ADAMA India Pvt.Ltd., (formerly known as Makhteshim-Agan India Pvt.Ltd.,), Hyd, Hyderabad V. DCIT, Circle-1(1), Hyd, Hyderabad

ITA 497/HYD/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6275 (ITAT-HYDERABAD)
• Duration Of Justice: 9 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-01-2017
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 24-10-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 07-04-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: CATENA OF DECISIONS
• Keywords: Transfer pricing; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 271(1)(c); 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 143(3); 92; 144C; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 497/HYD/2016 ASSESSMENT YEAR: 2011-12 ADAMA INDIA PRIVATE LIMITED, (FORMERLY KNOWN AS MAKHTESHIM- AGAN INDIA PRIVATE LIMITED) HYDERABAD [PAN: AABCM8797N] VS DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI RAGHUNATHAN, S. AR FOR REVENUE : SHRI P. CHANDRA SEKHAR, DR DATE OF HEARING : 24-10-2016 DATE OF PRONOUNCEMENT : 13-01-2017 O R D E R PER D. MANMOHAN, VICE-PRESIDENT: THIS IS AN APPEAL AGAINST THE ORDER OF THE ASSESSING OFFICER U/S. 143(3) R.W.S. 144C OF THE INCOME TAX ACT [ACT] CO NSEQUENT TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL [DRP]-I, BENGALURU. THE ISSUE IN THIS APPEAL IS WITH REFERENCE TO TRANSFE R PRICING ADJUSTMENTS MADE BY THE ASSESSING OFFICER [AO]/TRANSF ER PRICING OFFICER [TPO] ON THE COMPULSORILY CONVERTIBLE DEBENTU RES (CCDS) ISSUED IN INDIAN CURRENCY. 2. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE H AS ISSUED RS. 4,62,00,000/- CCDS OF RS. 10/- EACH CONVERTIBLE INTO ONE I.T.A. NO. 497/HYD/2016 ADAMA INDIA PRIVATE LIMITED (FORMERLY KNOWN AS MAKHTESHIM-AGAN INDIA PRIVATE LI MITED) :- 2 -: EQUITY SHARE FOR EVERY DEBENTURE HELD TO CELCIUS PRO PERTY BV OF RS. 10/-. APPELLANT HAD PAID INTEREST @ 12% ON THE CC DS AMOUNTING TO RS. 5,22,64,414/-. DURING THE TRANSFER P RICING PROCEEDINGS, THE ASSESSEE BENCHMARKED THE WEIGHTED AVE RAGE RATE OF PRIME LENDING RATE (PLR) AS PER THE STATE BANK OF INDIA (SBI), WHICH WAS AT 12.26%. SINCE THE RATE OF INTEREST PAID BY IT IS LESSER THAN SBI PLR, ASSESSEE HAS MAINTAINED THAT ITS RATE OF IN TEREST PAID IS CONSISTENT WITH ARMS LENGTH STANDARD FROM THE I NDIAN TP REGULATIONS PERSPECTIVE. THE LD.TPO HOWEVER, DID NO T AGREE WITH ASSESSEES CONTENTIONS. HE HAS CONSIDERED THE CCDS AS LOAN AND BENCHMARKED THE INTEREST RATE AT LIBOR PLUS 200 BASIS P OINTS, THEREBY DETERMINING ARMS LENGTH PRICE [ALP] AT RS. 1, 29,10,335/- AND MADE AN ADJUSTMENT OF RS. 3,93,54,079/-. 3. THE AO MADE THE ABOVE ADDITION IN THE DRAFT ORDER AN D ALSO ISSUED A DEMAND NOTICE U/S. 156 RAISING A DEMAND AS WELL AS INITIATING PENALTY PROCEEDINGS. 4. ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) CO NSIDERING THAT AS A FINAL ORDER AND ALSO PREFERRED OBJECTIONS BE FORE THE DRP. SINCE THE DRP ACCEPTED THE OBJECTIONS, THE ASSESSEE WITH DREW THE APPEAL BEFORE THE LD.CIT(A). HOWEVER, THE DRP REJECT ED THE ASSESSEES CONTENTIONS WITH REFERENCE TO THE TP ADJUSTM ENT MADE. ON THE OBJECTION THAT THE ASSESSMENT ORDER PASSED U/S. 1 43(3) R.W.S. 92CA(3) DT. 19-03-2015 WAS INVALID, THE DRP H OWEVER, CONSIDERED THAT IT IS A MISTAKE COMMITTED BY THE AO IN ISS UING A NOTICE U/S. 156 BUT SINCE THE ORDER ON THE FACE OF IT C LEARLY STATED AS DRAFT ASSESSMENT ORDER, THE DRP REJECTED THE OBJECTIO NS. IT CONFIRMED THE TP ADJUSTMENTS MADE BY THE TPO REJECTING THE I.T.A. NO. 497/HYD/2016 ADAMA INDIA PRIVATE LIMITED (FORMERLY KNOWN AS MAKHTESHIM-AGAN INDIA PRIVATE LI MITED) :- 3 -: ASSESSEES DETAILED CONTENTIONS. HENCE THE PRESENT APPE AL. ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1 THE LEARNED ASSESSING OFFICER ('AO') ERRED IN P ASSING A FINAL ASSESSMENT ORDER UNDER SECTION 143(3) R.W.S 92CA(3) OF THE INCOME-TAX ACT, 1961 ('ACT') DATED 19 MARCH 2015 WITHOUT PASSI NG A DRAFT ASSESSMENT ORDER UNDER SECTION 144C OF THE ACT AND THE LEARNED DISPUTE RESOLUTION PANEL ('DRP') ERRED IN UPHOLDING THE SAID ORDER. 2 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ASSESSMENT ORDER PASSED BY THE LD.AO DATED 19TH MARCH 2015 IS CONTRARY TO LAW AND IS LIABLE TO BE SET ASIDE. WITHOUT PREJUDICE TO GROUND NO. 1 AND 2, THE APPELL ANT RAISES THE FOLLOWING GROUNDS OF APPEAL: 3 ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN CONTRARY TO LAW, THE LEARNED TRANSFER PRICING OFFICER ('TPO')/LD. AO HAS ERRED IN GOING BEYOND THE SCOPE TO RE-CHARACTERIZE THE COMPULSORY CONVERT IBLE DEBENTURES ('CCD') AS LOAN FOR BENCHMARKING THE INTERNATIONAL TRANSACT ION OF INTEREST PAYMENTS ON CCD AND THE HON'BLE DRP HAS FURTHER ERR ED IN UPHOLDING THE ACTION OF LD. TPO/LD. AO. 4 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN CONTRARY TO LAW, THE LD. TPO/LD. AO ERRED AND SUBSEQUENTLY HON'BLE D RP FURTHER ERRED IN UPHOLDING THE ACTION OF LD. TPO/LD. AO BY NOT APPRE CIATING THE FACT THAT CCDS ARE CONSUMED IN INDIA AND INTEREST ON CCDS SHO ULD BE BENCHMARKED USING STATE BANK OF INDIA ('SBI') PRIME LENDING RATE ('PLR') RATHER THAN LONDON INTER-BANK OFFERED RATE ('LIBOR' ) RATE. 5 THE LD.TPO/LD.AO ERRED AND SUBSEQUENTLY DRP FURTH ER ERRED IN UPHOLDING THE ACTION OF LD.TPO/LD.AO IN CONSIDERING LIBOR PLUS 200 BASIS POINTS I.E. 2.91 %, S AN ARM'S LENGTH INTERES T ON CCD ON AD HOC BASIS WHICH IS COMPLETE VIOLATION OF TRANSFER PRICING PRO VISIONS AND AGAINST THE PRINCIPLES OF LAW. 6 THE LD.TPO/LD.AO ERRED ON FACTS AND IN LAW IN DIS REGARDING THE INDEPENDENT ALTERNATIVE ANALYSIS CARRIED OUT BY THE APPELLANT BASED ON THE DATA AVAILABLE FROM PUBLIC DATABASE I.E., NSDL WEBSITE; AND SUBSEQUENTLY DRP FURTHER ERRED IN NOT PROVIDING ANY DIRECTIONS / FINDINGS BY COMPLETELY IGNORING THE INDEPENDENT ANALYSIS UND ERTAKEN BY THE APPELLANT IN THIS REGARD. 7 THE LD. AO HAS ERRED IN INITIATING PENALTY PROCEE DINGS UNDER SECTION 271(1)(C) OF THE INCOME TAX ACT, 1961. I.T.A. NO. 497/HYD/2016 ADAMA INDIA PRIVATE LIMITED (FORMERLY KNOWN AS MAKHTESHIM-AGAN INDIA PRIVATE LI MITED) :- 4 -: 5. LD. COUNSEL MADE DETAILED SUBMISSIONS WITH REFERE NCE TO THE ORDER DT. 19-03-2015 AND THE FINAL ORDER PASSED BY TH E AO DT. 27-01-2016 TO SUBMIT THAT ISSUANCE OF NOTICE AND INI TIATION OF PENALTY PROCEEDINGS INDICATE THAT THE ORDER WAS A FINAL ORDER AND, THEREFORE THE SUBSEQUENT PROCEEDINGS ARE BAD IN LAW. WHEN IT WAS POINTED OUT THAT ASSESSEE WITHDREW THE APPEAL BEFORE THE C IT(A) AND ACCEPTED THE OBJECTIONS BEFORE THE DRP, LD. COUNSE L FAIRLY ADMITTED THAT ASSESSEE WITHDREW THE APPEAL. HOWEVER, COU NSEL RELIED UPON THE FOLLOWING CASE LAW IN SUPPORT OF THE STAND THAT THE AO WAS NOT JUSTIFIED IN TREATING THE DRAFT ASSESSMENT ORDE R AS A FINAL ORDER AND SUCH A COURSE OF ACTION IS NOT A CURA BLE IRREGULARITY; THEREFORE, THE DRAFT ASSESSMENT ORDER SHOULD BE TREATED AS BAD IN LAW: I. VIJAY TELEVISION (P) LTD., WP NOS. 1526 & 1527 OF 2014 [369 ITR 113] (MADRAS); II. LIONBRIDGE TECHNOLOGIES PVT. LTD., ITA NO. 1041/MUM/2 015 [62 TAXMANN.COM 48] (MUMBAI-TRIB); III. ZUARI CEMENT LTD., [WP NO. 5557 OF 2012] (AP HIGH CO URT) ASSESSEE SUBMITS THAT IT IS A LEGAL ISSUE AND IT CAN BE TAKEN AT ANY STAGE EVEN THOUGH THE ISSUE IS NOT PRESSED BEFORE THE CI T(A). AT THE SAME TIME, HE URGED THAT THE ISSUE ARISING OUT OF GRO UND NOS. 3 TO 6 IS COVERED IN FAVOUR OF THE ASSESSEE BY CATENA OF DECISIONS AND IF A DECISION IS TAKEN IN FAVOUR OF THE ASSESSEE, HE MAY NOT BE INTERESTED IN PRESSING GROUND NOS. 1 & 2. WE THEREFO RE PROCEED TO TAKE UP GROUND NOS. 3 TO 6. I.T.A. NO. 497/HYD/2016 ADAMA INDIA PRIVATE LIMITED (FORMERLY KNOWN AS MAKHTESHIM-AGAN INDIA PRIVATE LI MITED) :- 5 -: GROUND NOS. 3 TO 6 : 6. IT WAS THE SUBMISSION OF THE LD. COUNSEL THAT ASSESS EE HAS ISSUED THE CCDS TO THE AE WHICH WERE WRONGLY CATEGORIS ED AS LOAN BY THE TPO. REFERRING TO THE MINISTRY OF COMMERCE AND INDUSTRY, GOVT. OF INDIA, FDI POLICY CIRCULAR OF 2014, IT WAS S UBMITTED THAT CCDS ARE NOT LOANS AND SHOULD BE RECKONED AS CAPITAL INSTRUMENTS. HE FURTHER RELIED ON THE JUDGMENT OF THE H ON'BLE SUPREME COURT IN THE CASE OF SAHARA INDIA REAL ESTATE CORPORATION LIMITED AND SAHARA HOUSING INVESTMENT CORPORATION LIMI TED & ORS. VS. SECURITIES AND EXCHANGE BOARD OF INDIA & AN R. IN CIVIL APPEAL NO. 9813 OF 2011 DT. 31-08-2012 TO SUBMIT THAT HON'BLE SUPREME COURT HAS CATEGORISED THE CCDS AS HYBRID INSTR UMENTS AND DRP WAS WRONG IN REJECTING THE PRINCIPLES LAID DO WN BY THE HON'BLE SUPREME COURT. IT WAS FURTHER SUBMITTED THAT TPO HAS GONE BEYOND THE SCOPE TO RE-CHARACTERISE THE CCD AS LO AN IGNORING THE PRINCIPLES LAID DOWN BY THE HON'BLE DELHI HIGH CO URT IN THE CASE OF COTTON NATURALS INDIA PVT. LTD., [276 CTR 445] AND ALSO THE PRINCIPLES LAID DOWN BY THE HON'BLE HIGH COURT OF DEL HI IN THE CASE OF EKL APPLIANCES LTD., [345 ITR 241]. IT WAS ALSO S UBMITTED THAT TPO HAS NO POWER TO RE-CHARACTERISE THE TRANSACTION AS LAID DOWN BY THE CO-ORDINATE BENCH AT AHMADABAD IN THE CASE OF SUN PHARMACEUTICALS IND. LTD., IN ITA NO. 1589 & 1592/AHD /2011. IT WAS FURTHER SUBMITTED THAT TPO ALSO ERRED IN BENCHMARKI NG THE TRANSACTION WITH REFERENCE TO LIBOR PLUS WHEN BOTH TPO A S WELL AS DRP ACCEPTED THAT THE LOANS WERE GIVEN IN INDIAN RUPEE S. ACCORDINGLY, SBIS PLR RATE SHOULD HAVE BEEN BENCHM ARKED RATHER THAN LIBOR PLUS. LD. COUNSEL RELIED ON THE PRINCIPLE S LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. TATA AUTOCOMP SYSTEMS LTD., ITA NO. 1320 OF 2012 (374 ITR 5 16) I.T.A. NO. 497/HYD/2016 ADAMA INDIA PRIVATE LIMITED (FORMERLY KNOWN AS MAKHTESHIM-AGAN INDIA PRIVATE LI MITED) :- 6 -: (BOMBAY) TO SUBMIT THAT RATE OF INTEREST SHOULD BE DETERMINED BASED ON THE COUNTRY WHERE THE AMOUNT/LOAN IS RECEIVED/CONSUMED. LD. COUNSEL PLACED ON RECORD THE COMPARISON OF FACTS BETWEEN ASSESSEES CASE AND THE ABOVE REFERR ED CIT VS. TATA AUTOCOMP SYSTEMS LTD., ITA NO. 1320 OF 2012 (374 ITR 516) (BOMBAY). REFERRING TO THE DECISION OF THE CO-ORDINATE BENCH, MUMBAI IN THE CASE OF INDIA DEBT MANAGEMENT PVT. LTD., I N IT(TP)A NO. 7518/MUM/2014 DT. 10-03-2016 [69 TAXMANN.COM 125] , IT WAS SUBMITTED THAT ARMS LENGTH RATE SHOULD BE BASED ON INDIAN RUPEES IN WHICH DENOMINATION CCDS HAVE BEEN ISSUED A ND WERE UTILISED. 7. LD. DR, HOWEVER, SUBMITTED THAT DRP HAS ANALYSED THE ISSUES AND HAS ADOPTED THE LIBOR PLUS TWO HUNDRED BAS IS POINTS AS AN ALP AND RELIED ON THE ORDERS OF TPO/DRP. 8. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE RIVA L CONTENTIONS. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT THE CCDS WERE ISSUED IN INDIAN RUPEES. ACCORDINGLY, FO LLOWING THE PRINCIPLES LAID DOWN BY THE CO-ORDINATE BENCHES AND THE HON'BLE HIGH COURT AS RELIED ON BY THE ASSESSEE IN THE SUBMISS IONS, WE HAVE TO HOLD THAT TPO HAS WRONGLY TREATED THE ISSUANCE OF CCDS AS A LOAN, BY TREATING IT AS AN EXTERNAL COMMERCIAL BORROW ING, IGNORING THE FACT THAT LOAN IS A DEBT, WHEREAS CCD IS HYBRID INST RUMENT IN NATURE BASICALLY CATEGORISED AS EQUITY IN NATURE. IT WAS ACCEPTED BY THE HON'BLE SUPREME COURT IN THE CASE OF SAHARA INDIA REAL ESTATE CORPORATION LIMITED AND SAHARA HOUSING INVESTMENT CORPO RATION LIMITED & ORS. VS. SECURITIES AND EXCHANGE BOARD OF I NDIA & ANR. IN CIVIL APPEAL NO. 9813 OF 2011 DT. 31-08-2012 (SUP RA) WHILE I.T.A. NO. 497/HYD/2016 ADAMA INDIA PRIVATE LIMITED (FORMERLY KNOWN AS MAKHTESHIM-AGAN INDIA PRIVATE LI MITED) :- 7 -: ASSIGNING THE JURISDICTION TO SEBI AS AN EQUITY INSTRU MENT. FURTHER, THE POLICY OF GOVT. OF INDIA AND ALSO RBI EFF ECTIVE FROM 01- 04-2010 ALSO INDICATE THAT ISSUANCE OF CCD IS PART OF F DI BEING QUASI-EQUITY IN NATURE AND CONSIDERING THE SAME AS A LOAN WOULD BE COMPLETELY AGAINST REGULATIONS LAID BY DIPB, RBI A ND FEMA. IT IS TO BE REITERATED THAT ISSUANCE OF CCDS WAS DENOMIN ATED IN INDIAN RUPEES AND NOT FOREIGN CURRENCY. THEREFORE, TPO HAS ERRED IN CONSIDERING LIBOR AS BENCHMARK RATE WHICH IS IN COMPLETE CONTRADICTION TO THE PRINCIPLES ON THE ISSUE. THE FOL LOWING JUDICIAL PRECEDENTS SUPPORTS THAT THE RATE INTEREST HAS TO BE CONS IDERED IN THE CURRENCY IN WHICH LOAN HAS ORIGINATED: I. INDIA DEBT MANAGEMENT PVT. LTD., IT(TP)A NO. 7518/MUM/2014; II. CIT VS. COTTON NATURALS (I) LTD., ITA NO. 233/2014 (DE L.HC); III. M/S. BRAHMA CENTER DEVELOPMENT PVT. LTD., VS. ITO, ITA NO. 373/DEL/2016 (ITAT DEL). BY RESPECTFULLY FOLLOWING THE CO-ORDINATE BENCH AND HO NBLE HIGH COURT DECISIONS, WE AGREE WITH THE ASSESSEES CONTENTIO NS THAT THE CCDS CANNOT BE CATEGORISED AS A LOAN AND LIBOR PLUS T WO HUNDRED BASIS POINTS BENCHMARK CANNOT BE ACCEPTED ON THE FACTS OF THE CASE. 9. COMING TO THE ISSUE OF ADOPTING THE BENCHMARK RATE IN INDIAN CONTEXT, ASSESSEE HAS JUSTIFIED THE ALP NOT ONLY ON THE BASIS OF SBI PLR, WHICH WAS AT 12.26% FOR THE YEAR UNDER CONSIDERA TION, BUT ALSO FROM THE DATA FROM NSDL WEBSITE IN WHICH AVERAG E COUPON RATE RANGED FROM 0.50% TO 16.50% WITH AN ARITHMETIC MEAN OF I.T.A. NO. 497/HYD/2016 ADAMA INDIA PRIVATE LIMITED (FORMERLY KNOWN AS MAKHTESHIM-AGAN INDIA PRIVATE LI MITED) :- 8 -: 12.50%. THESE RATES WERE ALREADY BEFORE THE TPO. T HEREFORE, WE ARE OF THE OPINION THAT THERE IS NO NEED TO RESTORE THE M ATTER TO THE FILE OF THE AO FOR RE-EXAMINATION, WHEN ASSESSEE HAS JUSTIFIED THE ISSUANCE OF CCDS AT 12%. IN VIEW OF THAT WE ARE OF THE OPINION THAT THE RATE AT WHICH THE CCDS WERE GIVEN ARE WITHIN THE RANGE, THEREFORE, NO FURTHER ADDITION CAN BE CONSIDERED UNDER THE TP PROVISIONS. IN VIEW OF THAT, THE ADDITION SO MADE IS D ELETED AND GROUNDS OF THE ASSESSEE FROM 4 TO 6 ARE ACCORDINGLY CONSIDERED ALLOWED. SINCE THE ADDITION IS DELETED, WE DO NOT W ISH TO CONSIDER GROUND NOS. 1 & 2 AS HAS ALREADY BEEN INDICATED ABOV E. 10. GROUND NO. 7 IS WITH REFERENCE TO INITIATION OF P ROCEEDINGS U/S. 271(1)(C). AO HAS ONLY INITIATED THE PROCEEDING S BUT HAS NOT FINALISED THE PENALTY AS SUCH. THEREFORE, THERE IS N O NEED TO ADJUDICATE THE SAME AT THIS POINT OF TIME. THIS GROUND IS ACCORDINGLY REJECTED. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH JANUARY, 2017 SD/- SD/- (B. RAMAKOTAIAH) (D. MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT HYDERABAD, DATED 13 TH JANUARY, 2017 TNMM I.T.A. NO. 497/HYD/2016 ADAMA INDIA PRIVATE LIMITED (FORMERLY KNOWN AS MAKHTESHIM-AGAN INDIA PRIVATE LI MITED) :- 9 -: COPY TO : 1. ADAMA INDIA PRIVATE LIMITED, (FORMERLY KNOWN AS MAKHTESHIM-AGAN INDIA PRIVATE LIMITED) D.S-13, IKP KNOWLEDGE PARK, SY. NO. 542/2, GENOME VALLEY, TURKAPALLY, SHAMIRPET, HYDERABAD. 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1( 1), HYDERABAD. 3. DISPUTE RESOLUTION PANEL (DRP), HYDERABAD. 4. DIRECTOR OF INCOME TAX (IT & TP), HYDERABAD. 5. ADDL. COMMISSIONER OF INCOME TAX (TRANSFER PRICI NG), HYDERABAD. 6. D.R. ITAT, HYDERABAD. 7. GUARD FILE.