DCIT 8(3), MUMBAI V. TRIGYN TECHNOLOGIES LTD, MUMBAI

ITA 4855/MUM/2009

• Counselvise Citation: 485519914 RSA 2009
• Duration Of Justice: 4 year(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 30-07-2013
• Assessment Year: 2004-2005
• Appeal Filed On: 21-08-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJIT KU MAR JAIN
• Assessee Lawyers: VIJAY MEHTA; ANUJ KISNADWALA
• Keywords: Transfer pricing; International transaction; Additional evidence; Commercial expediency
• Section: 143(3); 92E; 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, M UMBAI BEFORE S/SHRI B.R.MITTAL,(JM) AND P.M.JAGTAP (AM) . . , . . , ./I.T.A. NO.4855/MUM/2009 ( / ASSESSMENT YEARS : 2004-05) DY. COMMISSIONER OF INCOME TAX-8(3), ROOM NO.217, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020. / VS. TRIGYN TECHNOLOGIES LIMITED, UNIT NO.27A, SDF-1, SEEPZ, ANDHERI (E), MUMBAI-400096 ./ ./PAN/GIR NO. : AAACL2065K ( & / APPELLANT) .. ( '& / RESPONDENT) & / ASSESSEE BY : S HRI AJIT KUMAR JAIN '& ) /RESPONDENT BY : S /S HRI VIJAY MEHTA AND ANUJ KISNADWALA ) , / DATE OF HEARING : 30.7.2013 ) , /DATE OF PRONOUNCEMENT : 21.08.2013 / O R D E R PER B.R.MITTAL,JM: THE DEPARTMENT HAS FILED THIS APPEAL FOR ASSESS MENT YEAR 2004-05 AGAINST THE ORDER OF LD. CIT(A) DATED 29.4.2009. 2. GROUND NO.1 OF APPEAL IS AS UNDER : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING INTEREST EXPENSES OF RS.7.98 CROR ES PAID ON BORROWINGS BY THE ASSESSEE WITHOUT ESTABLISHING THE COMMERCIAL EXPEDI ENCY OF THE FUNDS ADVANCES BY THE ASSESSEE WITHOUT APPRECIATING THE FACTS OF T HE CASE 3. THE RELEVANT FACTS ARE THAT THE ASSESSEE DEBITED INTEREST EXPENSES OF RS.7,98,19,398/-. AO HAS STATED THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESSEE WAS ASKED TO SUBMIT DETAILS OF LOANS TAKE N AND INTEREST PAID THEREON ALONG I.T.A. NO.4855/MUM/2009 2 WITH THE DETAILS OF INTEREST FREE LOANS AND ADVANC ES GIVEN. THAT THE ASSESSEE VIDE LETTER DATED 15.11.2006 SUBMITTED REQUISITE DETAILS TO TH E AO WHICH ARE STATED BY AO IN PARA 4.1 AT PAGES 2 TO 4 OF THE ASSESSMENT ORDER AS UNDE R : THE POSITION OF THE LOANS AND ADVANCES TO THE SUBS IDIARIES AND EMPLOYEES AS ON 31/03/2003 AND 31/03/2004 IS AS UNDER: LOANS TO SUBSIDIA RIES AS ON 31.3.2003 AS ON 31 .3.2004 CONSIDERED GOODS RS. 7,82,09,545 RS. 4,21,44,086 CONSIDERED DOUBTFUL RS.24,50,16,615 RS.21,86,98,434 LOANS/ ADVANCES TO EMPLOYEES CONSIDERED GOODS RS. 2,23,11,422 RS. 82,930 CONSIDERED DOUBTFUL RS.10,10,036 RS.1016,528 RS.34,65,4 7,618 RS.26,19,41,978 THE COMPANY HAS ADVANCED THE AMOUNTS TO ITS SUBSIDI ARIES IN THE COURSE OF ITS BUSINESS ACTIVITIES AS THE SURVIVAL OF THESE COMPAN IES IS CRUCIAL TO THE ACTIVITIES AND BUSINESS OF THE COMPANY. THE GAMUT OF THE RELAT IONSHIP OF THE COMPANY AND ITS SUBSIDIARIES IS AS UNDER: THE COMPANY IS ENGAGED IN THE BUSINESS OF DEVELOPM ENT OF SOFTWARE AS WELL AS PROVIDING SOFTWARE SERVICES WHERE THE MAIN DRIVING FORCE IS THE SKILLED MAN POWER. THE BUSINESS IS FULLY DEPENDENT ON THE SKILL ED TECHNICIANS AND THE WHOLE SOFTWARE SECTOR HAS A HUGE LABOUR TURNOVER. IN CASE THE BUSINESS OF THE SUBSIDIARIES (WHICH ARE IN HEAVY LOSSES) HAD COLLAP SED. IT WOULD ALSO HAVE HAD A SEVERE REPERCUSSION ON THE EMPLOYEES OF THE COMPANY , WHICH MAY HAVE PROMPTED THEM TO MOVE ON TO SOME OTHER COMPANIES WH EREBY THE BUSINESS OF THE COMPANY WOULD HAVE BEEN AFFECTED. KEEPING IN M IND THE ABOVE MENTIONED REASONS, A BUSINESS DECISION WAS TAKEN TO FUND THE ENVIRONMENT IN WHICH SUCH BUSINESS DECISION WAS TAKEN. IT WOULD NOT BE FAI R TO DISALLOW THE INTEREST ON THE GROUND THAT THE ADVANCES MADE TO THE SUBSIDIARIES W AS NOT IN THE COURSE OF BUSINESS. IT IS SUBMITTED THAT FOR ALLOWANCE OF INTEREST AS PER THE PROVISIONS OF SEC. 36(1)(III) THE FOLLOWING CONDITIONS NEEDS T O BE SATISFIED (I) MONEY SHOULD HAVE BEEN BORROWED BY THE COMPANY (II) THAT IT MUST HAVE BEEN BORROWED FOR THE PURPOSE OF BUSINESS AND (III) THAT THE COMPANY HAS PAID THE INTEREST ON THE SAID AMOUNT. THE APEX COURT IN THE CASE OF 'MADHAV PRASAD JATIA 118 ITR 200 HAS HELD THAT THE EXPRESSI ON 'FOR THE PURPOSE OF BUSINESS' IS WIDER IN SCOPE THAN THE EXPRESSION 'FO R THE PURPOSE OF EARNING INCOME, PROFITS OR GAINS'. HENCE IT IS SUBM ITTED THAT DISALLOWANCE U/S.36(1)(III) IS UNCALLED FOR, IN EACH AND EVERY C ASE WHERE BORROWED CAPITAL ON WHICH INTEREST IS BEING PAID DOES NOT RE SULT INCOME OR PROFITS FOR THE COMPANY. THE WHOLE CRUX OF ALLOWANCE OF INTERES T U/ S.36(1)(III) IS THAT THE BORROWED FUNDS SHOULD HAVE BEEN UTILIZED IN ADV ANCEMENT OF THE COMPANY'S BUSINESS INTERESTS OR MOTIVES. SINCE IN THE PRESENT CASE THE COMPANY HAD AS A I.T.A. NO.4855/MUM/2009 3 PRUDENT BUSINESSMAN ADVANCED MONEY TO PROTECT ITS B USINESS INTEREST, NO DISALLOWANCE OF DEDUCTION U/S.36(1)(III) CAN BE MAD E. IT IS SUBMITTED THAT VARIOUS COURTS AND TRIBUNALS HAVE HELD THAT NO DISALLOWANCE UNDER THE PROVISIONS OF SECTION 36(1)(III) CAN BE MADE IN RESPECT OF A LOAN ADVANCED TO A SUBSIDIARY COMPANY WHICH STANDS ON A DIFFERENT FOOTING TO AN A DVANCE MADE TO THE DIRECTORS, SISTER CONCERN ETC. RELIANCE IS PLACED O N THE FOLLOWING DECISIONS: INDIAN HOTELS CO. LTD. 92 ITD 97 (MUM) (TM) CADBURY FRY INDIA LTD 2 ITD 435 (MUM TRIB] D & H SECHERON ELECTRODES PVT. LTD. 142 ITR 528 (MP ) PADDUKOTTAI COMPANY 84 ITR 788 (MAD) PREMIER AUTO FINANCE PVT LTD 128 ITR 540 (DEL) BIRLA GWALIOR PVT LTD. 44 ITR 847 (MP) IN VIEW OF THE ABOVE IT IS SUBMITTED THAT SINCE THE MONEY HAS BEEN UTILIZED FOR THE PURPOSE OF BUSINESS NO DISALLOWANCE OF INT EREST CAN BE MADE. WITHOUT PREJUDICE TO THE ABOVE, THAT THE AMOUNTS HA VE BEEN ADVANCED IN COURSE OF BUSINESS, IT IS SUBMITTED THAT THE FUNDS HAVE BEEN ADVANCED FROM ITS OWN RESOURCES OR INTEREST FREE FUNDS AVAILABLE WITH THE COMPANY. LOANS TO SUBSIDIARIES ARE RS.42,144,086/ - (RS.4.2 CRORES - REFER SCH. 13 TO ACCOUNTS). THE COMPANY'S OWN FUNDS I.E., SHARE CAPI TAL + SHARE APPLICATION MONEY + RESERVES & SURPLUS AMOUNT TO RS.6,740,973,6 48/-. THE ACCUMULATED LOSSES (DEBIT BALANCE OF PROFIT & LOSS A/C) ARE RS.6,609,239,107/-. THUS THE NET OWNED FUNDS OF THE COMPANY ARE RS.131,734,541/- I.E., ABOUT RS.13 CRORES. HENCE FA R IN EXCESS OF LOANS TO SUBSIDIARIES. THE DOUBTFUL ADVANCES TO SUBSIDIARIES ARE ALREADY WRITTEN OFF, AND ARE REFLECTED IN ACCUMULATED LOSSES. IF DOUBTFU L ADVANCES TO SUBSIDIARIES ARE TO BE CONSIDERED THEN PROPORTIONAT E REDUCTION IN ACCUMULATED LOSSES WILL TAKE PLACE. WITHOUT PREJUDICE TO THE ABOVE, IT IS SUBMITTED THA T WHAT SHOULD BE CONSIDERED IS ONLY THE INTEREST IN RESPECT OF ADVAN CES MADE DURING THE YEAR AND NOT ON THE BALANCE OUTSTANDING AS AT THE END OF THE YEAR. ' 4. AO HAS STATED THAT ON PERUSAL OF BALANCE-SHEET, IT IS SEEN THAT THE ASSESSEE HAS ITS OWN FUNDS IN THE FORM OF SHARE CAPITAL AND RESE RVES AND SURPLUS AT RS.6,54,24,74,898/-. THE NET BLOCK OF FIXED ASSETS STOOD AT RS.1,25,62,893/ - AND CURRENT ASSETS IN THE FORM OF LOANS & ADVANCES, SUN DRY DEBTORS, CASH AND BANK BALANCES, ETC. STOOD AT RS.9,08,48,948/-. THAT TH E INVESTMENT IN QUOTED AND UNQUOTED EQUITY SHARES STOOD AT RS.47,94,23,600. AO HAS STA TED THAT WHILE GOING THROUGH PARA 9 OF NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR E NDED 31.03.2004, IT IS SEEN THAT THE ASSESSEE HAS MADE LONG TERN INVESTMENT (AT COST) A T RS.649,13,45,454/- AS UNDER : I.T.A. NO.4855/MUM/2009 4 7350000 EQUITY SHARES OF ECAPITAL SOLUTION(BERMUDA)LTD RS.606,47,16,375/ - 150000 EQUITY SHARES OF APPLISOFT INC. USA RS. 4,26,29,079/- 500000 EQUITY SHARES IN LEADING EDGE INFOTECH LTD. RS.50,00,000/- RS.649,13,45,454/- LESS : PROVISION FOR DECLINE OTHER THAN TEMPORARY IN THE VALUE OF INVESTMENT IN SUBSID IARIES RS.601,19,75,454/- NON TRADE(UNQUOTED) INVESTMENT 100 EQUITY SHARES OF BOMBAY MERCANTILE RS.3,600/- CO-OPERATIVE BANK LTD 5000 EQUITY SHAES OF NORTH CANARA GSB CO-OPERATIVE BANK LTD. RS.50,000/- RS.47,94,23,600/- 5. THUS, THE AO HAS STATED THAT AS AGAINST SHARE HO LDERS FUND OF RS.674,13,71,148/-, THE ASSESSEE HAS ACCUMULATED LO SSES OF RS.660,92,39,107/- AS ON 31.3.2004. THUS, THE RESERVES OF THE ASSESSEE AR E COMPLETELY WIPED OUT DUE TO ACCUMULATED LOSSES OVER THE YEARS. THUS, ASSESS EE HAS DONE WINDOW DRESSING OF THE BALANCESHEET BY REDUCING THE VALUE OF INVESTMENTS IN THE SHARES WHEREBY ONLY RS.47,93,70,000/- IS BEING SHOWN AS INVESTMENT IN E QUITY SHARES. AO HAS STATED THAT ASSESSEE HAS INVESTED RS.649.13 CRORES IN THE SHA RES, WHICH ARE REDUCED TO RS.47.93 CRORES BY WAY OF DIMINUTION IN THE VALUE OF SHARES OVER THE YEARS. AO HAS STATED THAT INVESTMENT IN THE SHARES IS NOT THE BUSINESS OF ASS ESSEE. THEREFORE, THESE INVESTMENTS ARE TO BE TREATED AS FOR NON BUSINESS PURPOSES. AO HAS STATED THAT ASSESSEE HAS FAILED TO PROVE THAT THE INTEREST BEARING FUNDS WERE NOT U TILIZED FOR NON-BUSINESS PURPOSES. AO AFTER CONSIDERING THE DECISIONS OF THE HONBLE PUN JAB AND HARYANA HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES LTD 205 CTR 304 (P&H) AND IN VARINDU AGRO CHEMICALS LTD-205 CTR 334 (P&H) HAS STATED THAT THE ONUS IS ON THE ASSESSEE TO PROVE THE NEXUS BETWEEN THE BORROWED FUND AND THE FUNDS ADVANCED TO OTHERS WITHOUT INTEREST, ONCE THE ASSESSEE HAS BORROWED CERTAIN FU NDS ON WHICH LIABILITY TO PAY INTEREST IS BEING INCURRED AND ON THE OTHER HAND THE ASSESSE E HAS UTILIZED THE FUNDS FOR GIVING INTEREST FREE ADVANCES AND WITHOUT ANY PURPOSE. TH AT THE ASSESSEE HAS GIVEN GENERALISED STATEMENT THAT THE INTEREST BEARING FUN DS ARE NOT UTILIZED FOR NON-BUSINESS PURPOSES. AO HAS STATED THAT THE DEDUCTION OR ALLOW ANCES ARE TO BE ALLOWED ON THE BASIS OF FACTS AND NOT ON THE BASIS OF GENERALISED SUBMIS SIONS. THAT THE ASSESSEE HAS NOT PRODUCED FACTUAL DETAILS ABOUT THE BORROWED FUNDS U TILISED FOR BUSINESS PURPOSES, HENCE THE ONUS IS NOT DISCHARGED. AO HAS REFERRED THE DE CISION OF HONBLE KERALA HIGH COURT IN THE CASE OF CIT V/S V I BABY AND CO. (248 ITR 248), THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF R.DALMIA V/S CIT (133 ITR 169) AND THE I.T.A. NO.4855/MUM/2009 5 DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE O F MIR MOHAMMAD ALI V/S CIT (383 ITR 413) (MADRAS) AND HAS STATED THAT WHEREIN IT IS NOT POSSIBLE TO ESTABLISH THE CORRELATION, THE DISALLOWANCE COULD BE ESTIMATE D OUT OF THE FULL AMOUNT OF INTEREST PAYABLE, ON SUCH BORROWED MONEY. ACCORDINGLY, TH E INTEREST EXPENSES AMOUNTING TO RS.7,98,19,398/- WAS DISALLOWED BY THE AO U/S 36 (1)(II) OF THE ACT, AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. BEING AGGRIEVE D, ASSESSEE FILED APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 6. ON BEHALF OF HE ASSESSEE IT WAS CONTENDED THAT T HE INTEREST EXPENDITURE INCURRED WAS PURELY FOR THE BUSINESS PURPOSES AND OUT OF COMMERCIAL EXPEDIENCY. IT WAS SUBMITTED THAT THE INTEREST OF RS.7,98,19,398/ - IS PAID ON THE ASSESSEES BORROWINGS, COMPRISES OF : (A) TERM LOAN FROM GLOBAL TRUST BANK AND EXIM BANK : RS.32,72,67,818/- (B) LEASE OBLIGATION : RS. 2,73,562/- AGGREGATING TO RS.32,75,41,380/-. THE ASSESSEE ALS O STATED IN RESPECT OF INVESTMENT IN SHARES AS UNDER : SHARES IN E-CAPITAL SOLUTION & APPLISOFT INC (USA) ARE SHARES OF FOREIGN COMPANIES AND HENCE, DISALLOWANCE PROVISION U/S.14 A WOULD NOT APPLY (BECAUSE DIVIDEND FOREIGN COMPANIES IS NOT EXEMPT). - SHARES IN E-CAPITAL SOLUTION WERE ACQUIRED THROUGH SHARE SWAP AND NOT IN CASH. IN OTHER WORDS, THE ASSESSEE ACQUIRED SHA RES NOT ONLY BY PAYMENT OF CASH BUT BY ISSUE OF ITS OWN SHARES TO THE SELLERS OF THE SAID SHARES. THIS IS EVIDENT FROM RBI APPROVAL 31.3.2000. THEREFORE. THE QUESTION OF USING THE BORROWED FUNDS FOR THIS ACQUISITION DOES NOT ARISE . HENCE, THE PRESUMPTION OF THE AO IS BASED ONLY ON CONJUNCTURES SURMISES AND N O ADDITION IS CALLED FOR IN RESPECT OF THIS INVESTMENT. - SHARES IN APPLISOFT INC. (USA) WERE ACQUIRED ON 1.1 .2001 AT RS.421.6 MILLION (USD 9 MILLION). THE RELEVANT RBI PERMISS ION IS DATED 10.10.2000. IT SHOWS THAT OUT OF USD 9 MILLION USD 1.52 MILLION WA S FUNDED FROM COMPANY'S OWN EEFC A/C. HENCE, IF AT ALL THERE IS A POSSIBIL ITY OF BORROWED FUNDS BEING USED, IT CAN BE FOR USD 7.48 MILLION [I.E.RS.351 MI LLION APPROX]. - NOW. APPLISOFT USA IS ENGAGED EXACTLY IN THE SAME B USINESS AS THAT OF THE APPELLANT (I.E. SOFTWARE DEVELOPMENT AND SOFTWA RE RELATED CONSULTANCY SERVICES}. THERE COULD BE TWO WAYS IN WHICH AN INDI AN COMPANY MAY OPERATE IN THE US;(I) BY OPENING A BRANCH THERE: OR (II) BY FLOATING/ACQUIRING A SUBSIDIARY THERE. THE APPELLANT CHOSE THE SECOND ROUTE. IF FUN DS WERE REMITTED TO BRANCH OUT OF BORROWED MONEYS, THERE WOULD BE NO QUESTION OF ALLEGING 'NON-BUSINESS' PURPOSE. HOW CAN THERE BE SUCH ALLEGATION MERELY BE CAUSE THE APPELLANT CHOSE THE SECOND ROUTE? - THE APPELLANTS APPLICATION TO RBI FOR ACQUISITION OF APPLISOFTS SHARES MAKES IT AMPLY CLEAR THAT THE APPELLANT EXPECTED N EARLY USD 8 MILLION BUSINESS I.T.A. NO.4855/MUM/2009 6 FROM APPLISOFT ON ACCOUNT OF TECHNICAL SERVICES/ CONSULTANCY FEES IN NEXT 5 YEARS, AS ALSO AROUND USD 14 MILLION BY WAY OF GAIN IN OFF SHORE REVENUE. THIS CONCLUSIVELY PROVES THE BUSINESS PURPOSE OF THE I NVESTMENT BEING MADE IN THE SAID COMPANY. 7. ASSESSEE SUBMITTED BEFORE LD. CIT(A) THAT THE H ONBLE APEX COURT HAS HELD IN THE CASE OF S.A.BUILDERS LTD V/S CIT - (288 ITR 1) THAT INTEREST FREE LOANS GIVEN TO SUBSIDIARY/SISTER CONCERNS DOES NOT GIVE RISE TO ANY INTEREST DISALLOWANCE,IF SUCH LOANS WERE GIVEN OUT OF 'COMME RCIAL EXPEDIENCY. THE ASSESSEE REFERRED THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF RAJEEVA LACHAN KANORIA (208 ITR 616) WHEREIN IT HAS BEEN HELD BY THEIR LORDSHIPS THAT THE ACTIVITY OF CONTROLLIN G, MANAGING, INVESTING AND FINANCING COMPANIES IS NOTHING BUT IS BUSINESS/PROF ESSION/VOCATIONAL ACTIVITY. THUS, ACQUIRING AND CONTROLLING INTEREST WAS HELD TO BE A BUSINESS PURPOSE BY THE HONBLE HIGH COURT. THE ASSESSEE ALSO DISTINGU ISHED THE CASE LAWS RELIED BY AO AND STATED THAT IN THE CASE OF V I BABY AND CO .(SUPRA), THE ASSESSEE FIRM BORROWED FUNDS FROM BANKS AND ALSO TRANSFERRED SIZE ABLE AMOUNT OF MONEY TO PERSONAL ACCOUNTS OF ITS PARTNERS AND ADVANCE TO TH EIR RELATIVES OF PARTNERS AND SISTER CONCERNS AND NOT CHARGED INTEREST. HOWEVER, THE ASSESSEE HAS NOT GIVEN ADVANCES TO PARTNERS( OR DIRECTORS) OR TO RELATIVE S. THE ASSESSEE HAS INFUSED MONEY IN THE SAME LINE OF BUSINESS, BUT IN A FOREI GN COUNTRY, THROUGH THE MEDIUM OF ITS FOREIGN SUBSIDIARY. THE ASSESSEE HAS ALSO DISTINGUISHED THE CASE LAW OF CIT V/S ORISSA CEMENT LTD (258 ITR365), AND R. DAL MIA V/S CIT (133 ITR 169) (DEL) RELIED ON BY AO AND WHEREIN IT WAS HELD THAT THE ONUS IS ON THE ASSESSEE TO PROVE THAT THE ADVANCES INTERALIA TO ITS SUBSIDIARY WERE MADE FROM NON-INTEREST BEARING FUNDS. 8. LD. CIT(A) CONSIDERED THE SUBMISSIONS OF ASSESSE E VIDE PARAS 2.4 TO 2.6 OF THE IMPUGNED ORDER AND HAS DELETED THE DISALLOWANCE OF INTEREST EXPENSES MADE BY THE AO. THE SAID PARAS 2.4 TO 2.7 OF THE ORDER OF LD. CIT(A ) READ AS UNDER : 2.4 I HAVE CAREFULLY CONSIDERED THE ABOVE ARGUM ENTS OF THE APPELLANT AS WELL AS THE FACTS OF THE CASE. I AGREE WITH THE ARGUMENT S OF THE APPELLANT THAT THE INTEREST EXPENDITURE HAS BEEN INCURRED OUT OF COMME RCIAL EXPEDIENCY. APPELLANT'S INVESTMENT IN SHARES OF E-CAPITAL SOLUTION WAS MADE THROUGH SHARE SWAP AND NOT IN CASH. THIS FACT IS EVIDENT FROM THE RBI APPROVAL WHICH WAS PRODUCED DURING THE COURSE OF HEARING BY THE APPELLANT. THEREFORE, IN MY VIEW THE QUESTION OF USING THE BORROWED FUNDS FOR THIS ACQUISITION DOES NOT ARISE. HENCE THE PRESUMPTION OF THE AO IS BASED ONLY ON CONJUNCTURE AND SURMISES. THEREFORE, NO ADDITION IS CALLED FOR IN RESPECT OF THIS INVESTMEN T. I.T.A. NO.4855/MUM/2009 7 2.5 FOR INVESTMENT IN SHARES IN APPLISOFT INC. (U SA), THE APPELLANT HAS SUBMITTED THAT PARTLY , BORROWED FUNDS COULD HAVE B EEN UTILIZED. HOWEVER, SINCE APPLISOFT INC (USA) IS INTO SIMILAR BUSINESS AS THA T OF THE APPELLANT (THIS FACT IS STATED TO BE EVIDENT FROM THE APPLICATION MADE TO T HE RBI FOR ACQUISITION OF APPLISOFT INC. (USA)), THE ACQUISITION OF SHARES IN A SUBSIDIARY ENGAGED IN SAME BUSINESS CANNOT BE SAID TO BE FOR A NON BUSINESS PU RPOSE. THE APPELLANT HAS IN THIS REGARD PLACED RELIANCE ON: A) RAJEEVA LOCHAN KANORIA ( 208 ITR 616) B) SRISHTI SECURITIES V/S JCIT (152 TAXMAN 40). ITAT ( MUM). LATER CONFIRMED BY BOMBAY HIGH COURT IN 2009-TIOL-178-HC -MUM-IT VIDE ORDER DATED 22/01/2009. 2.6 IN ABOVE CASES, IT HAS BEEN HELD THAT INTEREST PAID ON BORROWINGS FOR INVESTING IN SHARES OF COMPANIES EITHER AS STOCK I N TRADE OR FOR ACQUIRING CONTROLLING STAKE IS ALLOWABLE U/S 36(1)(III). FURT HERMORE, INTEREST EXPENDITURE IS ALLOWABLE IN VIEW OF THE JUDGMENT OF THE HON 'BLE A PEX COURT IN CASE OF S.A BUILDERS (SUPRA) CITED BY THE APPELLANT. THE APPELL ANT'S APPLICATION TO RBI FOR ACQUISITION OF APPLISOFTS SHARES DEMONSTRATES THAT THE APPELLANT EXPECTED A SUBSTANTIAL BUSINESS FROM APPLISOFT ON ACCOUNT OF T ECHNICAL SERVICES/ CONSULTANCY FEES IN NEXT 5 YEARS. THIS CONCLUSIVELY PROVES TH E 'BUSINESS PURPOSE' OF THE INVESTMENT BEING MADE IN THE SAID COMPANY. I AGREE THAT THE CASE LAWS RELIED UPON BY THE A.O. ARE DISTINGUISHABLE ON FACTS FROM THE CASE OF THE APPELLANT. IN CASE OF V.I BABY AND OTHERS (SUPRA) CITED BY THE AO , THE LOANS WERE ADVANCED TO PARTNERS AND RELATIVES OF THE FIRM AS WELL AS SISTE R CONCERNS INTEREST FREE AND NO COMMERCIAL EXPEDIENCY COULD BE PROVED. THE FACTS OF OTHER JUDGMENTS RELIED UPON BY THE AO ARE ALSO DIFFERENT. THE RECENT DECIS ION OF THE APEX COURT IN S.A. BUILDERS' CASE CLINCHES THE ISSUE IN FAVOUR OF THE APPELLANT. IN VIEW OF THE ABOVE DISCUSSION DISALLOWANCE OF INTEREST EXPENDITURE MAD E BY THE AO IS DELETED HENCE, THE DEPARTMENT IS IN APPEAL BEFORE THE TRIB UNAL. 9. LD. DR WHILE SUPPORTING THE ORDER OF THE AO SUB MITTED THAT ASSESSEE STATED THAT ADVANCES WERE GIVEN FOR THE PURPOSE OF BUSINES S BUT NO DETAILS WERE FILED THAT BORROWED FUNDS WERE UTILIZED FOR BUSINESS PURPOSE. HE SUBMITTED THAT THE ASSESSING OFFICER HAS STATED THAT THE ASSESSEES OWN FUNDS WE RE WIPED OUT DUE TO ACCUMULATED LOSSES. HE SUBMITTED THAT IT IS NOT CLEAR AS TO HOW THE INVESTMENT MADE BY THE ASSESSEE IN SUBSIDIARIES ARE FOR BUSINESS PURPOSES. HE SUBMITTED THAT AO HAS RIGHTLY MADE DISALLOWANCE OF INTEREST OF BORROWED FUNDS. ON THE OTHER HAND, LD. AR SUPPORTED THE ORDER OF THE LD. CIT(A) BY STATING FACTS AS STA TED BEFORE HIM. HE SUBMITTED THAT THE INVESTMENT IN SUBSIDIARIES WERE MADE FOR COMMERCIAL CONSIDERATION AND THE SAME WERE MADE IN THE ASSESSMENT YEAR 2001-02 AND THE PRESENT YEAR IS THE FOURTH YEAR OF MAKING SUCH INVESTMENT. HE SUBMITTED THAT IN EARLIER YEA RS, THE INTEREST EXPENDITURE CLAIMED BY ASSESSEE WERE ALLOWED, EVEN IN THE ASSESSMENT M ADE U/S 143(3) OF THE ACT.. LD. AR SUBMITTED THAT SIMILAR ISSUE CAME UP BEFORE THE TRIBUNAL FOR THE ASSESSMENT YEARS I.T.A. NO.4855/MUM/2009 8 2002-03 AND 2003-04 AND THE TRIBUNAL BY ITS COMMO N ORDER DATED 28.1.2011 HELD THAT INTEREST FREE LOANS HAD TO BE ADVANCED TO THE SUBS IDIARIES FOR THEIR SURVIVAL, AS THE SURVIVAL OF THE ASSESSEE WOULD BE AT STAKE, IF THE SUBSIDIARIES FAILED. THAT THE SYNERGIES OF THE BUSINESS OPERATION OF THE ASSESSEE COMPANY A ND ITS SUBSIDIARIES WERE RE-ALIGNED AND THE FUNCTIONS OF THE VARIOUS COMPANIES WERE MAD E COMPLIMENTARY AND SUPPLEMENTARY TO EACH OTHER, SO AS TO AVOID DUPLICA TION OF INTEREST AND DERIVING MAXIMUM VALUE IN ITS OPERATION. THUS, THE TRIBUNA L ALLOWED THE CLAIM CONSIDERING THAT THE INVESTMENTS WERE MADE BY THE ASSESSEE ON ACCOUN T OF COMMERCIAL CONSIDERATION. A COPY OF THE SAID ORDER IS PLACED AT PAGES 132 TO 145 OF THE PAPER BOOK. LD. AR FURTHER SUBMITTED THAT ON SIMILAR FACTS, THE DEPAR TMENT WHILE MAKING THE ASSESSMENT HAS NOT MADE ANY DISALLOWANCE ON ACCOUNT OF INTERES T IN THE ASSESSMENT YEAR2005-06. 10. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF LD. REPRESENTATIVE OF PARTIES AND ORDERS OF AUTHORITIES BELOW. WE HAVE ALSO CO NSIDERED EARLIER ORDER OF TRIBUNAL DATED 28.1.2011 FOR ASSESSMENT YEARS 2002-03 AND 20 03-04. WE OBSERVE THAT THE AO MADE DISALLOWANCE OF INTEREST OF RS.5,74,25,564/- I N ASSESSMENT YEAR 2002-03 FOR SIMILAR REASONS AS STATED IN THE ASSESSMENT YEAR UN DER CONSIDERATION. WE OBSERVE THAT THE LD. CIT(A) CONFIRMED THE ACTION OF AO. BUT TH E TRIBUNAL IN FURTHER APPEAL AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE VIDE PA RA 11 AT PAGE 9 OF THE ORDER ALLOWED THE CLAIM OF THE ASSESSEE. IT IS RELEVANT TO STATE THAT THE TRIBUNAL HAS STATED THAT LD. CIT(A) IN THE NEXT ASSESSMENT YEAR VIZ AS SESSMENT YEAR 2003-04 HIMSELF ALLOWED THE RELIEF TO THE ASSESSEE. TRIBUNAL ALLO WED THE CLAIM OF THE ASSESSEE IN AY 2002-03 AFTER OBSERVING THAT IN CASE BUSINESS OF S UBSIDIARY IS COLLAPSED IT WILL HAVE SEVERE REPERCUSSIONS ON THE ASSESSEE COMPANY. THAT THE SYNERGIES OF THE BUSINESS OPERATION OF THE ASSESSEE COMPANY AND ITS SUBSIDIAR IES WERE RE-ALIGNED AND THE FUNCTIONS OF THE VARIOUS COMPANIES WERE MADE COMPLI MENTARY AND SUPPLEMENTARY TO EACH OTHER, SO AS TO AVOID DUPLICATION OF INTEREST AND DERIVING MAXIMUM VALUE IN ITS OPERATION. THAT EACH COMPANY IS INTER DEPENDENT ON THE OTHER. THAT THE SURVIVAL OF ASSESSEE IS ALSO AT STAKE, IF THE SUBSIDIARIES FA IL. THE TRIBUNAL ALSO OBSERVED THAT SECTION 14A OF THE ACT WOULD ALSO NOT COME IN THE WAY FOR THE REASONS THAT THE MAJORITY OF THE SUBSIDIARIES ARE FOREIGN SUBSIDIAR IES AND THE QUESTION OF SECTION 14A BEING APPLIED FOR DIVIDEND RECEIVED FROM THEM DOE S NOT ARISE. THE TRIBUNAL ALSO HELD THAT SECTION 14A AND SECTION 36(1) (III) OPERATE I N DIFFERENT FIELDS. 11. DURING THE COURSE OF HEARING, IT WAS ALSO POIN TED OUT BEFORE US THAT INVESTMENT IN SHARES IN E-CAPITAL SOLUTION WERE THROUGH SHARE SWAP AND NOT SHARES INVESTMENT I.T.A. NO.4855/MUM/2009 9 WERE MADE IN CASH. THAT THE ASSESSEE ACQUIRED SHAR ES IN E-CAPITAL SOLUTION NOT BY PAYMENT OF CASH BUT BY ISSUE OF ITS OWN SHARES TO T HE SELLERS OF THE SAID SHARES AFTER TAKING APPROVAL FROM RESERVE BANK OF INDIA. THUS , QUESTION OF USING OF BORROWED FUNDS FOR ACQUIRING SHARES IN E-CAPITAL SOLUTION D OES NOT ARISE. THE ABOVE FACTS WERE NOT DISPUTED BY THE LD. DR AT THE TIME OF HEARING. WE ALSO OBSERVE THAT THE SHARES IN APPLISOFT INC (USA) WERE ACQUIRED ON 1.1.2001 AND OUT OF US$ (USD) 9 MILLION, US$ 1.52 MILLION WAS FUNDED FROM COMPANY'S OWN EEFC A/ C AGAIN. WE OBSERVE THAT ASSESSEE STATED THAT APPLISOFT INC. (USA) IS ENGAG ED IN THE SAME BUSINESS AS THAT OF THE ASSESSEE I.E. SOFTWARE DEVELOPMENT AND SOFTWAR E RELATED CONSULTANCY SERVICES. THE SAID FACTS WERE ALSO NOT DISPUTED BY THE LD. DR A T THE TIME OF HEARING OF APPEAL. THEREFORE, WE CONSIDER MERIT IN THE CONTENTION OF LD. AR THAT OUT OF TOTAL SHARES INVESTMENT OF RS.421.6 MILLION (USD) 9 MILLION, EV EN IF BORROWED FUNDS USED FOR ACQUIRING SHARES IN ABOVE COMPANY AT RS.351 MILLION APPROXIMATELY (USD 7.48 MILLION) IT COULD NOT BE SAID THAT THE BORROWED MONEY WERE USED FOR NON-BUSINESS PURPOSE. 12. CONSIDERING THE ABOVE FACTS AND THE ORDER OF TH E TRIBUNAL FOR ASSESSMENT YEARS 2002-03 AND 2003-04 DATED 28.1.2011 (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT THERE IS NO INFIRMITY IN THE ORDER OF LD. CIT(A) IN DELET ING THE DISALLOWANCE OF INTEREST EXPENDITURE MADE BY AO. HENCE, WE UPHOLD THE ORDER OF LD. CIT(A) AND REJECT GROUND NO.1 OF APPEAL TAKEN BY THE DEPARTMENT. 13. GROUND NO.2 TAKEN BY THE DEPARTMENT IS AS UNDER : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION ON ACCOUNT OF TRANSF ER PRICING ADJUSTMENT MADE BY THE TPO WITHOUT APPRECIATING THE FACTS OF THE CASE 14. SINCE THE ASSESSEE WAS HAVING TOTAL INTERNATION AL TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES OF MORE THAN RS.5 CRORES, AO MADE REFERENCE TO TRANSFER PRICING OFFICER U/S 92CA(1) FOR COMPUTATION OF ARM S LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION U/S 92C. ASSESSEE FILED A REPORT U/S 92E IN RESPECT OF INTERNATIONAL TRANSACTION ENTERED INTO WITH THE RE LATED PARTIES/ASSOCIATED ENTERPRISES. 15. TRANSFER PRICING OFFICER VIDE HIS ORDER DATED 14.12.2006 U/S 92CA(3) OF THE ACT PROPOSED ADDITION OF RS.73,92,756/- BY CONSIDERING THAT THE TRANSACTIONAL NET MARGIN METHOD (TNMM) IS THE MOST APPROPRIATE METHOD FOR DETERMINING ALP AS AGAINST COMPARABLE UNCONTROLLED PRICE METHOD (CUP) ADOPTED BY ASSESSEE. 16. IN VIEW OF ABOVE ADJUSTMENT PROPOSED BY TPO, AO MADE ADDITION OF I.T.A. NO.4855/MUM/2009 10 RS.73,92,756/-. IT IS RELEVANT TO STATE THAT ASSES SEE FILED ITS OBJECTIONS AGAINST THE PROPOSED ADJUSTMENT BEFORE AO AND STATED THAT TPO HAS ERRONEOUSLY RESORTED TO TNMM METHOD FOR DETERMINING ALP EVEN THOUGH DIRECT COMPARABLES USING THE COMPARABLE UNCONTROLLED PRICE (CUP) METHOD WERE AVA ILABLE FOR DETERMINING ALP AND ACCORDINGLY NO ADJUSTMENT SHOULD HAVE BEEN MADE TO THE VALUE OF TRANSACTIONS. IT IS ALSO RELEVANT TO STATE THAT ASSESSEE ALSO FILED DE TAILS OF PRICE CHARGED FROM THE ASSOCIATED CONCERN, BUT WE DO NOT CONSIDER IT REL EVANT TO STATE THE SAME IN DETAIL FOR THE REASONS TO BE MENTIONED HEREINAFTER. THE ASSES SEE DISPUTED THE SAID ADDITION MADE BY AO OF RS.73,27,756/- BEFORE LD. CIT(A). 17. ON BEHALF OF ASSESSEE, IT WAS CONTENDED THAT TP O ADOPTED TNMM AND SELECTED CERTAIN COMPARABLES TO ARRIVE AT ARITHMETIC MEAN OF 9.92 % AS AGAINST CUP METHOD SELECTED BY ASSESSEE FOR DETERMINING ALP. THE SUBM ISSIONS AS MADE BY ASSESSEE BEFORE LD. CIT(A) AND THE OPERATIONAL ARRANGEMENT BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISES ARE STATED IN PARAS 3.2 TO 3.6 OF THE IMPUGNED ORDER AND LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF ASSESSE E VIDE PARA 3.8 HAS HELD THAT INTERNATIONAL TRANSACTION OF ASSESSEE WITH ITS ASSO CIATED ENTERPRISES ARE AT ALP AND ACCORDINGLY DELETED THE ADDITION MADE ON ACCOUNT O F TRANSFER PRICING ADJUSTMENT. HENCE, DEPARTMENT IS IN APPEAL BEFORE THE TRIBUNAL. 18. AT THE TIME OF HEARING, LD.DR SUBMITTED THAT A SSESSEE DID NOT FURNISH EXTERNAL CUP DATA BEFORE TPO AND THE SAME WERE FURNISHED BEF ORE LD.CIT(A). HE SUBMITTED THAT LD. CIT(A) ACCEPTED ADDITIONAL EVIDENCE WITHOUT REF ERRING TO THE TPO. HE SUBMITTED THAT INTERNATIONAL CUP DATA WERE NOT AVAILABLE AT ALL. HE FURTHER SUBMITTED THAT FOR APPLICATION OF CUP METHOD STANDARD OF COMPARABILI TY ARE STRINGENT AND SHOULD BE ACCURATE. ON THE OTHER HAND, LD. AR SUBMITTED THAT TPO IN HIS ORDER HAS NOT DISCUSSED AS TO WHY CUP METHOD IS NOT APPLICABLE THOUGH THE LD. CIT(A) HAS STATED TO APPLY CUP METHOD. HE FURTHER SUBMITTED THAT THE TPO DID NOT PROVIDE ANY DETAILS AND NAMES OF COMPARABLES TO THE ASSESSEE TO ARRIVE AT ARITHMETIC MEANS AT 9.92%. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAD ENTERED INTO THE TR ANSACTIONS WITH ASSOCIATED ENTERPRISES AS WELL AS NON ASSOCIATED ENTERPRISES AND TPO CONSIDERED THE ENTIRE SALES IN DETERMINING ALP OF THE ASSESSEE. THUS, TPO HAS M ADE COMPARISON AT ENTITY LEVEL INSTEAD OF TRANSACTIONAL LEVEL. LD. AR DURING THE COURSE OF HEARING RELIED ON THE DECISIONS OF THE MUMBAI BENCH OF TRIBUNAL IN THE CA SE OF DCIT V/S ANKIT DIAMONDS (2011) 43 SOT 523 AND DCIT V/S STARLITE (2010) 40 SOT 421 (MUM.) AND SUBMITTED THAT ALP OF INTERNATIONAL TRANSACTIONAL VALUE HAS TO BE ONLY AT TRANSACTION LEVEL OR AT A I.T.A. NO.4855/MUM/2009 11 LEVEL OF A CLASS OF TRANSACTION. THAT LAW DOES NOT PERMIT DETERMINATION OF ALP OF INTERNATIONAL TRANSACTION, BY COMPARING OPERATING MARGINS AT ENTITY LEVELS, OR BY TAKING OVERALL INDUSTRY LEVEL AVERAGES. LD. AR FURTHER S UBMITTED THAT DETAILS OF DATA TO APPLY INTERNAL CUP METHOD WERE ALSO FURNISHED TO AO AND REFERRED PAGES 81 TO 84 OF THE PAPER BOOK BUT AO DID NOT ACCEPT THE SAME. 19. IN VIEW OF ABOVE, LD. REPRESENTATIVES OF BOTH P ARTIES SUBMITTED THAT THE MATTER COULD GO BACK TO AO TO DECIDE THE ISSUE AFRESH IN CLUDING THE APPLICABILITY OF METHOD TO DETERMINE ALP. 20. CONSIDERING THE ABOVE FACTS AND SUBMISSIONS OF LD. REPRESENTATIVES OF BOTH PARTIES, WE AGREE THAT THE ISSUE REQUIRES RECONSID ERATION BY TPO AND THEREFORE MATTER BE RESTORED TO AO TO DETERMINE ALP INCLUDING APPL ICABILITY OF METHOD TO BE ADOPTED. HENCE, WE SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND RESTORE THE MATTER TO THE FILE OF AO TO DETERMINE ALP OF TRANSACTIONS OF THE ASSESSE E WITH ASSOCIATED ENTERPRISES AFRESH AFTER GIVING DUE OPPORTUNITY OF HEARING TO THE ASSE SSEE BY A REASONED ORDER AND IN ACCORDANCE WITH LAW. HENCE GROUND NO.2 OF THE APPEA L TAKEN BY DEPARTMENT IS ALLOWED FOR STATISTICAL PURPOSES. 21. IN THE RESULT, APPEAL OF DEPARTMENT IS ALLOWED IN PART FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 21ST AUG, 2013 ) 0 1 21ST AUG, 2013 ) SD/- SD/- ( . . / P.M.JAGTAP) ( . . /B.R.MITTAL) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; 1 DATED 21/ 08/2013 . . ./ SRL , SR. PS ! / COPY OF THE ORDER FORWARDED TO : 1. & / THE APPELLANT 2. '& / THE RESPONDENT. 3. 5 ( ) / THE CIT(A)- 4. 5 / CIT 5. 6 '8 , , 8 , / DR, ITAT, MUMBAI 6. / GUARD FILE. / BY ORDER, TRUE COPY (ASSTT. REGISTRAR) , 8 , /ITAT, MUMBAI