Appeal details
Counselvise Citation
37520114 RSA 2013
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 year(s) 2 month(s) 11 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
01-04-2015
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
I
Next Hearing Date
13-01-2015
Assessment Year
2008-2009
Appeal Filed On
21-01-2013
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I NEW DELHI) BEFORE SHRI I.C. SUDHIR AND SHRI J.S. REDDY ITA NO.5718/DEL/2013 ASSESSME NT YEAR: 2007-08 ITA NO. 375/DEL/2013 ASSESSMENT YEAR: 2 008-09 MOTHERSON SUMI SYSTEMS LTD., VS. ADDITIONAL CIT, F-7, BLOCK B-I, RANGE-5, G-6/B-1, MOHAN COOPERATIVE NEW DELHI. IND. ESTATE, MATHURA ROAD, NEW DELHI. (PAN: AAACM0405A) (APPELLANT) (RESPONDENT) REVENUE BY: SHRI PEEYUSH JAIN, CIT(DR) ASSESSEE BY: S/SHRI PAWAN KU MAR, TARUN KUMAR & MS. OINDRILA BALA, CAS DATE OF HEARING : 13.01.2015 DATE OF PRONOUNCEMENT: 01:04.2015 ORDER PER I.C. SUDHIR: JUDICIAL MEMBER ITA NO. 5718/DEL/2011 : THE ASSESSEE HAS QUESTIONED THE ASSESSMENT ORDER PASSED IN PURSUANCE TO THE DIRECTIONS ISSUED BY THE LEARNED DISPUTE RESOLUTION PANEL (DRP) ON THE FOLLOWING GROUNDS: 1.. THAT THE ASSESSMENT ORDER PASSED IN PURSUANCE TO THE DIRECTIONS ISSUED BY THE LEARNED DISPUTE RESOLUTION PANEL (DRP) IS A VITIA TED ORDER AS THE LD. DRP HAS ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE AD DITION MADE BY THE LD. ASSESSING OFFICER (O)/LD. TRANSFER PRICING OFFICE R (TPO) TO THE APPELLANTS INCOME; 2 2. THAT THE LD. AO ERRED IN LAW IN MAKING A DISALLOWAN CE OF INR 20,42,826/- UNDER SECTION 14A OF THE ACT AND IN DOING SO HAVE GROSSLY ERRED IN: 1.1 HOLDING THAT RULE 8D OF THE INCOME TAX RULES, 1961 (IT RULES) HAS NOT BEEN APPLIED DESPITE THE FACT THAT THE MODE OF COMPUTATION OF THE DISALLOWANCE IS SIMILAR AS THAT HAS BEEN MENTIO NED IN RULE 8D OF THE IT RULES. 1.2 NOT APPRECIATING THE DIRECTIONS OF THE DRP IN CORRE CT SENSE THAT THE METHODOLOGY PRESCRIBED IN THE RULE 8D OF THE IT RUL ES, SHOULD NOT BE FOLLOWED WHILE MAKING THE DISALLOWANCE. 1.3 MAKING THE DISALLOWANCE WITHOUT ESTABLISHING THE NE XUS BETWEEN DIVIDEND INCOME AND THE EXPENSE DEBITED TO THE PROF IT AND LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION. 2. THAT THE REFERENCE MADE BY THE LD. AO SUFFERS FROM JURISDICTIONAL ERROR AS THE LD.AO HAS NOT RECORDED ANY REASONS IN THE DRAFT ASS ESSMENT ORDER BASED ON WHICH HE REACHED THE CONCLUSION THAT IT WAS NECESSARY OR EXPEDIENT TO REFER THE MATTER TO THE LD. TRANSFER PRICING OFFICER (TPO) FOR COM PUTATION OF THE ARMS LENGTH PRICE (LP), AS IS REQUIRED UNDER SECTION 92CA (1) OF THE INCOME TAX ACT, 1961 (THE ACT). 3. THE LD. DRP ERRED BOTH ON FACTS AND IN LAW IN CONFI RMING THE LD. AO/TPOS ACTION OF MAKING AN ADJUSTMENT OF RS.4,61,99,357 TO THE INCOME OF THE APPELLANT BY HOLDING THAT THE INTERNATIONAL TRANSACTIONS OF T HE APPELLANT PERTAINING TO RECEIPT OF INTEREST ON THE LOANS GIVEN TO ITS FOUR SUBSIDIA RIES DO NOT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE INCOME-TAX ACT 1961 (CT). IN DOING SO THE LD. DRP HAS GROSSLY ERRED IN AGREEING THE TPOS ACT ION OF; 3.1 DISREGARDING THE ALP, AS DETERMINED BY THE ASSESSES IN THE TRANSFER PRICING (TP) DOCUMENTATION MAINTAINED BY IT IN TERMS OF SECTION 92D OF THE ACT READ WITH RULE 10D OF THE IN COME-TAX RULES, 1962 (RULES); 3.2 DISREGARDING THE FACT THAT THE INTERNATIONAL TRANSA CTION OF INTEREST RECEIVED ON LOAN HAS BEEN ACCEPTED TO BE AT AN ARM S LENGTH IN PRIOR YEARS AND NO CHANGES HAVE HAPPENED IN THE CIRCUMSTA NCES OF THE CASE WARRANTING A FRESH ANALYSIS OR REJECTION OF TH E ARMS LENGTH NATURE OF THE TRANSACTIONS; 3.3 COMPLETELY DISREGARDING THE DETAILED AND PROPER COM PARABILITY ANALYSIS OF THE INTEREST RECEIVED ON LOANS AS SUBMI TTED BY THE ASSESSEE UNDER COMPARABLE UNCONTROLLED PRICE (UP) METHOD ON THE BASIS OF THE COMPARABLE THIRD PARTY LOAN AGREEM ENTS AND INSTEAD DETERMINED THE ARMS LENGTH INTEREST RATE ON THE BA SIS OF INDIAN CORPORATE BONDS, THEREBY RESULTING IN AN ERRONEOUS APPLICATION OF CUP METHOD; 3 3.4 COLLECTING INFORMATION ON CORPORATE BOND YIELDS OF THE COMPANIES BY EXERCISING POWER GRANTED TO THE LD. TPO U/S 133( 6) OF THE ACT THAT WAS NOT AVAILABLE TO THE ASSESSEE IN THE PUBLI C DOMAIN AND IN DOING SO; 4.4.1. VIOLATING THE FUNDAMENTAL PRINCIPLES OF NATU RAL JUSTICE BY RELYING ON THE INFORMATION SOURCED U/S 133(6); 4.4.2. NOT SHARING WITH THE ASSESSEE, THE INFORMATI ON/REPLY RECEIVED BY THE LD. TPO U/S133(6). 4.5. DISREGARDING THE ANALYSIS CARRIED OUT BY THE A SSESSEE TO BENCHMARK THE INTERNATIONAL TRANSACTION OF INTEREST RECEIVED ON LOAN ON VARIOUS INCORRECT T/BASELESS STATEMENTS WITH SEVERAL INFIRM ITIES IN THE TP ORDER SO AS TO MISLEAD THE CAUSE OF JUSTICE, THEREB Y CLEARLY DEMONSTRATING A PREJUDICED MINDSET DRIVEN WITH THE SINGLE-MINDED INTENTION TO RECOMMEND A TP ADJUSTMENT. 4.6 DISREGARDING JUDICIAL PRONOUNCEMENTS IN INDIA I N UNDERTAKING THE TP ADJUSTMENT. 5. THE LD. AO/LD. TPO ERRED IN INCORRECTLY CALCULAT ING THE INTEREST ON LOAN BASED ON THE ALP DETERMINED BY THE LD. TPO. 6. THE LD. AO GROSSLY ERRED IN PROPOSING TO LEVY IN TEREST U/S 234B OF THE ACT. THE ABOVE GROUND ARE WITHOUT PREJUDICE TO EACH OTHE R THE APPELLANT CRAVES LEAVE TO ALTER, AMEND OR WITHD RAW ALL OR ANY OF THE GROUNDS HEREIN OR ADD ANY FURTHER GROUNDS AS MAY BE CONSIDERED NECESSARY EITHER BEFORE OR DURING THE HEARING. 2. WE HAVE HEARD AND CONSIDERED THE ARGUMENTS ADVAN CED BY THE PARTIES IN VIEW OF ORDERS OF THE AUTHORITIES BELOW, MATERIA L AVAILABLE ON RECORD AND THE DECISIONS RELIED UPON. 3. THE BASIC FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY I.E. MOTHERSON SUMI SYSTEM LTD. ( IN SHORT MSSL) IS A LE ADING SOLUTIONS PROVIDER FOR AUTOMOTIVE ELECTRICAL DISTRIBUTION SYS TEMS. THE ASSESSEE 4 COMPANY IS A JOINT VENTURE BETWEEN MOTHERSON AUTO P VT. LTD., SUMITOMO WIRING SYSTEMS LTD., JAPAN AND NISHHO IWAI CORPORAT ION, JAPAN. MSSLS OPERATIONS ARE MAINLY DIVIDED INTO FOUR BROAD DIVIS ION I.E. THE FIRST DIVISION I.E. THE WIRING HARNESS DIVISION, MANUFACTURES INTE GRATED WIRING HARNESSES. THE SECOND DIVISION, SPBU DIVISION, IS INTO MANUFAC TURING OF COOLING FANS FOR COMPUTER SERVER. THE 3 RD DIVISION, THE PVC WIRES DIVISION, MANUFACTURES A WIDE RANGE OF WIRES FOR THE AUTOMOTI VE APPLICATIONS AS WELL AS DOMESTIC/INDUSTRIAL APPLICATION. THE 4 TH IS POLYMER DIVISION WHICH MANUFACTURES INJECTION MOLDED, BLOW MOLDED, COMPRES SION MOLDED AND VACUUM FORMED COMPONENTS. DURING THE YEAR, THE ASSESSEE HAS UNDERTAKEN THE F OLLOWING INTERNATIONAL TRANSACTIONS: THE ASSESSEE HAS CLUBBED ITS INTERNATIONAL TRANSACT ION INTO THREE CLASSES. MANUFACTURING ACTIVITIES HAVE BEEN CATEGORIZED IN C LASS-I, RECEIPTS OF INTEREST ON LOAN HAVE BEEN CATEGORIZED IN CLASS-II, AND REIMBURSEMENT OF EXPENSES HAVE BEEN CATEGORIZED IN CLASS-III. S.NO. DESCRIPTION OF TRANSACTION VALUE OF TRANSACTI ON 1. PURCHASE OF RAW MATERIAL, COMPONENTS, TOOLS, SPARES. 919,549,747/- 2. SALE OF GOODS 862,502,712/- 3. PURCHASE OF CAPITAL ASSETS 7,194,453/- 4. PAYMENT OF ROYALTY 52,250,358/- 5. PURCHASE OF SERVICES 2,103,376/- 6. OTHER OPERATING INCOME 5,104,757/- 7. REIMBURSEMENT OF EXPENSES. 449,662/- 8. RECEIPT OF INTEREST ON LOAN 33,338,49 9/- 5 3.1 FOR CLASS ONE AND CLASS THREE TRANSACTIONS, AS DISCUSSED HEREINABOVE IN PARA NO.3, TNMM HAS BEEN SELECTED AS THE MOST APPRO PRIATE METHOD. OP/PC HAS BEEN SELECTED AS THE PLI . THE OP/PC OF THE ASS ESSEE COMPANY, HAS BEEN CALCULATED AT 16.69%, WHILE THE MEAN OP/PC OF 25 CO MPARABLES HAVE BEEN CALCULATED AT 9.47%. FOR CLASS TWO TRANSACTION OF R ECEIPT OF LOAN, THE ASSESSEE HAD USED CUP METHOD FOR BENCH MARKING. THE ASSESSEE HAS USED ALTERNATE INVESTMENT OPPORTUNITY IN THE BANK FD AS THE BENCH MARK. IT WAS STATED THAT THE AVERAGE RETURN EARNED ON BANK DEPOSIT WAS 7,.26 % PER ANNUM DURING THE YEAR. AFTER ADJUSTING FOR SIX MONTHS, OVERAGE FOR W HAT PREMIUM, IT WAS STATED THAT THE EFFECTIVE EARNING WAS HIGHER THAN THE BANK FD INTEREST AMOUNT. THEREFORE, THE TRANSACTION ARE STATED TO BE AT ARMS LENGTH. IT WAS SUBMITTED THAT THE ASSESSEE HAS EXTENDED FOREIGN CURRENT LOAN TO ITS SUBSIDIARIES, THE DETAILS OF THESE LOANS AS PER TP REPORT ARE AS UNDE R: MSSL HAS EXTENDED FOREIGN CURRENCY LOANS TO FOUR O F ITS SUBSIDIARIES. AS PER TP REPORT, THE DETAILS OF THESE LOANS ARE PROVIDED IN FOLLOWING TABLE: LOAN AMOUNT BORROWING ENTITY RATE OF INTEREST (%) START DATE OF LOAN EFFECTIVE INTEREST RATE (IN INR TERMS) COMPARABLE INTEREST RATE ON ALTERNATE INVESTMENT OPTION EURO1,000,000 MOTHERSON SUMI SYSTEMS LIMITED MAURITIUS HOLDINGS LTD 4.5% OCTOBER 2003 7.79% 7.26% EURO 5,000,000 MOTHERSON SUMI SYSTEMS LIMITED MIDES 5% APRIL2005 8.29% 7.26% 6 (FZE) EURO 150,000 MOTHERSON SUMI SYSTEMS LIMITED HANDELS GMBH 4.2% OCTOBER 2004 7.49% 7.26% USD 2,000,000 MOTHERSON ELECTRICAL WIRES LANKA (PVT) LTD (MEW. SRI LANKA) 6% APRIL 2005 8.11% 7.26% 4. FOR TRANSFER PRICING THE ASSESSEE CLUBBED ITS IN TERNATIONAL TRANSACTIONS INTO THREE CLASSES. WHILE MANUFACTURING ACTIVITY HA S BEEN CATEGORIZED INTO CLASS ONE, RECEIPT OF INTEREST ON LOAN HAS BEEN CAT EGORIZED INTO CLASS TWO AND REIMBURSEMENT OF EXPENSES HAVE BEEN CATEGORIZED INT O CLASS THREE. THE DISPUTE IN THE PRESENT APPEAL IS RESTRICTED TO CLAS S TWO TRANSACTION RAISED IN GROUND NOS. 3, 4 AND 5 SO FAR AS TRANSFER PRICING IS CONCERNED. THE SAME WILL BE ADJUDICATED UPON IN THE SUCCEEDING PARAGRAPHS. 5. BESIDES IN GROUND NO.2, THE ISSUE RAISED IS REGA RDING THE VALIDITY OF DISALLOWANCE OF RS.20,42,826 UNDER SEC. 14A OF THE ACT. 6. GROUND NO.1 IS GENERAL IN NATURE, HENCE, IT DOES NOT NEED INDE PENDENT ADJUDICATION. 7 7. GROUND NOS.2, 2.I, 2.III & 2.III : THE ASSESSING OFFICER MADE DISALLOWANCE OF RS.20,42,826 UNDER SEC. 14A OF THE INCOME-TAX ACT, 1961 AFTER APPLYING RULE 8D OF THE INCOME-TAX RULES, 196 2. THE LEARNED DRP HAS UPHELD THE SAME. 8. IN SUPPORT OF THE GROUNDS, THE LEARNED AR SUBMIT TED THAT THE AUTHORITIES BELOW ARE NOT CORRECT IN APPLYING RULE 8D OF THE INCOME-TAX RULES, 1962 FOR MAKING THE DISALLOWANCE UNDER SEC. 14A OF THE ACT, SINCE PROVISIONS OF RULE 8D AS NOTIFIED IS APPLICABLE WIT H EFFECT FROM ASSESSMENT YEAR 2008-09. HE POINTED OUT THAT AN IDENTICAL ISSU E WAS ALSO RAISED BEFORE THE ITAT IN THE ASSESSEES OWN CASE IN ITA NO. 5105 /DEL/2010 FOR THE ASSESSMENT YEAR 2006-07, WHEREIN THE ITAT HAS HELD THAT THE ASSESSING OFFICER IS NOT CORRECT IN APPLYING RULE 8D AND THE MATTER WAS REFERRED BACK TO THE FILE OF THE ASSESSING OFFICER TO MAKE DISALL OWANCE AFTER GIVING OPPORTUNITY TO THE ASSESSEE. HE SUBMITTED THAT IN PURSUANCE TO THE ABOVE DIRECTIONS OF THE ITAT FOR THE ASSESSMENT YEAR 2006 -07, THE ASSESSING OFFICER HAS MADE DISALLOWANCE ONLY TO THE EXTENT OF 0.5% P.F. THE AVERAGE INVESTMENT HELD BY THE ASSESSEE DURING THE ASSESSME NT YEAR 2006-07. THE ASSESSEE HAS DULY ACCEPTED THE SAID APPEAL EFFECT O RDER PASSED BY THE ASSESSING OFFICER. 8 9. THE LEARNED CIT(DR) DID NOT DISPUTE THE ABOVE SU BMISSIONS OF THE LEARNED AR THAT AN IDENTICAL ISSUE HAS BEEN DECIDED BY THE ITAT IN THE CASE OF ASSESSEE ITSELF FOR THE ASSESSMENT YEAR 2006-07. HE, HOWEVER, PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW ON THE ISSUE. 10. RESPECTFULLY FOLLOWING THE ORDER OF THE ITAT IN THE CASE OF THE ASSESSEE ITSELF FOR THE ASSESSMENT YEAR 2006-07 (SU PRA), ON IDENTICAL ISSUE, WE REMAND THE MATTER TO THE FILE OF THE ASSESSING O FFICER TO DECIDE THE ISSUE AFRESH AFTER AFFORDING OPPORTUNITY OF BEING HEARD T O THE ASSESSEE IN VIEW OF THE ORDER OF THE ITAT PASSED IN THE ASSESSMENT YEAR 2006-07. THESE GROUNDS ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 11. GROUND NOS. 3 AND 4, (4.1 TO 4.4, 4.4.1, 4.4.2, 4. 5, 4.6) & 5 : THE LEARNED TPO ACCEPTED THE ARMS LENGTH ANALYSIS AND NATURE OF ALL THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT EXCEPT RECEIPT OF INTEREST ON LOANS TO SUBSIDIARIES. THE RELEVANT FACTS ARE THAT BASED ON THE FUNCTIONAL ANALYSIS, THE ASSESSEE TRIED TO ESTABLISH THAT THE ASSESSEE HAS LESS COMPLEX OPERATIONS AND BEARS LESSER SHARE OF RISK AND WAS ACCORDINGLY SELECTED AS THE TESTED PARTY FOR THE TRANSFER PRICING ANALYSIS. AS DISCUSS ED IN PARA NO.3 HEREINABOVE, THE INTERNATIONAL TRANSACTION WAS CLAS SIFIED BY THE ASSESSEE IN 9 THREE CATEGORIES. IN CLASS-I, WAS MANUFACTURING ACT IVITIES. IN CLASS-II WAS RECEIPTS OF INTERESTS ON LOAN AND IN CLASS-III WAS REIMBURSEMENT OF EXPENSES. FOR CLASS-I AND CLASS-III TRANSACTIONS, TNNM HAS B EEN SELECTED AS THE MOST APPROPRIATE METHOD. OP/TC HAS BEEN SELECTED AS THE PLI. THE OP/TC OF THE ASSESSEE IS CALCULATED AT 16.69%, WHIL E THE MEAN OP/TC OF 25 COMPARABLES HAS BEEN CALCULATED AT 9.47%. FOR CLASS-II TRANSACTIONS OF RECEIPT OF LOAN, THE ASSESSEE HAS U SED CUP METHOD FOR BENCHMARKING. THE ASSESSEE HAS USED ALTERNATE INVES TMENT OPPORTUNITY IN THE BANK FD AS THE BENCHMARK. IT IS STATED THAT THE AVERAGE RETURN EARNED ON A BANK DEPOSIT WAS 7.26% P.A., DURING THE YEAR. AFTER ADJUSTING FOR 6 MONTHS AVERAGE FORWARD PREMIUM, IT IS STATED THAT THE EFFECTIVE EARNING WAS HIGHER THAN THE BANK FD INTER EST AMOUNT. THEREFORE, THE TRANSACTION ARE STATED TO BE AT ARM; S LENTH. LOANS TO THE SUBSIDIARIES: 6MSSL HAS EXTENDED FOREIGN CURRENCY LOANS TO FOUR O F ITS SUBSIDIARIES. AS PER TP REPORT, THE DETAILS OF THES E LOANS ARE PROVIDED IN FOLLOWING TABLE: LOAN AMOUNT BORROWING ENTITY RATE OF INTEREST (%) START DATE OF LOAN EFFECTIVE INTEREST RATE (IN INR TERMS) COMPARABLE INTEREST RATE ON ALTERNATE INVESTMENT OPTION EURO1,000,000 MOTHERSON SUMI SYSTEMS LIMITED MAURITIUS HOLDINGS LTD 4.5% OCTOBER 2003 7.79% 7.26% EURO MOTHERSON 5% APRIL2005 8.29% 7.26% 10 5,000,000 SUMI SYSTEMS LIMITED MIDES (FZE) EURO 150,000 MOTHERSON SUMI SYSTEMS LIMITED HANDELS GMBH 4.2% OCTOBER 2004 7.49% 7.26% USD 2,000,000 MOTHERSON ELECTRICAL WIRES LANKA (PVT) LTD (MEW. SRI LANKA) 6% APRIL 2005 8.11% 7.26% 12. THE ASSESSEE SUBMITTED THAT THE ABOVE ANALYSIS IS BASED ON THE PREMISES THAT THE LOAN ADVANCED TO THE AES ARE JUSTIFIED IF THE EQUIVALENT RUPEE INCOME DURING THE YEAR (2006-07) IS HIGHER THAN THE INCOME THAN THE INCOME THAT WOULD BE EARNED ON A RUPEE INVESTING IN THE INDIAN MARKET. WITH THE ASSISTANCE OF THE ABOVE TABLE, IT WAS SUBMITTED THA T THE ASSESSEE HAS INVESTMENT OPTION, WHICH ESTABLISHES THAT THE INTER NATIONAL TRANSACTION OF ASSESSEE RELATED TO RECEIPT OF INTEREST MEETS THE A RMS LENGTH STANDARD. IT WAS POINTED OUT THAT THE ASSESSEE HAS RECEIVED INTEREST OF RS.3.33 CRORES ON LOAN GIVEN TO FOUR OF ITS AES. THE EFFECTIVE RATE OF INT EREST THAT HAS BEEN CHARGED ARE AT THE RATES RANGING BETWEEN 7.49 TO 8.29%. IT WAS SUBMITTED THAT IN FORM 3CEB INTEREST HAS BEEN BENCHMARKED USING CUP METHOD . 11 13. THE LEARNED TPO DID NOT AGREE WITH THE ASSESSEE WITH THIS FINDING THAT THE MANNER IN WHICH CUP METHOD HAS BEEN APPLIED BY THE ASSESSEE IN THE TRANSFER PRICING REPORT IS ERRONEOUS. HE HELD THAT THE LOAN GIVEN TO AE CANNOT BE BENCHMARKED WITH THE RATE THAT THE ASSESSEE WOUL D HAVE GOT BY INVESTING IN FD/CD/CP. THEREFORE, A SHOW-CAUSE NOTICE DATED 7 .9.2011 WAS ISSUED TO THE ASSESSEE COMPANY. IT WAS COMPLIED WITH BUT, THE LEARNED TPO WAS NOT SATISFIED THEREWITH AND HE MADE AN ADJUSTMENT OF RS .4,16,99,357 I.E. THE INCOME OF THE ASSESSEE WAS ENHANCED BY THE SAID AMO UNT ON ACCOUNT OF DIFFERENCE IN ARMS LENGTH PRICES LENGTH INTEREST AND THE INTEREST CHARGED BY THE ASSESSEE ON LOANS GIVEN TO THE SUBSIDIARIES. TH IS ACTION OF THE LEARNED TPO HAS BEEN UPHELD BY THE DRP, QUESTIONED IN THE P RESENT GROUNDS. 14. IN SUPPORT OF THE GROUNDS, THE CONTENTIONS OF T HE ASSESSEE REMAINED THAT THE INTEREST RATES WERE ACCEPTED AT ARMS LENG TH IN THE EARLIER YEARS. SINCE THE INTEREST RATES CANNOT BE CHANGED YEAR AFT ER YEAR, THEREFORE, THE SAME SHOULD BE CONSIDERED AT ARMS LENGTH THIS YEAR ALSO. IT WAS SUBMITTED THAT THE ALTERNATIVE INVESTMENT OPPORTUNITY AVAILAB LE WITH THE ASSESSEE COMPANY WAS BANK FD AND THE AVERAGE RETURN ON A BAN K FD WAS 7.26% PER ANNUM DURING THE PERIOD APRIL 2006 TO MARCH 2007. T HE EFFECTIVE RATE EARNED BY THE ASSESSEE WAS IN THE RANGE OF 7.79% TO 8.11%. IT WAS SUBMITTED 12 THAT THE ASSESSEE HAD CONDUCTED A CORROBORATIVE ANA LYSIS BY EXAMINING THIRD PARTY LOAN AGREEMENTS FOR BENCH MARKING THE LOAN TR ANSACTIONS BY TAKING THE OVERSEAS SUBSIDIARIES AS THE TESTED PARTY. THE CRED IT RATING OF THE SUBSIDIARY WAS DETERMINED USING S&P CORPORATE RATING CRITERIA. BASED UPON THE IMPLIED CREDIT RATING, A SEARCH WAS CONDUCTED IN THE LPC LO AN CONNECTOR DATA BASE. THE RESULT OF SEARCH WERE AS UNDER: BORROWING ENTITY IMPLIED CREDIT RATING INTEREST CHARGED INTEREST RATE AS PER THE SEARCH MOTHERSON SUMI SYSTEMS LIMITED MAURITIUS HOLDINGS LTD BB- 4.5% (EURO) 4.54% MOTHERSON SUMI SYSTEMS LIMITED MIDEST (FZE) A 5%(EURO) 2.03% MOTHERSON SUMI SUSTEMS LIMITED HANDELS GMBH B- 4.2% (EURO) 6 MONTHS EURIBOR + 205BPS MOTHERSON ELECTRICAL WIRES LANKA (PVT) LTD (MEW, SRI LANKA) BBB+ 6% (USD) 4.81% 15. THE ASSESSEE STATED THAT SINCE THE INTEREST RAT E CHARGED TO THE SUBSIDIARIES IS HIGHER, THEREFORE, BY SELECTING THE OVERSEAS SUBSIDIARY AS THE TESTED PARTY, ALSO SUBSTANTIATE THAT THE INTEREST H AS BEEN CHARGED AT ARMS LENGTH. IN SUPPORT, THE LEARNED AR REFERRED PAGE NO S. 384 TO 387 OF THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE I.E. COPIES OF TP ORDERS FOR ASSESSMENT YEARS 2005-06 AND 2006-07. HE, THEREAFTER, REFERRED PAGE NOS. 9 AND 11 OF 13 THE PAPER BOOK I.E. DETAILS OF ASSOCIATED ENTERPRIS ES AND INTERNATIONAL TRANSACTIONS. HE, THEREAFTER REFERRED PAGE NO. 61 O F THE PAPER BOOK I.E. DETAILS OF INTEREST RECEIVED ON LOANS TO SUBSIDIARI ES. HE ALSO REFERRED PAGE NOS. 174 TO 177 OF THE PAPER BOOK I.E. SUBMISSION O F THE ASSESSEE ON INTEREST ON LOAN ADVANCED TO A.ES. THE LEARNED AR SUBMITTED THAT THE ISSUE IS AS TO WHETHER ARMS LENGTH INTEREST RATE SHOULD BE BASED ON DOMESTIC BASIS OR FOREIGN BASIS. THE LEARNED AR PLACED RELIANCE ON TH E FOLLOWING DECISIONS: 1. M/S. BHANSALI & CO. VS. ACIT, ITA NO. 825/MUM/20 14 (A.Y. 2009-10) ORDER DATED 05.12.2014; 2. HINDUJA GLOBAL SOLUTIONS LTD. VS. ACIT, ITA NO.254/MUM/2013 (A.Y. 2008-09)- ORDER DATED 05.06. 2013. 16. THE LEARNED CIT(DR) ON THE OTHER HAND TRIED TO JUSTIFY THE ORDERS OF THE AUTHORITIES BELOW. HE POINTED OUT THAT TESTED P ARTIES ARE INDIAN ENTITIES. IF CREDIT OF AN ENTITY IS NOT UP TO THE MARK, THEN, TH EY WILL GET LOAN ON HIGHER RATE. THERE WAS NO FINDING ON CREDIT RATING. 17. CONSIDERING ABOVE SUBMISSIONS, WE FIND THAT IT IS AN UNDISPUTED FACT THAT IN THE EARLIER ASSESSMENT YEARS 2005-06 AND 20 06-07, THE INTEREST RATES HAVE BEEN ACCEPTED AT ARMS LENGTH. ON AN IDENTICAL ISSUE, THE MUMBAI BENCH OF THE ITAT IN THE CASE HINDUJA GLOBAL SOLUTI ONS LTD. VS. ACIT 14 (SUPRA) HAS GIVEN FOLLOWING FINDINGS. THE RELEVANT PARA NO.17 THEREOF IS BEING PRODUCED HEREUNDER: 17. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMIS SIONS AND PERUSED THE RECORD. THE CASE OF THE ASSESSSEE WAS THAT LIB OR AS ON 31/3/2008 WAS 2.49% AGAINST WHICH THE ASSESSEE HAS CHARGED IN TEREST @ 6% P.A. IN OTHER WORDS, INTEREST CHARGED BY THE ASSESSES IS MU CH HIGHER THEN THE CORRESPONDING ARMS LENGTH LIBOR EVEN FROM AN INDIA N TRANSFER PRICING PERSPECTIVE. IT IS NOT IN DISPUTE THAT THE LOAN HA S BEEN DENOMINATED IN US DOLLARS. THOUGH THE LD. DR, FOR THE FIRST TIME, RA ISED A CONTENTION THAT THE ASSESSEE MIGHT HAVE TAKEN LOAN IN THE EARLIER YEAR TO ADVANCE THE SAME TO ITS AE IN THE EARLIER YEAR, IN FACT NEITHER THE TPO NOR THE DRP HAS CONSIDERED THE ASPECT FROM THAT ANGEL AND THE ASSES SES CONSISTENTLY PRAYED BEFORE THE TAX AUTHORITIES THAT THE ASSESSES HAS NO T INCURRED ANY INTEREST COST ON FUNDS GIVEN TO THE AE AS THE SOURCE OF FUND IS SURPLUS AVAILABLE WITH THE ASSESSEE. IN THE ABSENCE OF ANY MATERIAL TO PROVE TO THE CONTRARY, MERELY BECAUSE SOME INTEREST HAS BEEN PAID IN THE I MMEDIATELY PRECEDING YEAR, IT CANNOT BE ASSUMED THAT THE ASSESSEE BORROW ED FUNDS IN THE IMMEDIATELY PRECEDING YEAR WAS THE SOURCE FOR THE P URPOSE OF ADVANCING LOANS TO ITS AE. HAVING REGARD TO THE OVERALL CIRC UMSTANCES OF THE CASE WE ARE OF THE VIEW THAT THE ISSUE STANDS SQUARELY COVE RED BY THE DECISION OF THE ITAT DELHI BENCH IN THE CASE OF COTTON NATURALS (I) P. LTD. WHEREIN THE BENCH OBSERVED THAT THE CUP METHOD IS THE MOIST APPROPRIATE METHOD IN ORDER TO ASCERTAIN ARMS LENGTH PRICE OF THE INT ERNATIONAL TRANSACTION I.E, WHERE THE LENDING OF MONEY WAS IN FOREIGN CURRENCY TO ITS AE THE DOMESTIC PRIME LENDING RATE WOULD HAVE NO APPLICABI LITY AND THE INTERBANK RATE FIXED SHOULD BE TAKEN AS BENCHMARK RATE FOR IN TERNATIONAL TRANSACTIONS. WE, THEREFORE, HOLD THAT LIBOR RATE HAS TO BE ADOPT ED IN THE INSTANT CASE SINCE THE INTEREST CHARGED BY THE ASSESSEE FROM ITS AE IS HIGHER THAN THE LIBOR RATE IN THE YEAR UNDER CONSIDERATION NO TRANS FER PRICING ADJUSTMENT 15 IN THAT REGARD IS WARRANTED. WE THEREFORE SET ASID E THE ORDER OF THE AO IN THIS REGARD AND ALLOW THE GROUNDS URGED BY THE ASSE SSEE. 18. AGAIN IN THE CASE OF M/S. BHANSALI & CO. (SUPRA ), THE MUMBAI BENCH OF THE ITAT HAS DECIDED THE ISSUE AS UNDER VIDE PAR A NO. 5 OF THE ORDER, THE IS AS UNDER: WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTHORI TIES BELOW. IT IS AN ADMITTED FACT THAT THE LOAN WAS GIVEN IN THE YEAR 2 005. IT IS ALSO UNDISPUTED FACT THAT INTEREST RATE CHARGED AS LIBOR PLUS 200 B ASIS POINTS HAVE BEEN ACCEPTED IN COMPLETED ASSESSMENTS FROM AYS 2005-06 TO 2008-09. THUS, BY TAKING A DIFFERENT VIEW ON THE SAME SET OF FACTS VI OLATES THE RULE OF CONSISTENCY. SECONDLY, THE DRP ERRED IN CONSIDERIN G THE LOAN AS LOAN FROM INDIA. THE FACT OF THE MATTER IS THAT IT WAS A FOR EIGN CURRENCY LOAN WHICH WAS GIVEN ABROAD. THEREFORE THE MOST APPROPRIATE METHO D IS TAKING THE LIBOR AS CORRECT BENCHMARK. A SIMILAR VIEW HAS BEEN TAKEN B Y THE TRIBUNAL IN THE CASE OF HINDUJA GLOBAL SOLUTION LTD. 145 ITD 361. CONSI DERING THE PAST HISTORY AND THE DECISION OF THE TRIBUNAL (SUPRA), WE FIND T HAT THE BENCHMARKING DONE BY THE ASSESSEE IS CORRECT AND THE AO IS DIRECTED T O DELETE THE ADDITION. GROUND NO.1 WITH ITS SUB GROUND IS ALLOWED. 19. THUS IN THE INTEREST OF JUSTICE, WE SET ASIDE T HE MATTER TO THE FILE OF THE LEARNED TPO/ASSESSING OFFICER TO DECIDE THE ISSUE A FRESH IN VIEW OF THE ABOVE FINDINGS OF THE ITAT IN THE CITED CASES AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE GROUND NOS. 3, 4 A ND 5 ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 16 20. GROUND NO. 6 : LEVY OF INTEREST UNDER SEC. 234B OF THE INCOME-TA X ACT, 1961 HAS BEEN QUESTIONED IN THIS GROUND, WHICH IS CONSEQUENTIAL IN NATURE. 21. IN RESULT, APPEAL IS ALLOWED FOR STATISTICAL PU RPOSES. ITA NO. 375/DEL/2013 : 22. THE ASSESSEE HAS RAISED FOLLOWINGS GROUNDS: 1. THAT THE ASSESSMENT ORDER PASSED IN PURSUANCE T O THE DIRECTIONS ISSUED BY THE LEARNED DISPUTE RESOLUTION PANEL (DR P) IS A VITIATED ORDER AS THE LD.DRP HAS ERRED IN BOTH ON FACTS AND IN LAW IN CONFIRMING THE ADDITION MADE BY THE LD. ASSESSING O FFICER (A.O) /LD. TRANSFER PRICING OFFICER (TPO) TO THE APPELL ANTS INCOME. 2. THE LD. A.O.LD. DRP ERRED IN LAW IN MAKING A DISALL OWANCE OF INR 3,980,801 UNDER SEC. 14A OF THE INCOME-TAX ACT (THE ACT) AND IN DOING SO HAVE GROSSLY ERRED IN: 2.1. MAKING THE DISALLOWANCE WITHOUT ESTABLISHING THE NE XUS BETWEEN DIVIDEND INCOME AND THE EXPENSE DEBITED TO THE PROFIT AND LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION. 2.1 APPLYING THE PROVISIONS OF RULE 8D OF THE INCOM E-TAX RULES, 1962 (THE RULES) IN COMPLETE DISREGARD TO EXPRESS PROVISIONS OF SEC. 14A(2) WHEREIN IT IS MANDATE THAT THE LD.A.O. SHOULD RECORD ITS SATISFACTION ON INCORRECTNESS OF THE CLAIM OF THE A SSESSEE IN RESPECT OF THE EXEMPT INCOME. 17 2.2 WITHOUT PREJUDICE TO THE CONTENTION OF THE APPELLAN T THAT NO DISALLOWANCES IS WARRANTED UNDER SEC. 14A OF THE AC T READ WITH RULE 8D OF THE RULES, THE LD. A.O. ERRED IN MAKING THE DISALLOWANCES OF RS.3,890,801 WHICH IS EXCESSIVE AN D UNREASONABLE AS DIVIDEND INCOME RECEIVED DURING THE YEAR IS MERELY RS.292,753. 3. THAT THE REFERENCE MADE BY THE A.O. SUFFERS FROM JU RISDICTIONAL ERROR AS THE LD. A.O. HAS NOT RECORDED ANY REASONS IN THE ASSESSMENT ORDER BASED ON WHICH HE REACHED THE CONCLUSION THAT IT WA S NECESSARY OR EXPEDIENT TO REFER THE MATTER TO THE LD. TPO FOR C OMPUTATION OF THE ARMS LENGTH (ALP), AS IS REQUIRED UNDER SEC. 92C A(1) OF THE INCOME-TAX ACT, 1961 (THE ACT). 4. THE LD. DRP ERRED BOTH ON FACTS AND IN LAW IN CONFI RMING THE LD.A.O/TPOS ACTION OF MAKING AN ADJUSTMENT OF RS.2 ,41,94,156 TO THE INCOME OF THE APPELLANT BY HOLDING THAT THE INT ERNATIONAL TRANSACTIONS OF THE APPELLANT PERTAINING TO RECEIPT OF INTEREST ON THE LOANS GIVEN TO ITS THREE SUBSIDIARIES DO NOT SATISF Y THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE INCOME-TAX ACT, 1961 (ACT). IN DOING SO THE LD. DRP HAS GROSSLY ERRED IN AGREEING THE TP OS ACTION OF; 4.1 DISREGARDING THE ALP, AS DETERMINED BY THE ASSESSEE IN THE TRANSFER PRICING (TP) DOCUMENTATION MAINTAINED BY IT IN TERMS OF SEC. 92D OF THE ACT READ WITH RULE 10D OF THE INCOM E-TAX RULES, 1962 (RULES); 4.2 DISREGARDING THE FACT THAT THE INTERNATIONAL TRANSA CTION OF INTEREST RECEIVED ON LOAN HAS BEEN ACCEPTED TO BE AT AN ARM S LENGTH IN PRIOR YEARS AND NO CHANGES HAVE HAPPENED IN THE CIR CUMSTANCES OF 18 THE CASE WARRANTING A FRESH ANALYSIS OR REJECTION O F THE ARMS LENGTH NATURE OF THE TRANSACTIONS; 4.3 COMPLETELY DISREGARDING THE DETAILED AND PROPER COM PARABILITY ANALYSIS OF THE INTEREST RECEIVED ON LOANS AS SUBMI TTED BY THE ASSESSEE UNDER COMPARABLE UNCONTROLLED PRICE (CUP ) METHOD ON THE BASIS OF THE COMPARABLE THIRD PARTY LOAN AGREEM ENTS AND INSTEAD DETERMINED THE ARMS LENGTH INTEREST RATE ON THE BA SIS OF THE PRIME LENDING RATE (PLR) APPLICABLE IN INDIA IN THAT PA RTICULAR YEAR, THEREBY RESULTING IN AN ERRONEOUS APPLICATION OF CU P METHOD. 4.4 COLLECTING INFORMATION ON CORPORATE BOND YIELDS OF THE COMPANIES BY EXERCISING POWER GRANTED TO THE LD. TPO UNDER SE C. 133(6) OF THE ACT THAT WAS NOT AVAILABLE TO THE ASSESSEE IN T HE PUBLIC DOMAIN AND IN DOING SO; 4.4.1 VIOLATING THE FUNDAMENTAL PRINCIPLES OF NATURAL JUS TICE BY RELYING ON THE INFORMATION SOURCED UNDER SEC. 133(6 ); 4.4.2 NOT SHARING WITH THE ASSESSEE, THE INFORMATION/REPL Y RECEIVED BY THE LD TPO UNDER SEC. 133(6). 4.5 DISREGARDING THE ANALYSIS CARRIED OUT BY THE AS SESSEE TO BENCHMARK THE INTERNATIONAL TRANSACTION OF INTEREST RECEIVED ON LOAN ON VARIOUS INCORRECT/BASELESS STATEMENTS WITH SEVERAL INFIRMITIES IN THE TP ORDER SO AS TO MISLEAD THE CAUSE OF JUSTICE, THEREB Y CLEARLY DEMONSTRATING A PREJUDICED MINDSET DRIVEN WITH THE SINGLE-MINDED INTENTION TO RECOMMEND A TP ADJUSTMENT. 4.6 DISREGARDING JUDICIAL PRONOUNCEMENTS IN INDIA I N UNDERTAKING THE TP ADJUSTMENT. 19 5. THE LD. A.O. GROSSLY ERRED IN PROPOSING TO LEVY INT EREST UNDER SEC. 234B OF THE ACT. 6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AN D IN LAW, THE LD. A.O. GROSSLY ERRED IN WITHDRAWING INTEREST UNDER SE C. 244A OF THE ACT. 7. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AN D IN LAW, THE LD. A.O. ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SEC. 271(1)(C) OF THE ACT. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTH ER. 23. GROUND NO.1 IS GENERAL IN NATURE, HENCE, DOES N OT NEED INDEPENDENT ADJUDICATION. 24. GROUND NOS. 2, 2.1 TO 2.3 : IN THESE GROUNDS, THE DISALLOWANCE OF RS.39,80,801 MADE UNDER SEC. 14A OF THE ACT READ WI TH RULE 8D OF THE I.T. RULES, HAS BEEN QUESTIONED. SINCE, THERE IS NO DISP UTE THAT RULE 8D WAS VERY MUCH APPLICABLE DURING THE ASSESSMENT YEAR UNDER CO NSIDERATION, THE LEARNED AR WITHDREW THESE GROUNDS. THE SAME ARE ACC ORDINGLY REJECTED AS WITHDRAWN. 25. GROUND NOS. 3, 4, 4.1 TO 4.4 (4.4.1 & 4.4.2), 4.5, 4.6 : IN THESE GROUNDS, ADJUSTMENT OF RS.2,41,94,156 TO THE INCOME OF THE ASSESSEE CONFIRMED BY THE LEARNED DRP HOLDING THAT THE INTER NATIONAL TRANSACTIONS OF 20 THE ASSESSEE PERTAINING TO RECEIPT OF INTEREST ON T HE LOANS GIVEN TO ITS SUBSIDIARIES DO NOT SATISFY THE ARMS LENGTH PRINCI PLES, HAS BEEN QUESTIONED BY THE ASSESSEE. UNDER ALMOST SIMILAR FACTS, AN IDE NTICAL ISSUE HAS ALREADY BEEN DECIDED BY US IN THE ABOVE APPEAL FOR THE ASSE SSMENT YEAR 2007-08. FOLLOWING THE SAME, THE MATTER IS SET ASIDE TO THE FILE OF THE LEARNED TPO/A.O. TO DECIDE THE ISSUE AFRESH AS DIRECTED THE REIN AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THESE G ROUNDS ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 26. GROUND NOS. 5 & 6 : CHARGING OF INTEREST UNDER SEC. 234B AND 244A OF THE INCOME-TAX ACT, 1961 HAS BEEN QUESTIONED, WH ICH BEING CONSEQUENTIAL IN NATURE DOES NOT NEED INDEPENDENT ADJUDICATION. 27. GROUND NO.7 : IT IS IN RELATION TO INITIATION OF PENALTY UNDER SEC. 271(1)(C) OF THE INCOME-TAX ACT, 1961 WHICH IS PREM ATURE AT THIS STAGE, HENCE, DOES NOT NEED ANY ADJUDICATION. 28. IN RESULT, THE APPEAL IS ALLOWED FOR STATISTICA L PURPOSES. 29. IN SUMMARY, BOTH THE APPEALS ARE ALLOWED FOR ST ATISTICAL PURPOSES. DECISION PRONOUNCED IN THE OPEN COURT ON 01 .04.201 5 SD/- SD/- ( J.S. REDDY ) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 01/04/2015 MOHAN LAL 21 COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR DATE DRAFT DICTATED ON COMPUTER 30.03.2015 DRAFT PLACED BEFORE AUTHOR 30.04.2015 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. 01.04.20 15 APPROVED DRAFT COMES TO THE SR.PS/PS 17.04.2015 KEPT FOR PRONOUNCEMENT ON 01.04.2015 FILE SENT TO THE BENCH CLERK 17.04.2015 DATE ON WHICH FILE GOES TO THE AR DATE ON WHICH FILE GOES TO THE HEAD CLERK. DATE OF DISPATCH OF ORDER.
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