DCIT 5(2), MUMBAI V. MERCATOR LINES LTD, MUMBAI

ITA 2190/MUM/2012

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 8390 (ITAT-MUMBAI)
• Duration Of Justice: 8 year(s) 2 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-06-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 20-11-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 02-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A MOHAN
• Keywords: Transfer pricing; Rectification of order; International transaction; Set aside
• Section: 143(3); 13

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL J BENCH MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO.2190/MUM/2012 (ASSESSMENT YEAR 2007-08) DCIT 5(2), R. NO. 571, 5 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400020 VS. M/S. MERCATOR LTD. (FORMERLY KNOWN AS MERCATOR LINE LTD. 3 RD FLOOR, MITTAL TOWER, B WING, NARIMAN POINT, MUMBAI- 400020. P AN: AAACM5007A APPELLANT RESPONDENT ITA NO.2286/MUM/2012 (ASSESSMENT YEAR 2007-08) M/S. MERCATOR LTD. (FORMERLY KNOWN AS MERCATOR LINE LTD. 3 RD FLOOR, MITTAL TOWER, B WING, NARIMAN POINT, MUMBAI- 400020. P AN: AAACM5007A VS. DCIT 5(2), R. NO. 571, 5 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400020 APPELLANT RESPONDENT APPELLANT BY : SHRI A. MOHAN (DR) RESPONDENT BY : SHRI M.P. LOHIA WITH SHRI NIKHIL TIWARI (ARS ) DATE OF HEARING : 09.01.2020 DATE OF PRONOUNCEMEN T : 16.06.2020 ORDER UNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. THESE CROSS APPEAL ARE DIRECTED AGAINST THE ORDER O F LD. COMMISSIONER OF INCOME-TAX (APPEALS)-15, MUMBAI [THE LD. CIT(A)] DA TED 30.01.2012, WHICH ARISES FROM THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) ON ITA NO. 2190 & 2286 MUM 2012-M/S. MERCATOR LTD. 2 31.01.2011. THE REVENUE IN ITS APPEAL HAS RAISED TH E FOLLOWING GROUNDS OF APPEAL: (1) 'WHETHER ON THE FACTS, CIRCUMSTANCES AND IN THE LAW, THE LD, CIT(A) WAS JUSTIFIED IN RESTRICTING THE ADDITION/ADJUSTMENT TO 0.25% FROM 0.50% ON ACCOUNT 07 UPFRONT FEES AND 'DELETING THE ADDITION/ADJUSTME NT MADE ON ACCOUNT OF ADMINISTRATIVE CHARGERS MADE BY THE TPO/A.O WITHOUT APPRECIATING THE FACTS THAT THE TERMS AND CONDITIONS/SECURITIES OFFERED BY THE SBI, WERE NOT KNOWN AND FURTHER ADOPTING THE FEES, CHARGED BY DBS BANK AS A LP WITHOUT EXAMINING THE TERMS ST' CONDITIONS OF THE LOAN GRANTED BY DBS BAN K OR THE SECURITY OFFERED TO THE DBS BANK?' THE APPELLANT PRAYS THAT THE-ORDER OF THE LD. (CIT( A) BE SET ASIDE AND THE ORDER OF THE A.O BE RESTORED. 2. THE ASSESSEE IN ITS CROSS APPEAL HAS RAISED THE FOL LOWING GROUNDS OF APPEAL ( REVISED GROUNDS OF APPEAL DATED 31.05.2013 FILED ON 25.06.2013): TRANSFER PRICING 1. THE LEARNED CIT(A) HAS ERRED IN UPHOLDING TRANSF ER PRICING ADJUSTMENT OF RS 7,03,48,212 TO THE INCOME OF THE APPELLANT. A) INTEREST ON LOANS/QUASI EQUITY GIVEN BY THE APPE LLANT TO ITS AES ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEA RNED CIT(A) HAS: 2. ERRED IN CONFIRMING THE REJECTION OF THE ECONOMI C ANALYSIS UNDERTAKEN BY THE APPELLANT IN ITS TRANSFER PRICING STUDY REPORT TO B ENCHMARK THE AFORESAID TRANSACTION. 3. ERRED IN UPHOLDING THE REJECTION OF TRANSACTIONA L NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD TO JUSTIFY THE ARM'S LENGTH NATURE OF THE AFORESAID TRANSACTION AND APPLYING COMPARABLE UNCONTROLLED PR ICE ('CUP') AS THE MOST APPROPRIATE METHOD. 4. ERRED IN CONFIRMING THE ACTION OF THE AO THAT IN TEREST OF RS 47,55,918 SHOULD HAVE BEEN CHARGED BY THE APPELLANT FROM ITS ASSOCIA TED ENTERPRISE CAE') - MERCATOR OFFSHORE LIMITED ('MOL') AS AGAINST NIL CH ARGED BY THE APPELLANT FROM MOL. 5. ERRED IN CONFIRMING THE ACTION OF THE AO THAT IN TEREST OF RS 18,37,94,251 SHOULD HAVE BEEN CHARGED BY THE APPELLANT FROM ITS AE - MERCATOR LINES ITA NO. 2190 & 2286 MUM 2012-M/S. MERCATOR LTD. 3 SINGAPORE PTE LIMITED ('MLS') AS AGAINST RS 13,68,2 9,245 CHARGED BY THE APPELLANT FROM MLS. 6. ERRED IN CONFIRMING THE ACTION OF THE AO THAT IN TEREST OF RS 1,03,93,334 SHOULD HAVE BEEN CHARGED BY THE APPELLANT FROM ITS AE - MLS AS AGAINST NIL CHARGED BY THE APPELLANT FROM MLS. 7. ERRED IN ENHANCING THE ACTION OF THE AO THAT INT EREST OF RS 3,39,117 SHOULD HAVE BEEN CHARGED BY THE APPELLANT FROM ITS AE - ME RCATOR INTERNATIONAL PTE LIMITED ('MIL') AS AGAINST NIL CHARGED BY THE APPEL LANT FROM MIL. 8. ERRED IN CONSIDERING THE ALL IN COST CEILING EXT ERNAL COMMERCIAL BORROWINGS CECB') RATES ISSUED BY RESERVE BANK OF INDIA CRBI') AS CUP FOR THE PURPOSE OF BENCHMARKING THE TRANSACTION. 9. WITHOUT PREJUDICE TO THE ABOVE, HAS ERRED IN NOT CONSIDERING THAT NO COST WAS INCURRED BY THE APPELLANT AND HENCE THIS SHOULD HAV E BEEN CONSIDERED AS INTERNAL CUP AND THEREBY NO ADJUSTMENT IS REQUIRED UNDER TRANSFER PRICING. 10. WITHOUT PREJUDICE TO THE ABOVE, HAS ERRED IN NO T CONSIDERING NIL RATE OF INTEREST ON FCCB - ZERO CUPON BONDS ISSUED BY MLS A S APPROPRIATE RATE FOR THE PURPOSE OF MAKING THE ADJUSTMENT. 11. WITHOUT PREJUDICE TO THE ABOVE, HAS ERRED IN NO T CONSIDERING THE RATE OF INTEREST OF 2.5 PERCENT ON CONVERTIBLE BONDS ISSUED BY MLS AS APPROPRIATE RATE FOR THE PURPOSE OF MAKING THE ADJUSTMENT. 12. WITHOUT PREJUDICE TO THE ABOVE, HAS ERRED IN NO T CONSIDERING THE AVERAGE RATE OF INTEREST I.E 2.91 PERCENT PAID BY MLS TO THIRD P ARTIES AS APPROPRIATE RATE FOR THE PURPOSE OF MAKING THE ADJUSTMENT. 13. WITHOUT PREJUDICE TO THE ABOVE, HAS ERRED IN NO T PROVIDING THE BENEFIT OF THE VARIATION OF 5 PERCENT FROM THE ARITHMETIC MEAN AS PROVIDED IN THE PROVISO TO SECTION 92C(2) OF THE ACT, WHILE MAKING THE ADJUSTM ENT TO THE VALUE OF INTERNATIONAL TRANSACTIONS OF THE APPELLANT. 8) UPFRONT FEES AND ADMINISTRATIVE CHARGES ON LOANS GIVEN BY THE APPELLANT TO ITS AES B) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS: 14. ERRED IN UPHOLDING ADJUSTMENT OF RS 78,94,837 O N ACCOUNT OF UPFRONT FEES AND ADMINISTRATIVE CHARGES ON LOANS GRANTED BY THE APPELLANT TO ITS AES. ITA NO. 2190 & 2286 MUM 2012-M/S. MERCATOR LTD. 4 15. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN CARRYI NG ON ADJUSTMENT OF 0.25 PERCENT DESPITE CONSIDERING ALL-IN-COST CEILING ECB RATES ISSUED BY RBI AS CUP FOR THE PURPOSE OF BENCHMARKING INTEREST ON LOANS. THE ABOVE REVISED AND MODIFIED GROUNDS OF APPEAL AR E WITHOUT PREJUDICE AND ARE ALTERNATIVE TO EACH OTHER. 3. THE ASSESSEE VIDE APPLICATION DATED 11.05.2013 (FIL ED ON 26/05/2013) HAS RAISED THE FOLLOWING ADDITIONAL GROUND OF APPEAL: 16. FAILED TO APPRECIATE THAT THE TRANSFER PRICING REGULATIONS DOES NOT APPLY TO THE EXTENT OF OPERATIONS CARRIED OUT THROUGH OPERAT ING QUALIFYING SHIPS, BEING COMPANY REGISTERED UNDER THE TONNAGE TAX SCHEME (TT S) PROVIDED UNDER THE ACT AND INCOME IS COMPUTED AS PER THE SAID SCHEME. 4. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF SHIPPING AND CARGO HANDLING SERVICES. T HE ASSESSEE-COMPANY FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2007 -08 ON 29.10.2007 DECLARING TOTAL INCOME AT RS. 13,62,32,257/-. ALONG WITH THE RETURN OF INCOME, THE ASSESSEE FURNISHED REPORT UNDER FORM 3C EB AND REPORTED INTERNATIONAL TRANSACTION WITH ITS ASSOCIATES ENTER PRISES (AES) IN THE FOLLOWING MANNER: S.NO. NATURE OF TRANSACTIONS FY 2006-07 METHOD ADOPTED BY THE ASSESSEE FY 2005-06 1 PROVIDING VESSELS ON VOYAGE CHARTER BASIS TO AE (FEES RECEIVED FROM AES). 22,25,55,236 TNMM 7,90,22,750 2 AVAILING VESSELS ON VOYAGE CHARTER BASIS FROM AE (FEES PAID TO AES) 45,48,88,369 TNMM 20,22,26,410 3 PROVIDING LOANS TO AES (PAID TO AES) 76,21,08,121 CUP/TNMM 273,36,75,000 4 RECEIPT OF INTEREST FROM AES 13,68,29,245 CUP/TNM M 14,70,27,397 ITA NO. 2190 & 2286 MUM 2012-M/S. MERCATOR LTD. 5 5 REIMBURSEMENT OF EXPENSES (RECEIVED FROM AES) 4,51,40,408 ACTUAL 5,95,31,499 TOTAL 162,15,21,379 322,14,83,056 5. CONSEQUENT UPON REPORTING INTERNATIONAL TRANSACTION , THE ASSESSING OFFICER MADE REFERENCE TO THE TRANSFER PRICING OFFICER (TPO ) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) WITH REGARD TO INTERNATIONA L TRANSACTION WITH ITS AES ABOUT THE LOAN GRANTED TO ITS AE IN SINGAPORE. THE ASSESSEE GRANTED THE SAID LOAN TO ITS AE FOR PURCHASE OF VESSEL. THE ASS ESSEE ADOPTED A TRANSACTION NET MARGIN METHOD (TNMM) AS MOST APPROP RIATE METHOD. DURING THE TRANSFER PRICING ASSESSMENT, THE TPO ASK ED THE ASSESSEE AS TO WHY NO INTEREST HAS BEEN CHARGED ON THE LOAN PROVID ED TO AE. THE ASSESSEE SUBMITTED THAT THE AE SUFFERED LOSSES AND ITS COMME RCIAL OPERATION HAD NOT STARTED, THUS, THE AES WERE NOT IN A POSITION TO PA Y THE INTEREST. THE ASSESSEE HAS SET UP AE IN SINGAPORE TO EXPAND ITS BUSINESS O PERATION ABROAD AND SUSTAINING ITS OVERSEAS SUBSIDIARIES AND MANAGED FI NANCIAL DIFFICULTIES AND HAVE ACHIEVED THE SAID PURPOSE, THE ASSESSEE HAS PR OVIDED LOAN. THE ASSESSEE ALSO CONTENDED THAT THE ACTIVITY IS A SHAR EHOLDER ACTIVITY AND NOT CHARGING OF INTEREST WAS JUSTIFIED. THE LOAN IS PRO VIDED FROM ASSESSEE IS INTERNAL ACCRUAL AND NO COST IS INCURRED IN PROVIDI NG THE SAID FUND. THE CONTENTION OF ASSESSEE WAS NOT ACCEPTED BY THE TPO. THE TPO HELD THAT THE ASSESSEE HAS NOT PROVED THAT THE INTERNAL ACCRUAL W AS USED TO PROVIDE THE LOAN. THE ALTERNATIVE PLEA OF ASSESSEE ABOUT THE LO AN AVAILED BY AE IN SINGAPORE FROM INDEPENDENT THIRD PARTY SHOULD BE CO NSIDERED AS AN INTERNAL ITA NO. 2190 & 2286 MUM 2012-M/S. MERCATOR LTD. 6 CUP FOR THE PURPOSE OF BENCHMARKING WAS ALSO DISREG ARDED BY TPO. THE TPO MADE THE ADJUSTMENT OF RS. 7.29 CRORE ON ACCOUN T OF INTEREST ON LOAN BY ASSESSEE BY ADOPTING 7.35% RATE OF INTEREST BEIN G SBI PRIME LENDING RATE. THE TPO ALSO NOTED THAT THE ASSESSEE HAS NOT CHARGED UPFRONT FEE AND ADMINISTRATIVE CHARGES ON LOAN GIVEN TO AE. THE ASS ESSEE IN ITS REPLY STATED THAT THE UPFRONT FEES AND ADMINISTRATIVE CHARGE ARE CHARGED BY THE BANK TO COVER CERTAIN COST INCURRED TO PROVIDE THE LOAN VIZ . FEES PAID FOR PROFESSIONAL VALUER FOR OBTAINING VALUATION CERTIFICATE, FEES PA ID FOR EXPORT FOR REVIEW OF FINANCIAL STATEMENT, FEES PAID FOR RATING AGENCIES FOR OBTAINING CREDIT RATING OR FOR DOCUMENTATION ETC. IT WAS FURTHER STATED THA T A LOT OF FUNCTION ARE PERFORMED/EFFORTS ARE PUT IN BY BANKERS FOR PROVIDI NG LOAN AND HENCE UPFRONT FEES AND ADMINISTRATIVE CHARGES ARE CHARGED BY THEM . THE ASSESSEE HAS NOT CARRIED OUT ANY FUNCTION PERFORMED BY BANK AND EARN ED UPFRONT FEES AND ADMINISTRATIVE CHARGES ARE NOT CHARGED. THE ASSESSE E IN ALTERNATIVE CONTENTION SUBMITTED THAT IN CASE OF ADJUSTMENT AND UPFRONT FEES IS MADE; THE SAME SHOULD BE RESTRICTED TO .25% OF THE LOAN A MOUNT, BEING THE RATE AT WHICH THE DBS BANK CHARGED UPFRONT FEES FROM ASSESS EE. THE CONTENTION OF ASSESSEE WAS NOT ACCEPTED BY TPO. THE TPO HELD THAT IN ASSESSEES CASE, THE SBI CHARGED UPFRONT FEES OF .75% ON LOAN AMOUNT AND DBS BANK HAD CHARGED FEES .25%, THEREBY THE TPO CONSIDERED .50% AS UPFRONT FEES ON THE SAID AMOUNT THEREBY THE TPO WORKED OUT THE UPFRONT FEES AND ADMINISTRATIVE CHARGES AT RS. 4.32 CRORE IN ITS ORDER DATED 27.10. 2010. THE TPO PASSED THE ITA NO. 2190 & 2286 MUM 2012-M/S. MERCATOR LTD. 7 RECTIFICATION ORDER AND REDUCED THE UPFRONT FEES AN D ADMINISTRATIVE CHARGES TO RS. 3.15 CRORE VIDE ITS ORDER DATED 09.12.2010. ON SERVICE OF DRAFT ASSESSMENT ORDER, THE ASSESSEE FILED ITS RESPONSE A ND CONTENDED THAT THE ASSESSEE WOULD EXERCISE ITS OPTION TO FILE APPEAL B EFORE CIT(A) AND REQUESTED TO PASS FINAL ASSESSMENT ORDER. ACCORDING LY, THE ASSESSING OFFICER PASSED FINAL ASSESSMENT ORDER DATED 31.01.2011 UNDE R SECTION 143(3) RWS 144C(13). 6. ON APPEAL BEFORE THE LD. CIT(A), THE ASSESSEE WAS G RANTED PARTIAL RELIEF TO THE ASSESSEE BY DIRECTING THE ASSESSING OFFICER TO COMPUTE THE ALP ON INTEREST ON LOAN GRANTED BY ASSESSEE TO ITS AE BY A DOPTING THE RATE PRESCRIBED BY RBI FOR EXTERNAL COMMERCIAL BORROWING (ECB) I.E. SIX MONTH LIBOR + 200 BASIC POINT FOR LOAN WITH AVERAGE MATURITY PERI OD AND SIX MONTH LIBOR +300 BASIC POINT FOR LOAN WITH AVERAGE MATURITY PUR POSE MORE THAN FIVE YEARS. THE LD. CIT(A) FURTHER RESTRICTED THE UPFRON T FEES TO .25% AND THE ADMINISTRATIVE CHARGES ON LOAN TO AE WAS DELETED. 7. THUS, FURTHER AGGRIEVED BOTH THE PARTIES HAVE FILED THEIR RESPECTIVE APPEAL BY RAISING THE GROUNDS OF APPEAL AS NARRATED ABOVE. T HE REVENUE HAS CHALLENGED THE ORDER OF LD CIT(A) IN RESTRICTING TH E RATE OF UPFRONT FEE @ 0.25% OF LOAN AMOUNT AND IN DELETING THE ADDITION OF ADMINISTRATIVE CHARGES. SIMILARLY THE ASSESSEE HAS FILES ITS APPEA L AGAINST THE ORDER OF LD CIT(A) IN BY ADOPTING THE RATE PRESCRIBED BY RBI FO R EXTERNAL COMMERCIAL BORROWING (ECB) I.E. SIX MONTH LIBOR + 200 BASIC PO INT FOR LOAN WITH ITA NO. 2190 & 2286 MUM 2012-M/S. MERCATOR LTD. 8 AVERAGE MATURITY PERIOD AND SIX MONTH LIBOR +300 BA SIC POINT FOR LOAN WITH AVERAGE MATURITY PURPOSE MORE THAN FIVE YEARS. 8. WE HAVE HEARD THE SUBMISSION OF LD. AUTHORIZED REPR ESENTATIVE (AR) OF THE ASSESSEE AND LD. DEPARTMENTAL REPRESENTATIVE (DR) F OR THE REVENUE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. NO SUBMIS SIONS WERE MADE WITH REGARD TO GROUND NO.16 (ADDITIONAL GROUND), THUS, A DDITIONAL GROUND OF APPEAL WAS TREATED AS NOT PRESSED AND RESULTANTLY D ISMISSED. 9. GROUND NO. 2 TO 13 RELATES TO ADJUSTMENT ON ACCOUNT OF INTEREST ON LOAN/QUASI EQUITY BY ASSESSEE. THE LD. AR OF THE AS SESSEE SUBMITS THAT DURING THE RELEVANT PERIOD, THE ASSESSEE GRANTED IN TEREST BEARING AND INTEREST FREE LOANS TO ITS AE FOR THE PURPOSE OF VESSEL, PUR CHASE OF RIG AND ENABLING THE ASSESSEE TO RAISED FUNDS THROUGH IPO. THE DETAI LS OF LOAN WERE PROVIDED TO THE LOWER AUTHORITIES. THE ASSESSEE ADOPTED TNMM METHOD AS MOST APPROPRIATE METHOD AND COMPARED THE OPERATING MARGI N ON OPERATING INCOME EARNED BY ASSESSEE WITH THAT OF COMPARABLE C OMPANIES AND JUSTIFIED INTERNAL TRANSACTION FOR GRANTING INTEREST FREE LOA N. THE TPO MADE THE ADJUSTMENT OF RS. 7.29 CRORE ON ACCOUNT OF INTEREST BY ADOPTING 7.75% TO SBI PRIME LENDING RATE. BEFORE THE LD. CIT(A), THE ASSESSEE STATED THAT INTERNAL CUP IS AVAILABLE. THE LD. CIT(A) UPHELD TH E ORDER OF TPO AND ALSO OBSERVED THAT GRANTING OF LOAN TO AE CANNOT BE CONS IDERED AS SHAREHOLDER ACTIVITIES AND THAT NO DOCUMENTARY EVIDENCE HAS BEE N FURNISHED BY ASSESSEE AND HELD THAT NO PART OF THOSE LOAN HAVE BEEN CONVE RTED INTO EQUITY AT ALL. ITA NO. 2190 & 2286 MUM 2012-M/S. MERCATOR LTD. 9 HOWEVER, THE LD. CIT(A) GRANTED PART RELIEF TO THE ASSESSEE BY DIRECTING THE ASSESSING OFFICER TO COMPUTE THE ALP ON INTEREST ON LOAN GRANTED BY ASSESSEE TO ITS AE BY ADOPTING THE RATE PRESCRIBED BY RBI FOR EXTERNAL COMMERCIAL BORROWING (ECB) I.E. SIX MONTH LIBOR + 2 00 BASIC POINT FOR LOAN WITH AVERAGE MATURITY PERIOD AND SIX MONTH LIB OR +300 BASIC POINT FOR LOAN WITH AVERAGE MATURITY PURPOSE MORE THAN FIVE Y EARS. THE LD. AR OF THE ASSESSEE SUBMITS THAT THE LD. CIT(A) ERRONEOUSLY US ED ECB RATE AS PER THE RBI CIRCULAR. RBI CIRCULAR IS APPLICABLE TO THE ECB AND TRADE CREDIT AVAILED BY RESIDENTS, WHEREAS THE ASSESSEE HAS PROVIDED LOA N TO ITS NON-RESIDENT AE AND THUS, THE RBI CIRCULAR RELIED BY LD. CIT(A) IS NOT APPLICABLE. 10. IN SUPPORT OF HIS SUBMISSIONS THE LD AR FOR THE ASS ESSEE RELIED ON THE DECISION OF BOMBAY HIGH COURT IN CIT VS TATA AUTOCO MP SYSTEM LTD 374 ITR 516 (BOM), WHEREIN IT WAS HELD THAT THE ARMS L ENGTH RATE OF INTEREST IN THE CASE OF LOANS ADVANCED TO THE AES WOULD BE DETE RMINED ON THE BASIS OF RATE OF INTEREST CHARGED IN THE COUNTRIES WHERE LOA N IS RECEIVED/CONSUMED. 11. IN OTHER ALTERNATIVE SUBMISSION, THE LD. AR OF THE ASSESSEE SUBMITS THAT THE INTEREST RATE OF AN UNCONTROLLED TRANSACTION (INTER NAL CUP) IS AVAILABLE FOR THE PURPOSE OF BENCHMARKING OF INTERNATIONAL TRANSA CTION, PROVISION OF INTEREST FREE LOANS. THE LD. AR OF THE ASSESSEE SU BMITS THAT THE BENCH MAY CONSIDER TO ADOPT INTERNAL CUP RATE AVAILABLE ( I.E . @6.22% ) FOR THE PURPOSE OF BENCHMARKING OF THE TRANSACTION OF PROVISION OF INTEREST FREE LOANS TO AES ,THE DETAILS OF WHICH IS AVAILABLE AT PAGE NO. 384/ 385 OF THE PAPER BOOK(PB). ITA NO. 2190 & 2286 MUM 2012-M/S. MERCATOR LTD. 10 12. ON THE OTHER HAND THE LD DR FOR THE REVENUE SUPPOR TED THE ORDER OF LD CIT(A). 13. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES A ND HAVE GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. DURING THE TRA NSFER PRICING ADJUSTMENT THE TPO INDENTIFIED THE FOLLOWING TRANSACTION FOR D ETERMINATION OF ALP; SR NO. NAME OF AE PURPOSE OF LOAN AMOUNT OF LOAN (RS.) RATE OF INTEREST PERIOD 1 MERCATOR OFFSHORE LTD, SINGAPORE PURCHASE OF RIG 11,58,73,522/- NILL 21.06.2006 TO 31.03. 2007 2 (A)MERCATOR LINES SINGAPORE PTE LTD ENABLING RAISING FUNDS THROUGH IPO 122,71,30,741/- 7.75% 01.04.2006 TO 31.03.2007 116,86,95,944/- 7.75% 01.04.2006 TO 30.09.2006 116,86,95,944/- NILL 01.10.2006 TO 31.03.2007 (B)MERCATOR LINES SINGAPORE PTE LTD SINGAPORE PURCHASE OF VESSEL 61,88,70,000/- NILL 06.01.2007 TO 31.03.2007 3 MERCATOR INTERNATIONAL LTD SINGAPORE DOWNSTREAM INVESTMENT 2,73,64,599/- NILL 07.02.2007 TO 31.03.2007 14. DURING THE TRANSFER PRICING ASSESSMENT, THE TPO ASK ED THE ASSESSEE FOR JUSTIFICATION AS TO WHY NO INTEREST IS CHARGED ON T HE LOANS PROVIDED TO AE. THE ASSESSEE FILED ITS DETAILED REPLY AND CONTENDED THAT THE AE SUFFERED LOSSES AND ITS COMMERCIAL OPERATION HAD NOT STARTED , THUS, THE AES WERE NOT IN A POSITION TO PAY THE INTEREST. THE ASSESSEE HAS SET UP AE IN SINGAPORE TO EXPAND ITS BUSINESS OPERATION ABROAD AND SUSTAINING ITS OVERSEAS SUBSIDIARIES AND MANAGED FINANCIAL DIFFICULTIES AND HAVE ACHIEVE D THE SAID PURPOSE, THE ITA NO. 2190 & 2286 MUM 2012-M/S. MERCATOR LTD. 11 ASSESSEE HAS PROVIDED LOAN. IT WAS ALSO CONTENDED T HAT THE ACTIVITY IS A SHAREHOLDER ACTIVITY AND NOT CHARGING OF INTEREST W AS JUSTIFIED. THE LOAN IS PROVIDED FROM ASSESSEE IS INTERNAL ACCRUAL AND NO C OST IS INCURRED IN PROVIDING THE SAID FUND. THE EXPLANATION FURNISHED BY THE ASSESSEE WAS NOT ACCEPTED BY THE TPO. THE TPO CONCLUDED THAT THE ASS ESSEE HAS NOT PROVED THAT THE INTERNAL ACCRUAL WAS USED TO PROVIDE THE L OAN. THE ALTERNATIVE PLEA OF ASSESSEE ABOUT THE LOAN AVAILED BY AE IN SINGAPORE FROM INDEPENDENT THIRD PARTY SHOULD BE CONSIDERED AS AN INTERNAL CUP FOR T HE PURPOSE OF BENCHMARKING WAS ALSO DISREGARDED BY TPO. THE TPO M ADE THE ADJUSTMENT OF RS. 7.29 CRORE ON ACCOUNT OF INTEREST ON LOAN BY ASSESSEE BY ADOPTING 7.35% RATE OF INTEREST BEING SBI PRIME LENDING RATE . 15. BEFORE LD. CIT (A) THE ASSESSEE AGAIN FILED DETAILE D SUBMISSIONS AS SUBMITTED BEFORE US. THE LD CIT (A) AFTER CONSIDERI NG THE CONTENTION OF THE ASSESSEE DIRECTED THE ASSESSING OFFICER TO COMPUTE THE ALP ON INTEREST ON LOAN GRANTED BY ASSESSEE TO ITS AE BY ADOPTING THE RATE PRESCRIBED BY RBI FOR EXTERNAL COMMERCIAL BORROWING (ECB) I.E. SIX MO NTH LIBOR + 200 BASIC POINT FOR LOAN WITH AVERAGE MATURITY PERIOD AND SIX MONTH LIBOR +300 BASIC POINT FOR LOAN WITH AVERAGE MATURITY PURPOSE MORE T HAN FIVE YEARS. 16. BEFORE US THE LD. AR FOR THE ASSESSEE VEHEMENTLY SU BMITTED THAT ECB RATE AS PER THE RESERVE BANK OF INDIA (RBI) CIRCULAR IS APP LICABLE TO THE ECB AND TRADE CREDIT AVAILED BY RESIDENTS, WHEREAS THE ASSE SSEE HAS PROVIDED LOAN TO ITS NON-RESIDENT AE AND THUS, THE RBI CIRCULAR RELI ED BY LD. CIT(A) IS NOT ITA NO. 2190 & 2286 MUM 2012-M/S. MERCATOR LTD. 12 APPLICABLE. WE FIND CONVINCING FORCE IN THE SUBMISS IONS OF THE LD. AR FOR THE ASSESSEE. WE ARE CONSCIOUS OF THE FACT THAT THE ARMS LENGTH RATE OF INTEREST IN THE CASE OF LOANS ADVANCED TO THE AES IS TO BE DETERMINED ON THE BASIS OF RATE OF INTEREST CHARGED IN THE COUNTRIES WHERE LOAN IS RECEIVED/ CONSUMED. THE LD AR FOR THE ASSESSEE IN ALTERNATIVE SUBMISSIONS ALSO SUBMITTED THAT INTERNAL CUP IS AVAILABLE, FOR THE P URPOSE OF BENCHMARKING OF TRANSACTION OF INTEREST FREE LOAN AS THE AES ALSO A VAILED LOAN FROM DBS BANK SINGAPORE AND THE DOCUMENTS EVIDENCING THE INTEREST RATE AT 6.22% CHARGED BY DBS BANK IS FILED ON RECORD VIDE PAGE NO. 384/38 5 OF PB. CONSIDERING THE SUBMISSIONS OF THE LD. AR FOR THE ASSESSEE, WE DIRECT THE AO/TPO TO CONSIDER INTERNAL CUP OF 6.22% FOR THE PURPOSE OF B ENCHMARKING OF INTERNATIONAL TRANSACTION OF PROVISION OF INTEREST FREE LOANS AND RECOMPUTE THE ARMS LENGTH PRICE AFRESH. NEEDLESS TO DIRECT T HAT BEFORE MAKING FRESH CALCULATION/ COMPUTATION THE AO/TPO SHALL GRANT OPP ORTUNITY OF HEARING TO THE ASSESSEE. 17. IN THE RESULT THESE GROUNDS OF APPEAL ARE ALLOWED FOR STATISTICAL PURPOSE. 18. GROUND NO. 14 & 15 AND THE GROUND OF APPEAL RAISED BY THE REVENUE ARE INTERCONNECTED, THUS, TAKEN TOGETHER FOR DISCUSSION S AND ADJUDICATION. THE LD AR FOR THE ASSESSEE SUBMITS THAT AN ADJUSTMENT OF R S. 3,15,79,348/- ON ACCOUNT OF UPFRONT FEE COST AND ADMINISTRATIVE EXPE NSES ON LOAN GIVEN TO FOREIGN AES WAS MADE BY TPO, HOWEVER, ON APPEAL THE LD CIT(A) DIRECTED THE TPO/AO TO WORKOUT ADJUSTMENT BY TAKING CONSOLID ATED RATE OF 0.25% OF ITA NO. 2190 & 2286 MUM 2012-M/S. MERCATOR LTD. 13 UPFRONT FEE FOR LOAN GRANTED BY ASSESSEE AND DELETE D THE ADDITION OF ADMINISTRATIVE CHARGES. THE LD AR FOR THE ASSESSEE FURTHER SUBMITS THAT GENERALLY UPFRONT FEES AND ADMINISTRATIVE CHARGES A RE GENERALLY CHARGED BY THE BANKS TO RECOVER CERTAIN COSTS INCURRED IN PROV IDING LOANS, VIZ FEES PAID TO PROFESSIONAL VALUER FOR OBTAINING VALUATION CERT IFICATE, FEES PAID TO EXPERTS FOR REVIEW OF FINANCIAL STATEMENTS, FEES PAID TO RA TING AGENCIES FOR OBTAINING CREDIT RATING OF THE BORROWER, FEES PAID TO PROFESS IONAL FOR VETTING THE DOCUMENTS SUBMITTED BY THE BORROWER, THE COMMISSION PAID TO AGENTS/ FINANCIAL INTERMEDIARIES IF ANY, EXPENSES INCURRED FOR MANAGING THE LOANS ACCOUNT, THEY WORK MONTHLY STOCK STATEMENTS, DATED STATEMENTS AND INTERIM FINANCIAL STATEMENTS ETC. FURTHER, BANKS ALSO PREPA RE/VET THE FINANCIAL PROJECTIONS OF THE BORROWER, CARRY OUT DUE ALLEGIAN CE AND PREPARE A REPORT ON THE FINANCIAL VIABILITY BEFORE PROVIDING LOANS. THE ASSESSEE IS NOT IN THE BUSINESS OF FINANCING. THE ASSESSEE HAS NOT INCURRE D ANY EXPENSES WHILE GRANTING LOAN TO ITS ASSOCIATED ENTERPRISES. THE LE ARNED CIT(A) HIMSELF AGREED THAT THE CHARGING OF UPFRONT FEES OR ADMINIS TRATIVE FEE BY ASSESSEE AKIN TO THE BANKS WOULD NOT BE APPROPRIATE. THE FIN DING OF LEARNED CIT(A) ARE CONTRADICTORY IN ITS OWN. THE LEARNED AR OF THE ASSESSEE FURTHER SUBMITS THAT PROVIDING OF LOAN BY ASSESSEE TO ITS AES IS NO T AKIN TO PROVIDING OF LOAN BY BANKS CALLING FOR ANY LOAN PROCESSING FEES. THE LEARNED AR PRAYED FOR DELETING THE ENTIRE ADDITIONS. ITA NO. 2190 & 2286 MUM 2012-M/S. MERCATOR LTD. 14 19. ON THE OTHER HAND THE LD. DR FOR THE REVENUE SUPPOR TED THE ORDER OF TPO/ AO. THE LD DR WOULD SUBMITS THAT THE LD CIT(A) GRAN TED RELIEF TO THE ASSESSEE BY DIRECTING THE ASSESSING OFFICER TO ADOP T .25% OF UPFRONT FEE ON ADHOC BASIS. THE LD DR PRAYED TO RESTORE THE ORDER OF TPO/AO AND TO SET ASIDE THE ORDER OF LD CIT(A). 20. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF THE PA RTIES AND HAVE GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. DURING THE TRANSFER PRICING ADJUSTMENT PROCEEDINGS, TPO TOOK HIS VIEW THAT THE ASSESSEE HAS NOT CHARGED UPFRONT FEE AND ADMINISTRATIVE CHARGES ON L OAN GIVEN TO AE. SHOW CAUSE NOTICE WAS ISSUE TO THE ASSESSEE. THE ASSESSE E FILED ITS REPLY AND STATED THAT THE UPFRONT FEES AND ADMINISTRATIVE CHARGE ARE CHARGED BY THE BANK TO COVER CERTAIN COST INCURRED TO PROVIDE THE LOAN VIZ . FEES PAID FOR PROFESSIONAL VALUER FOR OBTAINING VALUATION CERTIFICATE, FEES PA ID FOR EXPORT FOR REVIEW OF FINANCIAL STATEMENT, FEES PAID FOR RATING AGENCIES FOR OBTAINING CREDIT RATING OR FOR DOCUMENTATION ETC. IT WAS FURTHER STATED THA T A LOT OF FUNCTION ARE PERFORMED/EFFORTS ARE PUT IN BY BANKERS FOR PROVIDI NG LOAN AND HENCE UPFRONT FEES AND ADMINISTRATIVE CHARGES ARE CHARGED BY THEM . THE ASSESSEE HAS NOT CARRIED OUT ANY FUNCTION PERFORMED BY BANK AND EARN ED UPFRONT FEES AND ADMINISTRATIVE CHARGES ARE NOT CHARGED. THE ASSESSE E IN ALTERNATIVE CONTENTION SUBMITTED THAT IN CASE OF ADJUSTMENT AND UPFRONT FEES IS MADE; THE SAME SHOULD BE RESTRICTED TO .25% OF THE LOAN A MOUNT, BEING THE RATE AT WHICH THE DBS BANK CHARGED UPFRONT FEES FROM ASSESS EE. THE CONTENTION OF ITA NO. 2190 & 2286 MUM 2012-M/S. MERCATOR LTD. 15 ASSESSEE WAS NOT ACCEPTED BY TPO. THE TPO HELD THAT IN ASSESSEES CASE, THE SBI CHARGED UPFRONT FEES OF .75% ON LOAN AMOUNT AND DBS BANK HAD CHARGED FEES .25%, THEREBY THE TPO CONSIDERED .50% AS UPFRONT FEES ON THE SAID AMOUNT THEREBY THE TPO WORKED OUT THE UPFRONT FEES AND ADMINISTRATIVE CHARGES AT RS. 4.32 CRORE IN ITS ORDER DATED 27.10. 2010. THE TPO PASSED THE RECTIFICATION ORDER AND REDUCED THE UPFRONT FEES AN D ADMINISTRATIVE CHARGES TO RS. 3.15 CRORE VIDE ITS ORDER DATED 09.12.2010. BEFORE LEARNED CIT(A) THE ASSESSEE MADE SIMILAR SUBMISSION AS MADE BEFORE TPO /AO AS WELL AS BEFORE THIS BENCH. THE LEARNED CIT(A) AFTER CONSIDERING TH E SUBMISSION OF ASSESSEE RESTRICTED THE UPFRONT FEES TO .25% OF THE LOAN AMO UNT AND THE ADMINISTRATIVE CHARGES ON LOAN TO AE WAS DELETED. 21. IN OUR VIEW WHILE BENCHMARKING INTERNATIONAL TRANSA CTION, AN ELEMENT OF INCOME, EXPENSES, OR IN APPORTIONMENT OF ANY CONTRI BUTION TO ANY COST, MUST BE EMBEDDED IN IT. IN CASE OF LENDING OR BORROWING OF MONEY, THE DETERMINATION OF ARM AND SPICE IS MADE ON THE BASIS OF INCOME, EXPENSES, INTEREST, ALLOCATION OR APPORTIONMENT OR ANY CONTRI BUTION TO ANY COST ELEMENT IS ROOTED IN THE TRANSACTION WHICH MAY HAVE BEARING ON THE PROFIT OR LOSS OF THE ASSESSEE. IN OUR HUMBLE VIEW, IN CASE OF CAPITA L FINANCING THE USUAL ELEMENT IS THE INTEREST EARNED OR INCURRED. WE HAVE NOTED THAT THE CASE OF ASSESSEE THROUGHOUT THE PROCEEDING IS THAT THE LOAN S WERE PROVIDED FROM ASSESSEES OWN FUND AND THAT NO EXPENSES WERE INCUR RED. THE TPO HAS NOT BROUGHT ON RECORD THAT WHILE GRANTING LOAN THE ASSE SSEE TO ITS ASSESSEE HAS ITA NO. 2190 & 2286 MUM 2012-M/S. MERCATOR LTD. 16 INCURRED, RECOVERED OR EARNED ANY EXPENSES ON ACCOU NT OF UPFRONT FEES OR ADMINISTRATIVE CHARGES. CONSIDERING THE AFORESAID FACTUAL DISCUSSION, WE DIRECT THE AP/TPO TO DELETE THE ENTIRE UPFRONT FEES AND ADMINISTRATIVE CHARGES. IN THE RESULT THE GROUND NO. 13 & 14 OF AP PEAL OF ASSESSEE ARE ALLOWED. RESULTANTLY THE GROUNDS OF APPEAL RAISED B Y REVENUE ARE DISMISSED. 22. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALL OWED AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON 16/06/2020 AS PER RUL E 34(5) OF ITAT RULES, 1963. SD/- SD/- R.C. SHARMA PAWAN SINGH ACCOUNTANT MEMBER JUDICIAL M EMBER MUMBAI, DATE: 16.06.2020 SK COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. DR J BENCH, ITAT, MUMBAI 6. GUARD FILE BY ORDER, DY./ASST. REGISTRAR ITAT, MUMBAI