Aithent Technologies Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 257/DEL/2017

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 2845 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 7 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-09-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2006-2007
• Appeal Filed On: 16-01-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SNDEEP KR MISHRA
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Notional interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH '1-1' NEW DLEHI BEFORE SHRI PRAMOD KUMAR, VICE PRESIDENT AND SHRI K. NARSIMHA CHARY, JUDICIAL MEMBER ITA.NO 257/DEL/2017 ASSESSMENT YEAR: 2006-07 AITHENT TECHNOLOGIES PVT. LTD. A- VS ACIT, 16/9, VASANT VIHAR, NEW DELHI- CIRCLE-2(1), CENTRAL REVENUE 110057 BUILDING, I.P. ESTATE, NEW DELHI-110002 PAN:-AAACS2319H ASSESSEE REVENUE ASSESSEE BY SHRI ATUL NINAWAT REVENUE BY SHRI SNDEEP KR. MISHRA DATE OF HEARING 01/08/2019 DATE OF PRONOUNCEMENT C72/O9/2019 ORDER PER K. NARSIMHA CHARY. J.M. THIS IS AN APPEAL BY M/S AITHENT TECHNOLOGIES PVT. LTD. (THE ASSESSEE) BEING AGGRIEVED BY THE ASSESSMENT ORDER DATED 28/11/2016 PURSUANT TO THE DIRECTIONS DATED 18/10/2016 OF THE DISPUTE RESOLUTION PANEL -I, NEW DELHI (FOR SHORT HEREINAFTER CALLED 'LD. DRP'). 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY AND HAS BEEN ENGAGED IN THE BUSINESS OF DEVELOPMENT AN EXPORT OF SOFTWARE. FOR THE ASSESSMENT YEAR 2006-07, THEY HAVE FLED THEIR RETURN OF INCOME ON 30/11/2006 SHOWING THE INCOME AS NIL. INSOFAR AS THIS APPEAL IS CONCERNED, IT HAS ADVANCED INTEREST FREE LOAN TO ITS WHOLLY OWNED SUBSIDIARY, NAMELY, AITHENT INC., USA THROUGH THE CONTINUING LOAN AGREEMENT DATED 27/6/2001, 27/7/2001 AND 31/7/2001 AGGREGATING TO USD 1,700,000/-. IN 2 VIEW OF THE INTERNATIONAL TRANSACTION, DETERMINATION OF ARM'S LENGTH PRICE WAS REFERRED TO THE LD. TPO. LD. TPO BY ORDER DATED 08/10/2009 SUGGESTED AN UPWARD ADJUSTMENT OF RS.3,59,15,504/-, I.E. RS.1,46,12,770/- ON ACCOUNT OF NOTIONAL INTEREST AS PER PLR RATE @ 10.5% ON LOANS GIVEN TO THE AE AND RS.2,13,02,734/- ON ACCOUNT OF THE SOFTWARE DEVELOPMENT SERVICES. ACCORDINGLY, THE LD. AO PASSED THE ORDER DATED 26/05/2010. 3. AGGRIEVED BY THE SAID DRAFT ORDER, THE ASSESSEE FILED OBJECTION BEFORE THE LD. DRP. LD. DRP BY ORDER DATED 17/05/2010 CONFIRMED THE SAID ADJUSTMENTS. THE ASSESSEE, THEREFORE, PREFERRED AN APPEAL TO THE ITAT SET- ASIDE THE ISSUE RELATING TO THE ADJUSTMENT OF RS.1,46,12,770/- ON ACCOUNT OF NOTIONAL INTEREST @10.5% LOAN TO THE LD. TPO/AO TO RECOMPUTE THE ALP BASED ON CUP METHOD. 4. SUBSEQUENTLY, BY ORDER DATED 27/01/2016, LD. TPO SUGGESTED AN ADJUSTMENT OF RS.3,43,23,624/- COMPRISING OF RS.1,83,82,474/- BY BENCHMARKING THE INTEREST ON LOAN @ SBI PLR +300 BASIS POINTS WHICH CAME TO 13.25%, AND RS.1,59,41,150/- ON ACCOUNT OF SOFTWARE DEVELOPMENT SERVICES. CONSEQUENTLY, THE LD. AO PASSED THE ORDER DATED 23/03/2016. 5. ASSESSEE CHALLENGED THE ADJUSTMENT ON ACCOUNT OF THE INTEREST ON LOAN BEFORE THE LD. DRP AND THE LD. DRP BY ORDER DATED 18/10/2016 BY FOLLOWING ITS OWN ORDER FOR THE AY 2002-03 HELD THE INTEREST AT US LIBOR PLUS 500 BASIS POINTS, WHICH CAME TO RS. 1,40,40,048/-. LD. AO PASSED ORDER DATED 28/11/2016 MAKING THE ADDITIONS. AGGRIEVED BY THE SAID ADDITIONS, ASSESSEE PREFERRED THIS APPEAL ARGUING THAT THE MARK UP OF 500 BASIS POINTS ADDED TO THE LIBOR IS NOT JUSTIFIED, SINCE ENTITIES ARE UNDER THE SAME MANAGEMENT AND CONTROL, WHICH REDUCED THE RISK FACTORS. 3 6. ACCORDING TO THE LD. AR GRANTING LOAN TO THE WHOLLY OWNED SUBSIDIARY IS LESS RISKY AS COMPARE TO LOAN GRANTED BY BANKS AND THE AUTHORITIES BELOW MISSED THIS POINT WHILE MAKING THE MARK UP OF 500 BASIS POINTS TO THE LIBOR. HE PLACED RELIANCE ON THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS M/S COTTON NATURALS (I.) PVT. LTD. (TS-117-HC-2015(DEL)-TP) AND THE DECISION OF THE HON'BLE RAJASTHAN HIGH COURT IN THE CASE OF CTI VS M/S VAIBHAV GEMS LTD. IN ITA NO.14 OF 2015. FURTHER RELIANCE IS PLACED ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN HINDUJA GLOBAL SOLUTIONS LTD. VS CIT (2013) 35 TAXMAN.COM 348 (MUM. TRIB.). 7. PER CONTRA, LD. DR SUBMITTED THAT AS REVEALED BY THE NAME ITSELF, LIBOR MEANS 'LANDON INTER BANK OFFERED RATE' AND THEREFORE, THE LIBOR RATE WITHOUT ANY MARK-UP IS APPLICABLE ONLY TO THE BANKS INTER SE AND NOT TO THE NON-BANKING ENTITIES. HE FURTHER SUBMITTED THAT IN THE CASE OF COTTON NATURALS, IT WAS HELD THAT WHERE THE TRANSACTION WAS OF LENDING MONEY IN FOREIGN CURRENCY TO ITS FOREIGN SUBSIDIARY THE COMPARABLE TRANSACTION WAS OF FOREIGN CURRENCY LENDING BY UNRELATED PARTIES AND THE FINANCIAL POSITION AND THE CREDIT RATING OF SUBSIDIARIES WILL BE BROADLY THE SAME AS THE HOLDING COMPANY. WHILE REFERRING TO THE DECISION IN HINDUJA GLOBAL SOLUTIONS (SUPRA), LD. DR SUBMITTED THAT IN THAT CASE AS ON 31/03/2008, THE LIBOR WAS 2.49% AGAINST WHICH THE ASSESSEE HAD CHARGED INTEREST AT 6% WHICH IS MUCH HIGHER THAN THE CORRESPONDING ARM'S LENGTH LIBOR. LD. DR INSISTED THAT THE INDIAN TRANSFER PRICING PERSPECTIVE SHALL NOT BE IGNORED AND THE RISK FACTOR VARIES FROM CASE TO CASE. 8. LD. AR, IN REPLY, IN THE ALTERNATIVE, SUBMITTED THAT THE MARK UP AT ANY RATE MORE THAN 170 POINTS WOULD NOT BE JUSTIFIED HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THIS CASE AND IN CASE OF THE TRIBUNAL NOT 4 ACCEPTING THE LIBOR WITHOUT MARK-UP, IT MAY BE RESTRICTED TO LIBOR PLUS 170 BASIS POINTS. 9. IN SO FAR AS THE FACTS ARE CONCERNED, THERE IS NO DISPUTE THAT THE ASSESSEE ADVANCED THE INTEREST FREE LOAN TO ITS WHOLLY OWNED SUBSIDIARY. IN THE FIRST ROUND OF LITIGATION, THE LD. TPO RECKONED THE NOTIONAL INTEREST AS PER PLR AND WAS CONFIRMED BY THE LD. DRP. IN THE SECOND ROUND OF LITIGATION, THE LD. TPO BENCH MARKED THE INTEREST ON LOAN AT SBI PLR PLUS 300 BASIS POINTS, WHEREAS, LD. DRP, WHILE FOLLOWING THEIR OWN FINDING FOR THE AY 2002-03 MADE IT US LIBOR PLUS 500 BASIS POINTS. IT IS NOT THE CASE OF THE ASSESSEE THAT THE FACTS INVOLVED IN THE MATTER ARE DIFFERENT FROM THOSE INVOLVED FOR THE AY 2002-03. IT IS NOT THE CASE OF THE ASSESSEE THAT THE FINDINGS OF THE LD. DRP FOR THE AY 2002-03 ARE IN ANY WAY DISTURBED IN ANY SUBSEQUENT PROCEEDINGS. 10. IN THE CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THE LIBOR WITH MARK UP CANNOT BE FOUND FAULT WITH, HAVING REGARD TO THE FACTS OF THE CASE OF THE ASSESSEE. HOWEVER, WE FIND THAT THE MARK UP OF 500 BASIS POINTS TO THE US LIBOR APPEARS TO BE UNJUSTIFIABLE. WE CONSEQUENTLY, ACCEPT THE ALTERNATE PLEA OF THE ASSESSEE AND FIND THAT THE BENCH MARKING OF THE INTEREST ON LOAN AT US LIBOR PLUS 170 BASIS POINTS WOULD MEET THE ENDS OF JUSTICE, AND, ACCORDINGLY, DIRECT THE LD. TPO TO RECOMPUTE THE NOTIONAL INTEREST AT US LIBOR PLUS 170 BASIS POINTS. GROUNDS OF APPEAL ARE, ACCORDINGLY, ALLOWED IN PART. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS IN PART. PRONOUNCED IN OPEN COURTPN THIS THE SEPTEMBER) %*.* ----- R A M O D KUMAR) ' (K. NARSIM /ZV LC E PRESIDENT JUDICIAL ME DATED: 09/2019/1' 5 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITATNEW DELHI DRAFT DICTATED DRAFT PLACED BEFORE AUTHOR APPROVED DRAFT COMES TO THE SR.PS/PS ORDER SIGNED AND PRONOUNCED ON FILE SENT TO THE BENCH CLERK DATE ON WHICH FILE GOES TO THE AR DATE ON WHICH FILE GOES TO THE HEAD CLERK. DATE OF DISPATCH OF ORDER. DATE OF UPLOADING ON THE WEBSITE