ZOOM ENTERTAINMENT NETWORK LTD, MUMBAI V. ASST CIT CIR 11(1), MUMBAI

ITA 3453/MUM/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 1333 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-04-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 23-11-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 18-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR YADAV
• Assessee Lawyers: S VENKATRAMA N
• Keywords: Transfer pricing; Earning of tax free income; Date of conversion; Validity of assessment; Notional interest
• Section: 143(3); 153A; 14A; 132

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A, MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI RAJENDRA, ACCOUNTANT MEMBER ITA NO.3453/MUM /2016 ASSESSMENT YEAR-2010-11 ZOOM ENTERTAINMENT NETWORK LIMITED, 1 ST FLOOR, TRADE GARDEN KAMALA MILLS COMPOUND SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI-400013 / VS. ACIT, CIRCLE-11(1), AAYAKAR BHAVAN, MUMBAI-400020 PAN NO. AAACZ2897B ( / ASSESSEE) ( / REVENUE) / ASSESSEE BY SHRI S. VENKATRAMAN / REVENUE BY SHRI RAJESH KUMAR YADAV- DR / DATE OF HEARING : 18/04/2017 / DATE OF ORDER: 21/04/2017 ITA NO.3453/MUM/2016 ZOOM ENTERTAINMENT NETWORK LTD. 2 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THE ASSESSEE IS AGGRIEVED BY THE IMPUGNED ORDER DATED 29/02/2016 OF THE FIRST APPELLATE AUTHORITY, MUMBAI, CONFIRMING THE DISALLOWANCE OF RS.27,19,404 /- MADE U/S 14A(2) OF THE INCOME TAX ACT, 1961 (HEREIN AFTER THE ACT) READ WITH RULE-8D OF THE RULES. 2. DURING HEARING, SHRI S. VENKATARAMAN, LD. COUNSEL FOR THE ASSESSEE, ADVANCED ARGUMENTS, WHICH ARE IDENTICAL TO THE GROUND RAISED. THE LD. COUNSEL ALS O RELIED UPON THE DECISION IN THE CASE OF M/S DAGA GLOBAL CHEMICALS VS ACIT (ITA NO.5592/MUM/2012), ORDER DAT ED 01/01/2015, NIMBUS COMMUNICATION LTD. VS ACIT (ITA NO.1424/MUM/2014), ORDER DATED 09/02/2016 AND TATA INDUSTRIES LTD. VS ITO (ITA NO.4894/MUM/2008), ORDE R DATED 20/07/2016. 2.1. ON THE OTHER HAND, THE LD. DR, SHRI RAJESH KUMAR YADAV, DEFENDED THE ADDITION AND PLACED RELIA NCE UPON THE DECISION FROM DELHI BENCH OF THE TRIBUNAL IN THE CASE OF BABA GLOBAL LTD. VS DCIT (ITA NO.1086 TO 1091/DEL./2015) ORDER DATED 05/05/2016. 2.2. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE LD. D R MAINLY RELIED UPON THE DECISION FROM DELHI BENCH OF THE ITA NO.3453/MUM/2016 ZOOM ENTERTAINMENT NETWORK LTD. 3 TRIBUNAL IN THE CASE OF BABA GLOBAL LTD. (SUPRA), T HEREFORE, BEFORE COMING TO ANY CONCLUSION, WE ARE REPRODUCING HEREUNDER THE RELEVANT PORTION OF THIS ORDER FOR RE ADY REFERENCE AND ANALYSIS:- THESE ARE SIX APPEALS FILED BY THE ASSESSEE AGAINS T THE ACTION OF THE LEARNED DRP UPHOLDING THE ORDER PASSED BY THE AO UN DER SECTION 153A READ WITH SECTION 144C OF THE ACT FOR ASSESSMENT YE ARS 2006-07 TO 2010-11 AND UNDER SECTION 143(3) FOR ASSESSMENT YEA R 2011-12 CONSEQUENT TO THE DIRECTION ISSUED BY THE LEARNED D ISPUTE RESOLUTION PANEL. 2. IN THE APPEAL FILED FOR ASSESSMENT YEARS, 2006-0 7, 2007-08 AND 2008- 09, BESIDES QUESTIONING THE VALIDITY OF ASSESSMENT FRAMED UNDER SECTION 153A OF THE INCOME-TAX ACT, 1961, THE ONLY ISSUE IS THE ADDITION OF AMOUNT OF THE NOTIONAL INTEREST ON FOREIGN CURRENCY LOAN ADVANCED BY THE ASSESSEE COMPANY TO ITS WHOLLY OWNED FOREIGN SUBSID IARIES. WHEREAS FOR ASSESSMENT YEARS 2009-10 TO 2011-12, BESIDES THE AB OVE ADJUSTMENT ON ACCOUNT OF THE NOTIONAL INTEREST, THE ISSUE ALSO IS THAT OF ADDITION UNDER SECTION 14A OF THE INCOME TAX ACT. 3. THE ASSESSEE COMPANY IS ENGAGED IN MANUFACTURING OF FLAVOURED CHEWING TOBACCO, KIWAM, SCENTED ELAICHI, ETC. UNDER THE BRAND NAME BABA AND TULSI AND EXPORTED ITS 100% OF PRODUCT ION DURING THE YEARS UNDER CONSIDERATION. 4. THE ORIGINAL ASSESSMENTS UNDER SECTION 143(3) WE RE COMPLETED IN RESPECT OF ASSESSMENT YEARS 2006-07, 2007-08 AND 20 08-09. THEREAFTER A SEARCH TOOK PLACE ON 21ST JANUARY, 2011. 5. THE AO THEREAFTER TOOK UP THE ASSESSMENT BY ISSU ING NOTICE UNDER SECTION 153A. DURING THE COURSE OF THE ASSESSMENT T HE AO REFERRED THE MATTER TO THE TRANSFER PRICING OFFICER. THE LEARNED TPO NOTED THAT THE ASSESSEE COMPANY HAS EXTENDED LOANS TO ITS SUBSIDIA RY COMPANIES AND HELD THAT THE ASSESSEE OUGHT TO HAVE CHARGED INTERE ST IN RESPECT OF SUCH LOANS AND ACCORDINGLY THE TPO RECOMMEND THAT INTERE ST AS PER THE ITA NO.3453/MUM/2016 ZOOM ENTERTAINMENT NETWORK LTD. 4 PRIME LENDING RATE OF STATE BANK OF INDIA BE ADDED AS INCOME ON ACCOUNT OF ADJUSTMENT OF ARMS LENGTH PRICE. THEREA FTER THE AO PASSED THE DRAFT ASSESSMENT ORDER MAKING ADDITIONS AS RECO MMENDED BY THE TPO. 6. AGGRIEVED BY THE ORDER OF THE TPO, THE ASSESSEE FILED OBJECTION BEFORE THE DISPUTE RESOLUTION PANEL. IT WAS CONTEND ED BY THE ASSESSEE THAT SINCE THE MONEY GIVEN AS LOAN TO ITS SUBSIDIAR Y COMPANIES WAS OWN MONEY AND HENCE NO ADJUSTMENT IS REQUIRED TO BE MAD E. IT WAS FURTHER SUBMITTED THAT THE RATE OF INTEREST CHARGED CANNOT BE THE PRIME LENDING RATE OF STATE BANK OF INDIA. THIS MONEY HAS BEEN AD VANCED IN FOREIGN CURRENCY AND AS SUCH INTEREST IS TO BE CHARGED AS P ER THE INTEREST RATE IN FOREIGN CURRENCY I.E. LIBOR. 7. THE LEARNED DRP DID NOT AGREE WITH THE CONTENTIO N OF THE ASSESSEE. HOWEVER, IT GAVE A PART RELIEF BY HOLDING THAT THE INTEREST RATE BE CHARGED BE ONLY BASE RATE AND FURTHER ADJUSTED BY 150 BASIS POINT IN TERMS OF SAFE HARBOUR RULES. ON THE ISSUE OF ADDITION UNDER SECTION 14A, THE LEARNED DRP CONFIRMED THE ACTION OF THE AO. 8. AGGRIEVED BY THE ORDER OF THE LEARNED DRP AND TH E FINAL ASSESSMENT ORDER PASSED BY THE AO THE ASSESSEE IS IN APPEAL BE FORE US. 9. IT WAS CONTENDED BY THE LEARNED AR THAT THE AO WAS NOT JUSTIFIED IN TINKERING WITH THE ASSESSMENT FOR ASSESSMENT YEARS 2006-07 TO 2008-09 AS THESE ASSESSMENTS HAVE NOT ABATED CONSEQUENT TO THE SEARCH. THE SEARCH HAS TAKEN PLACE ON 21ST JANUARY, 2011. NO IN CRIMINATING MATERIAL WAS FOUND DURING THE COURSE OF THE SEARCH AS IS EVI DENT FROM THE ASSESSMENT ORDER. IT WAS CONTENDED THAT IN THE ABSE NCE OF ANY INCRIMINATING MATERIAL, THE AO SHOULD NOT HAVE MADE AN ADDITION. IN SUPPORT THEREOF THE LEARNED AR RELIED UPON THE ORDE R OF THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE CIT (CENTRAL) III VE RSUS KABUL CHAWLA [2016] 380 ITR 573 (DEL). 10. ON THE ISSUE OF THE MERIT, IT WAS CONTENDED BY THE LEARNED AR THAT THE ADDITIONS ARE UNTENABLE AS THE ASSESSEE HAS PAI D THE ADVANCES TO ITS SUBSIDIARY COMPANIES OUT OF EEFC ACCOUNTS. THE EEFC ACCOUNT EVEN OTHERWISE DOES NOT EARN ANY INTEREST. THE ADVA NCES GIVEN TO THE ITA NO.3453/MUM/2016 ZOOM ENTERTAINMENT NETWORK LTD. 5 SUBSIDIARY COMPANIES WERE IN THE NATURE OF QUASI CA PITAL AND WERE FOR BUSINESS CONSIDERATION. THE MAIN PURPOSE OF GIVING ADVANCES TO ITS SUBSIDIARY COMPANIES WAS TO PROMOTE ITS EXPORT BUSI NESS AND TO HAVE FOOTHOLD IN THESE FOREIGN COUNTRIES. 11. IN THE ALTERNATIVE, IT WAS CONTENDED BY THE LEA RNED AR THAT THE RATE OF INTEREST CANNOT BE THAT OF THE INDIAN RUPEES. THE M ONEY HAS BEEN ADVANCED IN FOREIGN CURRENCY AND INTEREST RATE TO B E CHARGED HAS TO BE THE INTEREST RATE OF SUCH FOREIGN CURRENCY. IF THE MONEY HAS BEEN ADVANCED IN US DOLLAR IT HAS TO BE LIBOR. IN RESPEC T OF ADVANCES IN EURO THE INTEREST RATE HAS TO BE EUR (LIBOR) AND IN RESPECT OF ADVANCES GIVEN IN SWISS FRANC THE INTEREST RATE HAS TO BE THAT OF CHF (LIBOR). IN SUPPORT OF ITS CONTENTION THE LEARNED A R RELIED UPON THE JUDGMENT OF THE COORDINATE BENCH OF THE ITAT IN THE CASE OF COTTON NATURAL INDIA PVT. LTD. VS. DCIT, CIRCLE 3(1), NEW DELHI 142 ITD (DEL) 662 WHICH HAS ALSO BEEN CONFIRMED BY THE JURISDICTI ONAL DELHI HIGH COURT. THE LEARNED AR ALSO RELIED UPON THE FOLLOWIN G JUDGMENTS OF THE ITAT:- (I) SIVA INDUSTRIES & HOLDINGS LIMITED VS ACIT (20 11) 59 DTR 0182 (II) TATA AUTOCOMP SYSTEMS LIMITED VS ACIT (2012) 7 3 DTR 0220 (III) FOUR SOFT LTD. VS DCIT (2014) 106 DTR 0137(HY D) (IV) AURIONPRO SOLUTIONS LIMITED 12. IT WAS FURTHER CONTENDED THAT THE AMOUNT OF LOA N OUTSTANDING TO ITS SUBSIDIARY COMPANIES HAS BEEN CONVERTED INTO SHARE APPLICATION MONEY IN THE ASSESSMENT YEAR 2011-12. THE SAID LOAN HAVIN G BECOME SHARE APPLICATION MONEY, THE TPO CANNOT CHANGE THE CHARAC TERISTIC OF THE TRANSACTION SO AS TO TREAT THE SHARE APPLICATION AS LOAN MONEY SO AS TO CHARGE INTEREST THEREON. IN SUPPORT THEREOF, THE LE ARNED AR PLACED RELIANCE ON THE JUDGMENT OF THE COORDINATE BENCH OF THE ITAT IN THE CASE OF BHARTI AIRTEL LIMITED VS ACIT, ITA NO. 5816 /D/2012 DATED 11.03.2014. THE LEARNED AR ALSO RELIED UPON THE FOL LOWING JUDGMENTS:- ITA NO.3453/MUM/2016 ZOOM ENTERTAINMENT NETWORK LTD. 6 (I) PAN INDIA NETWORK INFRAVEST PRIVATE LIMITED VS ACIT (ITA NO. 7026 & 7025 /MUMBAI/2013 DATED 04.12.2015 (II) CIT VS EKL APPLIANCES, ITA NO. 1068/2011 AND 1 070/2011 (III) PARLE BUISCUITS P LTD VS DCIT (ITA NO. 9010/M UM/2010) DATED 11.4.2014 ITAT MUMBAI (IV) ALL CARGO LOGISTICS LTD VS ACIT (2014) 150 IT D 0651 DATED. 10.6.2014 13. ON THE ISSUE OF DISALLOWANCE UNDER SECTION 14A MADE BY THE AO IN ASSESSMENT YEAR 2009-10 TO 2011-12, IT WAS SUBMITTE D BY THE LEARNED AR THAT THE DISALLOWANCE HAS BEEN MADE BY THE AO WI THOUT RECORDING ANY SATISFACTION. THE AO HAS STRAIGHTAWAY INVOKED T HE PROVISIONS OF RULE 8D. IN SUPPORT THERE OF THE LEARNED AR HAS PLA CED RELIANCE ON THE JUDGMENT OF THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF CIT VS. TAIKISHA ENGINEERING INDIA LTD., (2015) 370 ITR 033 8 (DEL). 14. IT WAS FURTHER SUBMITTED THAT IN ANY CASE THE D ISALLOWANCE UNDER SECTION 14A CANNOT EXCEED THE DIVIDEND INCOME EARNE D BY THE ASSESSEE COMPANY. 15. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDER PASSED BY THE TPO AS MODIFIED BY THE LEARNED DRP. IT WAS CONT ENDED THAT THE ORDER PASSED BY THE TPO AS WELL AS THE LEARNED DRP ON THE ISSUE OF ADJUSTMENT OF INTEREST IS A SPEAKING ORDER. IT WAS FURTHER CONTENDED THAT ONCE THE SEARCH HAS BEEN INITIATED ALL THE ASSESSME NTS GET REOPENED CONSEQUENT TO THE ISSUE OF NOTICE UNDER SECTION 153 A AND AS SUCH THE AO IS ENTITLED TO MAKE ADJUSTMENT TO THE INCOME AS PERMISSIBLE UNDER THE LAW. 16. ON THE ISSUE OF RATE OF INTEREST IT WAS CONTEND ED THAT THE RATE OF INTEREST HAS TO BE THAT OF INDIAN RUPEES AS ASSESSE E WOULD HAVE EARNED THE INTEREST IN INDIAN RUPEES HAD IT NOT ADVANCED T HE MONEY TO ITS FOREIGN SUBSIDIARY. 17. AS REGARDS CONVERSION OF THE LOAN INTO SHARE AP PLICATION MONEY IN ASSESSMENT YEAR 2011-12 IT WAS CONTENDED THAT THERE IS NO DIFFERENCE ITA NO.3453/MUM/2016 ZOOM ENTERTAINMENT NETWORK LTD. 7 BETWEEN THE LOAN AND THE SHARE APPLICATION MONEY AN D HENCE INTEREST HAS TO BE CHARGED FOR THAT YEAR ALSO. 18. ON THE ISSUE OF DISALLOWANCE UNDER SECTION 14A IT WAS CONTENDED THAT THE AO HAS INVOKED THE PROVISIONS OF RULE 8D A ND MERE NOT RECORDING OF SATISFACTION WILL NOT MAKE SUCH DISALL OWANCE UNTENABLE IN THE EYE OF LAW. 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE ORDER PASSED BY THE AUTHORITIES BELOW. THE FIRST ISSUE IS ADDITION MADE BY THE AO IN THE ASSESSMENT YEARS WHICH HAVE NOT ABATED CO NSEQUENT TO THE SEARCH I.E. ASSESSMENT YEARS 2006-07, 2007-08 AND 2 008-09. AS PER THE FACTS ON RECORD, THE SEARCH TOOK PLACE ON 21.1.2011 . ASSESSMENTS FOR ALL THESE THREE YEARS HAVE BEEN COMPLETED UNDER SECTION 143(3) OF THE ACT. NO INCRIMINATING MATERIAL WAS FOUND DURING THE COUR SE OF THE SEARCH. AS IS EVIDENT FROM THE ASSESSMENT ORDER THE ADDITION H AS BEEN MADE CONSEQUENT TO THE REFERENCE MADE BY THE AO TO TPO. THE ISSUE WHICH ARISES FOR CONSIDERATION IS WHETHER THE AO COULD HA VE MADE ADDITION IN THESE ASSESSMENT YEARS WITHOUT THERE BEING ANY INCR IMINATING MATERIAL AND IN ABSENCE OF THE ABATEMENT OF ASSESSMENT ORDER S ALREADY FRAMED. THIS ISSUE IS NOW SQUARELY COVERED BY THE JUDGMENT OF THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF CIT (CENTRAL) III VS. KABUL CHAWLA (SUPRA) WHEREIN THE HONBLE HIGH COURT HAS BEEN PLE ASED TO HOLD AS UNDER:- 37. ON A CONSPECTUS OF SECTION 153A(1) OF THE ACT, READ WITH THE PROVISOS THERETO, AND IN THE LIGHT OF THE LAW EXPLA INED IN THE AFOREMENTIONED DECISIONS, THE LEGAL POSITION THAT E MERGES IS AS UNDER: I. ONCE A SEARCH TAKES PLACE UNDER SECTION 132 OF T HE ACT, NOTICE UNDER SECTION 153 A(1) WILL HAVE TO BE MANDATORILY ISSUED TO THE PERSON SEARCHED REQUIRING HIM TO FILE RETURNS FOR SIX AYS IMMEDIATELY PRECEDING THE PREVIOUS YEAR RELEVANT TO THE AY IN WHICH THE S EARCH TAKES PLACE. II. ASSESSMENTS AND REASSESSMENTS PENDING ON THE DA TE OF THE SEARCH SHALL ABATE. THE TOTAL INCOME FOR SUCH AYS WILL HAV E TO BE COMPUTED BY THE AOS AS A FRESH EXERCISE. III. THE AO WILL EXERCISE NORMAL ASSESSMENT POWERS IN RESPECT OF THE SIX YEARS PREVIOUS TO THE RELEVANT AY IN WHICH THE SEAR CH TAKES PLACE. THE AO HAS THE POWER TO ASSESS AND REASSESS THE 'TOTAL INCOME' OF THE AFOREMENTIONED SIX YEARS IN SEPARATE ASSESSMENT ORD ERS FOR EACH OF THE SIX YEARS. IN OTHER WORDS THERE WILL BE ONLY ONE AS SESSMENT ORDER IN ITA NO.3453/MUM/2016 ZOOM ENTERTAINMENT NETWORK LTD. 8 RESPECT OF EACH OF THE SIX AYS 'IN WHICH BOTH THE D ISCLOSED AND THE UNDISCLOSED INCOME WOULD BE BROUGHT TO TAX'. IV. ALTHOUGH SECTION 153 A DOES NOT SAY THAT ADDITI ONS SHOULD BE STRICTLY MADE ON THE BASIS OF EVIDENCE FOUND IN THE COURSE O F THE SEARCH, OR OTHER POST-SEARCH MATERIAL OR INFORMATION AVAILABLE WITH THE AO WHICH CAN BE RELATED TO THE EVIDENCE FOUND, IT DOES NOT M EAN THAT THE ASSESSMENT 'CAN BE ARBITRARY OR MADE WITHOUT ANY RE LEVANCE OR NEXUS WITH THE SEIZED MATERIAL. OBVIOUSLY AN ASSESSMENT H AS TO BE MADE UNDER THIS SECTION ONLY ON THE BASIS OF SEIZED MATE RIAL.' V. IN ABSENCE OF ANY INCRIMINATING MATERIAL, THE CO MPLETED ASSESSMENT CAN BE REITERATED AND THE ABATED ASSESSMENT OR REAS SESSMENT CAN BE MADE. THE WORD 'ASSESS' IN SECTION 153 A IS RELATAB LE TO ABATED PROCEEDINGS (I.E. THOSE PENDING ON THE DATE OF SEAR CH) AND THE WORD 'REASSESS' TO COMPLETED ASSESSMENT PROCEEDINGS. VI. INSOFAR AS PENDING ASSESSMENTS ARE CONCERNED, T HE JURISDICTION TO MAKE THE ORIGINAL ASSESSMENT AND THE ASSESSMENT UND ER SECTION 153A MERGES INTO ONE. ONLY ONE ASSESSMENT SHALL BE MADE SEPARATELY FOR EACH AY ON THE BASIS OF THE FINDINGS OF THE SEARCH AND ANY OTHER MATERIAL EXISTING OR BROUGHT ON THE RECORD OF THE A O. VII. COMPLETED ASSESSMENTS CAN BE INTERFERED WITH B Y THE AO WHILE MAKING THE ASSESSMENT UNDER SECTION 153 A ONLY ON T HE BASIS OF SOME INCRIMINATING MATERIAL UNEARTHED DURING THE COURSE OF SEARCH OR REQUISITION OF DOCUMENTS OR UNDISCLOSED INCOME OR P ROPERTY DISCOVERED IN THE COURSE OF SEARCH WHICH WERE NOT PRODUCED OR NOT ALREADY DISCLOSED OR MADE KNOWN IN THE COURSE OF ORIGINAL A SSESSMENT. CONCLUSION 38. THE PRESENT APPEALS CONCERN AYS, 2002-03, 2005- 06 AND 2006- 07.ON THE DATE OF THE SEARCH THE SAID ASSESSMENTS A LREADY STOOD COMPLETED. SINCE NO INCRIMINATING MATERIAL WAS UNEA RTHED DURING THE SEARCH, NO ADDITIONS COULD HAVE BEEN MADE TO THE IN COME ALREADY ASSESSED. 39. THE QUESTION FRAMED BY THE COURT IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. THE ABOVE VIEW HAS BEEN REITERATED BY THE HONBLE D ELHI HIGH COURT IN THE CASE OF CIT-7 VS. RRJ SECURITIES LTD. IN [2016] 380 ITR 612 (DEL) WHERE THE HONBLE COURT HAS BEEN PLEASED TO HOLD AS UNDER:- IN RESPECT OF SUCH ASSESSMENTS WHICH HAVE ABATED, THE AO WOULD HAVE THE JURISDICTION TO PROCEED AND MAKE AN ASSESSMENT. HOWEVER, IN RESPECT OF CONCLUDED ASSESSMENTS, THE AO WOULD ASSU ME JURISDICTION TOREASSESS PROVIDED THAT THE ASSETS/DOCUMENTS RECEI VED BY THE AO REPRESENTOR INDICATE ANY UNDISCLOSED INCOME OR POSS IBILITY OF ANY INCOME THAT MAY HAVE REMAINED UNDISCLOSED IN THE RELEVANT ASSESSMENT YEARS. THIS COURT IN COMMISSIONER OF INCOME TAX (CENTRAL)- III V. KABUL CHAWLA: ITA707/2014, DECIDED ON 28TH AUGUST, 2015 HAS HELD THAT COMPLETED ASSESSMENTS COULD ONLY BE INTERFERED WITH BY THE AO ON THE BASIS OF AN ITA NO.3453/MUM/2016 ZOOM ENTERTAINMENT NETWORK LTD. 9 INCRIMINATING MATERIAL UNEARTHED DURING THE COURSE OF THE SEARCH OR REQUISITION OF THE DOCUMENTS. IN ABSENCE OF ANY INC RIMINATING MATERIAL, THE AO DOES NOT HAVE ANY JURISDICTION TO INTERFERE IN CONCLUDED ASSESSMENTS. IN THE PRESENT CASE, AS STATED HEREINABOVE, THE ADD ITION HAS BEEN MADE WITHOUT THERE BEING ANY INCRIMINATING MATERIAL AND IN ABSENCE OF PENDENCY OF ASSESSMENT. IN THE ABSENCE OF ANY INCRI MINATING MATERIAL, AS HELD BY THE HONBLE HIGH COURT, THE ADDITION CAN NOT BE MADE IN AN ASSESSMENT UNDER SECTION 153A. RESPECTFULLY FOLLOWI NG THE JUDGMENT OF THE JURISDICTIONAL DELHI HIGH COURT, WE HOLD THAT T HE AO WAS NOT JUSTIFIED IN MAKING THE ADDITION AND ACCORDINGLY THE ADDITION MADE BY THE AO IN THE ASSESSMENT YEARS 2006-07, 2007-08 AND 2008-09 A RE DIRECTED TO BE DELETED. CONSEQUENTLY THE APPEALS FILED FOR THESE A SSESSMENT YEARS ARE ALLOWED. 20. AS REGARDS ASSESSMENT YEARS 2009-10 AND 2010-11 ARE CONCERNED THE LEARNED DRP HAS CONFIRMED THE ADDITION APPLYING THE BASE RATE OF STATE BANK OFINDIA PLUS 150 BASIS POINTS. IT WAS TH E CONTENTION OF THE LEARNED AR THAT NO ADDITION CAN BE MADE AS THE ADVA NCE MADE WAS OUT OF THE EEFC ACCOUNT WHICH CARRIES NO INTEREST. FURT HER AMOUNT ADVANCED WAS FOR PROMOTING ITS BUSINESS. ON THIS IS SUE WE ARE NOT IN AGREEMENT WITH THE CONTENTION OF THE LEARNED AR. TH E AMOUNT HAVING BEEN ADVANCED TO AN ASSOCIATED ENTERPRISES, THE SAM E HAS TO BE EVALUATED BY APPLYING ARMS LENGTH PRICE. SINCE IT WAS A LOAN DURING THE ASSESSMENT YEARS 2009-10 AND 2010-11, THE ASSESSEE COMPANY OUGHT TO HAVE COMPUTED THE ARMS LENGTH PRICE IN RESPECT OF SUCH LOAN ADVANCED TO ITS SUBSIDIARY COMPANIES. HOWEVER, AS R EGARDS THE INTEREST RATE WE ARE IN AGREEMENT WITH THE CONTENTION OF THE LEARNED AR THAT THIS CANNOT BE THE INTEREST RATE APPLICABLE TO INDIAN RU PEES. THESE ADVANCES HAVING BEEN MADE IN THE FOREIGN CURRENCY, THE RATE OF INTEREST HAS TO BE WITH REFERENCE TO THE INTEREST RATE ON LOANS AND AD VANCES IN RESPECT OF FOREIGN CURRENCY. THIS ISSUE IS COVERED BY THE JUDG MENT OF THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF CIT VS. COTTON NATURALS (P) P LTD. (2015) 276 CTR 0445 (DEL) WHEREIN THE HONBL E HIGH COURT HAS BEEN PLEASED TO HOLD AS UNDER:- 39. THE QUESTION WHETHER THE INTEREST RATE PREVAIL ING IN INDIA SHOULD BE APPLIED, FOR THE LENDER WAS AN INDIAN COMPANY/ASSES SEE, OR THE LENDING RATE PREVALENT IN THE UNITED STATES SHOULD BE APPLI ED, FOR THE BORROWER WAS A RESIDENT AND AN ASSESSEE OF THE SAID COUNTRY, IN OUR CONSIDERED OPINION, MUST BE ANSWERED BY ADOPTING AND APPLYING A COMMONSENSICAL AND PRAGMATIC REASONING. WE HAVE NO HESITATION IN H OLDING THAT THE INTEREST RATE SHOULD BE THE MARKET DETERMINED INTER EST RATE APPLICABLE TO ITA NO.3453/MUM/2016 ZOOM ENTERTAINMENT NETWORK LTD. 10 THE CURRENCY CONCERNED IN WHICH THE LOAN HAS TO BE REPAID. INTEREST RATES SHOULD NOT BE COMPUTED ON THE BASIS OF INTEREST PAY ABLE ON THE CURRENCY OR LEGAL TENDER OF THE PLACE OR THE COUNTRY OF RESI DENCE OF EITHER PARTY. INTEREST RATES APPLICABLE TO LOANS AND DEPOSITS IN THE NATIONAL CURRENCY OF THE BORROWER OR THE LENDER WOULD VARY AND ARE DEPEN DENT UPON THE FISCAL POLICY OF THE CENTRAL BANK, MANDATE OF THE GOVERNME NT AND SEVERAL OTHER PARAMETERS. INTEREST RATES PAYABLE ON CURRENC Y SPECIFIC LOANS/ DEPOSITS ARE SIGNIFICANTLY UNIVERSAL AND GLOBALLY A PPLICABLE. THE CURRENCY IN WHICH THE LOAN IS TO BE RE-PAID NORMALLY DETERMI NES THE RATE OF RETURN ON THE MONEY LENT, I.E. THE RATE OF INTEREST. KLAUS VOGEL ON DOUBLE TAXATION CONVENTIONS (THIRD EDITION) UNDER ARTICLE 11 IN PARAGRAPH 115 STATES AS UNDER:- THE EXISTING DIFFERENCES IN THE LEVELS OF INTEREST RATES DO NOT DEPEND ON ANY PLACE BUT RATHER ON THE CURRENCY CONCERNED. THE RATE OF INTEREST ON A US $ LOAN IS THE SAME IN NEW YORK AS IN FRANKFURT-A T LEAST WITHIN THE FRAMEWORK OF FREE CAPITAL MARKETS (SUBJECT TO THE A RBITRAGE). IN REGARD TO THE QUESTION AS TO WHETHER THE LEVEL OF INTEREST RA TES IN THE LENDERS STATE OR THAT IN THE BORROWERS IS DECISIVE, THEREFORE, P RIMARILY DEPENDS ON THE CURRENCY AGREED UPON (BFH BST.B1. II 725 (1994), RE . 1 ASTG). A DIFFERENTIATION BETWEEN DEBT-CLAIMS OR DEBTS IN NAT IONAL CURRENCY AND THOSE IN FOREIGN CURRENCY IS NORMALLY NO USE, BECAU SE, FOR INSTANCE, A US $ LOAN ADVANCED BY A US LENDER IS TO HIM A DEBT-CLA IM IN NATIONAL CURRENCY WHEREAS TO A GERMAN BORROWER IT IS A FOREI GN CURRENCY DEBT (THE SITUATION BEING DIFFERENT, HOWEVER, WHEN AN AG REEMENT IN A THIRD CURRENCY IS INVOLVED). MOREOVER, A DIFFERENCE IN IN TEREST LEVELS FREQUENTLY REFLECTS NO MORE THAN DIFFERENT EXPECTATIONS IN REG ARD TO RATES OF EXCHANGE, RATES OF INFLATION AND OTHER ASPECTS. HEN CE, THE CHOICE OF ONE PARTICULAR CURRENCY CAN BE JUST AS REASONABLE AS TH AT OF ANOTHER, DESPITE DIFFERENT LEVELS OF INTEREST RATES. AN ECONOMIC CRI TERION FOR ONE PARTY MAY BE THAT IT WANTS, IF POSSIBLE, TO AVOID EXCHANGE RI SKS (FOR EXAMPLE, BY MATCHING THE CURRENCY OF THE LOAN WITH THAT OF THE FUNDS ANTICIPATED TO BE AVAILABLE FOR DEBT SERVICE), SUCH AS TAKING OUT A U S $ LOAN IF THE PROCEEDS IN US $ ARE EXPECTED TO BECOME AVAILABLE ( SAY FROM EXPORTS). IF AN EXCHANGE RISK WERE TO PROVE INCAPABLE OF BEIN G AVOIDED (SAY, BY FORWARD RATE FIXING), THE APPROPRIATE COURSE WOULD BE TO ATTRIBUTE IT TO THE ECONOMICALLY MORE POWERFUL PARTY. BUT, EXACTLY WHER E THERE IS NO SPECIAL RELATIONSHIP, THIS WILL FREQUENTLY NOT BE POSSIBLE IN DEALINGS WITH SUCH PARTY. CONSEQUENTLY, IT WILL NORMALLY NOT BE P OSSIBLE TO REVIEW AND ADJUST THE INTEREST RATE TO THE EXTENT THAT SUCH RA TE DEPENDS ON THE CURRENCY INVOLVED. MOREOVER, IT IS QUESTIONABLE WHE THER SUCH AN ADJUSTMENT COULD BE BASED ON ART. 11 (6).FOR ART. 1 1(6), AT LEAST ITS WORDING, ALLOWS THE AUTHORITIES TO ELIMINATE HYPOTHETICALLY THE SPECIAL RELATIONSHIPS ONLY IN REGARD TO THE LEVEL OF INTERE ST RATES AND NOT IN REGARD TO OTHER CIRCUMSTANCES, SUCH AS THE CHOICE OF CURRE NCY. IF SUCH OTHER CIRCUMSTANCES WERE TO BE INCLUDED IN THE REVIEW, TH ERE WOULD BE DOUBTS AS TO WHERE THE LINE SHOULD BE DRAWN, I.E., WHETHER AN EXAMINATION SHOULD BE ALLOWED OF THE QUESTION OF WHETHER IN THE ABSENCE OF A SPECIAL RELATIONSHIP (I.E., FINANCIAL POWER, STRONG POSITIO N IN THE MARKET, ETC., OF THE FOREIGN CORPORATE GROUP MEMBER) THE BORROWING C OMPANY MIGHT NOT HAVE COMPLETELY REFRAINED FROM MAKING INVESTMENT FO R WHICH IT BORROWED THE MONEY. THE AFORESAID METHODOLOGY RECOMMENDED BY KLAUS VOGEL APPEALS TO US AND APPEARS TO BE THE REASONABLE AND PROPER PARAMETER ITA NO.3453/MUM/2016 ZOOM ENTERTAINMENT NETWORK LTD. 11 TO DECIDE UPON THE QUESTION OF APPLICABILITY OF INT EREST RATE. THE LOAN IN QUESTION WAS GIVEN IN FOREIGN CURRENCY I.E. US $ AN D WAS ALSO TO BE REPAID IN THE SAME CURRENCY I.E. US $. INTEREST RAT E APPLICABLE TO LOANS GRANTED AND TO BE RETURNED IN INDIAN RUPEES WOULD N OT BE THE RELEVANT COMPARABLE. EVEN IN INDIA, INTEREST RATES ON FCNR A CCOUNTS MAINTAINED IN FOREIGN CURRENCY ARE DIFFERENT AND DEPENDENT UPO N THE CURRENCY IN QUESTION. THEY ARE NOT DEPENDENT UPON THE PLR RATE, WHICH IS APPLICABLE TO LOANS IN INDIAN RUPEE. THE PLR RATE, THEREFORE, WOULD NOT BE APPLICABLE AND SHOULD NOT BE APPLIED FOR DETERMI NING THE INTEREST RATE IN THE EXTANT CASE. PLR RATES ARE NOT APPLICABLE TO LOANS TO BE RE-PAID IN FOREIGN CURRENCY. THE INTEREST RATES VARY AND ARE T HUS DEPENDENT ON THE FOREIGN CURRENCY IN WHICH THE REPAYMENT IS TO BE MA DE. THE SAME PRINCIPLE SHOULD APPLY. 21. ACCORDINGLY THE APPLICABLE RATE OF INTEREST SHA LL BE THE RATE OF INTEREST IN RESPECT OF SUCH FOREIGN CURRENCY IN WHICH THE LO ANS HAVE BEEN ADVANCE. AS PER THE DETAILS AVAILABLE ON RECORD DUR ING THE ASSESSMENT YEARS 2009-10 AND 2010- 11 ASSESSEE HAS ADVANCED TO ITS SUBSIDIARY COMPANIES AS DETAILED BELOW:- XXXXXXXXXXXXXXXX TAKING INTO CONSIDERATION OF THE ABOVE FACTS, THE L EARNED AO IS DIRECTED TO VERIFY THE ABOVE INTEREST RATE AND RECOMPUTE THE ADJUSTMENT ON ACCOUNT OF INTEREST BY APPLYING THE RATE OF INTEREST OF THE RELEVANT CURRENCY IN THE AY 2009-10 & 2010-11. ACCORDINGLY THIS GROUND OF TH E ASSESSEE IS PARTLY ALLOWED FOR AY 2009-10 & 2010-11. XXXXXXXXXXXXXXXXX 22. AS REGARDS THE ADDITION ON THIS ACCOUNT IN ASSE SSMENT YEAR 2011-12, THE ADVANCE GIVEN TO ITS SUBSIDIARY COMPANIES STAND CONVERTED INTO SHARE APPLICATION MONEY. ONCE THE LOAN HAS BEEN CON VERTED INTO SHARE APPLICATION MONEY, FOR THE ISSUE OF THE SHARE CAPIT AL, THEN SUCH AMOUNT CANNOT BE CONSIDERED AS LOAN. THE TPO IS NOT PERMIT TED UNDER THE LAW TO RE-CHARACTERIZE THE TRANSACTION AND ACCORDINGLY WE ARE OF THE VIEW THAT NO INTEREST ON SUCH SHARE APPLICATION MONEY CAN BE CHARGED. THE ABOVE VIEW IS SUPPORTED BY THE JUDGMENT OF THE COORDINATE BENCH OF THE ITAT IN THE CASE OF BHARTI AIRTEL LTD. VS. ACIT, [2014] 161 TTJ 0283 (DEL) WHEREIN THE ITAT HAS HELD AS UNDER:- ITA NO.3453/MUM/2016 ZOOM ENTERTAINMENT NETWORK LTD. 12 47. WE FIND THAT IN THE PRESENT CASE THE TPO HAS NOT DISPUTED THAT THE IMPUGNED TRANSACTIONS WERE IN THE NATURE OF PAYMENT S FOR SHARE APPLICATION MONEY, AND THUS, OF CAPITAL CONTRIBUTIO NS. THE TPO HAS NOT MADE ANY ADJUSTMENT WITH REGARD TO THE ALP OF THE C APITAL CONTRIBUTION. HE HAS, HOWEVER, TREATED THESE TRANSACTIONS PARTLY AS OF AN INTEREST FREE LOAN, FOR THE PERIOD BETWEEN THE DATES OF PAYMENT T ILL THE DATE ON WHICH SHARES WERE ACTUALLY ALLOTTED, AND PARTLY AS CAPITA L CONTRIBUTION, I.E. AFTER THE SUBSCRIBED SHARES WERE ALLOTTED BY THE SUBSIDIA RIES IN WHICH CAPITAL CONTRIBUTIONS WERE MADE. NO DOUBT, IF THESE TRANSAC TIONS ARE TREATED AS IN THE NATURE OF LENDING OR BORROWING, THE TRANSACT IONS CAN BE SUBJECTED TO ALP ADJUSTMENTS, AND THE ALP SO COMPUTED CAN BE THE BASIS OF COMPUTING TAXABLE BUSINESS PROFITS OF THE ASSESSEE, BUT THE CORE ISSUE BEFORE US IS WHETHER SUCH A DEEMING FICTION IS ENVI SAGED UNDER THE SCHEME OF THE TRANSFER PRICING LEGISLATION OR ON TH E FACTS OF THIS CASE. WE DONOT FIND SO. WE DONOT FIND ANY PROVISION IN LAW E NABLING SUCH DEEMING FICTION. IN VIEW OF THE ABOVE FACTS AND THE JUDGMENT OF COOR DINATE BENCH, THE AO IS DIRECTED TO VERIFY THE DATE OF CONVERSION OF LOA N TO SHARE APPLICATION MONEY AND NOT TO MAKE ANY ADJUSTMENT ON ACCOUNT OF INTEREST POST CONVERSION OF LOAN TO SHARE APPLICATION MONEY AND A CCORDINGLY THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL P URPOSE. 23. AS REGARDS THE DISALLOWANCE UNDER SECTION 14A I N RESPECT OF THE EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME IS C ONCERNED, WE NOTE THAT THE ASSESSEE HAS EARNED THE FOLLOWING INCOME I N THE ASSESSMENT YEARS 2009-10 TO 2011-12:- XXXXXXXXXXXXXXXX 25. THE CONTENTION OF THE ASSESSEE IS THAT IN THE A BSENCE OF ANY SATISFACTION BEING RECODED DISALLOWANCE UNDER SECTI ON 14A CANNOT BE SUSTAINED. THE ALTERNATIVE CONTENTION OF THE LEARNE D AR HAS BEEN THAT THE ADDITION IN ANY CASE CANNOT EXCEED THE EXEMPT I NCOME. AS REGARDS FIRST CONTENTION THAT NO SATISFACTION HAS BEEN RECO RDED WE NOTE FROM THE ASSESSMENT ORDER THAT THE AO HAS CONSIDERED THE EXP LANATION OF THE ASSESSEE AND AFTER TAKING INTO CONSIDERATION THE EX PLANATION HE HAS INVOKED RULE 8D. HAVING DONE SO, IT CANNOT BE SAID THAT THE AO HAS NOT TAKEN INTO CONSIDERATION THE EXPLANATION OF THE ASS ESSEE. 26. HOWEVER, AS REGARDS THE SECOND CONTENTION OF TH E LEARNED AR THAT THE DISALLOWANCE CANNOT EXCEED THE EXEMPT INCOME, W E ARE IN AGREEMENT WITH THIS CONTENTION. THIS VIEW IS SUPPOR TED BY THE JUDGMENT OF THE HONBLE JURISDICTIONAL DELHI HIGH COURT IN T HE CASE OF JOINT INVESTMENTS PVT. LTD. VERSUS COMMISSIONER OF INCOME TAX [2015] 372 ITA NO.3453/MUM/2016 ZOOM ENTERTAINMENT NETWORK LTD. 13 ITR 694 (DEL). ACCORDINGLY WE DIRECT THE AO TO REST RICT THE ADDITION TO THE EXEMPT INCOME. ACCORDINGLY THIS GROUND IS PARTLY AL LOWED IN FAVOUR OF THE ASSESSEE. 27. IN VIEW OF THE ABOVE FINDINGS THE ASSESSEES AP PEALS FOR THE A.Y. 2006-07 BEING ITA NO. 1086/DEL/2015, A.Y. 2007-08 B EING ITA NO. 1087/DEL/2015, A.Y. 2008-09 BEING ITA NO. 1088/DEL/ 2015 ARE ALLOWED, APPEAL FOR A.Y. 2009-10 BEING ITA NO. 1089/DEL/2015 , A.Y. 2010-11 BEING ITA NO. 1090/DEL/2015 AND A.Y. 2011-12 BEING ITA NO. 1091/DEL/2015 ARE PARTLY ALLOWED. 2.3. WE FIND THAT IN THE PRESENT APPEAL, THE ISSUE RELATES TO DISALLOWANCE OF RS.27,19,404/- MADE U/S 14A(2) OF THE ACT READ WITH RULE-8D OF THE RULES. CONSIDER ING THE TOTALITY OF FACTS, WE ARE OF THE VIEW THAT AT BEST, IF ANY DISALLOWANCE COULD BE MADE THAT CANNOT EXCEED THE EXEMPT INCOME. THE TRIBUNAL IN THE CASE OF NIMBUS COMMUNICATION LTD. (SUPRA) HAS MADE AN ELABORATE DISCUSSION AND THEREAFTER REACHED TO A PARTICULAR CONCLUSION, THUS, THE RATIO LAID DOWN IN THE CASES MENTIONED BY THE LD. COUNSEL FOR THE ASSESSEE, CLEA RLY SUPPORTS THE CASE OF THE ASSESSEE. SO FAR AS, THE C ASE OF BABA GLOBAL LTD. VS DCIT (SUPRA), RELIED UPON BY LD . DR IS CONCERNED, EVEN IN THAT CASE IN PARA-26, THERE IS CATEGORICAL FINDING THAT THE DISALLOWANCE CANNOT EX CEED THE EXEMPT INCOME. THE RATIO LAID DOWN IN JOINT INVESTMENT PVT. LTD. VS CIT (2015) 372 ITR 694 (DEL .) CLEARLY SUPPORTS THE CASE OF THE ASSESSEE, THUS THE CASE RELIED UPON BY LD. DR IS OF NOT MUCH HELP TO THE RE VENUE. THUS, THE APPEAL OF THE ASSESSEE IS ALLOWED. ITA NO.3453/MUM/2016 ZOOM ENTERTAINMENT NETWORK LTD. 14 FINALLY, THE APPEAL OF THE ASSESSEE IS ALLOWED. THIS ORDER WAS PRONOUNCED IN THE OPEN IN THE PRESENCE OF LD. REPRESENTATIVES FROM BOTH SIDES AT THE CONCLUSION OF THE HEARING ON 18/04/2017. SD/- SD /- (RAJENDRA) (JOGINDER SINGH) '# / ACCOUNTANT MEMBER $# / JUDICIAL MEMBER MUMBAI; # DATED : 21/04/2017 F{X~{T? P.S/. . . !%$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. %& '( / THE APPELLANT (RESPECTIVE ASSESSEE) 2. )*'( / THE RESPONDENT. 3. ++ , ( %& ) / THE CIT, MUMBAI. 4. ++ , / CIT(A)- , MUMBAI, 5. /01)2 , +%& %23 , / DR, ITAT, MUMBAI 6. 145 / GUARD FILE. ! / BY ORDER, */&) //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI