The DCIT(OSD)Circlw-8, Ahmedabad V. M/s. Sintex Industries Ltd., Ahmedabad

ITA 2553/AHD/2009

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63258 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 26-09-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 07-09-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DEVENDRASINGH KALYAN
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD C BENCH BEFORE: SHRI D.K. TYAGI, JUDICIAL MEMBER AND SHRI ANIL CHATURVEDI, ACCOUNTANT ME MBER ITA NO.2542/AHD/2009 A.Y. 2008-09 SINTEX INDUSTRIES LIMITED 701-2, ABHIJEET-1, MITHAKALI SIX ROADS, ELLISBRIDGE, AHMEDABAD 380 009 PAN-AADCS0858E APPELLANT VS. THE A.C.I.T.(OSD), CIRCLE-8 (OSD) AHMEDABAD RESPONDENT WITH ITA NO.2553/AHD/2009 A.Y. 2008-09 THE D.C.I.T.(OSD), CIRCLE-8 AHMEDABAD APPELLANT VS. SINTEX INDUSTRIES LIMITED ABHIJEET-1, 7 TH FLOOR, MITHAKALI SIX ROADS, AHMEDABAD PAN-AADCS0858E RESPONDENT DEPARTMENT BY : SHRI DEVENDRA SINGH KALYAN, CIT- D .R. ASSESSEE BY : SHRI SANJAY R. SHAH, A.R. DATE OF HEARING : 21.11.2012 DATE OF PRONOUNCEMENT : 31.12.2012 / ORDER PER : D.K. TYAGI, JUDICIAL MEMBER THESE CROSS APPEALS AGAINST THE ORDER OF LD. CIT(A) -XIV, AHMEDABAD, DATED 25.06.2009 WERE HEARD TOGETHER AND ARE BEING DISPOS ED OF BY THIS CONSOLIDATED ORDER. 2. GROUND NO.1 IN ASSESSEES APPEAL IS GENERAL IN N ATURE AND DOES NOT REQUIRE ANY ADJUDICATION. ITA NO.2542/AHD/2009, A.Y. 2008-09 WITH ITA NO.2553/AHD/2009, A.Y. 2008-09 2 3. GROUND NO.2 OF ASSESSEES APPEAL READS AS UNDER: - 2. THE LD. CIT(A) HAS ERRED IN CONFIRMING ALLOCATI ON OF DIRECTORS REMUNERATION, DIRECTORS TRAVELING EXPENSES, AUDIT FEES, COMPUTER EXPENSE AND SECURITY CHARGES FOR CALCULATING PROFIT ELIGIBLE FOR DEDUCTION U/S 80-IA OF THE INCOME TAX ACT, 1961. THIS GROUND IS SIMILAR TO GROUND NO.1 OF REVENUES APPEAL WHICH READS AS UNDER:- THE LD. CIT(A)-XIV, AHMEDABAD ERRED IN LAW AND ON FACTS IN DIRECTING TO ALLOW GENERAL OFFICE CHARGES AND MISCELLANEOUS EXPE NSES OF RS.2789490/- OUT OF THE ASSESSEES CLAIM FOR DEDUCT ION U/S 80IA. 4. BRIEF FACTS OF THE CASE ARE THAT THE A.O. HAS RE DUCED THE CLAIM OF THE ASSESSEE REGARDING DEDUCTION U/S 80IA BY RS.27.89 L ACS BY ALLOCATING VARIOUS HEADQUARTERS EXPENSES IN THE RATIO OF THE TURN OVER . LD. CIT(A) HAS GRANTED RELIEF TO THE ASSESSEE IN RESPECT OF GENERAL CHARGE S OF THE CORPORATE OFFICE I.E. RS.306.39 LACS AND MISCELLANEOUS EXPENSES OF RS.97/ - LACS FOLLOWING THE PREVIOUS ORDER OF HIS PREDECESSOR IN ASSESSMENT YEAR 2006-07 AND 2007-08. AGAINST THE RELIEF GRANTED BY LD. CIT(A) REVENUE IS IN APPEAL B EFORE US WHILE AGAINST THE REDUCTION OF THE CLAIM OF THE ASSESSEE U/S 80IA OF THE ACT ASSESSEE HAS COME IN APPEAL BEFORE US. 5. AT THE TIME OF HEARING IT WAS FAIRLY CONCEDED BY LD. COUNSEL OF THE ASSESSEE THAT THE ISSUE IS COVERED AGAINST THE ASSESSEE BY T HE TRIBUNALS ORDER IN ASSESSEES OWN CASE FOR THE A.Y. 2004-05 AND ALSO B Y THE TRIBUNALS ORDER IN ASSESSEES OWN CASE FOR THE A.Y. 2006-07, THE COPIE S OF THESE ORDERS WERE ALSO FILED BUT ALSO SUBMITTED THAT THESE COMMON HEADQUAR TERS EXPENSES WERE NOT EVEN INDIRECTLY RELATED TO SECTION 80IA AND SHOULD NOT HAVE BEEN ALLOCATED BY CIT(A) AND ALSO PLACED RELIANCE ON THE TRIBUNALS D ECISION IN THE CASE OF DCW LTD. VS. ADDL. C.I.T. 132 TTJ 442. LD. D.R. RELIED ON T HE ORDER OF THE A.O. ITA NO.2542/AHD/2009, A.Y. 2008-09 WITH ITA NO.2553/AHD/2009, A.Y. 2008-09 3 6. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD WE FIND THAT THIS ISSUE IS COVERED AGAINST THE ASSESSEE BY THE TRIBUN ALS ORDER IN ASSESSEES OWN CASE FOR THE A.Y. 2004-05 WHEREIN ON IDENTICAL FACT S FOLLOWING WAS HELD:- WE HAVE CONSIDERED THE RIVAL SUB MISSIONS AND PERU SED THE MATERIAL ON RECORD AND HAVE GONE THROUGH THE ORDERS OF THE AUTH ORITIES BELOW. AFTER CONSIDERING THE NATURE OF EXPENSES COMPRISED IN COM MON HEAD-QUARTER EXPENSES OF RS.461.79 LAKHS, WE FEEL THAT THE SAME WERE RIGHTLY ALLOCATED BY THE A.O. TO CPP UNIT BECAUSE DIRECTOR S AND HEAD-QUARTER ALSO HAVE IMP9ORTANT ROLE IN THE WORKING OF CPP UNI T AND HENCE THESE EXPENSES ARE TO BE APPORTIONED TO CPP UNIT ALSO AND HENCE, WE DECLINE TO INTERFERE IN THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND ACCORDINGLY THIS PART OF GROUND NO.1 AND 1.1 OF C.O. ARE REJECT ED. 7. IN VIEW OF THE ABOVE, GROUND NO.2 OF ASSESSEES APPEAL IS DISMISSED WHILE GROUND NO.1 OF REVENUES APPEAL IS ALLOWED. 8. GROUND NO.2.1 AND 2.2 OF ASSESSEES APPEAL READS AS UNDER: 2.1 LD. CIT(A) HAS ERRED IN CONFIRMING ALLOCATION OF SALARY OF RS.88.31 LACS PAID TO MR. S. B. DANGAYACH, MANAGING DIRECTOR & IN-CHARGE OF PLASTIC DIVISION AND SALARY OF RS.125.18 LACS PAID TO MR. RAHUL PATEL, MANAGING DIRECTOR & LOOKING AFTER SALES OF TEXTILE DIVISION TO CAPTIVE POWER PLANT FOR CALCULATION OF PROFIT ELIGIBLE FOR DEDUCTION U/S 801A OF THE ACT WHO ARE DEDICATEDLY WORKING ON THE RESPECTIVE D IVISIONS AND HAVE NOTHING TO DO WITH OPERATION OF THE CPP UNITS. IT I S SUBMITTED TO BE HELD SO NOW. 2.2 THE LD. CIT(A) HAS ERRED IN CONFIRMING ALLOCATI ON OF DIRECTORS REMUNERATION TOTALING TO RS.577.00 LACS INSTEAD OF RS.363.51 LACS WITHOUT APPRECIATING THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE APPELLANT. IT IS SUBMITTED TO BE HELD SO NOW. 9. AT THE TIME OF HEARING LD. COUNSEL OF THE ASSESS EE IN RESPECT OF THESE GROUNDS SUBMITTED THAT DIRECTORS REMUNERATION INCL UDED REMUNERATION OF THE TWO DIRECTORS OF THE TEXTILE AND PLASTIC DIVISISION WHI CH ARE NOT RELATED TO THE WORKING OF THE CPP UNIT. THE ROLE AND RESPONSIBILITIES OF THE DIRECTORS ARE DIFFERENT AND SPECIFICALLY ASSIGNED AND HENCE THE EXPENSES WHICH ARE NOT RELATED TO THE CPP UNITS SHOULD NOT BE APPORTIONED. ITA NO.2542/AHD/2009, A.Y. 2008-09 WITH ITA NO.2553/AHD/2009, A.Y. 2008-09 4 10. AFTER HEARING BOTH THE PARTIES, WE FIND THAT TH IS IS THE NEW CONTENTION RAISED BY THE ASSESSEE DURING THE YEAR UNDER APPEAL . HOWEVER, SINCE TOTAL DIRECTORS REMUNERATIONS WERE CONSIDERED FOR DISALL OWANCE AS MENTIONED IN GROUND NO.2, THIS IS ALSO COVERED AGAINST THE ASSES SEE BY THE ORDER OF THE TRIBUNAL FOR A.Y. 2004-05. 11. IN THE RESULT, THESE GROUNDS OF ASSESSEE ARE DI SMISSED. 12. GROUND NO.3 AND 3.1 OF ASSESSEE APPEAL READ AS UNDER:- 3. THE LD. CIT(A) HAS ERRED IN CONFIRMING ALLOCATI ON OF SALARY EXPENSES OF EMPLOYEES OF PLASTIC DIVISION IN THE RATIO OF S ALES OF BADDI UNIT FOR THE PURPOSE OF COMPUTATION OF PROFIT ELIGIBLE FOR DEDUC TION U/S 80IC OF THE ACT. 3.1 WITHOUT PREJUDICE TO ABOVE, THE LD. CIT(A) HAS ERRED IN CONFIRMING ALLOCATION OF SALARY OF ALL EMPLOYEES OF ENTIRE PLA STIC DIVISION INSTEAD OF SALARY OF EMPLOYEES OF PLASTIC DIVISION WHO ARE MAN AGING AFFAIRS OF THE ENTIRE DIVISION AS AGAINST ALLOCATING SALARY OF EMP LOYEES OF SEPARATELY IDENTIFIED UNITS OF PLASTIC DIVISION, IN THE RATIO OF SALES RELATING TO BADDI UNIT FOR THE PURPOSE OF COMPUTATION OF PROFIT ELIGI BLE FOR DEDUCTION U/S 80IC OF THE ACT. IT IS SUBMITTED TO BE HELD SO NOW . 13. THE A.O. HAS ALLOCATED TOTAL SALARY OF COMPANY IN THE RATIO OF SALES. LD. CIT(A) HAS GRANTED RELIEF BY CONFIRMING THE ALLOCAT ION OF SALARY OF PLASTIC DIVISION ONLY ON THE BASIS OF SALE OF SAID UNIT TO SALES OF PLASTIC DIVISION SALES ONLY AND NOT TOTAL SALARY OF THE COMPANY. 14. AT THE TIME OF HEARING LD. COUNSEL OF THE ASSES SEE SUBMITTED THAT ASSESSEE IS ENTITLED FOR FURTHER RELIEF FOR THE SALARY OF ON LY THOSE EMPLOYEES OF THE PLASTIC DIVISION WHO ARE MANAGING THE AFFAIRS OF THE ENTIRE DIVISION SHOULD ONLY BE ALLOCATED AS AGAINST THE SALARY OF THE EMPLOYEES OF THE ENTIRE PLASTIC DIVISION. LD. D.R., ON THE OTHER HAND, RELIED ON THE ORDER OF THE A.O. 15. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD, WE ARE OF THE CONSIDERED OPINION THAT IN VIEW OF THE PRINCIPLE AD OPTED IN THE EARLIER GROUNDS ITA NO.2542/AHD/2009, A.Y. 2008-09 WITH ITA NO.2553/AHD/2009, A.Y. 2008-09 5 THAT ALL THE SALARIES ARE TO BE ALLOCATED, ASSESSEE IS NOT ENTITLED TO RELIEF BEYOND WHAT IS GRANTED BY THE LD. CIT(A). THEREFORE, THES E GROUNDS OF THE ASSESSEE ARE DISMISSED. 16. GROUND NOS.4 AND 4.1 OF THE ASSESSEE READ AS UN DER:- 4. THE LD. CIT(A) HAS ERRED IN CONFIRMING ALLOCATI ON OF TOTAL ADMINISTRATIVE AND GENERAL EXPENSES OF THE APPELLA NT COMPANY AS A WHOLE ON THE BASIS OF RATIO OF SALES INSTEAD OF ALL OCATING ADMINISTRATIVE AND GENERAL EXPENSES OF PLASTIC DIVISION OF THE APP ELLANT COMPANY (UNDER WHICH BADDI UNIT WORKS) ON THE RATIO OF INVE STMENTS AS MADE BY THE APPELLANT FOR THE PURPOSE OF COMPUTATION OF PRO FIT ELIGIBLE FOR DEDUCTION U/S 80IC OF THE ACT. IT IS SUBMITTED TO BE HELD SO NOW. 4.1 WITHOUT PREJUDICE TO ABOVE AND IN THE FACTS AND CIRCUMSTANCES OF THE CASE, IF AT ALL ANY ADMINISTRATIVE AND GENERAL EXPENSES ARE TO BE ALLOCATED, THEN ONLY EXPENSES OF THE PLASTICS DIVIS ION OF THE COMPANY PERTAINING AND RELATABLE TO THE BADDI UNITS CAN ONL Y BE ALLOCATED. IT IS SUBMITTED IT BE SO HELD NOW. 17. BRIEF FACTS OF THE CASE ARE THAT THE A.O. HAS A LLOCATED RS.810.72 LACS I.E. 18% OF RS.4504/- LACS TOWARDS ADMINISTRATIVE AND GE NERAL CHARGES TO BADDI UNIT IN THE RATIO OF SALES FOR CALCULATING THE CLAIM FOR DEDUCTION U/S 80IC OF THE ACT. THIS ACTION OF THE A.O. HAS BEEN CONFIRMED BY LD. C IT(A). 18. AT THE TIME OF HEARING IT WAS SUBMITTED BY LD. COUNSEL OF THE ASSESSEE THAT OUT OF TOTAL GENERAL CHARGES AMOUNTING TO RS.4504/- LACS A SUM OF RS.2470.71/- LACS IS RELATED TO PLASTIC DIVISION. IT WAS FURTHE R SUBMITTED THAT COMPANY HAS ALREADY ALLOCATED RS.100.89/- LACS TOWARDS SUCH EXP ENSES AND HENCE NO FURTHER ALLOCATION IS CALLED FOR. HOWEVER, HE CONCEDED THA T THE ISSUE IS BROADLY COVERED AGAINST THE ASSESSEE BY THE ORDER OF THE ITAT FOR T HE A.Y. 2005-06 IN ASSESSEES OWN CASE VIDE PARA 15 TO 17 OF THAT ORDER. LD. D.R . RELIED ON THE ORDER OF THE LOWER AUTHORITIES. ITA NO.2542/AHD/2009, A.Y. 2008-09 WITH ITA NO.2553/AHD/2009, A.Y. 2008-09 6 19. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD WE FIND THAT THE ISSUE UNDER THIS APPEAL IS COVERED AGAINST THE ASSE SSEE BY THE TRIBUNALS ORDER FOR THE A.Y. 2004-05 IN ASSESSEES OWN CASE. HOWEV ER, WE FEEL THAT MATTER BE SENT BACK TO THE FILE OF THE A.O. ONLY FOR VERIFICA TION OF THE CALCULATION MISTAKE TO THE EXTENT OF RS.100.89/- LACS POINTED OUT BY THE A SSESSEE BEFORE US. THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL P URPOSE. 20. GROUND NO.5 OF THE ASSESSEE IS CONSEQUENTIAL IN NATURE AND DOES NOT REQUIRE ANY ADJUDICATION. 21. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED FOR STATISTICAL PURPOSE. 22. NOW WE ARE COMING TO THE REVENUES APPEAL (ITA NO.2553/AHD/2009 ) 23. GROUND NO.1 OF THE REVENUES APPEAL HAS ALREADY BEEN ALLOWED BY US WHILE DECIDING GROUND NO.2 OF ASSESSEES APPEAL. 24. GROUND NO.2 OF THE REVENUE READS AS UNDER:- THE LD. CIT(A) HAS ERRED IN DIRECTING TO ALLOCATE INTEREST EXPENSES ON THE BASIS OF INVESTMENT INSTEAD OF TURNOVER FOR THE PURPOSE OF DEDUCTION U/S 80IC ON BADDI UNIT. 25. AT THE TIME OF HEARING LD. COUNSEL OF THE ASSES SEE SUBMITTED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNA LS DECISION IN ASSESSEES OWN CASE FOR THE A.Y. 2003-04 VIDE PARA 8 OF THAT ORDER AND SIMILAR ORDER WAS FOLLOWED IN SUBSEQUENT A.YS. 2005-06 TO 2007-08. L D. D.R. RELIED ON THE ORDER OF THE A.O. 26. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD WE FIND THAT LD. CIT(A) HAS FOLLOWED HIS EARLIER ORDERS IN A.YS. 200 3-04, 04-05, 05-06 AND 06-07 ITA NO.2542/AHD/2009, A.Y. 2008-09 WITH ITA NO.2553/AHD/2009, A.Y. 2008-09 7 WHILE GRANTING RELIEF TO THE ASSESSEE AND IN THOSE YEARS THE ORDER PASSED BY HIM HAVE BEEN UPHELD BY THE TRIBUNAL. THEREFORE, THE M ATTER IS COVERED IN FAVOUR OF THE ASSESSEE. RESPECTFULLY FOLLOWING THE EARLIER O RDERS OF THE TRIBUNAL IN ASSESSEES OWN CASE, THIS GROUND OF THE REVENUE IS DISMISSED. 27. GROUND NO.3 OF THE REVENUE READS AS UNDER:- THE LD. CIT(A) HAS ERRED IN DIRECTING TO ALLOCATE SALARY EXPENSES ON THE BASIS OF INVESTMENT INSTEAD OF TURNOVER FOR THE PUR POSE OF DEDUCTION U/S 80IC ON BADDI UNIT. 28. AT THE TIME OF HEARING, AT THE VERY OUTSET, IT WAS SUBMITTED BY LD. COUNSEL OF THE ASSESSEE THAT SALARY ALLOCATION HAS BEEN MAD E BY LD. CIT(A) IN THE RATIO OF TURNOVER AND NOT IN THE RATIO OF INVESTMENT. THUS THE GROUND TAKEN BY THE REVENUE IS INCORRECT AND MISCONCEIVED AND DESERVES TO BE DISMISSED. LD. D.R., HOWEVER, RELIED ON THE ORDER OF LD. CIT(A). 29. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD WE FIND THAT LD. CIT(A) IN PARA 6.2 OF HIS ORDER HAS CLEARLY MENTION ED THAT ALLOCATION IS MADE ON THE BASIS OF SALES OF BADDI UNIT AND NOWHERE THERE IS A REFERENCE TO MAKE ALLOCATION ON THE BASIS OF INVESTMENT. THEREFORE, THIS GROUND OF THE REVENUE IS AGAINST THE FACTS OF THE CASE AND THEREFORE, THE SA ME IS DISMISSED. 30. GROUND NO.4 OF THE REVENUE READS AS UNDER:- 4. THE LD. CIT(A) HAS ERRED IN DIRECTING TO DELETE THE ADDITION OF RS.34023375/- ON A/C OF ADJUSTMENT MADE IN CONNECTI ON WITH INTERNATIONAL TRANSACTION U/S 92CA(3). 31. THIS GROUND OF THE REVENUE RELATES TO ADDITION OF RS.3,40,23,375/- MADE BY THE A.O. ON ACCOUNT OF ADJUSTMENT MADE IN CONNEC TION WITH INTEREST TO TRANSACTION U/S 92CA(3) ON THE BASIS OF THE ORDER P ASSED BY THE ADDL. COMMISSIONER OF INCOME TAX (TPO)-1, AHMEDABAD. ON A REFERENCE MADE BY THE ITA NO.2542/AHD/2009, A.Y. 2008-09 WITH ITA NO.2553/AHD/2009, A.Y. 2008-09 8 A.O. IN RESPECT OF INTERNATIONAL TRANSACTION OF ADV ANCING LOAN OF EURO17328380 TO THE ASSESSEE SUBSIDIARY COMPANY M/S SINTEX HOLDING BV @ 1%, THE TPO HAS BY ADOPTING THE AVERAGE EURIBOR RATE OF 4.5% PLUS 0.5 I.E. 5% WORKED OUT THE INTEREST ON THE INTERNATIONAL INTEREST TRANSACTION OF LOAN OF EURO 173228380 AT EURO 674103.96 AND MADE ADDITION OF RS.3,40,23,375/ -. ASSESSEES SUB MISSION BEFORE THE TPO WAS THAT THE AMOUNT ADVANCED WAS NOT FOR THE PURPOSE OF LENDING BUT WAS FOR EXPANSION OF BUSINESS. THIS ARRANGEMEN T WAS FOR THE BUSINESS/ECONOMIC NEED OF THE GROUP, NOT FOR EARNIN G INTEREST INCOME AND THE ASSESSEE COMPANY HAS RECEIVED THE INTEREST @ 1% AS PER THE AGREEMENT ENTERED INTO AND SUCH INTEREST HAS BEEN OFFERED FOR TAXATIO N DURING THE YEAR UNDER APPEAL. THIS EXPLANATION OF THE ASSESSEE WAS NOT A CCEPTABLE AND THE TRANSACTION WAS TREATED AS LOAN TO THE SUBSIDIARY COMPANY AND T HE ADDITION OF RS.3,40,23,375/- WAS MADE BY THE TPO. THE ADDITION MADE BY THE TPO WAS ADOPTED BY THE A.O. IN HIS ORDER AND THE AMOUNT OF RS.3,40,23,375/- WAS ADDED TO THE INCOME OF THE ASSESSEE. THE ASSESSEE CARRIE D THE MATTER BEFORE LD. CIT(A) WHO AFTER TAKING INTO CONSIDERATION THE SUBMISSIONS OF THE ASSESSEE DELETED THIS ADDITION. AGGRIEVED BY THIS DELETION BY LD. CIT(A) NOW THE REVENUE IS IN APPEAL BEFORE US. 32. AT THE TIME OF HEARING LD. D.R., RELYING ON THE ORDER OF THE T.P.O. SUBMITTED THAT LD. CIT(A) HAS COMPLETELY IGNORED THE PROVISIO NS OF CHAPTER-X OF THE ACT WHILE GIVING RELIEF TO THE ASSESSEE BY SIMPLY ACCEP TING THE SUBMISSIONS OF THE ASSESSEE BEFORE HIM. FOR MAKING THIS SUBMISSION HE RELIED ON A NOTE IN WHICH RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS:- (I) AIHENT TECHNOLOGIES PVT. LTD. VS. ITO (DELHI) (II) PEROT SYSTEMS TSI VS. DCIT (ITAT, DELHI) ITA NO.2542/AHD/2009, A.Y. 2008-09 WITH ITA NO.2553/AHD/2009, A.Y. 2008-09 9 (III) LMN INDIA LTD., AAR, 769 OF 2007 (IV) DCIT VS. TECH. MAHINDRA LTD., 46 SOT 141 (MUM BAI) LD. COUNSEL OF THE ASSESSEE, ON THE OTHER HAND, REI TERATED THE SAME SUBMISSIONS AS MADE BEFORE LD. CIT(A) IN RESPONSE TO THE NOTE F ILED BY LD. D.R. A REJOINDER WAS FILED BY LD. COUNSEL OF THE ASSESSEE IN WHICH T HE CASE LAWS RELIED BY LD. D.R. WERE DISTINGUISHED AND RELIANCE WAS PLACED ON ANOTH ER DECISION OF BANGLORE TRIBUNAL IN THE CASE OF WIPRO LTD., THE COPY OF WHI CH WAS ALSO ENCLOSED WITH THAT REJOINDER. 33. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD, WE FIND THAT BEFORE LD. CIT(A) ASSESSEE PLACED RELIANCE ON THE FOLLOWIN G WRITTEN SUBMISSIONS:- 'PLEASE NOTE THAT THE LEANED ADDL. COMMISSIONER OF INCOME-TAX (TPO)-I HAS GROSSLY ERRED IN LAW AND ON FACTS OF TH E CASE IN MAKING ADDITION OF RS.3,40,23,375/- BY INVOKING THE PROVIS IONS OF SECTION 92CA(3) IN RESPECT OF INTERNATIONAL TRANSACTION OF ADVANCING LOAN OF EURO 17328380 TO THE APPELLANT'S SUBSIDIARY COMPANY M/S. SINTEX HOLDING BV. THE APPELLANT SUBMITS THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THERE IS NO JUSTIFICATION FOR ADOPTING THE AVERAGE EURIBOR RATE OF 4.5% PLUS 0.5% AND THEREBY MAKING THE IMPUG NED ADDITION OF RS.3,40,23,375/-. IT IS FURTHER SUBMITTED THAT DURING THE YEAR UNDER APPEAL THE APPELLANT COMPANY HAD ENTERED INTO AN INTERNATIONAL TRANSACTION OF ADVANCING LOAN OF EURO 17328380 TO ITS SUBSIDIARY C OMPANY M/S. SINTEX HOLDING BV ON WHICH INTEREST @ 1% IS RECEIVED AS PE R THE AGREEMENT ENTERED INTO. ON A REFERENCE MADE U/S. 92CA THE LEA RNED ADDL. COMMISSIONER OF INCOME-TAX (TPO)-I, AHMEDABAD DETER MINED INCOME ON THE LOAN SO ADVANCED AT EURO 674103.96. ACCORDIN GLY, THE ACIT (OSD) MADE ADDITION OF RS. 34023375/- ON THE BASIS OF THE ORDER U7S. 92CA (3) DATED 27/3/2009 PASSED BY THE ADDL. CIT (T PO)-I, AHMEDABAD. IN CONNECTION WITH ABOVE, WITH REGARD TO THE LOAN T RANSACTION BETWEEN THE APPELLANT AND ITS ASSOCIATED ENTERPRISE , SINTEX HOLDINGS BV, THE FOLLOWING POINTS MERIT CONSIDERATION: IT IS SUBMITTED THAT THE AMOUNT WAS GIVEN TO S INTEX HOLDINGS BV OUT OF FUNDS RAISED THROUGH ISSUE OF FCCB (WHICH IS ALS O AN OPTIONALLY ITA NO.2542/AHD/2009, A.Y. 2008-09 WITH ITA NO.2553/AHD/2009, A.Y. 2008-09 10 CONVERTIBLE BONDS). FCCBS WERE ISSUED AT '0%' COUPO N RATE AND THEREFORE THE COMPANY DID NOT INCUR ANY COST IN RAI SING THE FUNDS. WE MAY FURTHER MENTION THAT THE BONDS WERE REDE EMABLE AT A PREMIUM OF 5% (I.E. 1% P.A. FOR 5 YEARS) AND THEREF ORE 1% P.A. WAS THE HIGHEST COSTS THAT THE COMPANY WOULD HAVE BORNE IF THE BONDS WERE TO BE REDEEMED. IN VIEW THEREOF, CHARGING 1% INTERE ST P.A. IS JUSTIFIED. YOUR GOODSELF WOULD APPRECIATE THAT ALL THE F CCBS HAVE BEEN LATER ON CONVERTED INTO EQUITY AT SIGNIFICANTLY HIGH PREM IUM AND NO PREMIUM HAS BEEN PAID ON REDEMPTION OF FCCB. THUS, IN FACT THE COMPANY HAS EARNED SPREAD OF 1% OVER THE AMOUNTS GRANTED TO SIN TEX HOLDINGS BV. WITHOUT PREJUDICE TO ABOVE, IT IS SUBMITTED TH AT THE AMOUNT ADVANCED IS NOT FOR THE PURPOSE OF LENDING BUT IS F OR EXPANSION OF THE BUSINESS. THIS ARRANGEMENT IS FOR THE BUSINESS / EC ONOMIC NEED FOR THE GROUP, NOT FOR MERELY EARNING INTEREST INCOME. FOR THE PURPOSE OF TRANSFER PRICING, ANY COMPA RISON MUST BE MADE WITH THE TRANSACTIONS HAVING SIMILAR UNDERLYING SET OF CIRCUMSTANCES. EURIBOR IS A BENCHMARK RATE USED BY THE INTERNATION AL BANKS AND FINANCIAL INSTITUTIONS FOR LENDING IN EURO CURRENCY . IT MUST BE NOTED THAT THESE BANKS BORROW FROM OTHER AGENCIES/PUBLIC/BANKS , ETC. AND THEY HAVE TO PAY INTEREST ON SUCH BORROWINGS. FURTHER, T HESE BANKS AND INSTITUTIONS ARE IN THE BUSINESS OF MONEY-LENDING O NLY AND THEREFORE THEY NEED TO EARN SPREAD WHICH WOULD EFFECTIVELY ME ET THEIR OPERATING COSTS AND LEAVE A MARGIN FOR PROFITS. IT IS SETTLED PRINCIPLE OF TRANSFER PRICING THA T BEFORE COMPARISON WITH ANY TRANSACTION, IT MUST BE CONCLUDED THAT THE TRAN SACTIONS ARE COMPARABLE. O IN THE PRESENT CASE, THE ASSESSEE DOES NOT HAVE ANY COST WHILE RAISING THE FUNDS (AS OPPOSED TO SIGNIFICANT INTERE ST COST INCURRED BY BANKS FOR ONWARD LENDING AT EURIBOR). O THE BANKS ARE IN THE BUSINESS OF LENDING AND TH EREFORE THEY NEED TO MEET OPERATING COSTS OUT OF THE SPREAD OVER AND ABO VE INTEREST PAID ON THEIR BORROWING. WHEREAS THE ASSESSEE IS NOT IN THE BUSINESS OF MONEY- LENDING AND THEREFORE NO SUCH EXPENSES ARE TO BE ME T. THE CIRCUMSTANCES IN BOTH THE CASES ARE HIGHLY DIFFERENT AND THEREFORE THEY CANNOT BE COMPARED AT ALL. WE FURTHE R SUBMIT THAT THE COST OF FUNDS TO THE BANKS LENDING AT EURIBOR IS SI GNIFICANTLY HIGH AND THEREFORE AS A COROLLARY THEY NEED TO LEND AT HIGHE R RATES. WHAT EFFECTIVELY, THESE BANKS GET IS NOMINAL SPREAD WHIC H IS THEIR INCOME. IF THE TRANSACTION IS LOOKED AT FROM THESE PERSPECTIVE , THE ASSESSEE HAS ALSO EARNED 1% SPREAD ON THE TRANSACTION (SINCE ITS COSTS IS NIL). IT IS THEREFORE SUBMITTED THAT THE TRANSACTION IS JUSTIFI ED. WITHOUT PREJUDICE TO ABOVE, IT IS SUBMITTED THAT SINTEX HOLDINGS BV, OUR ASSOCIATED ENTERPRISE HAS ISSUED OPTIONALLY CON VERTIBLE DEBENTURES (OCB) @ 1%. IT IS NOT A LOAN SIMPLICITOR WHERE ONLY INTENTION IS TO EARN INTEREST INCOME. AS SUBMITTED ABOVE, THIS IS QUASI- EQUITY WHEREBY THE COMPANY GETS OPTION TO CONVERT THE SAME INTO EQUITY OVER A PERIOD OF TIME AT PAR ONLY. THUS, WHEN IT IS QUASI EQUITY IT CANNOT BE BENCH- MARKED WITH EURIBOR WHERE AS STATED ITS ONLY INTENT ION IS TO HAVE INTEREST INCOME. ITA NO.2542/AHD/2009, A.Y. 2008-09 WITH ITA NO.2553/AHD/2009, A.Y. 2008-09 11 THE APPELLANT PROVIDED FINANCIAL ASSISTANCE TO SI NTEX HOLDINGS BV FOR MAKING BUSINESS INVESTMENT IN RESPECT OF ACQUISITIO N OF TWO OPERATING COMPANIES. THUS, IT IS EVIDENT THAT THE APPELLANT H AS GRANTED FINANCIAL ASSISTANCE TO SINTEX BV FOR ACQUIRING OPERATING COM PANIES TO EXPAND ITS OPERATIONS GLOBALLY PURSUANT TO ITS STRATEGY FOR IN ORGANIC GROWTH. THE APPELLANT WOULD CERTAINLY BE BENEFITED FROM THE GRO WTH AND EARNINGS OF THE AQUIREE COMPANIES. HENCE, THERE IS NO APPARENT COMPARISON WITH EURIBOR RATE MORE SO WHEN THE ASSESSEE IS ENTITLED TO IT IS TO BE CONVERTED AT PAR. THE INDIAN TRANSFER PRICING REGULATIONS REQUIRE D ETERMINING ARM'S LENGTH PRICE CONSIDERING THE FUNCTIONS PERFORMED, R ISKS ASSUMED AND ASSETS EMPLOYED IN RESPECT OF THE INTERNATIONAL TRA NSACTIONS BETWEEN ASSOCIATED ENTERPRISES. THE APPELLANT DOES NOT PERF ORM ANY SIGNIFICANT FUNCTIONS OR BEAR ANY SIGNIFICANT RISKS IN RESPECT OF ITS TRANSACTIONS WITH SINTEX BV. THE APPELLANT HAS GIVEN LOAN TO RTS WHOL LY OWNED SUBSIDIARY SINTEX BV FOR MAKING BUSINESS INVESTMENTS. SINTEX B V BEING THE WHOLLY OWNED SUBSIDIARY, THE APPELLANT DOES NOT BEAR ANY S IGNIFICANT RISK (E.G. CONTRACT RISK AND BAD DEBT RISK) IN RESPECT OF FINA NCIAL ASSISTANCE EXTENDED BY IT TO SINTEX BV. THE FINANCIAL ASSISTANCE PROVIDED BY THE APPELLAN T IS IN THE FORM OF OPTIONALLY CONVERTIBLE DEBENTURES, WHEREBY, THE APP ELLANT HAS AN IRREVOCABLE RIGHT TO CONVERT THE LOAN INTO EQUITY S HARE CAPITAL AT ANY TIME DURING THE TENURE OF THE LOAN. ON EXERCISING T HE RIGHT OF CONVERSION, THE APPELLANT WOULD BE ENTITLED TO ITS SHARE IN THE DISTRIBUTABLE PROFITS OF SINTEX HOLDINGS BV WHICH I N TURN HOLDS OPERATING COMPANIES. THE APPELLANT WILL ALSO BE BENEFIT IN TE RM OF HIGHER VALUATION OF ACQUIREE COMPANIES. FURTHER, IT IS ALSO SUBMITTED THAT SO LONG AS THE FINANCIAL ASSISTANCE EXTENDED BY THE APPELLANT TO SINTEX BV IS QUASI EQU ITY, IN THE FORM OF OPTIONALLY CONVERTIBLE DEBENTURES, THE INSTRUMENT C ANNOT BE CONSIDERED AS LOAN AND CANNOT BE COMPARED WITH EURIBOR RATE AN D HENCE 1% CONTRACTUAL RATE CHARGED IS DULY JUSTIFIED. IN VIEW OF THE ABOVE AND HAVING REGARD TO THE ECONO MIC AND COMMERCIAL FACTORS, IT IS REASONABLE TO CONCLUDE TH AT THE INTEREST RATE OF 1 PERCENT CHARGED BY THE APPELLANT IN RESPECT OF OP TIONALLY CONVERTIBLE LOAN TO SINTEX BV APPEARS TO BE CONSISTENT WITH THE ARM'S LENGTH STANDARD FROM AN INDIAN TRANSFER PRICING PERSPECTIV E. IT IS THEREFORE PRAYED THAT THE UNJUSTIFIED ADDITION MAY PLEASE BE REMOVED/DELETED.' 34. AFTER TAKING INTO CONSIDERATION THE SUBMISSIONS OF THE ASSESSEE LD. CIT(A) DELETED THE ADDITION MADE BY THE A.O. BY OBSERVING AS UNDER:- I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE APPELLANT. I FIND THAT THE APPEL LANT HAS ADVANCED THE AMOUNT TO ITS SUBSIDIARY OUT OF FUNDS RAISED THROUG H FOREIGN CURRENCY CONVERTIBLE BONDS ISSUED TO PRIVATE INVESTORS AT 0% COUPON/ INTEREST ITA NO.2542/AHD/2009, A.Y. 2008-09 WITH ITA NO.2553/AHD/2009, A.Y. 2008-09 12 RATE .THUS THERE IS NO COST OF BORROWINGS TO THE AP PELLANT. THE APPELLANT HAS NO OPERATING COST IN THE SAID ADVANCE, STILL TH E APPELLANT HAS ADDED PROFIT MARGIN OR SPREAD OF 100 BASIS POINTS AND HAS CHARGED INTEREST @ 1 % FROM THE SUBSIDIARY. FURTHER THE ADVANCE TO SUBSI DIARY IS NOT A LOAN OR DEBT RATHER IT IS IN FORM OF QUASI-EQUITY AND CO NVERTIBLE BONDS. FURTHER AS CONTENDED BY THE APPELLANT THE EURIBOR R ATE IS THE RATE APPLICABLE FOR INTER BANK LENDINGS AND IT IS NOT AP PLICABLE TO THE APPELLANT. IN VIEW OF THE ABOVE FACTS I DO NOT FIND ANY JUSTIFICATION FOR COMPARING WITH EURIBOR RATE AS HAS BEEN DONE BY THE TPO. IN THE ABOVE FACTS AND CIRCUMSTANCES, I HOLD THAT THE ADDITION O RDERED BY THE TPO IS NOT JUSTIFIED, HENCE I DIRECT THE ADDITION TO BE DE LETED. 35. IT IS CLEAR FROM THE ABOVE THAT LD. CIT(A) HAS SIMPLY ACCEPTED THE SUBMISSIONS OF THE ASSESSEE AND HAS NOT PASSED A SP EAKING ORDER WHILE GIVING RELIEF TO THE ASSESSEE. WE ARE, THEREFORE, OF THE CONSIDERED OPINION THAT MATTER REQUIRES FRESH ADJUDICATION ON HIS PART BY PASSING A SPEAKING ORDER IN THE LIGHT OF CASE LAWS CITED BY BOTH THE PARTIES BEFORE US. THI S GROUND OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSE. 36. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOW ED FOR STATISTICAL PURPOSE. 37. IN THE COMBINED RESULT, ASSESSEES APPEAL AS WE LL AS REVENUES APPEAL ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN OPEN COURT ON 31.12.2012 SD/- SD/- (ANIL CHATURVEDI) (D.K. TYAGI) ACCOUNTANT MEMBER JUDICIAL MEMBER N.K. CHAUDHARY, SR. P.S. COPY OF THE ORDER FORWARDED TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT (APPEALS) BY ORDER 5. THE DR, AHMEDABAD 6. THE GUARD FILE A.R., ITAT, AHMEDABAD