Tooltech Global Engineering Pvt. Ltd., Pune V. Deputy Commissioner of Income-tax,

ITA 273/PUN/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84929 (ITAT-PUNE)
• Duration Of Justice: 6 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 11-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K MODI
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Commercial expediency
• Section: 92C; 143(3); 92B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.273/PN/2014 (ASSESSMENT YEAR : 2009-10) TOOLTECH GLOBAL ENGINEERING PVT. LTD., 401, BETA, GIGASPACE, VIMAN NAGAR, PUNE 14. PAN : AABCT0205A . APPELLANT VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE- 7, PUNE. . RESPONDENT ASSESSEE BY : MR. JAYESH DADIA DEPARTMENT BY : MR. A. K. MODI DATE OF HEARING : 22-07-2014 DATE OF PRONOUNCEMENT : 28-08-2014 ORDER PER G. S. PANNU, AM THE CAPTIONED APPEAL HAS BEEN PREFERRED BY THE ASSE SSEE PERTAINING TO THE ASSESSMENT YEAR 2009-10, WHICH IS DIRECTED AGAI NST THE ORDER OF THE DY. COMMISSIONER OF INCOME TAX, CIRCLE- 7, PUNE (IN SHORT THE ASSESSING OFFICER) PASSED U/S 143(3) R.W.S. 144C OF THE INCO ME TAX ACT, 1961 (IN SHORT THE ACT) DATED 10.01.2014, WHICH IS IN CONFORMITY WITH THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL, PUNE (IN SHORT THE D RP) DATED 18.12.2013. 2. THE SUBSTANTIVE DISPUTE IN THE PRESENT APPEAL IS IN RELATION TO AN ADDITION OF RS.2,38,00,879/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF ADJUSTMENT TO THE STATED VALUE OF INTERNATIONAL TRA NSACTION ENTERED BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES IN ORDER T O BRING THE SAME TO AN ARM'S LENGTH PRICE WITHIN THE MEANING OF SECTION 92(1) OF THE ACT. ITA NO.273/PN/2014 A.Y. : 2009-10 3. IN BRIEF, THE RELEVANT FACTS ARE THAT THE APPELL ANT IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 AND IS, INTER- ALIA, ENGAGED IN THE BUSINESS OF ENGINEERING DESIGN AND DEVELOPMENT SERVICES. FOR THE ASSESSMENT YEAR 2009-10, IT FILE D A RETURN OF INCOME ON 31.10.2009 DECLARING TOTAL INCOME OF RS.91,20,930/- . THE ASSESSING OFFICER NOTICED THAT ASSESSEE HAD ENTERED INTO CERTAIN INTE RNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES WHICH FELL WITHIN THE SC OPE OF SECTION 92B OF THE ACT. THE INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES WERE AS FOLLOWS :- INTERNATIONAL TRANSACTION AMOUNT (RS.) EXPORT OF ENGINEERING SERVICE 5,99,45,293 LOANS AND ADVANCES TOOLTECH DEUTSCHLAND GMBH, GERMANY 9,91,51,472 CONVERSION OF DEBTORS IN LOAN TOOLTECH DEUSCHLAND GMBH 1,87,61,275 LOANS AND ADVANCES TOOLTECH EUROPE OY, FINLAND 32,91,354 REIMBURSEMENT OF EXPENSES 4,98,201 4. IN TERMS OF SECTION 92(1) OF THE ACT, THE ASSESS ING OFFICER WAS REQUIRED TO COMPUTE INCOME ARISING FROM THE INTERNATIONAL TR ANSACTIONS, HAVING REGARD TO THE ARM'S LENGTH PRICE OF SUCH TRANSACTIONS. THE A SSESSING OFFICER REFERRED THE MATTER TO THE TRANSFER PRICING OFFICER (TPO) U/S 92 CA(1) OF THE ACT FOR COMPUTING THE ARM'S LENGTH PRICE OF THE INTERNATION AL TRANSACTIONS. ACCORDINGLY, THE TPO AFTER AFFORDING APPROPRIATE OP PORTUNITY TO THE ASSESSEE OF BEING HEARD, PASSED AN ORDER U/S 92CA(3) OF THE ACT DATED 23.01.2013 DETERMINING AN ADJUSTMENT OF RS.2,38,00,870/- TO TH E STATED VALUES OF INTERNATIONAL TRANSACTIONS ON ACCOUNT OF LOANS AND ADVANCES GIVEN BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES ON ACCOUNT O F INTEREST. THE ORDER OF THE TPO PASSED U/S 92CA(3) OF THE ACT FORMED THE BASIS FOR THE ASSESSING OFFICER TO PASS A DRAFT ASSESSMENT ORDER PROPOSING AN ADDIT ION ON ACCOUNT OF ADJUSTMENT TO THE ARM'S LENGTH PRICE OF INTERNATION AL TRANSACTIONS BY WAY OF INTEREST. THE ASSESSEE CARRIED THE MATTER BEFORE T HE DISPUTE RESOLUTION PANEL ITA NO.273/PN/2014 A.Y. : 2009-10 (DRP), AND AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE DRP VIDE ORDER DATED 18.12.2013 DIRECTED THE ASSESSING OFFIC ER TO SUSTAIN ADJUSTMENT OF RS.2,38,00,879/- TOWARDS NON-CHARGING OF INTEREST O N LOANS AND ADVANCES GIVEN TO THE ASSOCIATED ENTERPRISES. ACCORDINGLY, THE ASSESSING OFFICER BY WAY OF AN ORDER PASSED U/S 143(3) R.W.S. 144C OF TH E ACT DATED 10.01.2014 HAS MADE AN ADDITION OF RS.2,38,00,879/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT TO THE INTERNATIONAL TRANSACTIONS OF LOA NS AND ADVANCES GIVEN TO THE ASSOCIATED ENTERPRISES FREE OF INTEREST. 5. THE FIRST CATEGORY OF LOAN TO TOOLTECH DEUTSCHLA ND GMBH (IN SHORT THE TTD) IS RS.6,04,85,670/-, WHICH REPRESENTS THE OP ENING BALANCE OUTSTANDING AS ON 01.04.2008. ON THIS ASPECT, PLEA OF THE ASSE SSEE IS THAT SUCH LOAN HAS BEEN GIVEN OUT OF INTERNAL ACCRUALS AND OTHER INTER EST-FREE LOANS RECEIVED FROM PROMOTERS/DIRECTORS IN THE PAST YEARS. THE SECOND CATEGORY OF ADVANCES COMPRISE OUTSTANDING SUNDRY DEBTORS FOR SALES MADE TO TTD AMOUNTING TO RS.1,87,61,274/-, WHICH WAS CONVERTED INTO LOAN AS ON 31.03.2009. THE THIRD CATEGORY OF ADVANCES COMPRISE OF LOANS OF RS.66,87, 000/- AND RS.9,24,52,000/- GIVEN TO TTD DURING THE YEAR FOR T HE PURPOSE OF MAKING INVESTMENT IN EQUITY OF A NEW COMPANY I.E. MBT SIMA -TECHNIK (IN SHORT MBT). IT HAS BEEN CONTENDED THAT ALL THE ADVANCE S WERE MADE ON ACCOUNT OF COMMERCIAL EXPEDIENCY AND THEREFORE THERE WAS NO JU STIFICATION FOR MAKING ADJUSTMENT ON ACCOUNT OF NON-CHARRING OF INTEREST. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ANY ADDITION ON ACCOUNT OF INTEREST CAN BE MADE ONLY FOR A REAL INCOME ACCRUING TO THE ASSESSEE WHEREAS IN THE PRESENT CASE NO ACTUAL INTEREST INCOME HAS ACCRUED TO THE ASSESSEE SINCE NO INTEREST HAS BEEN CHARGED ON ADVANCES GIVEN TO THE ASSOCIATED ENTERPR ISES. 6. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE HAS POINTED OUT THAT THE IMPUGNED ADJUSTMENT ON ACCOUNT OF NON-CHARGING OF INTEREST ON AN INTERNATIONAL TRANSACTION OF LOANS T O ASSOCIATED ENTERPRISES ITA NO.273/PN/2014 A.Y. : 2009-10 UNDER THE TRANSFER PRICING REGULATION IS TO BE EXAM INED IN THE LIGHT OF SIMILAR TRANSACTIONS ENTERED IN AN UNCONTROLLED SITUATION B ETWEEN TWO INDEPENDENT PARTIES AND THUS, ASSESSEES PLEA OF COMMERCIAL EXP EDIENCY FOR NON-CHARGING OF INTEREST IS NOT A GROUND OF DEFENCE AGAINST A TR ANSFER PRICING ADJUSTMENT. 7. IN THIS CONTEXT, IN-PRINCIPLE, WE FIND THAT THE PLEA OF THE ASSESSEE IS INDEFENSIBLE. THE QUESTION BEFORE US IS RELATING T O DETERMINATION OF INCOME ARISING FROM AN INTERNATIONAL TRANSACTION, WHICH IS REQUIRED TO BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE, AS PER THE MANDATE OF SECTION 92(1) OF THE ACT. THE CASE OF THE ASSESSING OFFICER IS THAT THE IMPUGNED INTERNATIONAL TRANSACTIONS ARE IN THE NATURE OF LENDING OR BORROW ING BETWEEN ASSOCIATED ENTERPRISES, AND ARE, THUS SUBJECT TO TRANSFER PRIC ING ASSESSMENT. UNDISPUTEDLY, IF THE TRANSACTIONS ARE TREATED IN TH E NATURE OF LENDING OR BORROWING, THE SAME FALL WITHIN THE MEANING OF INT ERNATIONAL TRANSACTION DEFINED IN SECTION 92B OF THE ACT, AND THEIR ARM'S LENGTH PRICE HAS TO BE DETERMINED AS PER SECTION 92C OF THE ACT. THE PLEA OF THE ASSESSEE TO THE EFFECT THAT IT HAS NOT ACTUALLY EARNED ANY INTEREST FROM IMPUGNED ADVANCES, IS OF NO CONSEQUENCE WHILE DETERMINING THE ARM'S LENGT H PRICE OF THE INTERNATIONAL TRANSACTION. THUS, IN-PRINCIPLE, WE FIND ENOUGH JUSTIFICATION ON THE PART OF THE TPO FOR HAVING REJECTED THE PLEA OF THE ASSESSEE. WHILE REJECTING THE STAND OF THE ASSESSEE, TPO HAS FOLLOWED THE DEC ISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF PEROT SYSTEMS TSI (I NDIA) LTD. VS. DCIT, 2010- TIOL-51-ITAT-DEL. 8. APART FROM THE AFORESAID, ASSESSEE HAS MADE TWO- FOLD ARGUMENTS. FIRSTLY, AS PER THE ASSESSEE, ALL THE ADVANCES MADE TO THE ASSOCIATED ENTERPRISES IN QUESTION ARE NOT IN THE NATURE OF LO ANS; AND, SECONDLY, IT IS CANVASSED THAT EVEN IF AN ADJUSTMENT FOR NON-CHARGI NG OF INTEREST IS TO BE MADE THE SAME OUGHT TO BE MADE WITH REFERENCE TO TH E LIBOR RATE AND NOT IN THE MANNER MADE BY THE TPO. ITA NO.273/PN/2014 A.Y. : 2009-10 9. IN ORDER TO APPRECIATE THE AFORESAID PLEAS, THE FOLLOWING DISCUSSION IS RELEVANT. WITH RESPECT TO THE LOANS AND ADVANCES O UTSTANDING FROM TTD, THE DETAILS ARE AS FOLLOWS. AS ON THE FIRST DAY OF THE YEAR UNDER CONSIDERATION I.E. 01.04.2008 AN AMOUNT OF RS.6,04,85,670/- WAS OUTSTA NDING FROM THE SAID ASSOCIATED ENTERPRISE, AND THE SAME HAS BEEN TREATE D BY THE TPO AS A TRANSACTION OF LOAN ADVANCED FREE OF INTEREST. FUR THER, THE SECOND LIMB OF LOAN COMPRISES OF ADVANCES MADE DURING THE YEAR UNDER CO NSIDERATION OF RS.66,87,000/- AND RS.9,24,52,000/- TOTALING TO RS. 9,91,39,000/-, FOR THE PURPOSE OF MAKING INVESTMENT IN THE EQUITY CAPITAL OF A NEW COMPANY, I.E. MBT. THE ASSESSEE IDENTIFIED INTEREST IN RELATION TO THE AFORESAID INVESTMENT AT RS.1,07,27,321/-, WHICH WAS NOT CHARGED TO THE P ROFIT & LOSS ACCOUNT BUT WAS DEBITED TO THE MBT INVESTMENT ACCOUNT; AND, REF LECTED IN THE BALANCE- SHEET UNDER THE HEAD INVESTMENTS AS SHARE APPLIC ATION MONEY. THIRD CATEGORY OF LOAN TO TTD IS A SUM OF RS.1,87,61,274/ -, WHICH REPRESENTED RECOVERABLE SALES DEBTORS CONVERTED INTO LOAN. TH E ASSESSEE HAD MADE SALES TO ITS ASSOCIATED ENTERPRISES AND THE OUTSTANDING S ALE DEBTORS TO THE EXTENT OF RS.1,87,61,274/- HAS BEEN CONVERTED INTO A LOAN. 10. IN THIS CONTEXT, THE TPO OBSERVED THAT THE NON- CHARGING OF INTEREST ON THE AFORESAID LOANS WAS NOT AN ARM'S LENGTH PRICE T RANSACTION AND THEREFORE ACCORDING TO HIM AN ADJUSTMENT WAS REQUIRED TO BE M ADE IN ORDER TO BRING SUCH TRANSACTIONS TO ARM'S LENGTH PRICE BY WAY OF I NTEREST. IN SO FAR AS THE INTEREST ADJUSTMENT IN RELATION TO RS.6,04,85,670/- , REPRESENTING OPENING BALANCE IS CONCERNED, THE TPO COMPUTED IT BY APPLYI NG AN INTEREST RATE OF 14.78% ON THE BASIS OF THE PREVAILING RATE OF INTER EST CHARGED BY STATE BANK OF INDIA. WITH REGARD TO THE ADVANCES OF RS.66,87,000 /- AND RS.9,24,52,000/- MADE DURING THE YEAR FOR THE PURPOSES OF MAKING INV ESTMENT IN THE EQUITY CAPITAL OF A NEW COMPANY, I.E. MBT, THE TPO NOTED T HAT ASSESSEE HAD ITSELF IDENTIFIED INTEREST EXPENDITURE TO THE TUNE OF RS.1 ,07,27,321/- IN THIS REGARD, THOUGH NOT REFLECTED IN THE PROFIT & LOSS ACCOUNT B UT SHOWN AS PART OF ITA NO.273/PN/2014 A.Y. : 2009-10 INVESTMENT IN THE BALANCE-SHEET. AS PER THE TPO, THE AFORESAID AMOUNT OF INTEREST REPRESENTED AN INTERNAL COMPARABLE TRANSAC TION AND CONSIDERING THE SAME TO BE AN INTERNAL CUP CONSIDERED A SUM OF RS.1 ,07,27,321/- AS AN ADJUSTMENT ON ACCOUNT OF NON-CHARGING ON INTEREST O F SUCH TRANSACTION. WITH REGARD TO THE LOAN OF RS.1,87,61,274/- WHICH REPRES ENTED THE OUTSTANDING AMOUNT OF DEBTORS CONVERTED INTO LOAN, THE ASSESSIN G OFFICER COMPUTED THE ARM'S LENGTH PRICE BY APPLYING THE RATE OF INTEREST RELATABLE TO THE AMOUNTS ADVANCED BY THE ASSESSEE FOR INVESTMENT IN EQUITY O F A NEW COMPANY. ACCORDINGLY, ON THIS COUNT, THE TPO MADE AN ADJUSTM ENT OF RS.23,93,401/-. 11. FIRSTLY, THE PLEA OF THE ASSESSEE IS THAT THE A MOUNT OF RS.1,87,61,274/- REPRESENTED OUTSTANDING BALANCE IN SUNDRY DEBTORS ACCOUNT AGAINST SALES MADE, WHICH WAS CONVERTED INTO LOAN ON 31.03.2009 B Y WAY OF A BOOK ENTRY. A REFERENCE HAS BEEN MADE TO PAGES 29 TO 31 OF THE PAPER BOOK WHEREIN IS PLACED A COPY OF THE ACCOUNT OF TTD APPEARING IN TH E ACCOUNT BOOKS OF THE ASSESSEE. IT WAS CONTENDED THAT THE AMOUNT OUTSTAN DING FROM THE ASSOCIATED ENTERPRISE ON ACCOUNT OF SALES, HAS BEEN CONVERTED INTO A LOAN ONLY AT THE YEAR-END AND THEREFORE EVEN IF INTEREST IS LIABLE T O BE CHARGED FOR THE PURPOSES OF ARM'S LENGTH PRICE, AS THE AMOUNT WAS CONVERTED INTO LOAN ONLY AT THE YEAR- END, NO ADJUSTMENT WAS REQUIRED TO BE MADE FOR THE PERIOD UNDER CONSIDERATION. FURTHER, WITH REGARD TO THE ADVANCE S OF RS.66,87,000/- AND RS.9,24,52,000/- MADE DURING THE YEAR, IT IS EXPLAI NED THAT THE SAME HAVE BEEN ADVANCED FOR MAKING INVESTMENT IN THE EQUITY C APITAL OF A NEW COMPANY, NAMELY, MBT, AND THE SAME ARE NOT LOANS BUT SHARE A PPLICATION MONEY PENDING ALLOTMENT. THE SAID AMOUNT ALONGWITH INTER EST ELEMENT OF RS.1,07,27,321/- THEREOF TOTALING TO RS.10,04,23,22 2/- HAS BEEN REFLECTED AS INVESTMENT IN THE BALANCE-SHEET. A REFERENCE IN THIS CONTEXT HAS BEEN MADE TO THE BALANCE-SHEET FOR THE YEAR UNDER CONSIDERATI ON, A COPY OF WHICH HAS BEEN PLACED AT PAGE 7 OF THE PAPER BOOK. ITA NO.273/PN/2014 A.Y. : 2009-10 12. IN SO FAR AS THE AMOUNT OF RS.9,91,39,000/- (I. E. RS.66,87,000/- + RS.9,24,52,000/-) ADVANCED DURING THE YEAR IS CONCE RNED, THE TREATMENT GIVEN BY THE ASSESSEE IS IN THE NATURE OF SHARE APPLICAT ION MONEY. THE AFORESAID AMOUNT OF SHARE APPLICATION MONEY IS OUTSTANDING AS THE INVESTEE COMPANY HAS NOT ISSUED SHARES TO THE ASSESSEE TILL THE CLOS E OF THE PREVIOUS YEAR UNDER CONSIDERATION. THE NATURE OF THE AFORESAID TRANSAC TION IS SHARE APPLICATION MONEY, AND CLEARLY IT IS NOT IN THE NATURE OF A LEN DING OR BORROWING. THE TPO HAS TREATED SUCH TRANSACTION IN THE NATURE OF INTER EST-FREE LOAN PRIMARILY FOR THE REASON THAT TILL THE CLOSE OF THE PREVIOUS YEAR UND ER CONSIDERATION NO SHARES HAVE BEEN ACTUALLY ALLOTTED TO THE ASSESSEE. ACCOR DINGLY, ARM'S LENGTH PRICE ADJUSTMENT HAS BEEN MADE ON ACCOUNT OF INTEREST ELE MENT ON SUCH AMOUNT. IN OUR CONSIDERED OPINION, THE ACTION OF THE TPO IN CH ANGING THE CHARACTERISTIC OF THE TRANSACTION OF PAYMENT OF SHARE APPLICATION MON EY AS AN INTEREST-FREE LOAN IS UNWARRANTED AND BEYOND HIS JURISDICTION WHICH CA RRYING OUT THE TRANSFER PRICING PROCEEDINGS. THERE IS NO PROVISION OF LAW WHICH ENABLES THE TPO TO CHANGE THE CHARACTER OF A TRANSACTION WHILE SUBJECT ING IT TO THE PROCESS OF DETERMINATION OF ARM'S LENGTH PRICE. THE TPO WAS R EQUIRED TO BENCHMARK SUCH TRANSACTIONS AGAINST A SIMILARLY PLACED TRANSA CTION AND NOT DEEM THE TRANSACTION TO BE A LENDING OR BORROWING TRANSACTIO N. NO DOUBT, A TRANSACTION OF ADVANCING LOANS IS WITHIN THE PURVIEW OF TRANSFE R PRICING MECHANISM AND THE ARM'S LENGTH PRICE COMPUTED THEREOF IS INCLUDIBLE I N THE ASSESSABLE INCOME OF THE ASSESSEE. SO HOWEVER, WHERE THE CHARACTER OF P AYMENT IS TOWARDS SHARE APPLICATION MONEY, THEREBY REFLECTING A CAPITAL INV ESTMENT, AND THE SAME NOT HAVING BEEN DISPUTED BY THE TPO, SUCH A TRANSACTION CANNOT BE SUBJECT TO AN ARM'S LENGTH PRICE ADJUSTMENT UNDER THE PLEA OF IT BEING A TRANSACTION OF LENDING OR BORROWING. THEREFORE, IN OUR VIEW, THE TPO WAS NOT JUSTIFIED IN TREATING THE AFORESAID TRANSACTION AS BEING AN INTE REST-FREE LENDING TRANSACTION ENTERED WITH THE ASSOCIATED ENTERPRISE. MOREOVER, IT IS ALSO NOT THE CASE OF THE TPO THAT IN A COMPARABLE TRANSACTION OF SHARE APPLI CATION MONEY AMONGST UNRELATED PARTIES, THE TRANSACTION WOULD HAVE ENTAI LED CHARGING OF INTEREST FOR ITA NO.273/PN/2014 A.Y. : 2009-10 THE PERIOD BETWEEN PAYMENT OF SHARE APPLICATION AND THE DATE OF ALLOTMENT OF SHARES. THEREFORE, IN OUR CONSIDERED OPINION, THE APPROACH OF THE AUTHORITIES BELOW IN THE CONTEXT OF THE AFORESAID AMOUNT OF RS. 9,91,39,000/- BY TREATING IT TO BE A TRANSACTION IN THE NATURE OF INTEREST-FREE LENDING TRANSACTION PER SE, AND SUBJECTING IT TO AN ARM'S LENGTH PRICE ADJUSTMENT I S ERRONEOUS AND UNWARRANTED. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION TO THE SAID EXTENT. 13. IN SO FAR AS THE AMOUNT OF RS.1,87,61,274/- IS CONCERNED, NO DOUBT AS ON 31.03.2009 THE SAME STOOD CONVERTED INTO AN INTE REST-FREE LOAN, BUT INITIALLY THE SAID AMOUNT REFLECTED UNREALIZED CONSIDERATION OF SALES MADE BY ASSESSEE TO ITS ASSOCIATED ENTERPRISE. THE ADDITION ON THIS COUNT HAS BEEN COMPUTED BY THE LOWER AUTHORITIES BY CONSIDERING THAT THE AMOUN T REPRESENTED A LOAN TRANSACTION FOR THE COMPLETE PERIOD OF 12 MONTHS CO MPRISED IN THE YEAR UNDER CONSIDERATION. IN-FACT, AS PER THE APPELLANT, THE OUTSTANDING AMOUNT WAS CONVERTED INTO LOAN ONLY ON THE LAST DAY OF THE PRE VIOUS YEAR UNDER CONSIDERATION. NO DOUBT, A TRANSACTION OF INTEREST FREE LENDING IS LIABLE TO BE SUBJECT TO ARM'S LENGTH PRICE ADJUSTMENT, SO HOWEVE R, WHERE THE LENDING HAS OCCURRED ON THE LAST DAY OF THE PREVIOUS YEAR UNDER CONSIDERATION, NO ADJUSTMENT WOULD BE NECESSARY FOR THE RELEVANT YEAR . HOWEVER, IN THIS CONTEXT, WE DO NOT FIND ANY DETERMINATION BY THE TP O OR THE ASSESSING OFFICER REGARDING ASSESSEES PLEA THAT OUTSTANDING DEBTORS BALANCE HAS BEEN CONVERTED INTO LOAN ON THE LAST DAY OF PREVIOUS YEA R UNDER CONSIDERATION. AS THE SAME INVOLVES A FACTUAL APPRECIATION, WE DEEM I T FIT AND PROPER TO RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICE R. THE ASSESSEE SHALL SATISFY THE ASSESSING OFFICER THAT THE AMOUNT OF RS.1,87,61 ,274/- WAS CONVERTED INTO AN INTEREST-FREE LOAN ONLY AT THE CLOSE OF THE YEAR UNDER CONSIDERATION AND IF THE ASSESSING OFFICER IS SO SATISFIED THEN THE IMPU GNED ARM'S LENGTH PRICE ADJUSTMENT MADE BY TREATING IT AS AN INTEREST-FREE LOAN FOR THE ENTIRE PERIOD OF TWELVE MONTHS UNDER CONSIDERATION, WOULD BE UNSUSTA INABLE. IF THE ASSESSING ITA NO.273/PN/2014 A.Y. : 2009-10 OFFICER IS NOT SO SATISFIED THEN HE SHALL FREE TO P ROCEED AS PER LAW. NEEDLESS TO MENTION, THE ASSESSEE SHALL BE ALLOWED AN OPPORTUNI TY TO SUBMIT APPROPRIATE MATERIAL AND EVIDENCE IN SUPPORT OF ITS PLEA AND ON LY THEREAFTER THE ASSESSING OFFICER SHALL PASS AN ORDER AFRESH ON THIS ASPECT A S PER LAW. 14. THE ONLY OTHER LIMB OF THE LOAN ADVANCED TO TTD IS A SUM OF RS.6,04,85,670/-, WHICH IS THE OPENING BALANCE. TH E NATURE OF SUCH PAYMENT BEING A LENDING TRANSACTION IS NOT DISPUTED. IT IS ALSO NOT DISPUTED THAT THE SAID LOAN IS INTEREST-FREE. THE PLEA OF THE ASSESSEE HA S BEEN THAT THE SAID SUM WAS ADVANCED IN THE EARLIER PERIODS OUT OF FUNDS WH ICH DID NOT HAVE ANY INTEREST COSTS. IT IS ALSO CANVASSED THAT IN THE P AST, A PORTION OF THE AFORESAID LOAN WAS CONVERTED FROM OUTSTANDING DEBTORS BALANCE S. THE AFORESAID PLEAS OF THE ASSESSEE, IN OUR CONSIDERED OPINION, DO NOT MITIGATE THE DETERMINATION OF ARM'S LENGTH PRICE ADJUSTMENT WITH RESPECT TO TH E AMOUNT OF RS.6,04,85,670/- BECAUSE SO FAR AS THE YEAR UNDER C ONSIDERATION IS CONCERNED, IT REPRESENTS A LENDING TRANSACTION WITHOUT CHARGIN G OF INTEREST. THEREFORE, IN OUR CONSIDERED OPINION, THE TPO/ASSESSING OFFICER M ADE NO MISTAKE IN DETERMINING THE ARM'S LENGTH PRICE ADJUSTMENT WITH RESPECT TO THE AFORESAID TRANSACTION ON ACCOUNT OF NON-CHARGING OF INTEREST. 15. THE ONLY OTHER ASPECT WHICH HAS BEEN ASSAILED B Y THE ASSESSEE IS THE ARM'S LENGTH PRICE ADJUSTMENT COMPUTED BY THE TPO B Y APPLYING 14.75% RATE OF INTEREST, REPRESENTING PREVAILING DOMESTIC RATE OF INTEREST IN INDIA. ACCORDING TO THE ASSESSEE, IF AT ALL AN ADJUSTMENT IS TO BE M ADE, THE SAME BE MADE, HAVING REGARD TO THE LIBOR RATE. IN OUR CONSIDERED OPINION, THE AFORESAID PLEA OF THE ASSESSEE IS QUITE JUSTIFIED BECAUSE THE TRAN SACTION IN QUESTION IS NOT A LENDING OR BORROWING BETWEEN TWO DOMESTIC ENTITIES. THE TRANSACTION IN QUESTION IS BETWEEN TWO CROSS-BORDER ENTITIES AND I S IN FOREIGN CURRENCY AND THEREFORE SUCH A TRANSACTION IS BOUND TO BE EXAMINE D IN THE CONTEXT OF THE PREVAILING LENDING PRACTICES IN THE INTERNATIONAL M ARKET. OSTENSIBLY, THE ITA NO.273/PN/2014 A.Y. : 2009-10 DOMESTIC BANK RATE IS NOT A SOUND BASIS AND INSTEAD INTERNATIONALLY ACCEPTED RATE OF LIBOR IS CERTAINLY A BETTER BENCHMARK IN OR DER TO COMPUTE THE ARM'S LENGTH PRICE INTEREST RATE IN RESPECT OF THE IMPUGN ED TRANSACTIONS. THEREFORE, WE DIRECT THE ASSESSING OFFICER TO CULL OUT THE AVE RAGE OF THE LIBOR RATE FOR THE PERIOD UNDER CONSIDERATION AND THEREAFTER COMPU TE APPROPRIATE ARM'S LENGTH PRICE ADJUSTMENT WITH RESPECT TO INTEREST CO MPONENT OF THE TRANSACTIONS OF ADVANCING INTEREST-FREE LOANS TO ASSOCIATED ENTE RPRISES. 16. BEFORE PARTING, WE MAY ALSO MAKE A REFERENCE TO ANOTHER AMOUNT OF RS.32,91,354/-, WHICH HAS ALSO BEEN CONSIDERED AS A LENDING TRANSACTION BY THE TPO. THE SAID SUM IS ADVANCED TO ANOTHER ASSOC IATED ENTERPRISE, NAMELY, TOOLTECH EUROPE OY, FINLAND. THE CLAIM OF THE ASSE SSEE BEFORE THE LOWER AUTHORITIES AS WELL AS BEFORE US HAS BEEN THAT THE SUM OF RS.32,91,354/- HAS BEEN ADVANCED TO TOOLTECH EUROPE OY, FINLAND BY WAY OF CONVERSION OF SUNDRY DEBTORS OUTSTANDING FROM THEM. IN THIS CONT EXT, NEITHER THE MATERIAL ON RECORD AND NOR THE DISCUSSION IN THE ORDERS OF THE LOWER AUTHORITIES REVEAL AS TO THE DATE ON WHICH THE AMOUNT OF SUNDRY DEBTORS OUTS TANDING FROM ASSOCIATED ENTERPRISE HAS BEEN CONVERTED INTO INTEREST-FREE LO AN. FROM THE DATE ON WHICH THE SUNDRY DEBTORS HAVE BEEN CONVERTED INTO LOAN AN D UPTO THE CLOSE OF THE PREVIOUS YEAR UNDER CONSIDERATION, THE IMPUGNED SUM CERTAINLY PARTAKES THE CHARACTER OF A LENDING TRANSACTION, WHICH IS LIABLE TO BE SUBJECT TO THE ARM'S LENGTH PRICE ADJUSTMENT. THEREFORE, WE DEEM IT FIT AND PROPER TO RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER, W HO SHALL CONSIDER THE DATE ON WHICH THE BALANCE OF SUNDRY DEBTORS OUTSTANDING HAS BEEN CONVERTED INTO LOAN AND ONLY THEREAFTER DETERMINE THE ARM'S LENGTH PRIC E ADJUSTMENT FOR THE REQUIRED PERIOD UPTO THE CLOSE OF THE YEAR UNDER CO NSIDERATION. NEEDLESS TO SAY, THE ASSESSEE SHALL FURNISH THE REQUISITE MATER IAL AND EVIDENCE SO AS TO ENABLE THE ASSESSING OFFICER TO CULL OUT COMPLETE F ACTS AND THEREAFTER DETERMINE AN ARM'S LENGTH PRICE ADJUSTMENT, IF REQU IRED, FOR NON-CHARGING OF INTEREST ON SUCH LENDING TRANSACTION. ITA NO.273/PN/2014 A.Y. : 2009-10 17. IN THE AFORESAID MANNER, THE IMPUGNED GROUND OF THE ASSESSEE RELATING TO THE ADDITION OF RS.2,38,00,879/- ON ACCOUNT OF A RM'S LENGTH PRICE ADJUSTMENT IN RESPECT OF INTEREST-FREE LOANS/ADVANCES MADE TO ASSOCIATED ENTERPRISES IS DISPOSED OFF. THE ASSESSING OFFICER IS DIRECTED TO RE-COMPUTE THE ARM'S LENGTH PRICE ADJUSTMENT KEEPING IN MIND OUR AFORESAID DECI SION. NEEDLESS TO SAY, THE ASSESSING OFFICER SHALL CONSIDER THE SUBMISSIONS OF THE ASSESSEE AND THEREAFTER RE-COMPUTE THE INCOME OF THE INTERNATION AL TRANSACTIONS IN QUESTION KEEPING IN MIND OUR AFORESAID DISCUSSION AND AS PER LAW. THUS, ON THIS GROUND ASSESSEE SUCCEEDS FOR STATISTICAL PURPOSES. 18. THE SECOND GROUND RELATES TO A DISALLOWANCE OF RS.80,01,223/- OUT OF INTEREST EXPENDITURE. IN THIS CONTEXT, THE ASSESSI NG OFFICER HAD NOTED IN THE DRAFT ASSESSMENT ORDER THAT ASSESSEE WAS REQUIRED T O JUSTIFY THE INTEREST EXPENDITURE OF RS.80,01,233/- DEBITED IN THE PROFIT & LOSS ACCOUNT. THE ASSESSING OFFICER HAS OBSERVED THAT ASSESSEE DID NO T FURNISH ANY SATISFACTORY EXPLANATION ALONGWITH DOCUMENTARY EVIDENCE TO SUPPO RT THE PLEA THAT INTEREST- FREE ADVANCES WERE MADE FOR THE PURPOSES OF BUSINES S. THEREFORE, HE DISALLOWED A SUM OF RS.80,01,233/-. THE DRP HAS AL SO SUSTAINED THE ACTION OF THE ASSESSING OFFICER AFTER REJECTING THE OBJECT IONS RAISED BY THE ASSESSEE. AGAINST SUCH AN ADDITION BY THE ASSESSING OFFICER, ASSESSEE IS IN FURTHER APPEAL BEFORE US. 19. BEFORE US, THE LEARNED REPRESENTATIVE FOR THE A SSESSEE HAS REFERRED TO PAGE 11 OF THE PAPER BOOK FOR EXPLAINING THE DETAIL S OF THE FINANCE COST OF RS.80,01,233/- DEBITED IN THE PROFIT & LOSS ACCOUNT . THE SAID AMOUNT REPRESENTS INTEREST ON FOREIGN BILL DISCOUNTING, BA NK CHARGES, INTEREST ON VEHICLE LOAN, INTEREST ON CASH CREDIT FACILITY AND INTEREST ON FACTORING, ETC.. THE PLEA OF THE ASSESSEE IS THAT THE CORRESPONDING FUND S HAVE BEEN PUT TO USE IN THE BUSINESS OF THE ASSESSEE AND THAT THE INTEREST- FREE ADVANCES REFERRED TO IN THE BALANCE-SHEET WERE IN-FACT ADVANCES MADE IN THE COURSE OF BUSINESS AND ITA NO.273/PN/2014 A.Y. : 2009-10 THEREFORE THE ENTIRE FINANCE COST OF RS.80,01,233/- REFLECTS EXPENDITURE INCURRED IN THE COURSE OF BUSINESS ACTIVITY ONLY. 20. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE HAS REFERRED TO THE FOLLOWING OBSERVATIONS OF THE DRP I N ORDER TO SUPPORT THE STAND OF THE ASSESSING OFFICER :- 2.4.5 WE HAVE CONSIDERED THE ARGUMENTS OF THE ASS ESSEE. WE ARE UNABLE TO AGREE WITH THE ASSESSEE FOR THREE REASONS . FIRSTLY, THE LEARNED AO IN THE DRAFT ASSESSMENT ORDER HAS STATED THAT THE A SSESSEE DID NOT PROVE THAT THE ADVANCES WERE MADE FOR THE PURPOSES OF BUSINESS . WHEN THE ASSESSEE HAS NOT PROVED FACTS BEFORE THE AO, THERE IS NO QUE STION OF TAKING DECISION IN FAVOUR OF THE ASSESSEE AT THIS ORDER APPROVAL STAGE , WHICH WOULD AMOUNT TO ACCEPTING THAT THE ADVANCES WERE MADE FOR THE PURPO SES OF BUSINESS. SECONDLY, AS MENTIONED, THE ASSESSEE HAS NOT MADE A NY ARGUMENTS EITHER BEFORE US DURING THE HEARING OR IN THE WRITTEN SUBM ISSION. THEREFORE, THERE IS NO MATERIAL WITH US TO TAKE THE DECISION IN FAVOUR OF THE ASSESSEE. THIRDLY, THE ASSESSEES ARGUMENT OF DOUBLE TAXATION IS MISCONCEI VED BECAUSE THE INTEREST RELATABLE TO INTEREST FREE ADVANCES MADE TO THE AE OF RS.1,07,27,321/- HAS NOT BEEN DEBITED TO PROFIT AND LOSS ACCOUNT BUT IS DEBI TED TO LEDGER ACCOUNT TTD. THEREFORE, THE INTEREST AMOUNT OF RS.80,01,233/- IS NOT RELATABLE TO THE INTEREST FREE ADVANCES MADE TO AES. THEREFORE, IT IS NOT A CASE OF DOUBLE TAXATION AS CONTENDED BY THE ASSESSEE. 21. ON THE BASIS OF THE AFORESAID, IT IS SOUGHT TO BE MADE OUT THAT ASSESSEE COULD NOT ESTABLISH THAT THE ADVANCES HAVE BEEN MAD E FOR THE PURPOSES OF BUSINESS. 22. IN THE CONTEXT OF THE AFORESAID GROUND, WE HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND ALSO THE MATERIAL REFERRE D TO IN THE COURSE OF HEARING BEFORE US. INTEREST EXPENDITURE IS ALLOWABLE U/S 3 6(1)(III) OF THE ACT SO LONG AS THE CORRESPONDING FUNDS HAVE BEEN UTILIZED FOR THE PURPOSES OF BUSINESS. SO HOWEVER, IN THE PRESENT CASE WE FIND THAT THE ADDIT ION HAS BEEN MADE IN DISREGARD TO THE PLEA OF THE ASSESSEE THAT THE IMPU GNED FINANCE COSTS ARE RELATABLE TO FUNDS USED FOR THE PURPOSES OF BUSINES S. IN-FACT, ONE OF THE ELEMENT OF EXPENDITURE IS INTEREST ON VEHICLE LOANS , WHICH OSTENSIBLY REPRESENTS INTEREST ON A SPECIFIC LOAN RAISED FOR A CQUIRING VEHICLES. THERE IS NOTHING TO SUGGEST THAT THE SAME IS FOR NON-BUSINES S PURPOSES, AND THE ITA NO.273/PN/2014 A.Y. : 2009-10 ADDITION HAS BEEN MADE BY THE ASSESSING OFFICER MEC HANICALLY. SIMILARLY, ASSESSEE HAS POINTED OUT THAT THE ADVANCES SHOWN UN DER THE HEAD CURRENT ASSETS, IN THE BALANCE-SHEET REFLECT ADVANCES MADE IN THE COURSE OF ITS BUSINESS ACTIVITIES. NO SPECIFIC FINDINGS HAVE BEE N RECORDED BY THE LOWER AUTHORITIES ON SUCH AN ASPECT CANVASSED BY THE ASSE SSEE BEFORE THEM. FOR THE ABOVE REASONS, WE ARE UNABLE TO SUSTAIN THE ACT ION OF THE ASSESSING OFFICER IN DISALLOWING THE IMPUGNED EXPENDITURE OF RS.80,01,233/-. HOWEVER, IN ORDER TO ENSURE APPROPRIATE DETERMINATION OF THE ISSUE, IN THE INTEREST OF JUSTICE AND FAIR PLAY, WE DEEM IT FIT AND PROPER TO SET-ASIDE THE ORDER OF THE ASSESSING OFFICER AND RESTORE THE MATTER BACK TO HI S FILE WITH DIRECTIONS TO REAPPRAISE THE FACTUAL MATRIX AND THEREAFTER PASS A SPEAKING ORDER IN THE CONTEXT OF THE FINANCE COSTS OF RS.80,01,233/- DEBI TED IN PROFIT & LOSS ACCOUNT. NEEDLESS TO SAY, ASSESSING OFFICER SHALL ALLOW THE ASSESSEE AN APPROPRIATE OPPORTUNITY OF BEING HEARD AND FURNISH MATERIAL AND SUBMISSIONS IN SUPPORT OF ITS CLAIM AND ONLY THEREAFTER THE ASSESS ING OFFICER SHALL PASS AN ORDER AFRESH ON THIS ASPECT IN ACCORDANCE WITH LAW. THUS, ON THIS ASPECT ALSO ASSESSEE SUCCEEDS FOR STATISTICAL PURPOSES. 23. IN THE COURSE OF HEARING, ASSESSEE REFERRED TO THE FOLLOWING ADDITIONAL GROUND OF APPEAL :- (1) THE HONBLE DISPUTE RESOLUTION PANEL (DRP) HAS ERRED IN LAW AND ON THE FACTS OF THE CASE IN DIRECTING THE ASSES SING OFFICER TO MAKE AN ADDITION OF RS.11,57,367/- AS NOTIONAL CORPORATE GU ARANTEE FEE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENTS. THE ACTION IS UNJUST IFIED, UNWARRANTED AND WITHOUT PREJUDICE THE ADDITION IS EXCESSIVE. 24. THE AFORESAID ADDITIONAL GROUND OF APPEAL SEEKS TO CHALLENGE AN ARM'S LENGTH PRICE ADJUSTMENT DETERMINED BY THE TPO IN HI S ORDER U/S 92CA(3) OF THE ACT DATED 23.01.2013 ON ACCOUNT OF NOTIONAL CORPORA TE GUARANTEE FEE. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THO UGH THE TPO HAD DETERMINED SUCH ARM'S LENGTH PRICE ADJUSTMENT BUT I N THE FINAL ASSESSMENT ITA NO.273/PN/2014 A.Y. : 2009-10 ORDER PASSED BY THE ASSESSING OFFICER U/S 143(3) R. W.S. 144C OF THE ACT DATED 10.01.2014 THE SAID ADDITION IS CONSPICUOUS BY ITS ABSENCE. IN THIS CONTEXT, OUR ATTENTION HAS BEEN DRAWN TO PARA 5 OF THE ASSES SMENT ORDER DATED 10.01.2014 IN THIS REGARD. AS A CONSEQUENCE, WE FI ND THAT THE AFORESAID ADDITIONAL GROUND OF APPEAL IS PREMATURE AND ITS AD MISSION AND ADJUDICATION AT THIS STAGE WOULD ONLY BE A MERE ACADEMIC EXERCIS E IN THE ABSENCE OF ANY TAX LIABILITY HAVING BEEN DETERMINED AGAINST THE AS SESSEE ON THIS ASPECT. THEREFORE, FOR THE PRESENT, THE AFORESAID ADDITIONA L GROUND OF APPEAL IS TREATED AS INFRUCTUOUS AND IS DISMISSED AS BEING PR EMATURE. 25. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED, AS ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH AUGUST, 2014. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 28 TH AUGUST, 2014. SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE DRP, PUNE; 4) THE DR B BENCH, I.T.A.T., PUNE; 5) GUARD FILE. BY ORDER //TRUE COPY// SR. PRIVATE SECRETARY I.T.A.T., PUNE