDITION OF RS.18,93,42,665/ - . 4. IN APPEAL, THE LD. CIT(A) VIDE ORDER DATED 22.09.2016 OBSERVED THAT THE ASSESSEE HAD ADVANCED CERTAIN LOANS TO ITS AE AND BENCHMARKED THE RATE OF INTEREST TO BE CHARGED FROM THE AE @ 13%, AS IT HAD SOURCED THESE LOANS FROM ITS HOLDING COMPANY AT THIS RATE OF INTEREST AND THE AO, FOLLOWING THE ORDER OF THE TPO MADE AN ADDITION OF RS.18,62,62,539/ - . THE LD. CIT(A), CONSIDERING THE FACT THAT THERE IS NO SIGNIFICANT REDUCTION IN LIBOR OVER THE YEARS, HELD THAT THE INTEREST RATE CHARGED BY THE ASSESSEE FROM ITS AE IS AT ARMS LENGTH AND NO FURTHER ADJUSTMENT IS REQUIRED TO BE MADE TO THIS RATE AND THUS ALLOWED THE APPEAL FILED BY THE ASSESSEE. 5. BEFORE US, THE LD. DR RELIES ON THE ORDER OF THE AO. ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSESSEE RELIES ON THE ORDER OF THE ITAT K BENCH MUMBAI IN ASSESSEES OWN CASE FOR THE AY 2009 - 10 AND THUS SUPPORTS THE ORDER PASSED BY THE L D. CIT(A). 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. WE FIND THAT THE SAME ISSUE AROSE BEFORE THE CO - ORDINATE BENCH IN ASSESSEES OWN CASE FOR AY 2009 - 10 IN ITA NO. 2115/MUM/2015. THE TRIBUNAL VIDE ORDER DATED 19.02.2016 HELD AS UNDER: 9.1.1 IN VIEW OF OUR FINDING THAT THERE IS NO INCOME/POTENTIAL INCOME ARISING TO THE ASSESSEE OUT OF THE IMPUGNED INTERNATIONAL TRANSACTION OF INVESTMENT IN ACQUIRING SHARES IN ITS SUBSIDIARY TOPS BV, NETHERLANDS, T HE SAME WOULD M/S TOPSGROUP ELECTRONIC ITA NO. 205/MUM/2017 4 NOT FALL WITHIN THE PURVIEW OF INDIAN TRANSFER PRICING PROVISIONS. IN COMING TO THIS VIEW WE DREW SUPPORT FROM THE RATIO LAID DOWN IN THE FOLLOWING JUDICIAL PRONOUNCEMENTS : - (I) VODAFONE INDIA SERVICES PVT. LTD. (368 ITR 1(BOM)(VODAFONE IV) , WHEREIN AT PARA 42 IT IS MENTIONED THAT THE RATIO APPLIES EQUALLY TO INBOUND AND OUTBOUND CAPITAL TRANSACTIONS; (II) SHELL INDIA MARKETS PVT. LTD. (269 ITR 516)(BOM) (III) EQUINOX BUSINESS PARKS PVT. LTD. [230 TAXMAN 191(BOM)] (IV) VIJAY ELECTRICALS L TD., [60 SOT (HYD)] (V) HILL COUNTRY PRODUCTS LTD. [48 TAXMAN.COM 94 (HYD)] 9.1.2 IN THE ABSENCE OF PROVISIONS/RULES FOR RE - CHARACTERIZATION OF INVESTMENT IN SHARE CAPITAL INTO LOAN AND VICE - VERSA, WE ARE OF THE CONSIDERED VIEW THAT THE RE - CHARACTERIZATI ON OF THE IMPUGNED CAPITAL TRANSACTION INTO A LOAN AS SOUGHT FOR BY THE TRANSFER PRICING OFFICER/CIT(A) IS NOT TENABLE IN LAW IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF BESIX KIER DABHOL SA(SUPRA), WHICH WAS FOLLOWED BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF AEGIS LTD.,(SUPRA) TO WHICH ONE OF US IS PARTY. 9.1.3 IN THE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE AS DISCUSSED ABOVE, WE DELETE (I) THE ADDITION OF RS.124,17,50,258/ - MADE BY THE TRANSFER PRICING OFFICER/CIT(A) ON ACCOUNT FO ALLEGED EXCESS CONSIDERATION PAID AND (II) ADDITION OF RS.18,62,62,539/ - ON ACCOUNT OF NOTIONAL INTEREST COMPUTED @15% ON THE AFORESAID SUM OF RS.124,17,50,258/ - SOUGHT TO BE RE - CHARACTERIZED AS A LOAN. IN THIS VIEW OF THE MATT ER, THE ALTERNATE PLEA OF THE ASSESSEE TO RECONSIDER THE LIBOR RATE FOR THE PURPOSE OF COMPUTING THE ADDITION ON ACCOUNT OF NOTIONAL INTEREST BECOMES ACADEMIC. M/S TOPSGROUP ELECTRONIC ITA NO. 205/MUM/2017 5 6.1 FACTS BEING IDENTICAL, WE FOLLOW THE ABOVE ORDER OF THE CO - ORDINATE BENCH AND UPHOLD THE OR DER OF THE LD. CIT(A). 7. IN THE RESULT, THE APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31/01/2019. SD/ - SD/ - ( SAKTIJIT DEY ) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED: 31/01/2019 RAHUL SHARMA, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// ( SR. PRIVATE SECRETARY ) ITAT, MUMBAI