DCIT, Circle-17(1), Hyd, Hyderabad V. Devgen Seeds & Crop Technology Pvt.Ltd., Sec'bad, Secunderabad

ITA 399/HYD/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6044 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-03-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 08-12-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 24-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P CHANDRA SEHKAR
• Assessee Lawyers: K R VASUDEVAN; UJJWAL TIWARI
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 399/HYD/2016 ASSESSMENT YEAR: 2011-12 DY. COMMISSIONER OF INCOME- TAX, CIRCLE 17(1), HYDERABAD. VS. DEVGEN SEEDS & CROP TECHNOLOGY PVT. LTD., SECUNDERABAD. PAN AACCD 5732 D (APPELLANT) (RESPONDENT) REVENUE BY : SHRI P. CHANDRA SEHKAR ASSESSEE BY : SHRI K.R. VASUDEVAN & SHRI UJJWAL TIWARI DATE OF HEARING 30-01-2017 DATE OF PRONOUNCEMENT 24-03-2017 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST THE ORDER PASSED U/S 143(3) R.W.S. 92CA(3) AND 144C(5) OF THE INCOME TAX ACT, 1961 (IN SHORT ACT) DATED 25/01/2016 RELATING TO AY 2011-12. 2. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF AGRICULTURAL OPERATIONS I.E. CULTIVATION OF LAND, S OWING, IRRIGATION, PRODUCTION AND SALE OF SEEDS GROWN PRIMARILY THROUG H CONVENTIONAL AGRICULTURAL OPERATIONS AND TRADING OF SEEDS. THE A SSESSEE FILED ITS RETURN OF INCOME FOR THE AY 2011-12 ON 20/11/2011 A DMITTING LOSS OF RS. 28,81,87,828/-. THE RETURN WAS PROCESSED U/S 14 3(1) ACCEPTING THE INCOME RETURNED BY THE ASSESSEE. SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS AND, ACCORDINGLY, NOTICE U/S 143(2) OF THE ACT WAS ISSUED. SINCE THE ASSESSEE WAS INVO LVED IN THE INTERNATIONAL TRANSACTION IN EXCESS OF RS. 15 CRORE S, THE CASE WAS 2 ITA NO. 399/H/16 DEVGEN SEEDS & CROP TECHNOLOGY P. LTD. REFERRED TO ADDITIONAL DIRECTOR OF INCOME-TAX (TRAN SFER PRICING), HYDERABAD AFTER GETTING APPROVAL FROM COMMISSIONER OF INCOME TAX I, HYDERABAD. 2.1 AS PER 3CEB REPORT/TP DOCUMENT, THE INTERNATION AL TRANSACTIONS REFLECTED ARE AS UNDER: AE NATURE OF TRANSACTION AMOUNT DEVGEN SINGAPORE INTEREST PAID ON FULLY CONVERTIBLE DEBENTURES 68,00,000 DEVGEN SINGAPORE INTEREST PAID ON EXTERNAL COMMERCIAL BORROWINGS 89,35,357 DEVGEN PTE LTD. ISSUE OF SHARE CAPITAL 20,00,00,000 2.2 EXAMINATION OF TP STUDY CONDUCTED BY TAX PAYER THE TAXPAYER HAS CARRIED OUT THE ECONOMIC ANALYSIS AND HAS SUMMARIZED IT AS UNDER: NATURE OF INTERNATIONAL TRANSACTION AMOUNT MAM PLI MARGIN OF TAXPAYER MARGIN OF COMPARA BLES INTEREST PAID ON FULLY CONVERTIBLE DEBENTURES 68,00,000 CUP NA NA NA INTEREST PAID ON EXTERNAL COMMERCIAL BORROWINGS 89,35,357 CUP NA NA NA ISSUE OF SHARE CAPITAL 20,00,00,000 VALUATION AS PER CCI GUIDELINES 2.3 ANALYSIS OF THE TRANSACTIONS: AS PER THE AUDITED STATEMENT OF ACCOUNTS THE FINANC IALS OF THE TAXPAYER ARE AS UNDER: DESCRIPTION AMOUNT (RS.) OPERATING REVENUE 585,253,806 OPERATING COST 888,484,694 OPERATING PROFIT -303,230,888 OP/OC -51.81 OP/OR -34.13 3 ITA NO. 399/H/16 DEVGEN SEEDS & CROP TECHNOLOGY P. LTD. TPO HAS MADE ALP ADJUSTMENT ON THE PAYMENT OF IN TEREST ON A) FULLY CONVERTIBLE DEBENTURES (FCD) B) EXTERNAL COMMERCIAL BORROWINGS (ECB) 2.4 INTEREST ON FULLY CONVERTIBLE DEBENTURES (FCD): DURING THE TP PROCEEDINGS, THE ASSESSEE SUBMITTED THAT ASSESSEE HAS ISSUED 1.7 CRORE UNSECURED FULLY CONVE RTIBLE DEBENTURES (FCD) OF RS. 10/- EACH, AGGREGATING RS. 17 CRORES T O DEVGEN SINGAPORE FOR A MAXIMUM PERIOD OF 15 YEARS. BASED ON THE TERMS OF FCDS, FIXED INTEREST RATE OF 4% FOR YEARS 1 AND 2, THEN 12% FROM 3 TO 5 WOULD BE PAYABLE. INTEREST RATE FOR YEAR 6 TO 15 WOULD BE ON A MUTUALLY AGREED BASIS. IT IS ALSO RESOLVED THAT AFT ER A MATURITY PERIOD OF 5 YEARS OR AFTER MUTUALLY AGREED PERIOD THEREUPO N UPTO A MAXIMUM OF 15 YEARS FROM THE DATE OF ISSUE, EQUITY SHARES O F RS. 10 EACH BE OFFERED/ISSUED TO THE HOLDERS OF FCD IN THE RATIO O F 1:1. THE ASSESSEE SUBMITTED THAT IT HAS PAID INTEREST ON FCD TO ASSOC IATE ENTERPRISE (AE) AT A SIMPLE AVERAGE RATE OF INTEREST OF 8.8% P ER ANNUM. THE AMOUNT OF INTEREST RATE PAID HAS NOT BEEN DISCOUNTE D TO DETERMINE ITS PRESENT VALUE. FOR THE PURPOSE OF BENCH MARKING AT THIS RATE, THE ASSESSEE HAD RELIED ON THE INDEPENDENT SEARCH CONDU CTED IN PROWESS DATABASE IN FY 2009-10 AS THE TERMS AND CONDITIONS OF THE ARRANGEMENT REMAINS THE SAME. BASED ON THE SEARCH C ONDUCTED, THE AVERAGE RATE OF INTEREST PAID BY THE 2 BROADLY IDEN TIFIED COMPARABLE INDEPENDENT COMPANIES, RANGES FROM 6.78 PERCENT TO 12 PERCENT WITH AN ARITHMETICAL MEAN OF 9.39 PERCENT. ALSO THE PRI ME LENDING RATE (PLR) FOR THE SAME PERIOD RANGES FROM 8.91 PERCENT TO 9.91 PERCENT. SINCE THE AVERAGE RATE OF INTEREST PAID BY THE ASSE SSEE TO AE IS LESS THAN THE AVERAGE INTEREST RATE PAID BY INDEPENDENT COMPANIES AND THE AVERAGE PLR RATE, HENCE, THE INTEREST PAID BY THE A SSESSEE IS WITHIN THE ARMS LENGTH PRICE. 2.5 THE TPO OBSERVED THAT THE TAXPAYER PAID INTERES T OF 4% DURING THIS AY TO AE ON FCD AND THE CONTENTION OF THE ASSE SSEE CANNOT BE ACCEPTED BECAUSE AVERAGE RATE OF INTEREST PAYABLE T O AE IS 8.8% FOR 5 YEARS, THIS FIGURE WAS ARRIVED AT BY THE ASSESSEE A FTER TAKING AVERAGE 4 ITA NO. 399/H/16 DEVGEN SEEDS & CROP TECHNOLOGY P. LTD. RATE OF INTEREST TO BE PAID DURING THE 5 YEARS. HO WEVER, NO SUCH AVERAGING IS ALLOWED AS TRANSACTION IS TO BE TAKEN YEAR ON YEAR BASIS. THE TPO FURTHER OBSERVED THAT THE ASSESSEE PAID INT EREST OF 4%, WHICH IS REQUIRED TO BE COMPARED WITH LIBOR/SIBOR U NDER CUP. THE AVERAGE ONE YEAR SIBOR DURING THE YEAR RANGED FROM 0.78 TO 0.94 AND THE AVERAGE OF WHICH WORKS OUT TO 0.86% WHICH I S MUCH LESS THAN THE INTEREST PAID BY THE TAXPAYER, NECESSITATING AD JUSTMENT. HE OBSERVED THAT VARIOUS JUDICIAL FORUMS HAVE HELD THA T FOR INTERNATIONAL LOAN TRANSACTION LIBOR IS APPROPRIATE CUP. A FEW O F THEM ARE FOUR SOFT LTD., QUARK SYSTEMS LTD., DR. REDDY, AUROBINDO ETC. BY ITAT, HYDERABAD BENCHES. ALL THE COURTS HAVE GENERALLY HE LD A MARK-UP OF 200 BASIS POINTS TO BE REASONABLE. ACCORDINGLY, THE TPO WORKED OUT THE ALP OF INTEREST ON FCD AS UNDER: INTEREST @ 4% ON RS. 17,00,00,000 RS. 68,00,000 INTEREST @ SIBOR + 200 BP (0.86+2 = 2.86) RS. 48,6 2,000 EXCESS PAID RS. 19,38,000 ACCORDINGLY, TPO MADE THE ALP ADJUSTMENT TO THE E XTENT OF RS. 19,38,000/-. 2.6 INTEREST PAID ON EXTERNAL COMMERCIAL BORROWINGS (ECB): DURING FY 2008-09, THE ASSESSEE BORROWED SUM AGGRE GATING SGD 24.3 MILLION FROM DEVGEN, SINGAPORE. THE AGREEM ENT WAS ENTERED INTO ON DECEMBER 15, 2008 AND DURATION OF T HE AGREEMENT IS TILL JULY 15, 2014. THE LOAN WAS BORROWED AT A FIXE D INTEREST RATE 5.94 PERCENT PER ANNUM, WHICH WAS DETERMINED AT 3 MONTHS SIBOR + 500 BASIS POINTS AT THE DATE OF DISBURSEMENT OF LOAN I. E. 2 ND FEBRUARY, 2009. FOR THE PURPOSES OF THIS BORROWING, ASSESSEE FALLS UNDER AUTOMATIC APPROVAL ROUTE PRESCRIBED BY THE ECB/FCCB GUIDELINES, THE ABOVE BORROWING HAS BEEN PERMITTED BY THE RBI AND H AS BEEN ALLOTTED A LOAN REGISTRATION NO. 2008709 VIDE APPROVAL NO. DSIM/BPSD/4886/04.61.19/2008-09. 5 ITA NO. 399/H/16 DEVGEN SEEDS & CROP TECHNOLOGY P. LTD. 2.7 THE ASSESSEE SUBMITTED BEFORE THE TPO THAT ASS ESSEE HAS COMPARED ECB INTEREST RATE 5.94% AGAINST LIBOR. THE SAME WAS EXPLAINED IN ASSESSEES TP MEMORANDUM IN PARA 5.2 ( REFER PAGE 227 OF PAPER BOOK II). BASED ON THE TP MEMORANDUM, TH E ASSESSEE CONSIDERED THE PAYMENT OF INTEREST ON ARMS LENGTH AS THE INTEREST RATE CHARGED DURING FY 2010-11 IS LOWER THAN THE LI BOR. FURTHER, ASSESSEE SUBMITTED THAT ALL THE TERMS AND CONDITION S OF THE LOAN ARE WITHIN THE REGULATORY FRAMEWORK LAID DOWN BY RBI AN D THE AMOUNT PAID IN RESPECT OF INTEREST ON THE LOAN APPEARS TO BE CO NSISTENT WITH THE ARMS LENGTH PRINCIPLE. 2.8 THE ASSESSEE FURTHER SUBMITTED THAT BASED ON TH E CORROBORATIVE APPROACH AS EXPLAINED IN TP MEMORANDUM, INTEREST ON ECB AT THREE YEARS AVERAGE EFFECTIVE RUPEE COST OF 8.72% IS LOWE R THAN THE AVERAGE RANGE OF PLR 8.91 TO 9.91 PERCENT. 2.9 THE TPO OBSERVED THAT THE ASSESSEE PAID AN INTE REST OF 5.94% DURING FY UNDER CONSIDERATION TO ITS AE. THE ASSESS EE FURTHER STATED ASSESSEES INTEREST ON ECB AT 3 YEARS AVERAGE EFFEC TIVE RUPEE COST OF 8.72% IS LOWER THAN THE AVERAGE RANGE OF PLR 8.91 T O 9.91 PER CENT. THE INTEREST TO BE PAID ON EXTERNAL COMMERCIAL BORR OWING SHOULD BE COMPARED WITH THE PLR PREVAILING IN THE COUNTRY WHI CH EXTENDED THE LOAN AND NOT THE INDIA'S PLR. THE ISSUE HAS BEEN CO NSIDERED. VARIOUS JUDICIAL FORUMS HAVE HELD THAT FOR INTERNATIONAL LO AN TRANSACTION LIBOR IS APPROPRIATE CUP. A FEW OF THEM ARE FOUR SOFT LTD ., QUARK SYSTEMS LTD., DR. REDDY, AUROBINDO ETC., BY HYDERABAD ITAT. ALL THE COURTS HAVE GENERALLY HELD A MARK-UP OF 200 BASIS POINT TO BE REASONABLE. HOWEVER, DURING THE YEAR UNDER CONSIDERATION, THE A SSESSEE PAID INTEREST OF 5.94% WHICH IS HIGHER THAN THE 3 MONTH SIBOR RATE. THE 3 MONTH SIBOR RATES DURING THE YEAR RANGED FROM 0.44% TO 0.63% WITH AN AVERAGE OF 0.50%, NECESSITATING ADJUSTMENT. ACCO RDINGLY THE ARM'S LENGTH PRICE OF INTEREST ON ECB IS WORKED OUT AS UN DER: INTEREST @5.94% ON LOAN TAKEN = RS.89,35, 357 INTEREST @ SIBOR+200 BP (0.50+2=2.50) =RS.37,60,672 6 ITA NO. 399/H/16 DEVGEN SEEDS & CROP TECHNOLOGY P. LTD. EXCESS PAID =RS.51,74,685 ACCORDINGLY, TPO MADE ALP ADJUSTMENT OF RS. 51,74 ,685/-. 3. AGGRIEVED WITH THE ABOVE ORDER, THE ASSESSEE PRE FERRED AN APPEAL BEFORE THE DRP. 4. AS REGARDS THE INTEREST ON ECB, THE DRP OBSERVED THAT ADJUSTMENT ON PAYMENT OF INTEREST OF RS. 51,74,685/ - FORMING A VIEW THAT WHEN THE INTEREST PAID TO THE BANK (WHICH CAN BE CONSIDERED AS INTERNAL CUP) IS AT 11.7%, THE PAYMENT OF INTEREST @ 5.94% FOR AY 2011-12 IS REASONABLE AND TO BE CONSIDERED AT ARMS LENGTH AND ALSO CONSIDERED THE FACT THAT ASSESSEE HAS NOT INCURRED ANY POTENTIAL LOSS BY BORROWING MONEY FROM AE. 4.1 AS REGARDS, INTEREST ON FCB, THE DRP DELETED TH E INTEREST ADJUSTMENT OF RS. 19,38,000/- HOLDING THAT THE INTE REST PAID FOR THE AY AT 4% IS MUCH LESS THAN THE INTEREST CHARGED BY IND EPENDENT BANK IN RESPECT OF WORKING CAPITAL LOSS. FURTHER, THE DRP H AS RELIED ON THE DECISION OF ITAT BANGALORE BENCH IN THE CASE OF M/S LOGIX MICRO SYSTEMS LTD. ( ITA NO. 524/BAG/2009) WHEREIN IT WAS HELD THAT INTEREST AT 5% TO BE CONSIDERED TO BE ARMS LENGTH WITH REGARD TO RECEIVABLES FROM FOREIGN AES. 5. AGGRIEVED WITH THE ABOVE ORDER, THE REVENUE IS I N APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF DRP IS ERRONEOUS BOTH IN LAW AND F ACTS OF THE CASE. 2. THE DRP ERRED IN DELETING THE ADJUSTMENT MADE ON INTEREST ON ECB/FRD WITHOUT PROPERLY APPRECIATING THE FACTS AS TO WHY THE INTEREST RATE IS TAKEN AS LIBOR/SIBOR. 6. LD. DR SUBMITTED THAT THE ASSESSEE HAS BORROWED ECB/FRD FROM ITS AES SINCE IT IS AN INTERNATIONAL TRANSACTI ON, THE INTEREST HAS TO BE PAID BASED ON LIBOR/SIBOR. HE SUBSTANTIATED THE FINDINGS OF THE TPO IN HIS ORDER AND SUBMITTED THAT VARIOUS JUDICIA L PRONOUNCEMENTS GIVEN BY THE HONBLE ITAT, HYDERABAD THAT FOR RECEI VING INTEREST FROM 7 ITA NO. 399/H/16 DEVGEN SEEDS & CROP TECHNOLOGY P. LTD. ITS AES, BENCH MARKING WAS ALREADY DONE IN VARIOUS CASES THAT IT SHOULD BE LIBOR + 200 BASIS POINTS. THE ASSESSEE HA S ADOPTED RATE OF 4% WITHOUT ANY BASIS IN THE CASE OF FRD AND LIBO R + 500 BASIS POINTS ON ECB. HE FURTHER SUBMITTED THAT THE BENCH MARKING HAS TO BE ON INTERNATIONAL LEVEL AND HE OBJECTED TO THE BENC H MARKING CONSIDERING THE DOMESTIC INTEREST RATE. HE SUBMITTE D THAT DRP IS NOT JUSTIFIED GIVING RELIEF TO ASSESSEE TAKING BENCH MA RK ON DOMESTIC INTEREST RATE. HE VEHEMENTLY ARGUED THAT ADOPTION O F SIBOR + 500 BASIS POINTS IS FACTUALLY INCORRECT AND HE RELIED O N THE FINDINGS OF TPO. LD. DR RELIED ON THE ORDER OF ITAT DELHI BENCH IN THE CASE OF BRAHMA CENTER DEVELOPMENT (P) LTD. VS. ITO, [2016] 72 TAXMANN.COM 304. 7. THE LD. AR, ON THE OTHER HAND, SUBMITTED THAT TH E ASSESSEE HAS ALREADY SUBMITTED THAT TP MEMORANDUM BEFORE THE TPO AND IT HAD BENCH MARKED THE INTEREST RATE BASED ON LIBOR/SIBOR . HE SUBMITTED THAT ECB AND FRD ARE FOR A PERIOD OF 5 YEARS AND AB OVE. LD. AR BROUGHT TO OUR NOTICE THE TP MEMORANDUM (REFER PAGE S 212 TO 228). FURTHER, LD. AR SUBMITTED THAT AS PER THE RBI GUIDE LINES, LOAN WITH AVERAGE MATURITY PERIOD OF 3 YEARS AND UPTO 5 YEARS COST CEILING OVER 6 MONTHS LIBOR IS 300 BASIS POINTS. FOR THE AVERAGE MATURITY PERIOD OF LOAN MORE THAN 5 YEARS, THE COST CEILING OVER 6 MONTHS LIBOR IS 500 BASIS POINTS. HE SUBMITTED THAT IN THE GIVEN CA SE, THE ASSESSEE HAS BORROWED THE LOAN FROM ITS AES FOR A PERIOD OF 5 YEARS AND ABOVE, THE PAYMENT OF INTEREST TO ITS AES IS WITHIN THE RB I GUIDELINES. HE FURTHER SUBMITTED THAT THE BANKS TO LEND THE MONEY, WILL CONSIDER THE TERMS AND CONDITIONS OF THE LOAN, SUCH AS, TENURE, SENIORITY, SECURITY, CALL/PUT OPTION, CREDIT QUALITY OF THE BORROWER, MA RKET IN WHICH THE LOAN IS EXTENDED ETC., WHICH ARE CRUCIAL FACTORS IN DETE RMINATION OF THE INTEREST RATE. THE PRICING/FIXING OF THE INTEREST R ATE BY THE BANKS ARE DEPENDING ON THE SECURITY RISK AND TENURE OF THE LO AN. FOR BENCH MARKING WITH THE GIVEN CASE, IT HAS TO BE DETERMINE D BASED ON THE LEVEL PLAYING FIELD ADOPTED BY THE BANKS. ACCORDING LY, SPREAD OF 500 8 ITA NO. 399/H/16 DEVGEN SEEDS & CROP TECHNOLOGY P. LTD. BASIS POINTS IS AS PER THE INTERNATIONAL GUIDELINES AS WELL AS THE MASTER CIRCULAR ON ECB BY RBI. 7.1 LD. AR RELIED ON THE FOLLOWING CASES: 1. TECH MAHINDRA LTD. VS. DCIT, ITA NO. 1176/MUM/2 010 2. TRICOM INDIA LTD., ITA NO. 322/MUM/2014 3. APOLLO TYRES LTD. VS. ACIT, ITA NO. 616/COCH/20 11 4. M/S AITHENT TECHNOLOGIES PVT. LTD., ITA NO. 364 7/DEL./2007 5. M/S SIVA INDUSTRIES & HOLDINGS LTD. VS. ACIT, IT A NO. 2148/MDS/2010. 6. M/S COTTON NATUALS (I) PVT. LTD. VS. DCIT, ITA N O. 5855/DEL./2012. 7. VIJAY ELECTRICAL LTD. VS. ADDL. CIT, ITA NO. 114 0 & 1159/HYD/2013. 8. TOOLTECH GLOBAL ENGINEERING PVT. LTD. VS. DCIT, ITA NO. 273/PN/2014 9. TTK PRESTIGE LTD. VS. ACIT, ITA NO. 1257/BANG./2 011 10. KOHINOOR FOODS LTD., VS. ACIT, ITA NO. 3688 TO 3691/DEL/2012. 8. IN THE REJOINDER, LD. DR SUBMITTED THAT ASSESSEE HAS NOT SUBMITTED ANY DOCUMENT IN SUPPORT OF ADOPTING 500 B ASIS POINTS BEFORE THE TPO. THE TPO HAS ADOPTED 200 BASIS POINT S RELYING ON THE CASE LAWS, WHICH WERE BEFORE HIM. 9. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL FACTS ON RECORD AS WELL AS THE DECISIONS CITED. WHILE PAS SING THE ORDER, THE AO/TPO RELIED ON THE FOLLOWING DECISIONS OF THE ITA T, HYDERABAD. 9.1 M/S FOUR SOFT LTD., VS. DCIT, ITA NO. 1495/HYD/ 2010 FOR AY 2006-07, ORDER DATED 9 TH SEPTEMBER, 2011. THE COORDINATE BENCH IN THIS CASE HAS HELD AS UNDER: 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIALS AVAILABLE ON RECORD. WE DO NOT FIND ANY MERIT IN THE ARGUMENTS O F THE LEARNED DEPARTMENTAL REPRESENTATIVE AS WE FIND THAT THE ALP IS TO BE DET ERMINED FOR THE INTERNATIONAL TRANSACTION, THAT IS, ON INTERNATIONAL LOAN AND NOT FOR THE DOMESTIC LOAN. HENCE, THE COMPARABLE, IN RESPECT OF FOREIGN CURRENCY LOAN IN THE INTERNATIONAL MARKET, IS TO BE LIBOR BASED WHICH IS INTERNATIONALLY RECOGNISED AND ADOPTED. IN OUR CONSIDERED VIEW, THE DRP RIGHTLY DIRECTED THE ASSESSING OFFICER TO A DOPT THE LIBOR PLUS FOR THE PURPOSE OF TP ADJUSTMENT. OUR VIEW IS FORTIFIED BY THE DECISIO N OF THE MADRAS BENCH IN THE CASE OF SIVA INDUSTRIES [SUPRA]. WE DO NOT FIND ANY MERIT I N THE ARGUMENTS OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE DRP SHOULD HAVE ADOPTED T HE EURIBOR FOR THE PURPOSE OF THE 9 ITA NO. 399/H/16 DEVGEN SEEDS & CROP TECHNOLOGY P. LTD. TP ADJUSTMENTS, AS WE FIND THAT THE MOSTLY USED AND RECOGNISED BENCHMARK RATE FOR INTERNATIONAL LOAN IS LIBOR BASED. HENCE, THE DRP R IGHTLY DIRECTED THE ASSESSING OFFICER TO ADOPT THE LIBOR RATES. WE CONFIRM THE DIRECTIONS OF THE DRP. 9.2 AUROBINDO PHARMA LTD. VS. ACIT, [2014] 42 TAXMA NN.COM 556 (HYD. IN THIS CASE, THE COORDINATE BENCH HAS HELD AS UNDER: 4.3 WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE F ACTS. WITH REFERENCE TO PRINCIPLE THAT LIBOR + SPECIFIC PERCENTAGE POINTS IS TO BE CO NSIDERED AS ALP, THERE IS NO DISPUTE AS THIS ISSUE WAS DECIDED BY VARIOUS COORDINATE BEN CHES OF TRIBUNAL IN VARIOUS CASES. FEW OF THEM ARE AS UNDER: 4.4 IN THE CASE OF SIVA INDUSTRIES & HOLDINGS LTD. 46 SOT 112 (CHENNAI) HELD THAT 'A PERUSAL OF THE ORDER OF THE TPO CLEARLY SHOWS THAT THE ASSESSEE HAD RAISED THE FUNDS BY WAY OF ISSUANCE OF 0 PER CENT OPTIONAL CONVERTIBLE PREFERENTIAL SHARES. THUS IT IS NOTICED THAT THE FUNDS RAISED BY THE ASSESSEE COMPANY FOR G IVING THE LOAN TO INDIA TELECOM HOLDINGS LTD., MAURITIUS, WHICH IS ITS ASSOCIATED E NTERPRISES AND WHICH IS THE SUBSIDIARY COMPANY, IS OUT OF THE FUNDS OF THE ASSESSEE COMPAN Y. IT IS NOT BORROWED FUNDS. THE ASSESSEE HAS GIVEN THE LOAN TO THE ASSOCIATED ENTER PRISES IN US DOLLARS. THE ASSESSEE IS ALSO RECEIVING INTEREST FROM THE ASSOCIATED ENTERPR ISES IN INDIAN RUPEES. ONCE THE TRANSACTION BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES IS IN FOREIGN CURRENCY AND THE TRANSACTION IS AN INTERNATIONAL TRANSACTION , THEN THE TRANSACTION WOULD HAVE TO BE LOOKED UPON BY APPLYING THE COMMERCIAL PRINCIPLE S IN REGARD TO INTERNATIONAL TRANSACTION. IF THIS IS SO, THEN THE DOMESTIC PRIME LENDING RATE WOULD HAVE NO APPLICABILITY AND THE INTERNATIONAL RATE FIXED BEIN G LIB OR WOULD COME INTO PLAY. IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT IT LIB OR RA TE WHICH HAS TO BE CONSIDERED WHILE DETERMINING THE ARM'S LENGTH INTEREST RATE IN RESPE CT OF THE TRANSACTION BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES. AS IT IS N OTICED THAT THE AVERAGE OF THE LIB OR RATE FOR 1-4-2005 TO 31-3-2006 IS 4.42 PER CENT AND THE ASSESSEE HAS CHARGED INTEREST AT 6 PER CENT WHICH IS HIGHER THAN THE LLBOR RATE, WE ARE OF THE VIEW THAT NO ADDITION ON THIS COUNT IS LIABLE TO BE MADE IN THE HANDS OF THE ASSESSEE. IN THE CIRCUMSTANCES, THE ADDITION AS MADE BY THE ASSESSING OFFICER ON TH IS COUNT IS DELETED'. 4.5 IN THE CASE OF CIT VS. TECH MAHINDRA LTD. 46 SO T 141 (MUM) TRIBUNAL HELD THAT ' WHEN THERE IS A CHOICE BETWEEN THE INTEREST RATE OF A CURRENCY OTHER THAN THE CURRENCY IN WHICH TRANSACTION HAS TAKEN PLACE AND THE INTERE ST RATE IN RESPECT OF THE CURRENCY IN WHICH TRANSACTION HAS TAKEN PLACE, IN OUR CONSIDERE D VIEW, THE LATTER SHOULD BE ADOPTED. IN SIVA INDUSTRIES & HOLDINGS LTD.'S CASE ( SUPRA ), CO-ORDINATE BENCH WAS MAKING A CHOICE BETWEEN THE PLR (PRIME LENDING RATE IN INDIA) AND THE LIB OR (LONDON INTER BANK OFFERED RATE). THE CO-ORDINATE BENCH HEL D THAT 'ONCE THE TRANSACTION BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES IS IN FOREIGN CURRENCY AND THE TRANSACTION IS AN INTERNATIONAL TRANSACTION, THEN T HE TRANSACTION WOULD HAVE TO BE LOOKED UPON BY APPLYING THE COMMERCIAL PRINCIPLES I N REGARD TO INTERNATIONAL TRANSACTIONS', AND ACCORDINGLY PROCEEDED TO TAKE IN TO ACCOUNT INTEREST RATE IN TERMS OF LIBOR BASIS. WE HAVE ADOPTED THE SAME APPROACH BY T AKING INTO ACCOUNT THE COMMERCIAL PRINCIPLES AND PRACTICES WITH REGARD TO A US DOLLAR DENOMINATED EXTENDED CREDIT FOR ARRIVING AT THE BENCHMARK RATE, AND TAKE LIB OR AS THE BASE. ACCORDINGLY, THE LIBOR (US DOLLAR) HAS TO BE AS BENCHMARK FOR US DOL LAR TRANSACTIONS - RATHER THAN THE RATE OF INTEREST ON DOMESTIC BORROWINGS, EVEN WHICH IS LOWER THAN THE INTEREST RATE OF 10 PER CENT TAKEN AS ALP BY THE TPO, OR, FOR THAT P URPOSE, RATE OF INTEREST ON ANY OTHER CURRENCY LOANS.' 10 ITA NO. 399/H/16 DEVGEN SEEDS & CROP TECHNOLOGY P. LTD. 4.6 IN THE CASE OF M/S FOUR SOFT LTD VS DCIT CIRCLE -L(3), HYDERABAD, ITA NO. 1495/HYD/2010 TRIBUNAL HELD THAT 'WE HAVE CONSIDERE D THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE DO NO T FIND ANY MERIT IN THE ARGUMENTS OF THE LEARNED DEPARTMENTAL REPRESENTATIVE AS WE FI ND THAT THE ALP IS TO BE DETERMINED FOR THE INTERNATIONAL TRANSACTION, THAT IS, ON INTE RNATIONAL LOAN AND NOT FOR THE DOMESTIC LOAN. HENCE, THE COMPARABLE, IN RESPECT OF FOREIGN CURRENCY LOAN IN THE INTERNATIONAL MARKET, IS TO BE LIBOR BASED WHICH IS INTERNATIONAL LY RECOGNIZED AND ADOPTED. IN OUR CONSIDERED VIEW, THE DRP RIGHTLY DIRECTED THE ASSES SING OFFICER TO ADOPT THE LIB OR PLUS FOR THE PURPOSE OF TP ADJUSTMENT. OUR VIEW IS FORTI FIED BY THE DECISION OF THE MADRAS BENCH IN THE CASE OF SIVA INDUSTRIES'. 4.7 SIMILAR VIEW HAS BEEN TAKEN IN THE CASE OF TATA AUTO COMP SYSTEMS LIMITED VS. ACIT, ITAT MUMBAI, ITA NO. 7354/MUM/11(A. Y. 2007-0 8). 4.8 ON THE LEGAL PRINCIPLES THERE IS NO DISPUTE THA T LIBOR SPECIFIC PERCENTAGE POINTS HAS TO BE CONSIDERED AS ALP. THERE IS ALSO NO BASIS, AS RIGHTLY OBSERVED BY THE DRP, TO ADOPT CORPORATE BONDS RATE AT 17.26%. THEREFORE, IN PRINC IPLE WE AGREE WITH ASSESSEES CONTENTIONS THAT LIBOR + PERCENTAGE POINTS IS TO BE ACCEPTED. HOWEVER, IT IS SEEN FROM THE DETAILS FURNISHED AT PAGE 91 OF PAPER BOOK, FEW OF LOANS PROVIDED IN AY 2003-04 AND 2004-05 IN THE CASE OF ARUBINDO AND ARUBINDO FA RMO INDUSTRIA FARMACEUTICA LDTA AND LOANS OBTAINED FROM AXIS BANK AND FEDERAL BANK WHERE THE RATE OF INTEREST PAID WAS LIBOR +2.1% AND LIBOR +3.25%. ON THESE LOANS AS SESSEE SEEMS TO HAVE ADVANCED AT LIBOR +3% TO AURBINDO WHEREAS RATE OF INTEREST R ECEIVED IN AUROBINDO FARMO INDUSTRIA FARMACEUTICA LTDA IS 13.06%. THEREFORE, T O THE EXTENT OF ADVANCES WHICH WERE GIVEN AT A RATE LESSER THAN THE RATE AT WHICH THOSE ARE OBTAINED, THE AO IS DIRECTED TO EXAMINE AND IF SO, THE RATE OF INTEREST PAID SHOULD BE CONSIDERED AS ALP IN ORDER TO DETERMINE THE INTEREST RECEIVED. WITH THES E DIRECTIONS, THIS GROUND CONSIDERED PARTLY ALLOWED. 9.3 IN THE CASE OF DR. REDDYS LABORATORIES LTD. VS . ADDL. CIT, [2014] 48 TAXMANN.COM 374 (HYD.), THE COORDINATE BE NCH HAS HELD AS UNDER: 11. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. SIN CE THE ASSESSEE HAS ACCEPTED 7 PER CENT. IN THE EARLIER YEARS. THE TRIB UNAL FELT THAT 7 PER CENT IS REASONABLE AND ACCORDINGLY LIBOR LINKED INTEREST WA S NOT CONSIDERED. THE ISSUE IN FOUR SOFT LTD. (SUPRA) RELIED UPON BY THE ASSESSEE IS NOT ABOUT BANK INTEREST RATE OR FIXED DEPOSIT INTEREST RATE. THE I SSUE CONTESTED WAS RATE OF LIBOR, THE ACTUAL LIBOR RATE AS PER THE ASSESSEE WA S 4-L2 PER CENT WHEREAS THE DISPUTE RESOLUTION PANEL HAS TAKEN LIBOR AT 5.7 PER CENT. THE TRIBUNAL HAS DIRECTED THE ASSESSING OFFICER TO EXAMINE THE C ORRECT RATE OF LIBOR AND ADOPT LIBOR + RATE IN THAT CASE. THERE ARE OTHER JU DGMENTS ALSO WHERE 6 PER CENT. INTEREST RECEIVED WAS CONSIDERED AS LIBOR + 1 57 BASE POINTS, SO, 7 PER CENT INTEREST RATE APPROVED WOULD BE ABOUT LIBOR + 257 BASE POINTS. THE CO-ORDINATE BENCHES ARE APPROVING ON DIFFERENT FACT UAL SITUATION, LIBOR + I PER CENT TO 3 PER CENT AND CONSIDERING THAT, WE ALS O FEEL THAT 7 PER CENT RATE IS REASONABLE WHICH IS EQUIVALENT TO LIBOR + 2 PER CENT. BE THAT AS IT MAY, SINCE THE ASSESSEE HAS ACCEPTED 7 PER CENT IN THE E ARLIER YEAR AND THAT IS THE BASIS FOR DIRECTING TO ADOPT 7 PER CENT BY THE TRIB UNAL, WE DO NOT SEE ANY REASON TO MODIFY THE DIRECTIONS OF THE TRIBUNAL IN THIS REGARD. ACCORDINGLY, THIS CONTENTION OF THE ASSESSEE IS REJECTED. 11 ITA NO. 399/H/16 DEVGEN SEEDS & CROP TECHNOLOGY P. LTD. 9.4 FROM THE ABOVE JUDICIAL PRONOUNCEMENTS, THE COO RDINATE BENCH HAS ADJUDICATED THAT IN RESPECT OF FOREIGN CURRENCY LOAN IN THE INTERNATIONAL MARKET, THE LIBOR BASED INTEREST HAS TO BE ADOPTED. IN THE CASE OF FOUR SOFT AND AUROBINDO (SUPRA), THE CO ORDINATE BENCH HAS ONLY ADJUDICATED THAT LIBOR BASED INTEREST ALO NE ARE TO BE CONSIDERED FOR ALP ADJUSTMENT NOT THE DOMESTIC PLR . IN THE CASE OF DR. REDDY LABS (SUPRA), THE COORDINATE BENCH HAS ON LY CONFIRMED THE INTEREST RATE ALREADY ACCEPTED BY THE ASSESSEE AT 7 %, WHICH WAS CONSIDERED TO BE REASONABLE. NOWHERE, IT WAS ADJUDI CATED THAT THE BENCH MARKING OF INTEREST AT LIBOR + 200 BPS. MOREO VER, ALL THE INTEREST RATES WERE RECEIVED BY THE ASSESSEE FOR MA KING INVESTMENT IN AES, IN THE GIVEN CASE, ASSESSEE HAD BORROWED THE L OAN AND PAID THE INTEREST. THE BENCH MARKING HAS TO BE DONE KEEPING IN MIND THE INTERNAL AS WELL AS EXTERNAL CUP. 9.5 AFTER CAREFUL ANALYSIS OF THE JUDICIAL PRONOUNC EMENTS AND RBI GUIDELINES, WE ARE OF THE VIEW THAT THE ASSESSEE HA S BORROWED THE LOAN FROM ITS AES IN TERMS OF FCD AND ECB. FOR THE PURPOSE OF FCD, THE BENCH MARKING HAS TO BE DONE CONSIDERING THE INTERNAL AS WELL AS EXTERNAL CUP. OBVIOUSLY, THE INTEREST CHA RGED IS BETTER THAN INTERNAL CUP. THE EXTERNAL CUP ARE THE RATES AV AILABLE IN THE INTERNATIONAL MARKET. THE ASSESSEE HAS ALREADY SUBM ITTED THAT THE LIBOR RATE AT THAT POINT OF TIME WAS 1.24% WITH THE SPREAD OF 500 BPS, IT COMES TO 5.24%, WHICH IS LESS THAN 4% CHARG ED BY THE ASSESSEE. WITH REGARD TO ECB, THE BENCH MARKING HAS TO BE DONE ON EXTERNAL CUP AT THE RATE AVAILABLE IN THE INTERNA TIONAL MARKET. THE ASSESSEE HAS ALREADY CONSIDERED THIS ASPECT AND COM PARED THE LIBOR AND SIBOR RATES AT THAT POINT OF TIME AND CON SIDERED THE SIBOR BASED RATE WITH 500 BPS IS FAVOURABLE TO THE ASSESSEE. ACCORDINGLY, THE ASSESSEE HAS ADOPTED SIBOR + 500 B PS AS THE ALP. 9.6 THE LD. DR HAS VEHEMENTLY PUT FORTH HIS ARGUMEN T FOR ADOPTING 500 BPS INSTEAD OF ADOPTING 200 BPS AS ADOPTED BY T PO. WE FOUND THAT THERE IS NO BASIS FOR ADOPTING ONE SPREAD OF 2 00 BPS IN THE JUDICIAL PRONOUNCEMENT NOR IT IS PRUDENT IN THE BAN KING SECTOR. IN OUR 12 ITA NO. 399/H/16 DEVGEN SEEDS & CROP TECHNOLOGY P. LTD. CONSIDERED VIEW, WE CANNOT ADOPT THE 200 BPS AS UNI VERSAL RATE FOR ALL TYPES OF LOAN. THE LOANS ARE CATEGORIZED AS LONG TE RM AND SHORT TERM I.E. WORKING CAPITAL LOAN. WE OBSERVE THAT THE BANK S ARE ADOPTING THE 200 BPS ON WORKING CAPITAL LOANS AS SPREAD AND HIGH ER RATES BEYOND 500 BPS ON THE LONG TERM LOANS SUCH AS TERM LOANS. THE PRICING OF INTEREST ON TERM LOANS ARE DETERMINED BASED ON THE SECURITY, NET WORTH, RATINGS, TERM OF LOAN ETC. THE MORE RISK INV OLVED, THE PRICING DECISION OF THE BANKS WILL CHANGE. THE RBI IN ITS P RUDENTIAL NORMS HAS GIVEN WINDOWS FOR THE PRICING OF INTEREST AND THE S PREAD. BASED ON THE RBI GUIDELINES, THE TERM UP TO 5 YEARS, CAN HAVE SP READ OF 300 BPS AND BEYOND 5 YEARS, IT CAN BE 500 BPS. TAKING THE C LUE FROM THIS GUIDELINE, WE CAN COME TO UNDERSTAND THAT THE ASSES SEE HAS PROPERLY ALLOWED ITS AES TO ADOPT THE SPREAD OF 500 BPS. IN OUR CONSIDERED VIEW, THE RELEVANT ISSUE IS TO CHARGE THE INTEREST ON INTERNATIONAL TRANSACTION BASED ON THE LIBOR OR ANY OTHER RATES W HICH ARE THE BASIS FOR NEGOTIATION BETWEEN THE CONTRACTING PARTI ES AND THE RATES OF INTEREST OR SPREAD CANNOT BE THE SAME FOR ALL THE I NTERNATIONAL LOANS IRRESPECTIVE OF THEIR TERMS, RISK ETC. 10. IN VIEW OF THE ABOVE DISCUSSION, WE FIND NO INF IRMITY IN THE ORDER OF THE DRP IN DELETING THE ADJUSTMENT MADE ON INTER EST ON ECB/FRD AND ACCORDINGLY, WE UPHOLD THE ORDER OF THE DRP AND DISMISS THE GROUNDS RAISED BY THE REVENUE. 11. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. PRONOUNCED IN THE OPEN COURT ON 24 TH MARCH, 2017. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAH MAN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 24 TH MARCH, 2017 KV 13 ITA NO. 399/H/16 DEVGEN SEEDS & CROP TECHNOLOGY P. LTD. COPY TO:- 1) ACIT, CIRCLE 17(1), 9 TH FLOOR, SIGNATURE TOWERS, KONDAPUR, HYDERABAD. 2) M/S DEVGEN SEEDS AND CROPS TECHNOLOGY PVT. LTD., SURYA TOWERS, 105, SP ROAD, HYDERABAD. 3) DRP, BANGALORE. 4 CIT - 5, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 6) GUARD FILE