M/s. Siva Industries & Holdings Limited, CHENNAI V. ACIT, CHENNAI

ITA 2148/CHNY/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5095 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 10-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 22-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Source of fund; Deemed to accrue or arise in india; Wholly owned subsidiary; Revised return
• Section: 14A; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH A CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AN D SHRI GEORGE MATHAN, JUDICIAL MEMBER .. I.T.A. NO. 2148/MDS/2010 ASSESSMENT YEAR : 2006-07 M/S. SIVA INDUSTRIES & HOLDINGS LTD. (FORMERLY KLNOWN AS STERLING INFOTECH LTD.), NO. 327, ANNA SALAI, TEYNAMPET, CHENNAI-600 006. V. THE ASSISTANT COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE-VI(4), CHENNAI. (PAN: AAACS4460M) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SRIRAM SESHADRI RESPONDENT BY : SHRI SHAJI P. JACOB O R D E R PER GEORGE MATHAN, JUDICIAL MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3 ) READ WITH SECTION144C READ WITH SECTION 92CA(4) OF THE INCOME TAX ACT, 1961DAT ED 26-10-2010 FOR THE ASSESSMENT YEAR 2006-07. 2. SHRI SRIRAM SESHADRI, CA REPRESENTED ON BEHALF O F THE ASSESSEE AND SHRI SHAJI P. JACOB, LEARNED SR. DR REPRESENTED ON BEHAL F OF THE REVENUE. 3. IT WAS THE SUBMISSION BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THE ISSUES IN THE APPEAL ARE THREE-FOLD, THE FIRST ISSU E BEING AGAINST THE DISALLOWANCE I.T.A. NO.2148/MDS/2010 2 MADE BY THE ASSESSING OFFICER UNDER SECTION 14A OF THE ACT, THE SECOND BEING THE ACTION OF THE ASSESSING OFFICER IN BRINGING TO TAX THE ADDITION OF ` 45,23,817,53 SUGGESTED BY THE TPO ON ACCOUNT OF THE ADOPTION OF THE PRIME LENDING RATE IN RESPECT OF THE CHARGING OF INTEREST ON THE LOAN GIVEN BY THE ASSESSEE TO ITS SISTER CONCERN AS AGAINST THE LIBOR RATE AND THE THIRD ISSUE BEING AGAINST THE ACTION OF THE ASSESSING OFFICER IN NOT GRANTING THE TDS CREDIT AS CLAIMED BY THE ASSESSEE. 4. IN REGARD TO THE FIRST ISSUE BEING AGAINST THE A CTION OF THE ASSESSING OFFICER IN MAKING A DISALLOWANCE U/S. 14A IT WAS SU BMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT ORIGINALLY THE ASSES SEE HAD FILED ITS RETURN OF INCOME ON 27.11.2006 WHEREIN IT HAD MADE DISALLOWA NCE U/S. 14A. SUBSEQUENTLY ON THE BASIS OF EXPERT ADVICE THE ASSE SSEE HAD FILED A REVISED RETURN ON 18.3.2008 WHEREIN THE ASSESSEE HAD WITHDR AWN THE DISALLOWANCE MADE U/S 14A TO THE EXTENT OF ` 30,89,60,575/- IN THE ORIGINAL RETURN. IT WAS THE SUBMISSION THAT AS A CONSEQUENCE OF THE REVISED RET URN FILED WHEREIN THE REASON FOR THE FILING OF THE REVISED RETURN WAS SPECIFICAL LY MENTIONED. 5. THERE WAS A SURVEY ON THE PREMISES OF THE ASSESS EE ON 20.8.2009. IT WAS THE SUBMISSION THAT A DRAFT ASSESSMENT ORDER WAS IS SUED ON THE ASSESSEE ON 29.12.2009 WHICH WAS THE SUBJECT MATTER OF REFERENC E BEFORE THE DISPUTE RESOLUTION PANEL, CHENNAI. THE DISPUTE RESOLUTION PANEL, CHENNAI VIDE ITS ORDER DATED 28.9.2010 HAD APPROVED THE ADDITIONS PROPOSED BY THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER. CONSEQUENTLY, THE ASSE SSMENT ORDER IN THE I.T.A. NO.2148/MDS/2010 3 ASSESSEES CASE CAME TO BE PASSED ON 26.10.2010. I T WAS THE SUBMISSION THAT IN RESPECT OF THE DISALLOWANCE UNDER SECTION 14A THE A SSESSING OFFICER HAD MADE A DISALLOWANCE OF ` 33,86,85,626/-. THE LEARNED AUTHORIZED REPRESENTA TIVE SUBMITTED THAT THE DISALLOWANCE WAS OUT OF THE INTE REST PAID BY THE ASSESSEE ON THE LOANS BORROWED FOR BUSINESS PURPOSES. IT WAS S UBMITTED THAT THE TOTAL INTEREST PAYMENT DURING THE RELEVANT ASSESSMENT YEA R WAS ABOUT ` 42 CRORES. IT WAS THE SUBMISSION THAT THE ASSESSING OFFICER HAD A CCEPTED THE CLAIM OF INTEREST PAYMENTS AS INCURRED FOR BUSINESS PURPOSES AND EXCL UDIBLE FROM THE DISALLOWANCE U/S 14A TO AN EXTENT OF ` 8.14CRORES. IT WAS THE SUBMISSION THAT THE BALANC E OF ` 33.86 CRORES WAS CONSIDERED FOR DISALLOWANCE BY TH E ASSESSING OFFICER. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE P LACED BEFORE US THE CHART SHOWING THE BREAK UP OF THE INTEREST DISALLOWED BY THE ASSESSING OFFICER TO THE EXTENT OF ` 33.86 CRORES. THIS IS AS FOLLOWS : SR. NO. BREAK UP OF INTEREST DISALLOWED BA.O. AMOUNT OF PAPER BOOK TO THE EXTENT OF INR 33.86 CRORES INTEREST (INR REFERENCE IN CRORES)____________U 1. IDFC LIMITED (BREAK-UP GIVEN BELOW) 25.18 27 2. STANDARD CHARTERED BANK 3.43 28 3. STANDARD CHARTERED INVESTMENT AND LOANS LTD. 2.37 29 4. PROCESSING FEES PAID TO STANDARD CHARTERED BANK 2.00 32 5. KALIMATI INVESTMENT COMPANY LTD. 0.30 22 6. ATVL 0.53 19 7. INTEREST ON IL&FS SUBSCRIPTION FINANCE LTD. 0.05 23 TOTAL 33.86 I.T.A. NO.2148/MDS/2010 4 IT WAS THE SUBMISSION THAT OUT OF ` 33.86 CRORES, ` 25.18 CRORES RELATING TO IDFC LTD. WAS IN NO WAY CONNECTED TO THE INVESTMENTS IN SHARES. IT WAS FAIRLY AGREED THAT THE BALANCE OF ` 8.68 CRORES WAS CONNECTED TO THE INVESTMENT IN SHA RES. HE FURTHER DREW OUT ATTENTION TO A CHART SHOWING THE D ETAILS OF THE INVESTMENT DURING THE FINANCIAL YEAR 2005-06 IN THE SHARES OF COMPANIES. IT WAS THE SUBMISSION THAT AS ON 1.4.2005 THE INVESTMENT IN TH E SHARES OF COMPANIES WAS TO THE TUNE OF ` 97.63 CRORES. HE DREW OUR ATTENTION TO PAGE 6 OF THE PAPER BOOK WHICH IS COPY OF THE SCHEDULE ATTACHED AND FOR MING PART OF THE BALANCE SHEET FOR THE YEARS ENDED 31.3.2005 AND 31.3.2006 W HEREIN THE INVESTMENTS AS ON 31.3.2005 WAS TO THE EXTENT OF ` 97.63 CRORES. IT WAS THE SUBMISSION THAT DURING THE RELEVANT ASSESSMENT YEAR THE ASSESSEE HA D PURCHASED SHARES IN VARIOUS COMPANIES TO THE EXTENT OF ` 18.21 LAKHS. THE MAIN INVESTMENT DURING THE YEAR WAS IN THE INVESTMENT OF SHARES OF TATA TE LE SERVICES LTD. (TTSL) TO AN EXTENT OF ` 884 CRORES. IT WAS THE SUBMISSION THAT THE SAID I NVESTMENT WAS THROUGH A SHARE SUBSCRIPTION AGREEMENT FOR THE PREF ERENTIAL ALLOTMENT OF SHARES. IT WAS THE SUBMISSION THAT THE SHARES HAD BEEN PURC HASED AT A PREMIUM OF 70%. IT WAS THE SUBMISSION THAT THE ASSESSEE HAD ALSO SW APPED SHARES HELD BY THE ASSESSEE COMPANY IN DISHNET WIRELESS LTD. OF A VALU E OF ` 34.40 CRORES FOR SHARES IN AIRCEL TELEVENTURES LTD., A WHOLLY OWNED SUBSIDIARY BY THE SWAP BY WHICH THE ASSESSEE RECEIVED THE SHARES TO THE VALUE OF ` 129 CRORES. IT WAS THE FURTHER SUBMISSION THAT THE ASSESSEE HAD ALSO DISPO SED OF CERTAIN OTHER INVESTMENTS IN SOME COMPANIES. IT WAS THE SUBMISS ION THAT AS ON THE YEAR I.T.A. NO.2148/MDS/2010 5 ENDED 31-3-2006 THE INVESTMENTS IN THE SHARES HELD BY THE ASSESSEE WENT UP TO ` 1075 CRORES. IT WAS THE SUBMISSION THAT THE SHARE S SWAPPED BY WHICH THE ASSESSEE GOT ` 129 CRORES WORTH OF M/S. AIRCEL TELEVENTURES LTD. SHARES AS AGAINST THE DISHNET WIRELESS LTD. SHARES DURING THE YEAR DID NOT INVOLVE ANY FUND TRANSFER. IT WAS ON THE BASIS OF A SHARE SWAP AGRE EMENT WHICH WAS FOUND AT PAGES 99 TO 102 OF THE PAPER BOOK. IT WAS THE SUBM ISSION THAT THE MAIN ADDITION DURING THE YEAR WAS INVESTMENT IN THE SHARES OF TAT A TELE SERVICES LTD. TO THE EXTENT OF ` 884 CRORES FOR WHICH THE ASSESSEE HAD SOURCED ITS OWN FUNDS TO AN EXTENT OF ` 35 CRORES REPRESENTING A REPAYMENT OF LOAN FROM M/ S. AIRCEL TELEVENTURES LTD. AND SHARE APPLICATION MONEY RECEI VED FROM SHRI C. SHIVSANKARAN, WHO IS THE PROMOTER SHAREHOLDER TO AN EXTENT OF ` 67.10 CRORES. IT WAS THE SUBMISSION THAT ` 102 CRORES OUT OF ` 884 CRORES WAS CLEARLY OUT OF THE NON-INTEREST BEARING FUNDS AND IT WAS ALSO NOT OUT OF ANY LOANS TAKEN. THE BALANCE 782 CRORES WAS SOURCED BY TAKING A SHORT TE RM LOAN FROM M/S. KALIMATI INVESTMENT CO. LTD. TO AN EXTENT OF ` 132 CRORES AND THE BALANCE OF ` 650 CRORES WAS A LOAN TAKEN FROM M/S. STANDARD CHARTERED INVES TMENT AND LOANS LTD. AS AN ICD (INTER CORPORATE DEPOSIT) OF 10.5% PER ANNUM FO R AN AMOUNT OF ` 250 CRORES AND 9.5% PER ANNUM FOR ` 400 CRORES. THE BREAK UP OF THE SAME WAS FOUND AT PAGES 109, 110 AND 114 OF THE PAPER BOOK. IT WAS THUS THE SUBMISSION OF THE LEARNED AUTHORISED REPRESENTATIVE THAT THE L OAN FROM STANDARD CHARTERED BANK WAS TAKEN ON 27.2.2006 AND THE PURCHASE OF PRE FERENTIAL SHARES IN TTSL WAS ALSO PAID FOR ON 27.2.2006. IT WAS THE SUBMISS ION THAT ` 25.18 CRORES I.T.A. NO.2148/MDS/2010 6 INTEREST REPAYMENT TO IDFC LTD. WAS ON ACCOUNT OF ` 300 CRORES SECURED LOAN WHICH WAS TAKEN BY THE ASSESSEE COMPANY YON 30.3.20 05 FROM M/S. IDFC LTD. HE DREW OUR ATTENTION TO THE COPY OF THE LOAN AGREE MENT WHICH WAS FOUND AT PAGES 38 TO 71 OF THE PAPER BOOK. IT WAS THE SUBMI SSION THAT THIS AMOUNT OF ` 300 CRORES WAS USED FOR GRANTING A LOAN TO THE SUBS IDIARY AIRCEL TELE VEMTIRE LTD. TO AN EXTENT OF ` 128.75 CRORES AS ALSO REPAYMENT OF THE LOAN TAKEN FOR BUSINESS PURPOSES FROM HITECH HOUSING PROJECTS P. LTD. TO AN EXTENT OF ` 10.45 CRORES. ANOTHER ` 150 CRORES WAS USED FOR THE REPAYMENT OF INTER COR PORATE DEPOSITS FROM TTSL. ANOTHER ` 2.25 CRORES WAS USED FOR THE UPFRONT FEE FOR THE L OAN TAKEN FROM IDFC LTD. ABOUT ` 8.34 CRORES WAS IN FIXED DEPOSITS WITH HDFC BANK AND AROUND ` 66 LAKHS WAS UTILIZED FOR BUSINESS PURPOSES. IT W AS THE SUBMISSION THAT THAT ` 300 CRORES TAKEN FROM IDFC LTD. WAS NOT USED FOR A NY INVESTMENT IN THE SHARES AS THE SAME HAD BEEN TAKEN ON 31.3.2005 AND HAD ALSO BEEN USED UP SUBSTANTIALLY ON 31.3.2005 ITSELF AND THIS LOAN AMO UNT WAS NOT AVAILABLE FOR MAKING ANY INVESTMENT PRIOR TO 31.3.2005 OR IMMEDIA TELY AFTER 31.3.2005. IT WAS THUS THE SUBMISSION THAT FROM THE BALANCE SHEET AS ON 31.3.2005 IT IS CLEAR THAT IF ` 300 CRORES SECURED LOAN WHICH WAS THE ONLY SECURED LOAN WAS REMOVED, THEN ` 97.62 CRORES REPRESENTING THE OPENING BALANCE OF T HE INVESTMENT WAS ALSO NOT OUT OF ANY BORROWED FUNDS. IT WAS THE SUBMISSI ON THAT DURING THE YEAR THE ASSESSEE HAD TAKEN A LOAN OF ` 650 CRORES FROM STANDARD CHARTERED BANK AND ANOTHER ` 132 CRORES FROM KALIMATI INVESTMENT CO. LTD. THE N ` 782 CRORES WAS USED FOR MAKING THE INVESTMENT IN THE PREFERENTIAL SHARES OF TATA TELESERVICES I.T.A. NO.2148/MDS/2010 7 LTD. THE INVESTMENT IN TTSL HAD ALSO BEEN DONE ON 27-02-2006. IT WAS THUS THE SUBMISSION THAT THE INTEREST PAID TO IDFC LTD. TO AN EXTENT OF ` . 28.18 CRORES COULD NOT BE CONSIDERED FOR DISALLOWANCE OF INTERES T UNDER SECTION 14A AS NO PORTION OF THE SAME HAD BEEN USED FOR MAKING THE IN VESTMENT. REGARDING THE BALANCE OF ` 8.68 CRORES IT WAS FAIRLY AGREED THAT THE SAID INT EREST RELATED TO THE INTEREST PAYMENTS TO STANDARD CHARTERED BANK, M/S. KALIMATI INVESTMENT CO. LTD. ETC. THE FUNDS FROM WHICH IT HAD BEEN USED FOR MAKI NG THE INVESTMENTS IN THE SHARES OF TTSL. IT WAS THE SUBMISSION THAT IF AT A LL A DISALLOWANCE U/S 14A WAS CALLED FOR IT SHOULD BE RESTRICTED TO THE SAID AMOU NT ODF ` 8.68 CRORES AND NOTHING FURTHER AS THE DIRECT LINKING OF THE LOANS TO THE PURPOSE FOR WHICH THE SAME HAD BEEN USED HAD BEEN CLEARLY SHOWN BY THE AS SESSEE. THE LEARNED AUTHORISED REPRESENTATIVE FURTHER DREW OUR ATTENTIO N TO THE FINANCIAL RESULTS OF TTSL. IT WAS THE SUBMISSION THAT DURING THE FINANC IAL YEAR 2004-05 RELEVANT FOR THE ASSESSMENT YEAR 2005-06 THE PROFIT AFTER TAXATI ON WAS A LOSS OF ` 1664.07 CRORES. FOR THE ASSESSMENT YEAR 2006-07 IT WAS A L OSS OF ` 1878.21 CRORES. FOR THE ASSESSMENT YEAR 2007-08 IT WAS A LOSS OF ` 2062.52 CRORES. FOR THE ASSESSMENT YEAR 2008-09 IT WAS A LOSS OF ` 1813.76 CRORES AND FOR THE ASSESSMENT YEAR 2009-10 IT WAS A LOSS OF ` 1814.31 CRORES. IT WAS THE SUBMISSION THAT FROM THE FINANCIAL RESULTS OF TTSL CLEARLY SHOWED THAT IT WOULD NOT BE TURNING THE CORNER INTO A PROFIT ANY TIME IN THE NEAR FUTURE. IT WAS THE SUBMISSION THAT THE INVESTMENT IN THE SHARES OF TTS L BY THE ASSESSEE WAS PURELY A VENTURE CAPITAL INVESTMENT. THE LEARNED AUTHORIS ED REPRESENTATIVE DREW OUR I.T.A. NO.2148/MDS/2010 8 ATTENTION TO THE FINANCIAL RESULTS OF TTSL FOR THE VARIOUS ASSESSMENT YEARS WHICH WAS FOUND AT PAGES 118 TO 150 OF THE PAPER BOOK. H E FURTHER DREW OUR ATTENTION TO SECTION 5 OF THE COMPANIES ACT WHICH CLEARLY STA TES THAT A COMPANY CANNOT DECLARE DIVIDEND IF IT HAS CARRIED FORWARD LOSSES D URING THE RELEVANT ASSESSMENT YEARS FOR WHICH IT WISHES TO DECLARE ANY DIVIDEND. IT WAS THE FURTHER SUBMISSION THAT THE ASSESSEE HAD ALSO NOT RECEIVED ANY DIVIDEN D NOR CLAIMED ANY AMOUNT RECEIVED BY THE ASSESSEE AS DIVIDEND. IT WAS THE S UBMISSION THAT AS THE ASSESSEE HAD NOT CLAIMED ANY DIVIDEND INCOME AS EXE MPT FROM TAX, THE PROVISIONS OF SEC. 14A COULD NOT BE INVOKED ON THE ASSESSEE. THE LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTENTION TO SEC TION 115-O OF THE ACT WHICH PROVIDED THE SPECIAL PROVISION FOR TAX ON DISTRIBUT ION OF PROFITS OF A DOMESTIC COMPANY. IT WAS THE SUBMISSION THAT AS PER SEC. 11 5-O THE WORDS USED WERE DECLARED, DISTRIBUTED OR PAID BY SUCH COMPANY BY W AY OF DIVIDENDS (WHETHER INTERIM OR OTHERWISE). IT WAS THE SUBMISSION THAT NO AMOUNT HAD BEEN DECLARED, DISTRIBUTED OR PAID BY TTSL BY WAY OF DIV IDEND IN ANY MANNER WHATSOEVER. HE FURTHER DREW OUR ATTENTION TO SECTI ON 8 OF THE INCOME TAX ACT, 1961 UNDER THE HEAD DIVIDEND INCOME WHICH ALSO US ES THE WORDS DECLARED BY A COMPANY OR DISTRIBUTED OR PAID BY IT. HE ALSO D REW OUR ATTENTION TO SECTION 10(34) OF THE ACT TO SUPPORT HIS CONTENTION THAT WH AT WAS NOT INCLUDIBLE IN THE TOTAL INCOME OF THE PREVIOUS YEAR OF ANY PERSON WAS ANY INCOME BY WAY OF DIVIDENDS REFERRED TO IN SEC. 115-O. HE FURTHER D REW OUR ATTENTION TO SEC. 14A(1) TO SUBMIT THAT AS PER THE SAID SECTION IT WA S ONLY WHEN THERE WAS ANY I.T.A. NO.2148/MDS/2010 9 INCOME WHICH DID NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT DURING ANY RELEVANT ASSESSMENT YEAR NO DEDUCTION IN RESPECT OF THE EXPENDITURE INCURRED FOR EARNING SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, WAS ALLOWABLE. IT WAS THE SUBMISSION THAT DURING THE R ELEVANT ASSESSMENT YEAR THE ASSESSEE DID NOT HAVE ANY INCOME WHICH DID NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AND THEREFORE NO DISALLOWANCE BY INVO KING THE PROVISIONS OF SEC. 14A COULD BE MADE ON THE ASSESSEE. FOR THIS PROPOS ITION HE RELIED UPON THE DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. WINSOME TEXTILE INDUSTRIES LTD., REPORTED IN 319 IT R 204 (P&H) WHEREIN IT HAS BEEN HELD THAT WHERE THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION SECTION 14A COULD HAVE NO APPLICATION. HE ALSO PLACED RELI ANCE UPON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. WALFOR T SHARE AND STOCK BROKERS P. LTD. REPORTED IN 233 CTR 42 (S C) WHEREIN IN PAR A 18 OF THE SAID ORDER THE HON'BLE SUPREME COURT HAS HELD THAT FOR ATTRACTING SECTION 14A, THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE, WHICH IS ITS RE LATIONSHIP WITH THE TAX EXEMPT INCOME. IT WAS THE SUBMISSION THAT THERE WAS NO P ROXIMATE CONNECTION BETWEEN THE INTEREST PAID BY THE ASSESSEE AND ANY D IVIDEND INCOME AS THE ASSESSEE HAD NOT RECEIVED ANY DIVIDEND INCOME NOR I T HAD CLAIMED ANY INCOME AS NOT INCLUDIBLE IN ITS TOTAL INCOME. HE ALSO PLACED RELIANCE ON THE CIRCULAR NO. 14 OF 2001 DATED 22.11.2001 ISSUED BV THE CBDT TO SUBM IT THAT IN THE SAID CIRCULAR ALSO THE BOARD HAD EXPLAINED THAT THE PROVISIONS OF SEC. 14A WERE FOR RESTRICTING THE CLAIM OF EXPENSES IN RELATION TO THE EXEMPT INC OME. IT WAS THE SUBMISSION I.T.A. NO.2148/MDS/2010 10 THAT AS THERE WAS NO EXEMPT INCOME NO DISALLOWANCE U/S 14A WAS LIABLE TO BE MADE IN THE HANDS OF THE ASSESSEE. 6. IN REPLY THE LEARNED DR SUBMITTED THAT AS PER TH E DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. RAJENDRA PRASA D MOODY REPORTED IN 115 ITR 519 WHEREIN IT HAD BEEN HELD THAT JUST BECAUSE THER E IS NO INCOME THE EXPENDITURE CANNOT BE DISALLOWED. IT WAS THE SUBMI SSION THAT AS PER SEC. 14A IF AN ASSESSEE HAS EXEMPTED INCOME, THEN THE EXPENDITU RE IN RELATION TO SUCH EXEMPTED INCOME IS LIABLE TO BE DISALLOWED. IT IS NOT REQUIRED TO BE SEEN AS TO WHETHER THE ASSESSEE HAS EXEMPTED INCOME DURING THE RELEVANT ASSESSMENT YEAR IF THE EXPENDITURE HAS BEEN INCURRED TO MAKE AN INV ESTMENT WHICH HELPED THE ASSESSEE TO DERIVE EXEMPTED INCOME AT A FUTURE POIN T OF TIME ALSO THE EXPENDITURE IN RELATION TO SUCH EXEMPTED INCOME IS TO BE DISALLOWED IN VIEW OF THE PROVISIONS OF SEC. 14A. IT WAS THE SUBMISSION THAT THE DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF WINSOME TEXTILE INDUSTRIES LTD., REFERRED TO SUPRA, WAS NOT LIABLE TO BE FOLLO WED AS IT WAS NOT A JURISDICTIONAL HIGH COURT DECISION AND IT HAD NOT CONSIDERED THE D ECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF RAJENDRA PRASAD MOODY. HE PLACED RELIANCE ON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT I N THE CASE OF VISVAS PROMOTERS (P) LTD. V. ITAT AND ANOTHER REPORTED IN 323 ITR 11 4 (MAD) TO SUPPORT HIS CONTENTION THAT THE DECISION OF ONE HIGH COURT IS N EITHER BINDING PRECEDENT FOR ANOTHER HIGH COURT NOR FOR COURTS OR TRIBUNALS OUTS IDE ITS OWN TERRITORIAL JURISDICTION. HE ALSO RELIED UPON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT I.T.A. NO.2148/MDS/2010 11 IN THE CASE OF GEOFFREY MANNERS AND CO. LTD. V. CIT REPORTED IN 221 ITR 695 FOR THE SAME PROPOSITION. IT WAS THE FURTHER SUBMISSIO N THAT AS PER THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF MRS. BACHA F. GUZDAR, BOMBAY V. CIT REPORTED IN 27 ITR 1 (SC) THE HON'BLE SUPREME COURT HAD CATEGORICALLY HELD THAT A SHAREHOLDER WHO BUYS SHARES DOES NOT BUY ANY INTE REST IN THE PROPERTY OF THE COMPANY WHICH IS A JURISTIC PERSON ENTIRELY DISTINC T FROM THE SHAREHOLDERS. THE TRUE POSITION OF A SHAREHOLDER IN A COMPANY IS THAT ON BUYING SHARES HE BECOMES ENTITLED TO PARTICIPATE IN THE PROFITS OF THE COMPA NY IF AND WHEN THE COMPANY DECLARES, SUBJECT TO THE ARTICLES OF ASSOCIATION, T HAT THE PROFITS OR ANY PORTION THEREOF SHOULD BE DISTRIBUTED BY WAY OF DIVIDENDS A MONG THE SHAREHOLDERS. HE HAS A FURTHER RIGHT TO PARTICIPATE IN THE ASSETS OF THE COMPANY WHICH WOULD BE LEFT OVER AFTER WINDING UP. IT WAS THE SUBMISSION THAT THE FACT THAT THE ASSESSEE HAS INVESTED IN THE SHARES BY USING BORROWED FUNDS, THE EXPENDITURE IN THE FORM OF INTEREST ON THE BORROWALS WAS LIABLE TO BE DISAL LOWED BY INVOKING THE PROVISIONS OF SECTION 14A. IT WAS THE SUBMISSION T HAT AS A RESULT OF THE SURVEY ON THE ASSESSEE ON 20-08-2009 THE ASSESSING OFFICER HAD DIRECTED THE ASSESSEE TO GIVE THE DETAILS OF THE INTEREST ON THE INVESTME NTS. IT WAS THE SUBMISSION THAT THE ASSESSEE HAD GIVEN THE BREAK UP VIDE A LETTER D ATED 26-08-2009 AND AGAIN BY A LETTER DATED 10-09-2009 WHICH WERE SHOWN AT PAGES 1 AND 2 OF THE PAPER BOOK. IT WAS THE SUBMISSION THAT THIS WAS TO AN EX TENT OF R 30.89 CRORES AND THE ASSESSEE HAD ALSO PAID TAXES TO THE TUNE OF ` 40 CRORES KEEPING IN VIEW THE DISALLOWANCE OF INTEREST UNDER SEC. 14A. IT WAS TH E SUBMISSION THAT I.T.A. NO.2148/MDS/2010 12 THE ASSESSEE AFTER HAVING MADE A DECLARATION SHOULD NOT BE PERMITTED TO GO BACK FROM SUCH DECLARATION. IT WAS THE FURTHER SUBMISSI ON THAT WHEN THE ASSESSEE HAD INVESTED ITS INTEREST-FREE FUNDS FOR THE PURCHA SE OF SHARES AND HAD BORROWED MONEY FOR RUNNING ITS BUSINESS, IT AUTOMATICALLY MA DE THE INVESTMENT BY THE ASSESSEE OF ITS INTEREST-FREE FUNDS IN THE INVESTME NTS WHICH DERIVED THE ASSESSEE INCOME WHICH WAS NOT INCLUDIBLE IN THE TOTAL INCOME OF THE ASSESSEE, TO BE FOR NON-BUSINESS PURPOSES AND CONSEQUENTLY THE INTEREST DISALLOWANCE OUT OF THE INTEREST PAID ON THE INTEREST BEARING FUNDS HAS BEE N RIGHTLY MADE. HE RELIED ON THE DECISION OF THE HON'BLE KERALA HIGH COURT IN TH E CASE OF CIT V. ACCELERATED FREEZE DRYING CO. LTD. REPORTED IN 324 ITR 326 (KER ) AS ALSO THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF PUNJAB STAI NLESS STEEL INDS. V. CIT REPORTED IN 324 ITR 396 (DELHI) FOR THIS PROPOSITIO N. THE LEARNED DR RELIED ON THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE O F GODREJ AND BOYCE MFG. CO. LTD. V. DEPUTY COMMISSIONER OF INCOME-TAX REPORTED IN 328 ITR 81 (BOM) WHEREIN IT HAD BEEN HELD THAT THE DISALLOWANCE OF E XPENDITURE BY INVOKING THE PROVISIONS OF SECTION 14A WAS APPLICABLE TO DIVIDEN D INCOME AND INCOME FROM MUTUAL FUNDS EXEMPT UNDER SECTION 10(33) OF THE ACT . IT WAS THE SUBMISSION THAT THE HON'BLE BOMBAY HIGH COURT HAD TAKEN INTO C ONSIDERATION THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF WALFORT SH ARE AND STOCK BROKERS P. LTD., REFERRED TO SUPRA TO COME TO THE CONCLUSION T HAT THE PLAIN MEANING OF SEC. 14A IS THAT NO DEDUCTION CAN BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RELATION TO AN INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME I.T.A. NO.2148/MDS/2010 13 UNDER THE ACT. IT WAS THE SUBMISSION THAT IN THE D ECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF OF WINSOME TEXT ILE INDUSTRIES LTD., REFERRED TO SUPRA, THE ASSESSEE THEREIN HAD USED ITS OWN FUN DS WHEREAS IN THE PRESENT CASE THE FUNDS HAVE CLEARLY BEEN ADMITTED TO BE BOR ROWED FUNDS. IT WAS THE FURTHER SUBMISSION THAT THE ASSESSEE HAD IN ITS OWN LETTER AGREED THAT ` 32 CRORES OF INTEREST RELATES TO THE INVESTMENTS AND NOW THE ASSESSEE CANNOT BE PERMITTED TO GO BACK ON THE SAME. HE ALSO RELIED UPON THE DE CISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S. SIVA VEN TURES LTD., A SISTER CONCERN OF THE ASSESSEE IN ITA NO. 1950 AND 941/MDS/2008 DATED 31-7-2009 WHEREIN, IT WAS SUBMITTED, THE ISSUE OF SEC. 14A HAD BEEN HELD AGAINST THE ASSESSEE. IT WAS THE FURTHER SUBMISSION THAT THE ASSESSING OFFICER D ID NOT APPLY THE PROVISIONS OF SEC. 8D AS ONE TO ONE LINKING OF THE FUNDS WAS POSS IBLE. HE VEHEMENTLY SUPPORTED THE ORDER OF THE ASSESSING OFFICER. 7. IN REPLY THE LEARNED AUTHORISED REPRESENTATIVE S UBMITTED THAT LOAN TAKEN IN RELATION TO THE INVESTMENTS IN SHARES WAS ONLY T O AN EXTENT OF ` 782 CRORES AND THE LOAN WAS TAKEN ONLY ON 25.2.2006. IT WAS THE S UBMISSION THAT THE ASSESSEE HAD NO INTENTION TO EARN DIVIDEND. THE LETTERS REF ERRED TO BY THE ASSESSING OFFICER WERE THE LETTERS WHEREIN THE ASSESSEE WAS A SKED TO GIVE THE DETAILS OF THE INTEREST ATTRIBUTABLE TO THE FUNDS USED FOR MAKING THE INVESTMENTS. NOWHERE WAS THE ASSESSEE ASKED TO LINK THE INTEREST EXPENDI TURE TO THE LOANS IF ANY UTILIZED FOR MAKING THE INVESTMENTS. IT WAS THE FU RTHER SUBMISSION THAT THE DECISION IN THE SISTER CONCERNS CASE HAD NO APPLIC ABILITY YINSOFAR AS THE ISSUE IN I.T.A. NO.2148/MDS/2010 14 THE SAID DECISION WAS IN RELATION TO THE CARRY FORW ARD OF SHORT TERM CAPITAL LOSS FOR WHICH PURPOSE HE DREW OUR ATTENTION TO PARAS 4 TO 4.6 OF THE ORDER OF THE TRIBUNAL IN THE CASE OF M/S. SIVA VENTURES LTD., RE FERRED TO SUPRA. IT WAS THE SUBMISSION THAT THE DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF WINSOME TEXTILE INDUSTRIES LTD., REFERRED T O SUPRA, SQUARELY APPLIED INSOFAR AS THE ASSESSEE HAS NOT CLAIMED ANY EXEMPTI ON AND CONSEQUENTLY NO DISALLOWANCE U/S 14A COULD BE MADE. HE RELIED ON T HE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF WALFORT SHARE AND STOC K BROKERS P. LTD., REFERRED TO SUPRA. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AT TH E OUTSET A PERUSAL OF THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT I N THE CASE OF VISVAS PROMOTORS (P) LTD., REFERRED TO SUPRA, CLEARLY SHOWS THAT THE DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF WINSOME TEXTILE INDUSTRIES LTD., REFERRED TO SUPRA AS ALSO THE DECISION OF THE HON'BLE BOMBAY HI GH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD., REFERRED TO SUPRA, WOULD NOT HAVE THE FORCE OF BINDING PRECEDENT ON THIS TRIBUNAL. HOWEVER, A FUR THER READING OF THE SAID DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT C LEARLY SHOWS THAT THE SAID DECISIONS OF THE HON'BLE HIGH COURTS WOULD HAVE A P ERSUASIVE EFFECT. KEEPING IN MIND THIS POSITION, IF WE SEE THE DECISION OF THE B OMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. IT IS NOTICED THA T THE HON'BLE BOMBAY HIGH COURT HAS CONSIDERED THE DECISION OF THE HON'BLE SU PREME COURT IN THE CASE OF WALFORT SHARE AND STOCK BROKERS P. LTD., REFERRED T O SUPRA, AND THE FOLLOWING I.T.A. NO.2148/MDS/2010 15 PRINCIPLES HAVE BEEN SHOWN TO EMERGE FROM SECTION 1 4A AND THE DECISION IN WALFORT SHARE AND STOCK BROKERS P. LTD.: (A) THE MANDATE OF SECTION 14A IS TO PREVENT CLAIM S FOR DEDUCTION OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSES SEE; (B) SECTION 14A(1) IOS ENACTED TO ENSURE THAT ONLY EXPENSES INCURRED IN RESPECT OF EARNING TAXABLE INC OME ARE ALLOWED; (C) THE PRINCIPLE OF APPORTIONMENT OF EXPENSES IS WIDENED BY SECTION 14A TO INCLUDE EVEN THE APPORTIO NMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE INCO ME OF AN INDIVISIBLE BUSINESS; (D) THE BASIC PRINCIPLE OF TAXATION IS TO TAX NET INCOME. THIS PRINCIPLE APPLIES EVEN FOR THE PURPOS ES OF SECTION 14A AND EXPENSES TOWARDS NON-TAXABLE INCOME MUST BE EXCLUDED; (E) ONCE A PROXIMATE CAUSE FOR DISALLOWANCE IS ESTABLISHED WHICH IS THE RELATIONSHIP OF THE EXPE NDITURE WITH INCOME WHICH DOES NOT FORM PART OF THE TOTAL I NCOME- A DISALLOWANCE HAS TO BE EFFECTED. AS PER THE SAID DECISION, ONE OF THE MAIN PRINCIPLE S ARE THAT SEC. 14A IS TO PREVENT CLAIMS OF DEDUCTION OF EXPENDITURE IN RELAT ION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. SIM ILARLY, SEC. 14A*(1) IS ENACTED TO ENSURE THAT ONLY EXPENSES INCURRED IN EARNING TA XABLE INCOME ARE ALLOWED. SIMILARLY, THE BASIC PRINCIPLE OF TAXATION IS TO TA X THE NET INCOME AND THIS PRINCIPLE I.T.A. NO.2148/MDS/2010 16 APPLIES EVEN FOR THE PURPOSE OF SEC. 14A AND EXPENS ES TOWARDS NON TAXABLE INCOME MUST BE EXCLUDED. A PERUSAL OF THE PROVISION S OF SEC. 5(1) OF THE ACT PROVIDES FOR THE SCOPE OF THE TOTAL INCOME. IT INC LUDES ALL INCOMES FROM WHATEVER SOURCE DERIVED WHICH IS RECEIVED OR DEEMED TO BE RE CEIVED, ACCRUES, ARISES OR IS DEEMED TO ACCRUE OR ARISE IN INDIA OR ACCRUES OR AR ISES OUTSIDE INDIA DURING SUCH YEAR. THUS WHAT IS TO BE UNDERSTOOD IS THAT THE TOTAL INCOME IS RELATING TO SUCH YEAR. IF THE ASSESSEE DOES NOT HAVE ANY INCOM E AS FALLING WITHIN THE SCOPE OF TOTAL INCOME DURING ANY YEAR THE PROVISIONS OF THE ACT COULD NOT BE APPLIED TO HIM. A PERUSAL OF THE PROVISIONS OF SEC. 14A CL EARLY SHOWS THAT THE WORDS USED THEREIN ARE FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, .EXPENDITURE INCURRED IN RELATION TO INC OME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. THUS FOR THE APPLICABILITY OF SEC.14A THERE MUST BE (I) INCOME WHICH IS TAXABLE UNDER THE ACT F OR THE RELEVANT ASSESSMENT YEAR AND (2) THERE SHOULD ALSO BE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT DURING THE RELEVANT ASSESSMENT YEAR. IF EITHER ONE IS ABSENT, THEN SEC. 14A(1) HAS NO APPLICABILITY. IF WE HAVE TO ASSUME THAT SECTION 14A(1) WOULD APPLY, EVEN WHEN THE ASSESSEE DOES NOT HAVE ANY INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THEN IT WOU LD REACH IN A POSITION WHERE IF THE ASSESSEE MAKES ANY INVESTMENT IN ANY SHARES EVE N THOUGH THE ASSESSEE DOES NOT RECEIVE DIVIDEND INCOME, THE EXPENDITURE I N RELATION TO THE INVESTMENT IN THE SHARES WOULD STAND TO DISALLOWANCE. THIS DI SALLOWANCE WOULD CONTINUE YEAR AFTER YEAR AS LONG AS THE ASSESSEE HOLDS THE I NVESTMENT, WHETHER HE GETS I.T.A. NO.2148/MDS/2010 17 ANY INCOME OUT OF SUCH INVESTMENT OR NOT. AT A FUT URE POINT OF TIME IF THE ASSESSEE LIQUIDATES THAT INVESTMENT AND DERIVES A P ROFIT ON INVESTMENT WHICH WOULD BE LIABLE FOR TAXATION UNDER THE HEAD LONG T ERM CAPITAL GAINS, THEN THE PROFIT ON THE INVESTMENT WOULD ALSO BE TAXED. THIS IS NOT WHAT IS CONTEMPLATED U/S 14A. WHAT IS TAXABLE DURING THE RELEVANT ASSES SMENT YEAR IS THE TOTAL INCOME COMPUTED AS PER THE PROVISIONS OF THE ACT. WHEN CO MPUTING THE TOTAL INCOME AS PER SEC.5 THE INCOME SHOULD BE RECEIVED OR DEEMED T O BE RECEIVED OR ACCRUED OR ARISE OR DEEMED TO ARISE ANY INCOME DURING THE YEAR OR ACCRUE OR ARISE TO HIM OUTSIDE INDIA DURING THE YEAR. A N INVESTMENT WHIC H DOES NOT GIVE RISE TO ANY INCOME DEEMED TO ACCRUE OR ARISE CANNOT FORM PART O F THE TOTAL INCOME AND THEREFORE CANNOT FORM INCOME WHICH DOES NOT FORM PA RT OF THE TOTAL INCOME UNDER THE ACT. THUS ONCE THERE IS NO CLAIM OF INCO ME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, THERE CANNOT BE ANY DISALLOWANCE IN RELATION TO AN INVESTMENT WHICH MAY OR MAY NOT GIVE RISE TO ANY 0INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IN THE PRESENT CASE IT IS NOTICED THATNONE OF THE INVESTMENTS MADE BY THE ASSESSEE HAS GENERATED ANY DIVIDEND INCOME WHICH HAS BEEN CLAIMED BY THE ASSESSEE ATO BE NOT TO FORM PART OF THE TOTAL INCOME. IN THE CIRCUMSTANCES, AS IT IS NOTICED THAT THE ASSESS EE DOES NOT HAVE ANY INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME NOR HA S THE ASSESSEE MADE SUCH A CLAIM, WE ARE OF THE VIEW THAT NO DISALLOWANCE UNDE R SEC. 14A CAN BE MADE ON THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR. THI S VIEW OF OURS ALSO FINDS SUPPORT FROM THE DECISIONS OF THE HON'BLE SUPREME C OURT IN THE CASE OF WALFORT I.T.A. NO.2148/MDS/2010 18 SHARE AND STOCK BROKERS P. LTD., REFERRED TO SUPRA, OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. , REFERRED TO SUPRA, AND IS ALSO SUPPORTED BY THE VIEW EXPRESSED BY THE PUNJAB & HARYANA HIGH COURT IN THE CASE OF WINSOME TEXTILE INDUSTRIES LTD. THE OTHER DECISIONS RELIED UPON BY BOTH THE SIDES ARE NOT BEING DISCUSSED AS THEY ARE FOUND TO HAVE NO SPECIFIC RELEVANCE TO THE ISSUE IN THE APPEAL BEFORE US. 9. IN REGARD TO THE SECOND ISSUE IT WAS SUBMITTED B Y THE LEARNED AUTHORISED REPRESENTATIVE THAT THE ASSESSEE HAD GRANTED A LOAN OF ` 50 CRORES TO ITS SUBSIDIARY IN MAURITIUS FOR THE PURPOSE OF MAKING I NVESTMENTS AND HAS CHARGED INTEREST @ 6% PER ANNUM. THE ISSUE WAS REFERRED T O THE TPO. BEFORE THE LEARNED TPO IT WAS SUBMITTED THAT THE AVERAGE OF 12 MONTHS US $ DENOMINATED LIBOR RATE FOR THE PERIOD 1.4.2005 TO 31.3.2006 WAS 4.42% AND CONSEQUENTLY NO ADDITION ON ACCOUNT OF THE ARMS LENGTH INTEREST RATE WAS LIABLE TO BE MADE. IT WAS THE SUBMISSION THAT THE ASSESSING OFFICER HA D TAKEN A VIEW THAT THE US $ DENOMINATED LIBOR RATE COULD NOT BE CONSIDERED AS T HE LOAN WAS GIVEN FROM INDIA AND THE PRIME LENDING RATE IN INDIA WAS TO BE CONSIDERED. IT WAS THE SUBMISSION THAT CONSEQUENTLY THE ASSESSING OFFICER HAD DETERMINED THE RATE AT 11.75% AND THE DIFFERENCE TO THE EXTENT OF R 45,23, 817.53 WAS ADDED TO THE ASSESSEES INCOME. IT WAS THE SUBMISSION THAT THE PRIME LENDING RATE WAS A DOMESTIC RATE AND THE TRANSACTION DONE BY THE ASSES SEE WAS AN INTERNATIONAL TRANSACTION FOR WHICH THE LIBOR RATE WAS TO BE APPL IED. IT WAS THE SUBMISSION THAT THE RBI HAD ALSO GIVEN DIRECTIONS WHEREIN IT W AS SPECIFICALLY MENTIONED THAT I.T.A. NO.2148/MDS/2010 19 THE LIBOR RATE WAS TO BE APPLIED. HE DREW OUR ATTE NTION TO PAGES 151, 153, 169 AND 172 OF THE PAPER BOOK WHICH WERE CIRCULARS OF T HE RBI, WHEREIN THE RATE OF INTEREST ON EXPORT CREDIT IN FOREIGN CURRENCY BY BA NKERS THEMSELVES WAS AT LIBOR, EURO LIBOR OR EURIBOR RATE WHICH WAS APPLICABL E. IT WAS THE SUBMISSION THAT AS THE TRANSACTION WAS AN INTERNATI ONAL TRANSACTION, AS PER THE RBI GUIDELINE ITSELF THE LIBOR RATES HAD BEEN APPLI ED. IT WAS THE SUBMISSION THAT THE ADDITION TO THE TOTAL INCOME AS MADE BY TH E ASSESSING OFFICER BY RELYING UPON THE TPOS ORDER WAS LIABLE TO BE DELETED. 10. IN REPLY THE LEARNED DR SUBMITTED THAT LIBOR WA S APPLICABLE IF THE ASSESSEE ADVANCES LOANS IN FOREIGN CURRENCY. IT WA S THE SUBMISSION THAT THE SOURCE OF FUNDING IS IN INDIAN RUPEES AND THEREFORE PRIME LENDING RATE WAS TO BE APPLIED AND NOT LIBOR. HE VEHEMENTLY SUPPORTED THE ORDER OF THE ASSESSING OFFICER AND RELIED UPON THE ORDER OF THE TPO. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. A PE RUSAL OF THE ORDER OF THE TPO CLEARLY SHOWS THAT THE ASSESSEE HAD RAISED THE FUNDS BY WAY OF ISSUANCE OF 0% OPTIONAL CONVERTIBLE PREFERENTIAL SHARES. THUS IT IS NOTICED THAT THE FUNDS RAISED BY THE ASSESSEE COMPANY FOR GIVING THE LOAN TO INDIA TELECOM HOLDINGS LTD., MAURITIUS, WHICH IS ITS ASSOCIATED ENTERPRISES AND WHICH IS THE SUBSIDIARY COMPANY, IS OUT OF THE FUNDS OF THE ASSESSEE COMPAN Y. IT IS NOT BORROWED FUNDS. THE ASSESSEE HAS GIVEN THE LOAN TO THE ASSOCIATED EN TERPRISES IN US DOLLARS. THE ASSESSEE IS ALSO RECEIVING INTEREST FROM THE ASSOCI ATED ENTERPRISES IN INDIAN RUPEES. ONCE THE TRANSACTION BETWEEN THE ASSESSEE AND THE ASSOCIATED I.T.A. NO.2148/MDS/2010 20 ENTERPRISES IS IN FOREIGN CURRENCY AND THE TRANSACTI ON IS AN INTERNATIONAL TRANSACTION, THEN THE TRANSACTION WOULD HAVE TO BE LOOKED UPON BY APPLYING THE COMMERCIAL PRINCIPLES IN REGARD TO INTERNATIONAL TR ANSACTION. IF THIS IS SO, THEN THE DOMESTIC PRIME LENDING RATE WOULD HAVE NO APPLI CABILITY AND THE INTERNATIONAL RATE FIXED BEING LIBOR WOULD COME INTO PLAY. IN TH E CIRCUMSTANCES, WE ARE OF THE VIEW THAT IT LIBOR RATE WHICH HAS TO BE CONSIDE RED WHILE DETERMINING THE ARMS LENGTH INTEREST RATE IN RESPECT OF THE TRANSA CTION BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES. AS IT IS NOTICED THAT T HE AVERAGE OF THE LIBOR RATE FOR 1.4./2005 TO 31.3.2006 IS 4.42% AND THE ASSESSE E HAS CHARGED INTEREST AT 6% WHICH IS HIGHER THAN THE LIBOR RATE, WE ARE OF T HE VIEW THAT NO ADDITION ON THIS COUNT IS LIABLE TO BE MADE IN THE HANDS OF THE ASSESSEE. IN THE CIRCUMSTANCES, THE ADDITION AS MADE BY THE ASSESSIN G OFFICER ON THIS COUNT IS DELETED. 12. IN REGARD TO THE THIRD ISSUE IT WAS SUBMITTED T HAT THE ASSESSING OFFICER HAS NOT GRANTED TDS CREDIT AS CLAIMED BY THE ASSESSEE. IT WAS THE SUBMISSION THAT BEFORE THE DRP THE ISSUE HAD BEEN RAISED AND THE DR P CALLED FOR A REMAND REPORT AND THE REMAND REPORT WAS RECEIVED ON 27-8-2 010 AS PER PARA 16 OF ITS ORDER AND THE REMAND REPORT HAD NOT BEEN GRANTED FO R ITS REBUTTAL. IT WAS THE SUBMISSION THAT THE ASSESSEE HAD NO OBJECTION IF TH E ISSUE WAS RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR RE-VERIFICATION T O GRANT THE ASSESSEE OPPORTUNITY TO RECTIFY ANY DEFECTS IN THE TDS CERTIFICATES, IF ANY. I.T.A. NO.2148/MDS/2010 21 13. IN REPLY, THE LEARNED DR SUBMITTED THAT HE HAD NO OBJECTION TO THE RESTORING OF THIS ISSUE TO THE FILE OF THE ASSESSIN G OFFICER FOR RE-ADJUDICATION. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AS I T IS NOTICED THAT THE REMAND REPORT HAS BEEN RECEIVED BY THE DRP ON 27-8- 2010 AND THE SAME HAS NOT BEEN GRANTED TO THE ASSESSEE FOR ITS REBUTTAL, THIS ISSUE IS RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR RE-ADJUDICATION. THE ASSESSING OFFICER SHALL RE- CONSIDER THE ISSUE OF GRANT OF CREDIT FOR THE TDS C ERTIFICATES AND IF HE FINDS ANY OF THEM TO BE DEFECTIVE, HE SHALL GIVE THE ASSESSEE AD EQUATE OPPORTUNITY TO RECTIFY THE SAME AND RE-ADJUDICATE THE ISSUE IN ACCORDANCE WITH LAW. 15. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED FOR STATISTICAL PURPOSES. 16. THE ORDER WAS PRONOUNCED IN THE COURT ON 20-05- 2011. SD/- SD/- (ABRAHAM P. GEORGE) (GEORGE MATHAN) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 20 TH MAY, 2011. H. COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE