ITO 3(2)(2), MUMBAI V. MILLENNIUM APPLIANCES INDIA LTD, MUMBAI

ITA 5149/MUM/2015

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 0739 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-01-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 30-10-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMAR KUMARDR
• Assessee Lawyers: MAYANK CHAUHAN
• Keywords: Transfer pricing; Earning of tax free income; Date of conversion; Validity of assessment; Notional interest
• Section: 143(3); 153A; 14A; 132; 11

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, B MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO.5149/MUM/2015 ASSESSMENT YEAR: 2011-12 INCOME TAX OFFICER-3(2)(2), ROOM NO.673, 6 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400020 / VS. M/S MILLENIUM APPLIANCES INDIA LTD. 171-C, MITTAL COURT, NARIMAN POINT, MUMBAI-400021 ( / REVENUE) ( !'# $ /ASSESSEE) PAN. NO.AACCM7838D % & $ ' / DATE OF HEARING : 18/01/2018 & $ ' / DATE OF ORDER: 18/01/2018 ! / REVENUE BY SHRI SUMAR KUMAR-DR !'# $ ! / ASSESSEE BY SHRI MAYANK CHAUHAN ITA NO.5149 /MUM/2015 M/S MILLENIUM APPLIANCES INDIA LTD. 2 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THE REVENUE IS AGGRIEVED BY THE IMPUGNED ORDER DATED 28/08/2015 OF THE FIRST APPELLATE AUTHORITY, MUMBAI, DELETING THE DISALLOWANCE OF EXPENSES U/S 1 4A OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT). 2. DURING HEARING, THE LD. COUNSEL FOR THE ASSESSE E, SHRI MAYANK CHOUHAN EXPLAINED THAT NO EXEMPT INCOME WAS EARNED BY THE ASSESSEE DURING THE RELEVANT YEAR AND OWN FUNDS ARE MORE THAN THE INVESTMENT MADE BY THE ASSESSEE. IT WAS CONTENDED THAT THE OWN FUNDS AVAIL ABLE WITH THE ASSESSEE ARE TO THE TUNE OF RS.55.90 CRORE S, WHEREAS, THE STRATEGIC INVESTMENT WAS MADE OF RS.37 CRORES IN THE GROUP COMPANIES, THEREFORE, NO DISALLOWANCE WAS REQUIRED TO BE MADE. MR. SUMAN KUMAR, LD. DR, THOUG H DEFENDED THE DISALLOWANCE BUT DID NOT CONTROVERT TH E ASSERTIONS OF THE ASSESSEE WITH ANY POSITIVE MATERI AL BUT MERELY RELIED UPON THE DECISION IN THE CASE OF BABA GLOBAL LTD. VS DCIT (ITA NO.1086 TO 1091/DEL./2015) ORDER DATED 05/05/2016. ITA NO.5149 /MUM/2015 M/S MILLENIUM APPLIANCES INDIA LTD. 3 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE LD. D R MAINLY RELIED UPON THE DECISION FROM DELHI BENCH OF THE TR IBUNAL IN THE CASE OF BABA GLOBAL LTD. (SUPRA), THEREFORE, BEFORE COMING TO ANY CONCLUSION, WE ARE REPRODUCING HEREUN DER THE RELEVANT PORTION OF THIS ORDER FOR READY REFERE NCE AND ANALYSIS:- THESE ARE SIX APPEALS FILED BY THE ASSESSEE AGAINS T THE ACTION OF THE LEARNED DRP UPHOLDING THE ORDER PASSED BY THE AO UN DER SECTION 153A READ WITH SECTION 144C OF THE ACT FOR ASSESSMENT YE ARS 2006-07 TO 2010- 11 AND UNDER SECTION 143(3) FOR ASSESSMENT YEAR 201 1-12 CONSEQUENT TO THE DIRECTION ISSUED BY THE LEARNED DISPUTE RESOLUT ION PANEL. 2. IN THE APPEAL FILED FOR ASSESSMENT YEARS, 2006-0 7, 2007-08 AND 2008- 09, BESIDES QUESTIONING THE VALIDITY OF ASSESSMENT FRAMED UNDER SECTION 153A OF THE INCOME-TAX ACT, 1961, THE ONLY ISSUE IS THE ADDITION OF AMOUNT OF THE NOTIONAL INTEREST ON FOREIGN CURRENCY LOAN A DVANCED BY THE ASSESSEE COMPANY TO ITS WHOLLY OWNED FOREIGN SUBSID IARIES. WHEREAS FOR ASSESSMENT YEARS 2009-10 TO 2011-12, BESIDES THE AB OVE ADJUSTMENT ON ACCOUNT OF THE NOTIONAL INTEREST, THE ISSUE ALSO IS THAT OF ADDITION UNDER SECTION 14A OF THE INCOME TAX ACT. 3. THE ASSESSEE COMPANY IS ENGAGED IN MANUFACTURING OF FLAVOURED CHEWING TOBACCO, KIWAM, SCENTED ELAICHI, ETC. UNDER THE BRAND NAME BABA AND TULSI AND EXPORTED ITS 100% OF PRODUCT ION DURING THE YEARS UNDER CONSIDERATION. 4. THE ORIGINAL ASSESSMENTS UNDER SECTION 143(3) WE RE COMPLETED IN RESPECT OF ASSESSMENT YEARS 2006-07, 2007-08 AND 20 08-09. THEREAFTER A SEARCH TOOK PLACE ON 21ST JANUARY, 2011. ITA NO.5149 /MUM/2015 M/S MILLENIUM APPLIANCES INDIA LTD. 4 5. THE AO THEREAFTER TOOK UP THE ASSESSMENT BY ISSU ING NOTICE UNDER SECTION 153A. DURING THE COURSE OF THE ASSESSMENT T HE AO REFERRED THE MATTER TO THE TRANSFER PRICING OFFICER. THE LEARNED TPO NOTED THAT THE ASSESSEE COMPANY HAS EXTENDED LOANS TO ITS SUBSIDIA RY COMPANIES AND HELD THAT THE ASSESSEE OUGHT TO HAVE CHARGED INTERE ST IN RESPECT OF SUCH LOANS AND ACCORDINGLY THE TPO RECOMMEND THAT INTERE ST AS PER THE PRIME LENDING RATE OF STATE BANK OF INDIA BE ADDED AS INC OME ON ACCOUNT OF ADJUSTMENT OF ARMS LENGTH PRICE. THEREAFTER THE AO PASSED THE DRAFT ASSESSMENT ORDER MAKING ADDITIONS AS RECOMMENDED BY THE TPO. 6. AGGRIEVED BY THE ORDER OF THE TPO, THE ASSESSEE FILED OBJECTION BEFORE THE DISPUTE RESOLUTION PANEL. IT WAS CONTENDED BY T HE ASSESSEE THAT SINCE THE MONEY GIVEN AS LOAN TO ITS SUBSIDIARY COM PANIES WAS OWN MONEY AND HENCE NO ADJUSTMENT IS REQUIRED TO BE MAD E. IT WAS FURTHER SUBMITTED THAT THE RATE OF INTEREST CHARGED CANNOT BE THE PRIME LENDING RATE OF STATE BANK OF INDIA. THIS MONEY HAS BEEN AD VANCED IN FOREIGN CURRENCY AND AS SUCH INTEREST IS TO BE CHARGED AS P ER THE INTEREST RATE IN FOREIGN CURRENCY I.E. LIBOR. 7. THE LEARNED DRP DID NOT AGREE WITH THE CONTENTIO N OF THE ASSESSEE. HOWEVER, IT GAVE A PART RELIEF BY HOLDING THAT THE INTEREST RATE BE CHARGED BE ONLY BASE RATE AND FURTHER ADJUSTED BY 150 BASIS POINT IN TERMS OF SAFE HARBOUR RULES. ON THE ISSUE OF ADDITION UNDER SECTI ON 14A, THE LEARNED DRP CONFIRMED THE ACTION OF THE AO. 8. AGGRIEVED BY THE ORDER OF THE LEARNED DRP AND TH E FINAL ASSESSMENT ORDER PASSED BY THE AO THE ASSESSEE IS IN APPEAL BE FORE US. 9. IT WAS CONTENDED BY THE LEARNED AR THAT THE AO WAS NOT JUSTIFIED IN TINKERING WITH THE ASSESSMENT FOR ASSESSMENT YEARS 2006-07 TO 2008-09 AS THESE ASSESSMENTS HAVE NOT ABATED CONSEQUENT TO THE SEARCH. THE SEARCH HAS TAKEN PLACE ON 21ST JANUARY, 2011. NO IN CRIMINATING MATERIAL WAS FOUND DURING THE COURSE OF THE SEARCH AS IS EVI DENT FROM THE ASSESSMENT ORDER. IT WAS CONTENDED THAT IN THE ABSE NCE OF ANY INCRIMINATING MATERIAL, THE AO SHOULD NOT HAVE MADE AN ADDITION. IN SUPPORT THEREOF THE LEARNED AR RELIED UPON THE ORDE R OF THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE CIT (CENTRAL) III VE RSUS KABUL CHAWLA [2016] 380 ITR 573 (DEL). ITA NO.5149 /MUM/2015 M/S MILLENIUM APPLIANCES INDIA LTD. 5 10. ON THE ISSUE OF THE MERIT, IT WAS CONTENDED BY THE LEARNED AR THAT THE ADDITIONS ARE UNTENABLE AS THE ASSESSEE HAS PAID TH E ADVANCES TO ITS SUBSIDIARY COMPANIES OUT OF EEFC ACCOUNTS. THE EEFC ACCOUNT EVEN OTHERWISE DOES NOT EARN ANY INTEREST. THE ADVANCES GIVEN TO THE SUBSIDIARY COMPANIES WERE IN THE NATURE OF QUASI CA PITAL AND WERE FOR BUSINESS CONSIDERATION. THE MAIN PURPOSE OF GIVING ADVANCES TO ITS SUBSIDIARY COMPANIES WAS TO PROMOTE ITS EXPORT BUSI NESS AND TO HAVE FOOTHOLD IN THESE FOREIGN COUNTRIES. 11. IN THE ALTERNATIVE, IT WAS CONTENDED BY THE LEA RNED AR THAT THE RATE OF INTEREST CANNOT BE THAT OF THE INDIAN RUPEES. THE M ONEY HAS BEEN ADVANCED IN FOREIGN CURRENCY AND INTEREST RATE TO B E CHARGED HAS TO BE THE INTEREST RATE OF SUCH FOREIGN CURRENCY. IF THE MONE Y HAS BEEN ADVANCED IN US DOLLAR IT HAS TO BE LIBOR. IN RESPECT OF ADVANCE S IN EURO THE INTEREST RATE HAS TO BE EUR (LIBOR) AND IN RESPECT OF ADVANC ES GIVEN IN SWISS FRANC THE INTEREST RATE HAS TO BE THAT OF CHF (LIBO R). IN SUPPORT OF ITS CONTENTION THE LEARNED AR RELIED UPON THE JUDGMENT OF THE COORDINATE BENCH OF THE ITAT IN THE CASE OF COTTON NATURAL IND IA PVT. LTD. VS. DCIT, CIRCLE 3(1), NEW DELHI 142 ITD (DEL) 662 WHICH HAS ALSO BEEN CONFIRMED BY THE JURISDICTIONAL DELHI HIGH COURT. THE LEARNED AR ALSO RELIED UPON THE FOLLOWING JUDGMENTS OF THE ITAT:- (I) SIVA INDUSTRIES & HOLDINGS LIMITED VS ACIT (20 11) 59 DTR 0182 (II) TATA AUTOCOMP SYSTEMS LIMITED VS ACIT (2012) 7 3 DTR 0220 (III) FOUR SOFT LTD. VS DCIT (2014) 106 DTR 0137(HY D) (IV) AURIONPRO SOLUTIONS LIMITED 12. IT WAS FURTHER CONTENDED THAT THE AMOUNT OF LOA N OUTSTANDING TO ITS SUBSIDIARY COMPANIES HAS BEEN CONVERTED INTO SHARE APPLICATION MONEY IN THE ASSESSMENT YEAR 2011-12. THE SAID LOAN HAVING B ECOME SHARE APPLICATION MONEY, THE TPO CANNOT CHANGE THE CHARAC TERISTIC OF THE TRANSACTION SO AS TO TREAT THE SHARE APPLICATION AS LOAN MONEY SO AS TO CHARGE INTEREST THEREON. IN SUPPORT THEREOF, THE LE ARNED AR PLACED RELIANCE ON THE JUDGMENT OF THE COORDINATE BENCH OF THE ITAT IN THE CASE OF BHARTI AIRTEL LIMITED VS ACIT, ITA NO. 5816/D/20 12 DATED 11.03.2014. THE LEARNED AR ALSO RELIED UPON THE FOLLOWING JUDGM ENTS:- ITA NO.5149 /MUM/2015 M/S MILLENIUM APPLIANCES INDIA LTD. 6 (I) PAN INDIA NETWORK INFRAVEST PRIVATE LIMITED VS ACIT (ITA NO. 7026 & 7025 /MUMBAI/2013 DATED 04.12.2015 (II) CIT VS EKL APPLIANCES, ITA NO. 1068/2011 AND 1 070/2011 (III) PARLE BUISCUITS P LTD VS DCIT (ITA NO. 9010/M UM/2010) DATED 11.4.2014 ITAT MUMBAI (IV) ALL CARGO LOGISTICS LTD VS ACIT (2014) 150 IT D 0651 DATED. 10.6.2014 13. ON THE ISSUE OF DISALLOWANCE UNDER SECTION 14A MADE BY THE AO IN ASSESSMENT YEAR 2009-10 TO 2011-12, IT WAS SUBMITTE D BY THE LEARNED AR THAT THE DISALLOWANCE HAS BEEN MADE BY THE AO WITHO UT RECORDING ANY SATISFACTION. THE AO HAS STRAIGHTAWAY INVOKED THE P ROVISIONS OF RULE 8D. IN SUPPORT THERE OF THE LEARNED AR HAS PLACED RELIA NCE ON THE JUDGMENT OF THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF CIT VS. TAIKISHA ENGINEERING INDIA LTD., (2015) 370 ITR 0338 (DEL). 14. IT WAS FURTHER SUBMITTED THAT IN ANY CASE THE D ISALLOWANCE UNDER SECTION 14A CANNOT EXCEED THE DIVIDEND INCOME EARNE D BY THE ASSESSEE COMPANY. 15. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDER PASSED BY THE TPO AS MODIFIED BY THE LEARNED DRP. IT WAS CONT ENDED THAT THE ORDER PASSED BY THE TPO AS WELL AS THE LEARNED DRP ON THE ISSUE OF ADJUSTMENT OF INTEREST IS A SPEAKING ORDER. IT WAS FURTHER CON TENDED THAT ONCE THE SEARCH HAS BEEN INITIATED ALL THE ASSESSMENTS GET R EOPENED CONSEQUENT TO THE ISSUE OF NOTICE UNDER SECTION 153A AND AS SU CH THE AO IS ENTITLED TO MAKE ADJUSTMENT TO THE INCOME AS PERMISSIBLE UNDER THE LAW. 16. ON THE ISSUE OF RATE OF INTEREST IT WAS CONTEND ED THAT THE RATE OF INTEREST HAS TO BE THAT OF INDIAN RUPEES AS ASSESSE E WOULD HAVE EARNED THE INTEREST IN INDIAN RUPEES HAD IT NOT ADVANCED T HE MONEY TO ITS FOREIGN SUBSIDIARY. 17. AS REGARDS CONVERSION OF THE LOAN INTO SHARE AP PLICATION MONEY IN ASSESSMENT YEAR 2011-12 IT WAS CONTENDED THAT THERE IS NO DIFFERENCE BETWEEN THE LOAN AND THE SHARE APPLICATION MONEY AN D HENCE INTEREST HAS TO BE CHARGED FOR THAT YEAR ALSO. ITA NO.5149 /MUM/2015 M/S MILLENIUM APPLIANCES INDIA LTD. 7 18. ON THE ISSUE OF DISALLOWANCE UNDER SECTION 14A IT WAS CONTENDED THAT THE AO HAS INVOKED THE PROVISIONS OF RULE 8D AND ME RE NOT RECORDING OF SATISFACTION WILL NOT MAKE SUCH DISALLOWANCE UNTENA BLE IN THE EYE OF LAW. 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE ORDER PASSED BY THE AUTHORITIES BELOW. THE FIRST ISSUE IS ADDITION MADE BY THE AO IN THE ASSESSMENT YEARS WHICH HAVE NOT ABATED CO NSEQUENT TO THE SEARCH I.E. ASSESSMENT YEARS 2006-07, 2007-08 AND 2 008-09. AS PER THE FACTS ON RECORD, THE SEARCH TOOK PLACE ON 21.1.2011 . ASSESSMENTS FOR ALL THESE THREE YEARS HAVE BEEN COMPLETED UNDER SECTION 143(3) OF THE ACT. NO INCRIMINATING MATERIAL WAS FOUND DURING THE COUR SE OF THE SEARCH. AS IS EVIDENT FROM THE ASSESSMENT ORDER THE ADDITION HAS BEEN MADE CONSEQUENT TO THE REFERENCE MADE BY THE AO TO TPO. THE ISSUE WHICH ARISES FOR CONSIDERATION IS WHETHER THE AO COULD HA VE MADE ADDITION IN THESE ASSESSMENT YEARS WITHOUT THERE BEING ANY INCR IMINATING MATERIAL AND IN ABSENCE OF THE ABATEMENT OF ASSESSMENT ORDER S ALREADY FRAMED. THIS ISSUE IS NOW SQUARELY COVERED BY THE JUDGMENT OF THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF CIT (CENTRAL) III VS. KABUL CHAWLA (SUPRA) WHEREIN THE HONBLE HIGH COURT HAS BEEN PLE ASED TO HOLD AS UNDER:- 37. ON A CONSPECTUS OF SECTION 153A(1) OF THE ACT, READ WITH THE PROVISOS THERETO, AND IN THE LIGHT OF THE LAW EXPLAINED IN T HE AFOREMENTIONED DECISIONS, THE LEGAL POSITION THAT EMERGES IS AS UN DER: I. ONCE A SEARCH TAKES PLACE UNDER SECTION 132 OF T HE ACT, NOTICE UNDER SECTION 153 A(1) WILL HAVE TO BE MANDATORILY ISSUED TO THE PERSON SEARCHED REQUIRING HIM TO FILE RETURNS FOR SIX AYS IMMEDIATELY PRECEDING THE PREVIOUS YEAR RELEVANT TO THE AY IN WHICH THE S EARCH TAKES PLACE. II. ASSESSMENTS AND REASSESSMENTS PENDING ON THE DA TE OF THE SEARCH SHALL ABATE. THE TOTAL INCOME FOR SUCH AYS WILL HAV E TO BE COMPUTED BY THE AOS AS A FRESH EXERCISE. III. THE AO WILL EXERCISE NORMAL ASSESSMENT POWERS IN RESPECT OF THE SIX YEARS PREVIOUS TO THE RELEVANT AY IN WHICH THE SEAR CH TAKES PLACE. THE AO HAS THE POWER TO ASSESS AND REASSESS THE 'TOTAL INCOME' OF THE AFOREMENTIONED SIX YEARS IN SEPARATE ASSESSMENT ORD ERS FOR EACH OF THE SIX YEARS. IN OTHER WORDS THERE WILL BE ONLY ONE AS SESSMENT ORDER IN RESPECT OF EACH OF THE SIX AYS 'IN WHICH BOTH THE D ISCLOSED AND THE UNDISCLOSED INCOME WOULD BE BROUGHT TO TAX'. IV. ALTHOUGH SECTION 153 A DOES NOT SAY THAT ADDITI ONS SHOULD BE STRICTLY MADE ON THE BASIS OF EVIDENCE FOUND IN THE COURSE O F THE SEARCH, OR OTHER POST-SEARCH MATERIAL OR INFORMATION AVAILABLE WITH THE AO WHICH CAN BE RELATED TO THE EVIDENCE FOUND, IT DOES NOT MEAN THA T THE ASSESSMENT 'CAN ITA NO.5149 /MUM/2015 M/S MILLENIUM APPLIANCES INDIA LTD. 8 BE ARBITRARY OR MADE WITHOUT ANY RELEVANCE OR NEXUS WITH THE SEIZED MATERIAL. OBVIOUSLY AN ASSESSMENT HAS TO BE MADE UN DER THIS SECTION ONLY ON THE BASIS OF SEIZED MATERIAL.' V. IN ABSENCE OF ANY INCRIMINATING MATERIAL, THE CO MPLETED ASSESSMENT CAN BE REITERATED AND THE ABATED ASSESSMENT OR REAS SESSMENT CAN BE MADE. THE WORD 'ASSESS' IN SECTION 153 A IS RELATAB LE TO ABATED PROCEEDINGS (I.E. THOSE PENDING ON THE DATE OF SEAR CH) AND THE WORD 'REASSESS' TO COMPLETED ASSESSMENT PROCEEDINGS. VI. INSOFAR AS PENDING ASSESSMENTS ARE CONCERNED, T HE JURISDICTION TO MAKE THE ORIGINAL ASSESSMENT AND THE ASSESSMENT UND ER SECTION 153A MERGES INTO ONE. ONLY ONE ASSESSMENT SHALL BE MADE SEPARATELY FOR EACH AY ON THE BASIS OF THE FINDINGS OF THE SEARCH AND A NY OTHER MATERIAL EXISTING OR BROUGHT ON THE RECORD OF THE AO. VII. COMPLETED ASSESSMENTS CAN BE INTERFERED WITH B Y THE AO WHILE MAKING THE ASSESSMENT UNDER SECTION 153 A ONLY ON T HE BASIS OF SOME INCRIMINATING MATERIAL UNEARTHED DURING THE COURSE OF SEARCH OR REQUISITION OF DOCUMENTS OR UNDISCLOSED INCOME OR PROPERTY DISC OVERED IN THE COURSE OF SEARCH WHICH WERE NOT PRODUCED OR NOT ALREADY DI SCLOSED OR MADE KNOWN IN THE COURSE OF ORIGINAL ASSESSMENT. CONCLUSION 38. THE PRESENT APPEALS CONCERN AYS, 2002-03, 2005- 06 AND 2006- 07.ON THE DATE OF THE SEARCH THE SAID ASSESSMENTS A LREADY STOOD COMPLETED. SINCE NO INCRIMINATING MATERIAL WAS UNEA RTHED DURING THE SEARCH, NO ADDITIONS COULD HAVE BEEN MADE TO THE IN COME ALREADY ASSESSED. 39. THE QUESTION FRAMED BY THE COURT IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. THE ABOVE VIEW HAS BEEN REITERATED BY THE HONBLE D ELHI HIGH COURT IN THE CASE OF CIT-7 VS. RRJ SECURITIES LTD. IN [2016] 380 ITR 612 (DEL) WHERE THE HONBLE COURT HAS BEEN PLEASED TO HOLD AS UNDER:- IN RESPECT OF SUCH ASSESSMENTS WHICH HAVE ABATED, THE AO WOULD HAVE THE JURISDICTION TO PROCEED AND MAKE AN ASSESSMENT. HOWEVER, IN RESPECT OF CONCLUDED ASSESSMENTS, THE AO WOULD ASSUME JURIS DICTION TOREASSESS PROVIDED THAT THE ASSETS/DOCUMENTS RECEIVED BY THE AO REPRESENTOR INDICATE ANY UNDISCLOSED INCOME OR POSSIBILITY OF A NY INCOME THAT MAY HAVE REMAINED UNDISCLOSED IN THE RELEVANT ASSESSMEN T YEARS. THIS COURT IN COMMISSIONER OF INCOME TAX (CENTRAL)-III V. KABU L CHAWLA: ITA707/2014, DECIDED ON 28TH AUGUST, 2015 HAS HELD THAT COMPLETED ASSESSMENTS COULD ONLY BE INTERFERED WITH BY THE AO ON THE BASIS OF AN INCRIMINATING MATERIAL UNEARTHED DURING THE COURSE OF THE SEARCH OR REQUISITION OF THE DOCUMENTS. IN ABSENCE OF ANY INC RIMINATING MATERIAL, THE AO DOES NOT HAVE ANY JURISDICTION TO INTERFERE IN C ONCLUDED ASSESSMENTS. IN THE PRESENT CASE, AS STATED HEREINABOVE, THE ADD ITION HAS BEEN MADE WITHOUT THERE BEING ANY INCRIMINATING MATERIAL AND IN ABSENCE OF PENDENCY OF ASSESSMENT. IN THE ABSENCE OF ANY INCRIMINATING MATERIAL, AS HELD BY THE HONBLE HIGH COURT, THE ADDITION CANNOT BE MADE IN AN ASSESSMENT ITA NO.5149 /MUM/2015 M/S MILLENIUM APPLIANCES INDIA LTD. 9 UNDER SECTION 153A. RESPECTFULLY FOLLOWING THE JUDG MENT OF THE JURISDICTIONAL DELHI HIGH COURT, WE HOLD THAT THE A O WAS NOT JUSTIFIED IN MAKING THE ADDITION AND ACCORDINGLY THE ADDITION MA DE BY THE AO IN THE ASSESSMENT YEARS 2006-07, 2007-08 AND 2008-09 ARE D IRECTED TO BE DELETED. CONSEQUENTLY THE APPEALS FILED FOR THESE A SSESSMENT YEARS ARE ALLOWED. 20. AS REGARDS ASSESSMENT YEARS 2009-10 AND 2010-11 ARE CONCERNED THE LEARNED DRP HAS CONFIRMED THE ADDITION APPLYING THE BASE RATE OF STATE BANK OFINDIA PLUS 150 BASIS POINTS. IT WAS TH E CONTENTION OF THE LEARNED AR THAT NO ADDITION CAN BE MADE AS THE ADVA NCE MADE WAS OUT OF THE EEFC ACCOUNT WHICH CARRIES NO INTEREST. FURTHER AMOUNT ADVANCED WAS FOR PROMOTING ITS BUSINESS. ON THIS ISSUE WE AR E NOT IN AGREEMENT WITH THE CONTENTION OF THE LEARNED AR. THE AMOUNT H AVING BEEN ADVANCED TO AN ASSOCIATED ENTERPRISES, THE SAME HAS TO BE EV ALUATED BY APPLYING ARMS LENGTH PRICE. SINCE IT WAS A LOAN DURING THE ASSESSMENT YEARS 2009- 10 AND 2010-11, THE ASSESSEE COMPANY OUGHT TO HAVE COMPUTED THE ARMS LENGTH PRICE IN RESPECT OF SUCH LOAN ADVANCED TO ITS SUBSIDIARY COMPANIES. HOWEVER, AS REGARDS THE INTEREST RATE WE ARE IN AGREEMENT WITH THE CONTENTION OF THE LEARNED AR THAT THIS CAN NOT BE THE INTEREST RATE APPLICABLE TO INDIAN RUPEES. THESE ADVANCES HAVING BEEN MADE IN THE FOREIGN CURRENCY, THE RATE OF INTEREST HAS TO BE WI TH REFERENCE TO THE INTEREST RATE ON LOANS AND ADVANCES IN RESPECT OF F OREIGN CURRENCY. THIS ISSUE IS COVERED BY THE JUDGMENT OF THE JURISDICTIO NAL DELHI HIGH COURT IN THE CASE OF CIT VS. COTTON NATURALS (P) P LTD. (201 5) 276 CTR 0445 (DEL) WHEREIN THE HONBLE HIGH COURT HAS BEEN PLEASED TO HOLD AS UNDER:- 39. THE QUESTION WHETHER THE INTEREST RATE PREVAIL ING IN INDIA SHOULD BE APPLIED, FOR THE LENDER WAS AN INDIAN COMPANY/ASSES SEE, OR THE LENDING RATE PREVALENT IN THE UNITED STATES SHOULD BE APPLI ED, FOR THE BORROWER WAS A RESIDENT AND AN ASSESSEE OF THE SAID COUNTRY, IN OUR CONSIDERED OPINION, MUST BE ANSWERED BY ADOPTING AND APPLYING A COMMONSENSICAL AND PRAGMATIC REASONING. WE HAVE NO HESITATION IN H OLDING THAT THE INTEREST RATE SHOULD BE THE MARKET DETERMINED INTER EST RATE APPLICABLE TO THE CURRENCY CONCERNED IN WHICH THE LOAN HAS TO BE REPAID. INTEREST RATES SHOULD NOT BE COMPUTED ON THE BASIS OF INTEREST PAY ABLE ON THE CURRENCY OR LEGAL TENDER OF THE PLACE OR THE COUNTRY OF RESI DENCE OF EITHER PARTY. INTEREST RATES APPLICABLE TO LOANS AND DEPOSITS IN THE NATIONAL CURRENCY OF THE BORROWER OR THE LENDER WOULD VARY AND ARE DEPEN DENT UPON THE FISCAL POLICY OF THE CENTRAL BANK, MANDATE OF THE GOVERNME NT AND SEVERAL OTHER PARAMETERS. INTEREST RATES PAYABLE ON CURRENCY SPEC IFIC LOANS/ DEPOSITS ARE SIGNIFICANTLY UNIVERSAL AND GLOBALLY APPLICABLE . THE CURRENCY IN WHICH THE LOAN IS TO BE RE-PAID NORMALLY DETERMINES THE R ATE OF RETURN ON THE MONEY LENT, I.E. THE RATE OF INTEREST. KLAUS VOGEL ON DOUBLE TAXATION ITA NO.5149 /MUM/2015 M/S MILLENIUM APPLIANCES INDIA LTD. 10 CONVENTIONS (THIRD EDITION) UNDER ARTICLE 11 IN PAR AGRAPH 115 STATES AS UNDER:- THE EXISTING DIFFERENCES IN THE LEVELS OF INTEREST RATES DO NOT DEPEND ON ANY PLACE BUT RATHER ON THE CURRENCY CONCERNED. THE RATE OF INTEREST ON A US $ LOAN IS THE SAME IN NEW YORK AS IN FRANKFURT-A T LEAST WITHIN THE FRAMEWORK OF FREE CAPITAL MARKETS (SUBJECT TO THE A RBITRAGE). IN REGARD TO THE QUESTION AS TO WHETHER THE LEVEL OF INTEREST RA TES IN THE LENDERS STATE OR THAT IN THE BORROWERS IS DECISIVE, THEREFORE, P RIMARILY DEPENDS ON THE CURRENCY AGREED UPON (BFH BST.B1. II 725 (1994), RE . 1 ASTG). A DIFFERENTIATION BETWEEN DEBT-CLAIMS OR DEBTS IN NAT IONAL CURRENCY AND THOSE IN FOREIGN CURRENCY IS NORMALLY NO USE, BECAU SE, FOR INSTANCE, A US $ LOAN ADVANCED BY A US LENDER IS TO HIM A DEBT-CLA IM IN NATIONAL CURRENCY WHEREAS TO A GERMAN BORROWER IT IS A FOREI GN CURRENCY DEBT (THE SITUATION BEING DIFFERENT, HOWEVER, WHEN AN AGREEME NT IN A THIRD CURRENCY IS INVOLVED). MOREOVER, A DIFFERENCE IN INTEREST LE VELS FREQUENTLY REFLECTS NO MORE THAN DIFFERENT EXPECTATIONS IN REGARD TO RATES OF EXCHANGE, RATES OF INFLATION AND OTHER ASPECTS. HENCE, THE CHOICE OF O NE PARTICULAR CURRENCY CAN BE JUST AS REASONABLE AS THAT OF ANOTHER, DESPI TE DIFFERENT LEVELS OF INTEREST RATES. AN ECONOMIC CRITERION FOR ONE PARTY MAY BE THAT IT WANTS, IF POSSIBLE, TO AVOID EXCHANGE RISKS (FOR EXAMPLE, BY MATCHING THE CURRENCY OF THE LOAN WITH THAT OF THE FUNDS ANTICIPATED TO B E AVAILABLE FOR DEBT SERVICE), SUCH AS TAKING OUT A US $ LOAN IF THE PRO CEEDS IN US $ ARE EXPECTED TO BECOME AVAILABLE (SAY FROM EXPORTS). IF AN EXCHANGE RISK WERE TO PROVE INCAPABLE OF BEING AVOIDED (SAY, BY F ORWARD RATE FIXING), THE APPROPRIATE COURSE WOULD BE TO ATTRIBUTE IT TO THE ECONOMICALLY MORE POWERFUL PARTY. BUT, EXACTLY WHERE THERE IS NO SPECIAL RELATIONSHIP, THIS WILL FREQUENTLY NOT BE POSSIBLE IN DEALINGS WITH SU CH PARTY. CONSEQUENTLY, IT WILL NORMALLY NOT BE POSSIBLE TO REVIEW AND ADJUST THE INTEREST RATE TO THE EXTENT THAT SUCH RATE DEPENDS ON THE CURRENCY INVOL VED. MOREOVER, IT IS QUESTIONABLE WHETHER SUCH AN ADJUSTMENT COULD BE BA SED ON ART. 11 (6).FOR ART. 11(6), AT LEAST ITS WORDING, ALLOWS TH E AUTHORITIES TO ELIMINATE HYPOTHETICALLY THE SPECIAL RELATIONSHIPS ONLY IN R EGARD TO THE LEVEL OF INTEREST RATES AND NOT IN REGARD TO OTHER CIRCUMSTA NCES, SUCH AS THE CHOICE OF CURRENCY. IF SUCH OTHER CIRCUMSTANCES WERE TO BE INCLUDED IN THE REVIEW, THERE WOULD BE DOUBTS AS TO WHERE THE LINE SHOULD B E DRAWN, I.E., WHETHER AN EXAMINATION SHOULD BE ALLOWED OF THE QUESTION OF WHETHER IN THE ABSENCE OF A SPECIAL RELATIONSHIP (I.E., FINANCIAL POWER, STRONG POSITION IN THE MARKET, ETC., OF THE FOREIGN CORPORATE GROUP ME MBER) THE BORROWING COMPANY MIGHT NOT HAVE COMPLETELY REFRAINED FROM MA KING INVESTMENT FOR WHICH IT BORROWED THE MONEY. THE AFORESAID METHODOL OGY RECOMMENDED BY KLAUS VOGEL APPEALS TO US AND APPEARS TO BE THE REASONABLE AND PROPER PARAMETER TO DECIDE UPON THE QUESTION OF APP LICABILITY OF INTEREST RATE. THE LOAN IN QUESTION WAS GIVEN IN FOREIGN CUR RENCY I.E. US $ AND WAS ALSO TO BE REPAID IN THE SAME CURRENCY I.E. US $. I NTEREST RATE APPLICABLE TO LOANS GRANTED AND TO BE RETURNED IN INDIAN RUPEES W OULD NOT BE THE RELEVANT COMPARABLE. EVEN IN INDIA, INTEREST RATES ON FCNR ACCOUNTS MAINTAINED IN FOREIGN CURRENCY ARE DIFFERENT AND DE PENDENT UPON THE CURRENCY IN QUESTION. THEY ARE NOT DEPENDENT UPON T HE PLR RATE, WHICH IS APPLICABLE TO LOANS IN INDIAN RUPEE. THE PLR RATE, THEREFORE, WOULD NOT BE APPLICABLE AND SHOULD NOT BE APPLIED FOR DETERMININ G THE INTEREST RATE IN THE EXTANT CASE. PLR RATES ARE NOT APPLICABLE TO LO ANS TO BE RE-PAID IN FOREIGN CURRENCY. THE INTEREST RATES VARY AND ARE T HUS DEPENDENT ON THE FOREIGN CURRENCY IN WHICH THE REPAYMENT IS TO BE MA DE. THE SAME PRINCIPLE SHOULD APPLY. ITA NO.5149 /MUM/2015 M/S MILLENIUM APPLIANCES INDIA LTD. 11 21. ACCORDINGLY THE APPLICABLE RATE OF INTEREST SHA LL BE THE RATE OF INTEREST IN RESPECT OF SUCH FOREIGN CURRENCY IN WHICH THE LO ANS HAVE BEEN ADVANCE. AS PER THE DETAILS AVAILABLE ON RECORD DURING THE A SSESSMENT YEARS 2009- 10 AND 2010- 11 ASSESSEE HAS ADVANCED TO ITS SUBSID IARY COMPANIES AS DETAILED BELOW:- XXXXXXXXXXXXXXXX TAKING INTO CONSIDERATION OF THE ABOVE FACTS, THE L EARNED AO IS DIRECTED TO VERIFY THE ABOVE INTEREST RATE AND RECOMPUTE THE AD JUSTMENT ON ACCOUNT OF INTEREST BY APPLYING THE RATE OF INTEREST OF THE RE LEVANT CURRENCY IN THE AY 2009-10 & 2010-11. ACCORDINGLY THIS GROUND OF THE A SSESSEE IS PARTLY ALLOWED FOR AY 2009-10 & 2010-11. XXXXXXXXXXXXXXXXX 22. AS REGARDS THE ADDITION ON THIS ACCOUNT IN ASSE SSMENT YEAR 2011-12, THE ADVANCE GIVEN TO ITS SUBSIDIARY COMPANIES STAND CONVERTED INTO SHARE APPLICATION MONEY. ONCE THE LOAN HAS BEEN CONVERTED INTO SHARE APPLICATION MONEY, FOR THE ISSUE OF THE SHARE CAPIT AL, THEN SUCH AMOUNT CANNOT BE CONSIDERED AS LOAN. THE TPO IS NOT PERMIT TED UNDER THE LAW TO RE-CHARACTERIZE THE TRANSACTION AND ACCORDINGLY WE ARE OF THE VIEW THAT NO INTEREST ON SUCH SHARE APPLICATION MONEY CAN BE CHA RGED. THE ABOVE VIEW IS SUPPORTED BY THE JUDGMENT OF THE COORDINATE BENCH OF THE ITAT IN THE CASE OF BHARTI AIRTEL LTD. VS. ACIT, [2014] 161 TTJ 0283 (DEL) WHEREIN THE ITAT HAS HELD AS UNDER:- 47. WE FIND THAT IN THE PRESENT CASE THE TPO HAS NOT DISPUTED THAT THE IMPUGNED TRANSACTIONS WERE IN THE NATURE OF PAYMENT S FOR SHARE APPLICATION MONEY, AND THUS, OF CAPITAL CONTRIBUTIO NS. THE TPO HAS NOT MADE ANY ADJUSTMENT WITH REGARD TO THE ALP OF THE C APITAL CONTRIBUTION. HE HAS, HOWEVER, TREATED THESE TRANSACTIONS PARTLY AS OF AN INTEREST FREE LOAN, FOR THE PERIOD BETWEEN THE DATES OF PAYMENT T ILL THE DATE ON WHICH SHARES WERE ACTUALLY ALLOTTED, AND PARTLY AS CAPITA L CONTRIBUTION, I.E. AFTER THE SUBSCRIBED SHARES WERE ALLOTTED BY THE SUBSIDIA RIES IN WHICH CAPITAL CONTRIBUTIONS WERE MADE. NO DOUBT, IF THESE TRANSAC TIONS ARE TREATED AS IN THE NATURE OF LENDING OR BORROWING, THE TRANSACTION S CAN BE SUBJECTED TO ALP ADJUSTMENTS, AND THE ALP SO COMPUTED CAN BE THE BASIS OF COMPUTING TAXABLE BUSINESS PROFITS OF THE ASSESSEE, BUT THE CORE ISSUE BEFORE US IS WHETHER SUCH A DEEMING FICTION IS ENVI SAGED UNDER THE SCHEME OF THE TRANSFER PRICING LEGISLATION OR ON TH E FACTS OF THIS CASE. WE DONOT FIND SO. WE DONOT FIND ANY PROVISION IN LAW E NABLING SUCH DEEMING FICTION. ITA NO.5149 /MUM/2015 M/S MILLENIUM APPLIANCES INDIA LTD. 12 IN VIEW OF THE ABOVE FACTS AND THE JUDGMENT OF COOR DINATE BENCH, THE AO IS DIRECTED TO VERIFY THE DATE OF CONVERSION OF LOA N TO SHARE APPLICATION MONEY AND NOT TO MAKE ANY ADJUSTMENT ON ACCOUNT OF INTEREST POST CONVERSION OF LOAN TO SHARE APPLICATION MONEY AND A CCORDINGLY THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 23. AS REGARDS THE DISALLOWANCE UNDER SECTION 14A I N RESPECT OF THE EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME IS C ONCERNED, WE NOTE THAT THE ASSESSEE HAS EARNED THE FOLLOWING INCOME I N THE ASSESSMENT YEARS 2009-10 TO 2011-12:- XXXXXXXXXXXXXXXX 25. THE CONTENTION OF THE ASSESSEE IS THAT IN THE A BSENCE OF ANY SATISFACTION BEING RECODED DISALLOWANCE UNDER SECTI ON 14A CANNOT BE SUSTAINED. THE ALTERNATIVE CONTENTION OF THE LEARNE D AR HAS BEEN THAT THE ADDITION IN ANY CASE CANNOT EXCEED THE EXEMPT INCOM E. AS REGARDS FIRST CONTENTION THAT NO SATISFACTION HAS BEEN RECORDED W E NOTE FROM THE ASSESSMENT ORDER THAT THE AO HAS CONSIDERED THE EXP LANATION OF THE ASSESSEE AND AFTER TAKING INTO CONSIDERATION THE EX PLANATION HE HAS INVOKED RULE 8D. HAVING DONE SO, IT CANNOT BE SAID THAT THE AO HAS NOT TAKEN INTO CONSIDERATION THE EXPLANATION OF THE ASS ESSEE. 26. HOWEVER, AS REGARDS THE SECOND CONTENTION OF TH E LEARNED AR THAT THE DISALLOWANCE CANNOT EXCEED THE EXEMPT INCOME, WE AR E IN AGREEMENT WITH THIS CONTENTION. THIS VIEW IS SUPPORTED BY THE JUDGMENT OF THE HONBLE JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF JOIN T INVESTMENTS PVT. LTD. VERSUS COMMISSIONER OF INCOME TAX [2015] 372 ITR 69 4 (DEL). ACCORDINGLY WE DIRECT THE AO TO RESTRICT THE ADDITI ON TO THE EXEMPT INCOME. ACCORDINGLY THIS GROUND IS PARTLY ALLOWED IN FAVOUR OF THE ASSESSEE. 27. IN VIEW OF THE ABOVE FINDINGS THE ASSESSEES AP PEALS FOR THE A.Y. 2006-07 BEING ITA NO. 1086/DEL/2015, A.Y. 2007-08 B EING ITA NO. 1087/DEL/2015, A.Y. 2008-09 BEING ITA NO. 1088/DEL/ 2015 ARE ALLOWED, APPEAL FOR A.Y. 2009-10 BEING ITA NO. 1089/DEL/2015 , A.Y. 2010-11 BEING ITA NO. 1090/DEL/2015 AND A.Y. 2011-12 BEING ITA NO. 1091/DEL/2015 ARE PARTLY ALLOWED. 2.3. WE FIND THAT IN THE PRESENT APPEAL, SINCE, NO EXEMPT INCOME WAS EARNED BY THE ASSESSEE AND OWN FU NDS ITA NO.5149 /MUM/2015 M/S MILLENIUM APPLIANCES INDIA LTD. 13 ARE MORE THAN THE INVESTMENT MADE BY THE ASSESSEE, THEREFORE, WE FIND MERIT IN THE EXPLANATION OF THE ASSESSEE. AS CLAIMED BY THE ASSESSEE, THE OWN FUNDS AVAILABLE WITH THE ASSESSEE ARE RS.55.90 CRORES, WHEREAS, THE STRA TEGIC INVESTMENT MADE IN THE GROUP COMPANY WAS TO THE TUN E OF RS.37 CRORES. THE CASE OF THE ASSESSEE IS COVERED B Y THE RATIO LAID DOWN BY HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS RELIANCE UTILITIES AND POWER LTD. 313 ITR 340 (BOM.), WHEREIN, IT WAS HELD THAT WHERE THE ASSESSE E HAS SUFFICIENT INTEREST FREE FUNDS FOR MAKING THE INVES TMENT, IT COULD NOT BE PRESUMED THAT THE INVESTMENT WAS MADE OUT OF OTHER FUNDS, THUS, NO DISALLOWANCE U/S 14A IS WA RRANTED. THE LD. ASSESSING OFFICER INVOKED THE PROVISION OF SECTION 14A OF THE ACT ASSUMING THAT EXPENSES MUST HAVE BEE N INCURRED FOR MAKING THE INVESTMENT AND REJECTED CON TENTION OF THE ASSESSEE BY APPLYING THE METHOD PRESCRIBED U NDER RULE-8D OF THE RULES. THE DECISION IN THE CASE OF C IT VS UTI BANK LTD. (ITA NO.118 OF 2013) (GUJ.) AND THE MUMBA I BENCH OF THE TRIBUNAL IN THE CASE OF M/S FOODLINK S ERVICES (I.) PVT. LTD. VS DCIT (ITA NO.4620/MUM/2011 AND 7284/MUM/2011), WHEREIN, THE DECISION FROM HON'BLE ITA NO.5149 /MUM/2015 M/S MILLENIUM APPLIANCES INDIA LTD. 14 JURISDICTIONAL HIGH COURT IN THE CASE OF RELIANCE U TILITIES & POWER LTD. WAS FOLLOWED, AND DECIDED IN FAVOUR OF T HE ASSESSEE. THE CASE OF THE ASSESSEE IS ALSO COVERED BY THE RATIO LAID DOWN IN CIT VS HERO CYCLES 323 ITR 518 ( P & H). CONSIDERING THE TOTALITY OF FACTS, WHEN NO EXEMPT I NCOMES WAS EARNED AND OWN FUNDS ARE MORE THAN THE INVESTME NT, WE FIND NO INFIRMITY IN THE ORDER OF THE LD. COMMIS SIONER OF INCOME TAX (APPEAL), IT IS UPHELD. FINALLY, THE APPEAL OF THE REVENUE IS DISMISSED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF THE LD. REPRESENTATIVE FROM BOTH SIDES AT THE CONCLUSION OF THE HEARING ON 18/01/2018. SD/- SD/- ( RAJESH KUMAR ) (JOGINDER SINGH) '!# / ACCOUNTANT MEMBER $!# /JUDICIAL MEMBER % MUMBAI; ( DATED : 18/01/2018 F{X~{T? P.S / /. . . %$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. *+,- / THE APPELLANT (RESPECTIVE ASSESSEE) 2. ./,- / THE RESPONDENT. 3. 0 0 1$ ( *+ ) / THE CIT, MUMBAI. 4. 0 0 1$ / CIT(A)- , MUMBAI, ITA NO.5149 /MUM/2015 M/S MILLENIUM APPLIANCES INDIA LTD. 15 5. 34 .$ ! , 0 *+' *! 5 , % / DR, ITAT, MUMBAI 6. 6' 7% / GUARD FILE. ! / BY ORDER, TRUE COPY /! (DY./ASSTT. REGISTRAR) , % / ITAT, MUMBAI