V.I.P. INDUSTRIES LTD, MUMBAI V. ADDL CIT RG 7(3), MUMBAI

ITA 526/MUM/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8320 (ITAT-MUMBAI)
• Duration Of Justice: 10 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2014
• Appeal Filed By: Assessee
• Bench Allotted: K
• Next Hearing Date: 02-12-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 22-01-2014
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Notional interest
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER ITA NO.526/MUM/2014 ASSESSMENT YEAR: - 2009-10 V.I.P. INDUSTRIES LTD. DGPHOUSE, 88-C, OLD PRABBHADEVI ROAD, MUMBAI 400 025. VS.` ADDL. COMMISSIONER OF INCOME TAX, RANGE 7(3), MUMBAI. PAN:- AAACV0177G APPELLANT RESPONDENT ITA NO.881/MUM/2014 ASSESSMENT YEAR: - 2009-10 DY. COMMISSIONER OF INCOME TAX 7(3) ROOM NO. 615, 6 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. VS.` V.I.P. INDUSTRIES LTD. DGPHOUSE, 88-C, OLD PRABBHADEVI ROAD, MUMBAI 400 025. PAN:- AAACV0177G APPELLANT RESPONDENT ORDER PER VIJAY PAL RAO, JM THESE CROSS APPEALS ARE DIRECTED AGAINST THE ASSESS MENT ORDER DATED 10.12.2013 PASSED U/S 143(3) R.W.S 144C(1) OF INCOM E TAX ACT IN PURSUANT TO THE DIRECTION OF DRP U/S 144C(5) DATED 27.11.2013 FOR T HE A.Y. 2009-10. THE ASSESSEE HAS RAISED ONLY GROUND AS UNDER:- ASSESSEE BY SHRI J.P. BAIRAGRA REVENUE BY SHRI. K.C. PATNAIK DATE OF HEARING 02.12.2014 DATE OF PRONOUNCEMENT 10.12.2014 V.I.P. INDUSTRIES LTD. 2 | P A G E THE LD. ASSESSING OFFICER ERRED IN MAKING AN ADDI TION OF RS. 13,88,660/- ON ACCOUNT OF INTEREST ON LOAN ADVANCED TO AE IN UK AS PER THE DIRECTION OF DISPUTE RESOLUTION PANEL-II, MUMBAI U/S. 144C(5) OF THE INC OME TAX ACT, 1961. 2. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSE E ADVANCED LOAN OF US$ 33,50,000/- EQUIVALENT TO INR 16,98,78,500 TO ITS A E NAMELY CARLTON TRAVEL GOODS LTD., U.K.. THE ASSESSEE CHARGED INTEREST AT THE R ATE OF 10% PER ANNUM ON THE SAID LOAN ADVANCED TO AE. THE ASSESSEE ADOPTED CUP AS T HE MOST APPROPRIATE METHOD FOR BENCH MARKING ITS INTEREST CHARGED TO THE AE AN D APPLIED LIBOR OF 2.93% AS ALP. THUS THE ASSESSEE CLAIMED THAT THE INTEREST CH ARGED TO AE IS HIGHER THAN THE LIBOR AND, THEREFORE, THE SAME IS AT ARMS LENGTH. THE TPO WAS OF THE VIEW THAT ASSESSEE IS A TESTED PARTY AND, THEREFORE, THE LIBO R CANNOT BE CONSIDERED FOR BENCH MARKING OF OUTBOUND LOAN FROM INDIA. ACCORDINGLY, T HE TPO ADOPTED THE AVERAGE COST OF THE FUNDS OF THE ASSESSEE + 3% WHICH WAS W ORKED OUT AT 13.97% PER ANNUM AS ARMS LENGTH INTEREST RATE. CONSEQUENTLY, THE TP O MADE AN ADJUSTMENT ON ACCOUNT OF ARMS LENGTH INTEREST RATE BEING DIFFERENCE BETW EEN THE INTEREST CHARGED BY THE ASSESSEE AT THE RATE OF 10% AND ARMS LENGTH INTERE ST RATE OF 13.97% AMOUNTING TO RS. 1,25,59,062/-. 3. THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP AGA INST THE DRAFT ORDER OF ASSESSING OFFICER. THE DRP NOTED THAT THE ASSESSEE IS BORROWING FROM DOMESTIC MARKET AT THE RATE OF 10.97% AND CHARGING INTEREST FROM ITS AE ONLY AT THE RATE OF 10%. THE DRP HAS TAKEN THE SBI PLR RATE FOR BENCH M ARKING THE INTEREST BEING CHARGED TO ITS AE WHICH IS ALSO TO BE CONSIDERED IN CONSONANCE WITH THE SAFE HARBOR RATES ANNOUNCED IN THIS REGARD. ACCORDINGLY, THE DR P DIRECTED THE ASSESSING OFFICER/TPO TO RE-COMPUTE THE ADJUSTMENT BY APPLYIN G SBI PLR RATE FOR RELEVANT PERIOD WHICH IS 12.25%. HENCE A PART RELIEF WAS GIV EN BY THE DRP. 4. BEFORE US, THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS ADOPTED LIBOR FOR THE PURPO SE OF BENCH MARKING ITS INTEREST CHARGED TO THE AE AT THE RATE OF 10%, THEREFORE, TH E ASSESSEES INTEREST RATE IS AT ARMS LENGTH. HE HAS FURTHER SUBMITTED THAT THE ASS ESSEE HAS AVAILED THE FOREIGN V.I.P. INDUSTRIES LTD. 3 | P A G E EXCHANGE LOAN AT LIBOR RATE, THEREFORE, THE INTERES T CHARGED BY THE ASSESSEE AT THE RATE OF 10% ON THE ADVANCES TO THE AE IS MORE THAN THE COST OF THE FUND BORROWED BY THE ASSESSEE. IN SUPPORT OF HIS CONTENTION HE HA S RELIED UPON THE FOLLOWING DECISIONS:- (I) SIVA INDUSTRIES AND HOLDINGS LTD. VS. ACIT (2012) 1 45 TTJ 530 (II) FOUR SOFT LTD. VS. DCIT IN (ITA NO. 1495/HYD/2010 (III) NATURALS (I) PVT. LTD. VS. DCIT (2013) 22 ITR (T) 4 38 (DELHI-TRIB.) (IV) AURIONPRO SOLUTIONS LTD. VS. ADDL. CIT (2013) 27 IT R (T) 276 (V) AUTOCOMP SYSTEMS LTD. V. ACIT (2012) 52 SOT 48 (VI) CES P. LTD. VS. DCIT (2014) 41 TAXMANN.COM 409 (VII) HINDUJA GLOBAL SOLUTIONS LTD. VS. ADDL CIT (2013) 1 45 ITD 361 (VIII) APOLLO TYRES LTD. IN ITA NO. 616/COCH/2011. IT IS SUBMITTED THAT THE TRIBUNAL HAS CONSISTENTLY TAKEN A VIEW THAT FOR BENCH MARKING THE INTEREST CHARGED TO THE AE, LIBOR IS ACCEPTABLE ARMS LENGTH INTEREST. 5. ON THE OTHER HAND, THE LD. DR HAS RELIED UPON TH E ORDER OF AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESSEE IS A TESTED P ARTY AND, THEREFORE, THE INTEREST RATE PREVAILING IN THE INDIAN MARKET H AS TOBE ADOPTED AS ARMS LENGTH INTEREST. HE HAS SUPPORTED THE SBI PLR RATE ADOPTED BY THE DRP FOR BENCH MARKING THE INTEREST CHARGED BY T HE ASSESSEE TO ITS AE. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND REL EVANT MATERIAL ON RECORD. AT THE OUTSET WE NOTE THAT IN A SERIES OF D ECISIONS AS RELIED UPON BY THE ASSESSEE, THE TRIBUNAL HAS TAKEN A VIEW THAT TO BENCH MARK THE INTEREST CHARGED BY THE INDIAN ASSESSEE TO THE AE, LIBOR PLUS IS CONSIDERED AS ARMS LENGTH INTEREST RATE. I N THIS CASE THE V.I.P. INDUSTRIES LTD. 4 | P A G E ASSESSEE IS CHARGING THE INTEREST FROM AE AT THE RA TE OF 10% WHICH IS MORE THAN THE INTEREST RATE PAID BY THE ASSESSEE ON THE FOREIGN CURRENCY LOAN FROM SBI AT LIBOR + 205 BPS. THEREFOR E, EVEN IF THE ARMS LENGTH INTEREST ADOPTED AS 5.71% WHICH IS LIB OR + 2.5%, THE ASSESSEES INTEREST CHARGED TO THE AE AT THE RATE O F 10% IS MORE THAN THE ARMS LENGTH INTEREST RATE AND ACCORDINGLY NO A DJUSTMENT ON ACCOUNT OF ARMS LENGTH OF INTEREST IS WARRANTED. E VEN IF THE ASSESSEE HAS BEEN TAKEN AS A TESTED PARTY AND RATE PREVAILIN G IN INDIAN MARKET IS TAKEN INTO CONSIDERATION, THE ARMS LENGTH RATE OF INTEREST WOULD BE TAKEN AS THE INTEREST ON DEPOSIT IN BANK. BOTH THE AUTHORITIES BELOW HAVE APPLIED THE LENDING RATE FOR BENCH MARKING THE ARMS LENGTH INTEREST, WHEREAS THE ASSESSEE HAS ADVANCED THE LOA N TO ITS AE AND THE COMPARABLE INTEREST WOULD BE THE INTEREST INCOME ON PLACING THE AMOUNT IN BANK DEPOSIT. THEREFORE, EVEN FROM THAT A NGLE, THE INTEREST CHARGED BY THE ASSESSEE AT THE RATE OF 10% WOULD BE AT ARMS LENGTH AND NO ADJUSTMENT IS CALLED FOR ON THIS ACCOUNT. TH US IN VIEW OF THE ABOVE DISCUSSION AS WELL AS FOLLOWING THE EARLIER D ECISIONS OF THIS TRIBUNAL, WE HOLD THAT THE INTEREST CHARGED BY THE ASSESSEE AT THE RATE OF 10% FROM ITS AE, IN THE FACTS AND CIRCUMSTANCES OF THE CASE IS AT ARMS LENGTH AND ACCORDINGLY, THE ADDITION MADE BY THE ASSESSING OFFICER ON THIS ACCOUNT IS DELETED. 7. THE REVENUE IN ITA NO. 881/MUM/2014 HAS RAISED F OLLOWING GROUNDS:- THE LD. DRP HAS ERRED ON FACTS AND IN LAW IN REDU CING THE TRANSFER PRICING ADJUSTMENT WITHOUT PROPERLY APPRE CIATING THE FACTUAL AND LEGAL MATRIX OF THE CASE AS CLEARLY BROUGHT OUT BY THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT OR DER THE LD. DRP HAS ERRED IN FACTS AND IN LAW IN REDUCI NG THE TRANSFER PRICING ADJUSTMENT WITHOUT PROPERLY APPREC IATING V.I.P. INDUSTRIES LTD. 5 | P A G E THE FACT THAT THE TPO HAS MADE THE ADDITION ON ACCO UNT OF INTEREST FOR DELAYED REALIZATION OF SALES AS THE AS SESSEE HAD NOT REALIZED ANY AMOUNT FROM SALES MADE TO ITS AES WHEREAS ASSESSEE HAD REALIZED 80% SALES MADE TO ITS NON AES . 8. THE ONLY ISSUE RAISED BY THE REVENUE IN THIS APP EAL IS REGARDING THE ADJUSTMENT MADE BY THE ASSESSING OFFICER/TPO ON ACC OUNT OF INTEREST FOR DELAYED REALIZATION OF SALE FROM AE. THE TPO NO TED THAT THE A SUM OF RS. 3,75,61,993/- WAS OUTSTANDIN G AS ON 31 ST MARCH 2009 AND RS. 45.27 CRORE AS ON 1.4.2009 FROM ITS AE . THUS THE TPO OBSERVED THAT THE ASSESSEE DID NOT RECEIVE ANY AMOU NT FROM THE AE FOR THE SALE MADE DURING THE YEAR. THE TOTAL SALE TO IT S AE IS RS. 16.06 CRORES. THE TPO ASKED THE ASSESSEE TO FURNISH THE D ETAILS OF COST OF BORROWINGS. THE TPO HELD THAT EXTENDING THE CREDIT PERIOD TO THE AE FOR REALIZATION OF SALES IS A SHORT TERM LOAN TO THE AE AND ACCORDINGLY THE TPO COMPUTED THE ARMS LENGTH OF IN TEREST BY TAKEN AVERAGE COST OF THE ASSESSEES FUND AT 10.97%+3% FO R RISK AND RETURN. ACCORDINGLY, THE TPO APPLIED THE ARMS LENGTH RATE AT 13.97% AND MADE THE ADJUSTMENT OF RS. 5,50,16,111/-. 9. BEFORE THE DRP, THE ASSESSEE SUBMITTED THAT IT D OES NOT CHARGE ANY INTEREST ON DELAYED PAYMENT ON ACCOUNT OF SALES AFF ECTED EITHER IN INDIA OR ON EXPORT SALES. IT IS THE POLICY OF THE C OMPANY AND EVEN IN THE NORMAL BUSINESS PRACTICES, INTEREST IS NOT CHAR GED ON DELAYED PAYMENT FROM CUSTOMERS. THUS IT WAS CONTENDED THAT UNDER THIS CONSISTENT POLICY, NO INTEREST IS CHARGED ON THE EX PORT OUTSTANDING FROM THE AE EVEN WHEN THE AMOUNTS ARE DUE FOR A LON GER PERIOD. THE ASSESSEE FURTHER CONTENDED THAT ALLOWING THE CREDIT PERIOD ON EXPORT SALE IS NOT INTERNATIONAL TRANSACTION PER SE , BUT IS A RESULT OF THE INTERNATIONAL TRANSACTION AND HENCE CANNOT BE SUBJE CTED TO TRANSFER PRICING REGULATIONS. THE ASSESSEE SUBMITTED FRESH EVIDENCES BEFORE DRP WHICH WERE FORWARDED TO THE TPO FOR HIS REPORT. THE TPO GAVE V.I.P. INDUSTRIES LTD. 6 | P A G E HIS REPORT VIDE LETTER DATED 25.10.2013, WHEREIN T HE DOCUMENTS PRODUCED BY THE ASSESSEE WERE VERIFIED. ON THE BASI S OF REMAND REPORT, THE DRP HELD THAT THERE IS A UNIFORM BUSINE SS PRACTICE OF NOT CHARGING INTEREST ON ANY DELAYED EXPORT RECEIVABLES . THUS, BY NOT CHARGING ANY INTEREST ON EXPORT RECEIPTS FROM THE A E, NO SPECIAL BENEFIT HAS BEEN GIVEN TO THE AE. ACCORDINGLY, THE DRP DELETED THE ADJUSTMENT MADE BY THE TPO ON THIS ACCOUNT. 9. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND C ONSIDERED THE RELEVANT MATERIAL ON RECORD. IN THE REMAND REPORT D ATED 25.10.2013, THE TPO HAS VERIFIED THE DOCUMENTS PRODUCED BY THE ASSESSEE AND CONFIRMED THE NON CHARGING OF INTEREST ON DELAYED EXPORT RECEIPTS EIT HER FROM AE OR NON AE. FURTHER IT WAS ALSO AN UNDISPUTED FACT THAT THAT DU E TO THE DELAY IN REALIZATION OF SALES, THE ASSESSEE HAS EARNED FOREIGN EXCHANGE GAIN WHICH IS MUCH MORE THAN THE INTEREST ADJUSTMENT. THE LD. AUTHORIZED RE PRESENTATIVE OF THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. INDO AMERICAN JEWELLERY LTD. (2014) 4 TAXMANN.COM 310. HE HAS ALSO RELIED ON FOLLOWING DECISIONS :- (I) COMMUNICATION LTD VS. ACIT (2011) 9 TAXMANN.COM 26 (MUMBAI) (II) MASTEK LTD. VS. ADDL. CIT (2012) 53 SOT 111 (III) LINTAS INDIA (P) LTD. VS. ACIT (2013) 152 TTJ 706 (IV) HYPER QUALITY INDIA P. LTD. VS. ACIT IN ITA NO. 5630/DEL/2011. 10. IN THE CASE OF CIT VS. INDO AMERICAN JEWELLERY LTD. (SUPRA), THE HON'BLE HIGH COURT HAS HELD IN PARA 5 AS UNDER:- ON APPEAL FILED BY THE REVENUE, THE ITAT UPHELD TH E ORDER OF CIT(A). WHILE, UPHOLDING THE ORDER OF CIT(A), THE ITAT HELD THAT INTEREST INCOME IS ASSOCIATED ONLY WITH THE LENDING OR BORROWING OF MONEY AND NOT IN CASE OF SALE. WE EXPRESS NO OPINION ON THE ABOVE R EASONING OF ITAT AND KEEP THE REASONING OPEN FOR DEBATE IN AN APPROPRIAT E CASE. HOWEVER, IN V.I.P. INDUSTRIES LTD. 7 | P A G E THE FACTS OF THE PRESENT CASE, THE SPECIFIC FINDING OF ITAT IS THAT THERE IS COMPLETE UNIFORMITY IN THE ACT OF THE ASSESSEE IN N OT CHARGIN THE INTEREST FROM BOTH THE ASSOCIATED ENTERPRISES AND NON ASSOCI ATED ENTERPRISES DEBTORS AND THE DELAY IN REALIZATION OF THE EXPORT PROCEEDSD IN BOTH THE CASES IS SAME. IN THESE CIRCUMSTANCES THE DECISION OF THE TRIBUNAL IN DELETING THE NOTIONAL INTEREST ON OUTSTANDING AMOUN T OF EXPORT PROCEEDS REALIZED BELATEDLY CANNOT BE FAULTED. 11. THUS THE UNIFORM POLICY OF NOT CHARGING THE INT EREST BOTH FROM AE AND NON AE DEBTORS WAS RECOGNIZED AND ACCEPTED BY THE HON'B LE HIGH COURT AND NO ADJUSTMENT ON ACCOUNT OF NOTIONAL INTEREST ON THE O UTSTANDING AMOUNT ON EXPORT PROCEEDS CAN BE MADE. THE COLLECTION PERIOD FROM AE RANGES FROM 378 DAYS TO 655 DAYS AGAINST THE COLLECTION FROM EXPORT DEBTORS IS RANGING FROM 376 DAYS TO 1151 DAYS. WE FURTHER NOTE THAT 80% OF THE TOTAL SA LES OF THE ASSESSEE IS FROM NON AE CUSTOMERS, THEREFORE, WHEN THE ASSESSEE IS NOT C HARGING ANY INTEREST FROM NON AE THEN THERE IS NO CASE MADE OUT BY THE REVENUE TH AT THE ASSESSEE IS DOING ANY FAVOUR OR GIVING ANY BENEFIT TO THE AE BY EXTENDING THE CREDIT PERIOD OF REALIZATION OF SALES WHICH IS LESS THAN THE INTERNA L CUP BEING THE ASSESSEE ALLOWING THE CREDIT PERIOD TO THE NON-AE. ACCORDIN GLY, IT IS MANIFEST FROM THE FACTS AS RECORDED BY THE DRP THAT THE AVERAGE COLLE CTION PERIOD FROM AE IS LESS THAN THE AVERAGE COLLECTION PERIOD FROM NON AE. HEN CE, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE ORDER OF DRP IN DELETING THE A DJUSTMENT MADE BY TPO/ASSESSING OFFICER ON ACCOUNT OF CREDIT PERIOD E XTENDED TO THE AE. 12.. IN THE RESULT APPEALS OF ASSESSEE IS ALLOWED A ND THAT BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF DECEMBER 2014. SD/- SD/- (N.K.BILLAIYA) (VIJAY PAL RAO) (ACCOUNTANT MEMBER/ YS[KK LNL; YS[KK LNL; YS[KK LNL; YS[KK LNL; ) (JUDICIAL MEMBER/ U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; ) MUMBAI DATED 10-12-2014 SKS SR. P.S,