Cargill India Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 5733/DEL/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91258 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-06-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2007-2008
• Appeal Filed On: 22-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: VIJAY IYA R
• Keywords: Business income; Transfer pricing; Double taxation relief; Principle of natural justice; International transaction; Additional evidence; Permanent establishment; Question of law; Wholly owned subsidiary; Deemed dividend
• Section: 92C; 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I , NEW DELHI BEFORE SMT. DIVA SINGH , JM AND SH. N. K. SAINI, AM ITA NO. 5733 /DEL/201 1 : ASSTT. YEAR : 2007 - 08 CARGILL INDIA PVT. LTD., 111, RECTANGLE I, SAKET DISTRICT CENTER, SAKET NEW DELHI - 110017 VS ASSISTANT COMMISSIONER OF INCOME - TAX, CIRCLE 3(1), NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. A AA CC3269J ASSESSEE BY : SH. VIJAY IYA R , CA REVENUE BY : NONE DATE OF HEARING : 25 .0 3 .2015 DATE OF PRONOUNCEMENT : 19 .06 .2015 ORDER PER N. K. SAINI, AM: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 2 8.10.201 0 PASSED BY THE AO IN PURSUANT TO THE DIRECTIONS OF THE DRP DATED 09 .08.2011 FOR THE ASSESSMENT YEAR 2007 - 08 , U/S 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). 2. FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEAL: 1. GROUNDS RELATING TO TRANSFER PRICING MATTERS 1.1 THE IMPUGNED ASSES SMENT ORDER PASSED UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME TAX ACT, 1961 ( THE ACT ) RELATING TO ASSESSMENT YEAR 2007 - 08 IS ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 2 BAD IN LAW, CONTRARY TO FACTS, ILLEGAL AND UNTENABLE, THEREFORE, THE ADDITIONS MADE TO THE RETURNED INCOME DESERVE TO BE DELETED AND THE INCOME AS RETURNED BY THE APPELLANT DESERVES TO BE ACCEPTED AS THE CORRECT TAXABLE INCOME. 1.2 THE ORDER OF THE LEARNED TRANSFER PRICING OFFICER ( TPO ) U/S 92CA(3), PART DIRECTIONS ISSUED BY THE DISPUTE RESOLUTION PANEL ( DRP ) AND CON SEQUENTLY THE ADDITIONS MADE IN IMPUGNED ASSESSMENT ORDER FOR ASSESSMENT YEAR 2007 - 08 ARE CONTRARY TO LAW TO THE EXTENT ADDITIONS ARE MADE TO RETURNED INCOME AS THE SAME ARE MADE IN GROSS VIOLATION OF THE PRINCIPLES OF NATURAL JUSTICE WITHOUT CONSIDERING A LL THE RELEVANT MATERIALS ON RECORD AND BY RELYING ON IRRELEVANT MATERIALS. 1.3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON BLE DRP ERRED IN PARTLY CONFIRMING THE DRAFT ORDER PASSED BY THE LEARNED ASSISTANT COMMISSIONER OF INCOME TAX , CIRCLE 3(1), NEW DELHI (HEREINAFTER REFERRED TO AS AO ) THEREBY PARTLY CONFIRMING THE ORDER UNDER SECTION 92CA(3) OF THE ACT PASSED BY THE LEARNED TPO. A PART OF THE DIRECTIONS OF THE DRP/LEARNED TPO ARE CONTRARY TO LAW INTER ALIA FOR THE FOLLOWING REAS ONS: 1.3.1 THE HON BLE DRP & LEARNED TPO ERRED IN CONCLUDING THAT RETURN ON VALUE ADDED COSTS (ROVAC), USED BY APPELLANT AS PROFIT LEVEL INDICATOR ( PLI ) FOR ITS MERCHANTING BUSINESS, IS NOT PERMISSIBLE WHILE APPLYING TRANSACTIONAL NET MARGIN METHOD ( TNMM ) . THE HON BLE DRP & LEARNED TPO FAILED TO APPRECIATE THAT ROVAC IS THE APPROPRIATE PLI IN THE FACTS OF THE CASE. 1.3.2 THE HON BLE DRP & LEARNED TPO ERRED IN NOT CONSIDERING THE FACT THAT ALL UNDERLYING INTERNATIONAL ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 3 TRANSACTIONS OF MERCHANTING ACTIVITIES WERE UNDERTAKEN BY THE APPELLANT AT MARKET PRICES AND IGNORING THE COMPARABLE UNCONTROLLED PRICES SUBMITTED BY THE APPELLANT TO SUPPORT THE SAME. 1.3.3 THE HON BLE DRP & LEARNED TPO ERRED IN USING TRADING COMPANIES AS COMPARABLE TO THE APPELLANT DESPITE THE FACT THA T THE APPELLANT S ECONOMIC VALUE ADD IS SIMILAR TO THAT OF SERVICE PROVIDER, AND ITS RISK AND FUNCTIONS ARE SIGNIFICANTLY FEWER AS COMPARED TO A NORMAL TRADER. 1.3.4 WITHOUT PREJUDICE TO THE ABOVE, EVEN IF TRADING COMPANIES WERE TO BE USED AS COMPARABLE TO THE APPELLANT, THE HON BLE DRP & LEARNED TPO CONSIDERED INCOMPARABLE TRADING COMPANIES TO BENCHMARK THE COMBINED BUSINESS OF THE APPELLANT. 1.3.5 THE HON BLE DRP & LEARNED TPO ERRED IN ADOPTING INCONSISTENT BASIS WHILE CALCULATING THE OPERATING MARGIN, OF THE APPEL LANT VIS - - VIS THE COMPARABLE COMPANIES, USED FOR THE PURPOSE OF BENCHMARKING THE IMPUGNED INTERNATIONAL TRANSACTIONS. 1.3.6 THE HON BLE DRP & LEARNED TPO ERRED IN DIRECTING USE OF SINGLE YEAR DATA AS AGAINST THE MULTIPLE YEAR DATA USED BY THE APPELLANT, TO COM PUTE THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF THE APPELLANT USING TNMM METHOD. 1.3.7 THE HON BLE DRP ERRED IN NOT DIRECTING LEARNED TPO TO ALLOW A VARIATION OF 5 PERCENT IN DETERMINING THE ARM S LENGTH PRICE. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 4 1.3.8 THE HON BLE DRP ERRED IN NOT DEAL ING WITH ALL THE OBJECTIONS RAISED BY THE APPELLANT WITHOUT CITING ANY REASONS AND PROCEEDING PURELY ON PRESUMPTIONS. 2. GROUND RELATING TO CORPORATE TAX MATTERS 2.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ASSISTANT COMMIS SIONER OF INCOME TAX, CIRCLE 3(1), NEW DELHI (HEREINAFTER REFERRED TO AS LEARNED AO ) AND THE HON BLE DISPUTE RESOLUTION PANEL ( HON BLE DRP ) HAVE ERRED IN DISALLOWING THE CLAIM FOR DISCOUNTING CHARGES OF RS. 274,567,319/ - UNDER SECTION 40(A)(I) OF THE A CT. 2.1.1 THAT THE HON BLE DRP AND LEARNED AO ERRED IN FACTS AND IN LAW IN HOLDING THAT THE ASSESSEE WAS LIABLE TO WITHHOLD TAX UNDER SECTION 195 OF THE ACT WITH RESPECT TO DISCOUNTING CHARGES INCURRED BY IT WHILE GETTING DEMAND PROMISSORY NOTES ( PN ) DISCOUNTED WITH CTSFA. 2.1.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON BLE DRP AND LEARNED AO FAILED TO APPRECIATE THAT THE DISCOUNTING OF PN RESULTS IN BUSINESS INCOME FOR CTSFA, AND IN THE ABSENCE OF ITS PERMANENT ESTABLISHMENT ( PE ) IN INDIA UNDER THE RELEVANT DOUBLE TAX AVOIDANCE AGREEMENT ( THE TREATY ), THE SAME CANNOT BE BROUGHT TO TAX IN INDIA, AND THEREFORE THE ASSESSEE WAS NOT LIABLE FOR DEDUCTION OF TAX AT SOURCE UNDER SECTION 195 OF THE ACT. 2.1.3 THAT ON THE FACTS A ND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON BLE DRP AND LEARNED AO FAILED TO APPRECIATE THAT BY DISCOUNTING OF PN FROM CTSFA, THE ASSESSEE HAS NEITHER BORROWED ANY LOAN NOR INCURRED ANY DEBT, BUT HAS MERELY SOLD THE PN AT A DISCOUNT. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 5 2.1.4 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON BLE DRP AND LEARNED AO ERRED IN HOLDING THAT THE DISCOUNTING CHARGES WERE INTEREST UNDER SECTION 2(28A) OF THE ACT AND THEREFORE LIABLE FOR TAX WITHHOLDING UNDER SECTION 195 OF THE ACT. THE HON BLE D RP AND LEARNED AO ALSO ERRED IN COMPLETELY IGNORING THE CIRCULARS ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES CLARIFYING TO THE OPPOSITE EFFECT. 2.1.5 WITHOUT PREJUDICE TO ABOVE, THE HON BLE DRP AND LEARNED AO ERRED IN NOT APPRECIATING THAT PAYMENT OF INT EREST, IF ANY, IS BY A NON - RESIDENT BUYER OF GOODS TO CTSFA, AND THEREFORE, INCOME IS NOT TAXABLE IN INDIA AS PER PROVISION OF SECTION 9(1)(V)(C) OF THE ACT. 2.1.6 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON BLE DRP AND LEARNED AO ERRED IN MISCONSTRUING THE AMOUNT OF DISCOUNTING CHARGES AS INTEREST BY COMPLETELY IGNORING THE FACT THAT HON BLE DELHI HIGH COURT IN THE CASE OF CARGILL GLOBAL TRADING INDIA PRIVATE LIMITED ( CGTIPL ) ON THE SAME FACTS HAVE HELD THAT THE SAID DISCOUNTING CHARGES ARE NOT INTEREST AND THEREFORE, TAX IS NOT DEDUCTIBLE UNDER SECTION 195 AND HENCE CANNOT BE DISALLOWED UNDER SECTION 40(A)(I) OF THE ACT. 2.1.7 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON BLE DRP AND LEARNED AO ERRED IN CO MPLETELY IGNORING THE RULING OF THE HON BLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE PVT. LTD. AND DISALLOWING THE DISCOUNTING CHARGES ON THE GROUND THAT NO APPLICATION WAS MADE TO THE AO UNDER SECTION 195(2) OF THE ACT FOR DETERMINATION OF THE RATE OF WITHHOLDING. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 6 2.1.8 THAT HON BLE DRP HAS ERRED IN LAW IN DECLINING TO INTERVENE IN THE MATTER AS SAME WAS PENDING WITH CIT(A) AND ITAT FOR EARLIER YEARS. 2.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE HON BLE DRP AND LEARNE D AO ERRED IN TREATING THE LOAN RECEIVED FROM CGTIPL AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT AND MAKING AN ADDITION OF RS. 32,810,658/ - IN THE HANDS OF THE ASSESSEE TO THE EXTENT OF ACCUMULATED PROFITS IN THE BOOKS OF CGTIPL. 2.2.1 THAT ON TH E FACTS AND CIRCUMSTANCES OF THE CASE AN IN LAW, THE HON BLE DRP AND LEARNED AO ERRED IN NOT APPRECIATING THAT THE AFORESAID LOAN RECEIVED FROM CGTIPL DOES NOT SATISFY THE CONDITIONS OF 2(22)(E) OF THE ACT AND HENCE CANNOT BE TAXED AS DEEMED DIVIDEND IN TH E HANDS OF ASSESSEE. 2.2.2 THE HON BLE DRP HAS ERRED IN LAW IN DECLINING TO INTERVENE IN THE MATTER AS SAME WAS PENDING WITH CIT(A) AND ITAT FOR EARLIER YEARS. 2.3 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LEARNED AO HAS ERRED IN NO T GIVING THE CREDIT OF THE ADDITIONAL TDS CERTIFICATE AMOUNTING TO RS. 22,225 FILED AND CLAIMED DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 2.4 THE LEARNED AO HAS ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW BY INITIATING PENALTY PROCEEDIN GS U/S 271(1)(C) AGAINST THE APPELLANT FOR FURNISHING INACCURATE PARTICULARS OR FOR FAILURE TO DISCLOSE TRUE PARTICULARS OF INCOME. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 7 THE ABOVE GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO EACH OTHER. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, SUPPLEMEN T, AMEND, VARY, WITHDRAW OR OTHERWISE MODIFY THE GROUND MENTIONED HEREIN ABOVE AT OR BEFORE THE TIME OF HEARING. 3. THE PRESENT CASE WAS FIXED FOR HEARING ON 16.03.2015, D URING THE COURSE OF HEARING THE LD . COUNSEL FOR THE ASSESSEE MR. I YAR, CA STATED T HAT ALL THE ISSUES RAISED IN THIS APPEAL ARE COVERED VIDE ORDER DATED 2 8 .11.2013 IN ITA NO. 4095/DEL/2010 FOR THE ASSESSMENT YEAR 2006 - 07 IS ASSESSEE S OWN CASE. MR. J. JAMES, ADV. WAS PRESENT ON BEHALF OF THE DEPARTMENT AS A STANDING COUNSEL ON THE SAID D ATE. THE CASE WAS ADJOURNED FOR 19.03.2015 , SO THAT THE DEPARTMENTAL REPRESENTATIVE MAY GO THROUGH THE SMALL SYNOPSIS ADDRESSING THE ISSUE S, FILED BY THE LD. COUNSEL FOR THE ASSESSEE . HOWEVER, ON 19.03.2015 , THE LD. STANDING COUNSEL FOR THE REVENUE , MR. JU DI JAMES , WHILE MENTIONING AT THE OUTSET IN SOME OF THE APPEALS , ON THE ORAL INSTRUCTIONS OF LD. CIT DR , SH. A. K. SINGH WHO WAS NOT PRESENT IN THE COURT , SOUGHT ADJOURNMENT AND MISREPRESENTED THE FACT. ACCORDINGLY, INSTEAD OF GIVING AN ADJOURNMENT , PASS OVER WAS GIVEN IN THE BATCH OF 7 TO 8 APPEALS WHEREIN THE LD. STANDING COUNSEL HAD ALSO STATED THAT HE DOES NOT HAVE THE AUTHORITY TO ARGUE THOSE APPEALS. THUS, WHERE THE ISSUE OF LACK OF AUTHORITY WAS RAISED , THE APP EALS WERE PASSED OVER AND THE LD. STAND ING COUNSEL , WAS REQUIRED TO ADDRESS THE REMAINING APPEALS ON THE CAUSE LIST WHERE HE HAD AUTHORITY TO ARGUE THE ISSUE HAVING BEEN RAISED BY HIMSELF. HOWEVER, ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 8 INSTEAD OF ADDRESSING THE ISSUE RAISED BY HIMSELF , THE LD. STANDING COUNSEL SURPRISINGLY SHOUTED THAT HE WILL NOT ARGUE AND WALKED OUT OF THE COURT LEAVING THE REVENUE COMPLETELY UNREPRESENTED. IN VIEW OF THIS MISBEHAVIOR , IT WAS ANNOUNCED THAT THE COURT WOULD REASSEMBLE ON THE ARRIVAL OF SH. A. K. SINGH, LD. CIT DR. ON THE ARRIVAL OF THE LD. CIT DR A T ABOUT 12 PM , THE HEARINGS WERE PROCEEDED. SINCE THE PRESENT APPEAL ON 16.03.2015 HAD BEEN ARGUED AS A COVERED APPEAL , WHERE THE BENEFIT OF THE ARGUMENTS OF THE LD. AR WAS NOT AVAILABLE TO THE LD. CIT DR. IN THESE CIRCUMSTANCES THE LD. CIT DR SOUGHT TIME TO STUDY THE SAME WHICH WAS GIVEN AND THE APPEAL WAS ADJOURNED TO 25.03.2015. IT IS UNFORTUNATE THAT ON 19.03.2015 ITSELF , THE LD. CIT DR INSTEAD OF CONDEMNING THE MISBEHAVIOR OF THE LD. STANDING COUNSEL , OBJECTED TO THE RECORDING OF THE COURT PROCEEDINGS IN REGARD TO THE MISBEHAVIOR AND MISDEMEANOR OF THE LD. STANDING COUNSEL. HE ALSO LEFT THE COURT PROCEEDINGS LEAVING THE REVENUE IN LURCH. AS A RESULT THEREOF , THE REMAINING APPEAL S OF THE CAUSE LIST HAD TO BE ADJOURNED SO AS TO GIVE OPPORTUNITY TO THE REV ENUE. CARRYING THE BEHAVIOR FURTHER ON 25.03.2015 , THE LD. CIT DR , INSTEAD OF PUTTING THE DEPARTMENTAL STAND ON RECORD SOUGHT AN ADJOURNMENT WITHOUT SPECIFYING ANY SPECIFIC REASON. CONSIDERING THE REQUEST AND THE FACT THAT THE APPEAL HAD BEEN ALREADY ARGUE D TWICE AS A COVERED MATTER, T HE LD. AR WAS REQUIRED TO MAKE HIS SUBMISSION S . RIGHT TILL THE END OF THE SUBMISSIONS, THERE WAS NO ONE ON BEHALF OF THE REVENUE EITHER TO SEEK DATE OR MAKE REPRESENTATION. IN THESE CIRCUMSTANCES , THE ADJOURNMENT ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 9 WAS REJECTED AND THE APPEAL WAS HEARD. IN THE PRESENT CASE, P ASSING OF THE ORDER WAS DELAYED PRESUMING THAT THE REVENUE MIGHT SEEK AN OPPORTUNITY TO ADDRESS THE ISSUES BY MOVING AN APPROPRIATE PETITION. SINCE NO SUCH REQUEST TILL DATE W AS MADE O N THE FACE OF APATHY OF THE REVE NUE R EPRESENTING THE CASE , WE PROPOSE TO CONSIDER THE ISSUES OURSELVES AND DECIDE THE APPEAL ON MERIT AFTER CONSIDERING THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE AND PERUSING THE MATERIAL AVAILABLE ON THE RECORD . 4. GROUND NOS. 1.1 TO 1.3.8 ARE CO - RELATED AND RELATES TO THE TRANSFER PRICING MATTER. VIDE THESE GROUNDS THE GRIEVANCE OF THE ASSE SSEE RELATES TO THE R ETURN ON VALUE ADDED COST S (ROVAC ) USED BY THE ASSESSEE AS PROFIT LEVEL INDICATOR (PLI) FOR ITS MERCHANTING BUSINESS WHICH THE AO HELD AS NOT PERMISSIBLE FOR APPLYING TRANSACTIONAL NET MARTIN METHOD (TNMM). 5. THE FACTS OF THE CASE IN BRIEF ARE THAT T HE ASSESSEE IS A WHOLLY OWNED INDIAN SUBSIDIARY OF M/S CARGIL MAURITIUS LTD. AND WAS ENGAGED IN THE BUSINESS OF IMPORT, EXPOR T AND DOMESTIC TRADING IN EDIBLE OILS, FERTILIZERS, GRAINS, OIL SEEDS AND OTHER FOOD PRODUCTS/PROCESSED FOOD. IT WAS ALSO ENGAGED IN THE BUSINESS OF PROCESSING CRUDE OIL. THE ASSESSEE FILED ITS RETURN OF INCOME ON 31.10.2007 DECLARING LOSS OF RS. 136,18,93 ,333/ - . LATER ON, THE CASE WAS SELECTED FOR SCRUTINY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS , THE AO NO TICED FROM THE FORM NO. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 10 3CEB FILED ALONG WITH THE RETURN OF INCOME THAT THE ASSESSEE DURING THE Y EAR HAD INTERNATIONAL TRANSACTIONS WITH ASSOCIATED E NTERPRISES/CON CERNS TO THE TUNE OF RS. 34,561,8 60,46 5/ - . THE AO IN ORDER TO DETERMINE ARM S LENGTH PRICE IN RELATION TO INTERNATIONAL TRANSACTIONS TRANSFERRED THE CASE TO THE TRANSFER PRICING OFFICER (TPO) . THEREAFTER THE TPO PASSED THE ORDER U/S 92CA(3) O F THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) DATED 28.10.2010 WHEREIN HE HAD DONE AN UPWARD ADJUSTMENT OF RS. 2,811,825,553/ - WHILE DETERMINING THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. THEREAFTER THE AO PASSED DRAFT OF T HE PROPOSED ASSESSMENT ORDER ON 20.12.2010. THE ASSESSEE FILED FOLLOWING OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP ) : GROUND 1: THE LEARNED TPO HAS ERRED IN REJECTING BROKER QUOTES IN RESPECT OF IMPORT OF OIL AS VALID CUP. GROUND 2: THE LEARNED TPO HAS NOT ACCEPTED THE CBOT QUOTES AS VALID CUP. GROUND 3: THE LEARNED TPO HAS ERRED IN CONCLUDING THAT USE OF CUP METHOD REQUIRES EXACT COMPARABILITY AND ACCURATE ADJUSTMENTS AND HENCE IT CANNOT BE USED TO BENCHMARK THE IMPORT OF OIL TRANSACTION. GRO UND 4: THE LEARNED TPO HAS ERRED IN MAKING AN ADJUSTMENT TO THE UNRELATED PARTY SEGMENT OF CIPL, WITHIN THE MANUFACTURE AND SALE OF EDIBLE OIL BUSINESS. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 11 GROUND 5: THE LEARNED TPO ERRED IN CONCLUDING THAT RISK UNDERTAKEN IN MERCHANTING ACTIVITIES IS SAME A S THAT OF NORMAL TRADER. GROUND 6: THE LEARNED TPO HAS ERRED IN CONCLUDING THAT PLI USED FOR ROVAC ANALYSIS IS NOT APPROPRIATE IN THE CASE OF MERCHANTING ACTIVITIES. GROUND 7: THE COMPARABLE COMPANIES IDENTIFIED BY THE TPO TO BENCHMARK THE ASSESSEE S OPER ATING MARGIN FROM THE MERCHANTING SEGMENT ARE INAPPROPRIATE. GROUND 8: THE LEARNED TPO HAS ERRED IN APPLYING THE TURNOVER FILTER OF INR 500 CRORES TO REJECT COMPANIES IDENTIFIED BY THE ASSESSEE AS PART OF THE CORROBORATIVE TNMM ANALYSIS FOR BOTH MANUFACTU RING AND MERCHANTING BUSINESS. GROUND 9: THE LEARNED TPO HAS ERRED IN COMPUTING THE OPERATING MARGIN OF THE ASSESSEE. GROUND 10: THE LEARNED TPO HAS ERRED IN COMPUTING THE OPERATING MARGIN OF THE COMPARABLE COMPANIES. GROUND 11: THE LEARNED TPO HAS ADOP TED A FLAWED APPROACH BY USING SINGLE YEAR DATA AS AGAINST THE MULTIPLE YEAR DATA USED BY THE ASSESSEE, TO COMPUTE THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF THE ASSESSEE USING TNMM METHOD. GROUND 12: THE LEARNED TPO HAVE ERRED IN LAW IN N OT APPLYING THE PROVISO TO SECTION 92C OF THE ACT AND HAS FAILED TO ALLOW THE APPELLANT THE BENEFIT OF UPWARD VARIATION OF 5 PERCENT IN DETERMINING THE ARM S LENGTH PRICE. 6. THE ASSESSEE FILED THE FOLLOWING EVIDENCES FOR THE INTERNATIONAL TRANSACTION PE RTAINING TO THE IMPORT OF OIL BEFORE THE DRP: ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 12 A) COMPARABLE QUOTES FROM CHICAGO BOARD OF TRADE ( CBOT ); B) INTERNAL COMPARABLE UNCONTROLLED PRICES; C) COMPARABLE UNCONTROLLED TRANSACTION P RICES FOR IMPORT OF OIL SOURCED FROM CUSTOMS AUTHOR ITIES. 7. THE DRP OBSERVED THAT CBO T IS AN INTERNATIONALLY RECOGNIZED AND ACCEPTED COMMODITY EXCHANGE BASED IN CHICAGO, USA AND THAT THE QUOTATIONS PROVIDED BY COMMODITY EXCHANGES ARE SQUARELY COVERED BY RULE 10D(3). IT WAS FURTHER OBSERVED THAT THE TPO HAS ACCEPTED THE COMMODITY EXCHANGE QUOTES USED BY THE ASSESSEE IN SUPPORT OF INTERNATIONAL TRANSACTION PRICES FOR OTHER COMMODITIES SUCH AS SUGAR, WHERE DATA FROM NATIONAL COMMODITIES DERIVATIVES EXCHANGE WAS USED AND WHEAT, WHERE DATA FROM CBOT ITSELF WA S CONSIDERED AS COMPARABLE UNCONTROLLED PRICE INFORMATION. ACCORDINGLY, THE DRP WAS OF THE VIEW THAT CBOT WAS AN APPROPRIATE USE OF DATA FOR APPLYING CUP METHOD. THE DRP ALSO OBSERVED THAT THE ASSESSEE MADE AN ADJUSTMENT FOR SOAM PREMIUM TO THE CBOT DATA T O ARRIVE AT PRICES AT WHICH TRADES WERE CARRIED OUT BETWEEN BUYERS AND SELLERS IN THE OPEN MARKET AND THE BASIS OF THIS ADJUSTMENT WAS BASED ON DATA PROVIDED BY AN INTERNATIONAL BODY - THE AGRICULTURAL COMMODITIES I NTERNATIONAL S.A. FROM ARGENTINA, WHICH IS A LEADING GLOBAL AGRICULTURAL COMMODITIES CONSULTANCY FIRM. THE DRP ALSO MENTIONED THAT THE ASSESSEE MADE ADJUSTMENT FOR FREIGHT RATES PROVIDED BY GENEVA MARITIME. THE DRP HELD THAT THE PRICE SOURCED ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 13 FROM CBOT AND USED FOR COMPARISON WAS AUTHENTIC. AS REG ARDS TO THE EXTENT OF RISKS UNDERTAKEN IN MARCHANTING ACTIVITIES, THE ASSESSEE STATED THAT THE BUY AND SELL LEGS OF THE TRANSACTION WERE EXECUTED SIMULTANEOUSLY AND BETWEEN CARGILL GROUP ENTITIES, ENSURING THAT THE SALE AND PURCHASE WERE AT PREVAILING INTE RNATIONAL MARKET PRICES AND THAT THE FUNCTIONS IN THE CURRENT MERCHANTING ACTIVITIES WERE VERY LESS AS COMPARED TO A REGULAR TRADE. IT WAS FURTHER STATED THAT THE BUYER AND SELLER HAD ALREADY INDENTIFIED EACH OTHER AND THE PROPERTY IN GOODS INVOLVED IN THE MERCHANTING ACTIVITIES WAS TRANSFERRED ON AN INSTANTANEOUS BASIS, HENCE NO RISK ON ACCOUNT OF COMMODITY PRICE AND INVENTORY TRANSFERS ON BACK TO BACK BASIS. IT WAS ALSO STATED THAT RETURN ON VALUE ADDED COSTS (ROVAC) ARE PERMISSIBLE PROFIT LEVEL INDICATOR (PLI) UNDER THE INCOME TAX ACT. THE RELIANCE WAS PLACED ON CLAUSE (E) OF RULE 10B(1) OF THE INCOME TAX RULES. IT WAS FURTHER STATED THAT BERRY RATIO WAS WIDELY USED ACROSS THE WORLD AS A LEGITIMATE PROFIT AND WERE BEST SUITED TO THE FACTS AND CIRCUMSTANCE S OF THE BUSINESS OF THE ASSESSEE S MERCHANTING ACTIVITIES. THE RELIANCE WAS PLACED ON THE DECISION OF THE ITAT IN THE CASE OF SCHEFENACKER MOHT ERSON LTD . IT WAS ALSO STATED THAT THE FOOD CORPORATION OF INDIA (FCI) WAS A GOVERNMENT COMPANY AND REPORTS A NI L PROFIT FOR THE YEAR UNDER CONSIDERATION AND ITS SALES WERE SIGNIFICANTLY HIGHER THAN THE ASSESSEE IS MERCHANTING ACTIVITIES, THEREFORE, IT WAS NOT COMPARABLE. IT WAS ALSO STATED THAT THE TURNOVER FILTER WAS ARBITRARY AND LEADS TO SUBJECTIVITY IN THE ANAL YSIS. THE ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 14 ASSESSEE ARGUED BEFORE THE DRP THAT ITS OPERATING MARGIN HAD BEEN INCORRECTLY COMPUTED AND THAT THE INTEREST INCOME SHOULD HAVE BEEN CONSIDERED OPERATING. IT WAS FURTHER STATED THAT THERE WAS NO CONSISTENCY ON THE TREATMENT OF INTEREST INCOME AND EXPENSES, THEREFORE, EITHER BOTH OF THEM SHOULD HAVE BEEN CONSIDERED OPERATING OR NON - OPERATING AND SHOULD HAVE MATCHED WITH THE POSITION ADOPTED IN CASE OF COMPARABLE COMPANIES. 8. THE DRP AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED AS U NDER: GROUND NOS. 5 TO 10 ARE RELATED AND HENCE CONSIDERED TOGETHER. FOR THE INTERNATIONAL TRANSACTIONS PERTAINING TO MERCHANTING ACTIVITIES THE ASSESSEE HAS RAISED THE OBJECTIONS WHICH HAVE BEEN DISCUSSED ABOVE. OUR OBSERVATIONS WITH REGARD TO THESE OBJ ECTIONS ARE AS UNDER: 1. THE TPO IN HIS ORDER HAS CLEARLY SHOWN THAT ALL THE TRANSACTIONS OF PURCHASE AND SALE ARE CARRIED OUT BY THE ASSESSEE IN ITS OWN NAME WHICH WAS EVIDENT FROM THE FACT THAT THE ASSESSEE HAD REPORTED ALL THE SALES AND PURCHASE IN THE AU DITED ANNUAL ACCOUNTS. IT HAS NEVER BEEN THE CLAIM OF THE ASSESSEE THAT ITS AUDITED ANNUAL ACCOUNTS ARE LIABLE TO BE REJECTED. THEREFORE WE DON T FIND ANY MERIT IN ARGUMENT THAT THE ASSESSEE IS PARTICIPATING IN RISK FREE BUY - SELL TRADE. ONCE THE ASSESSEE H AS PURCHASED THE COMMODITY ALL THE RISKS ARE BEING BORNE BY THE ASSESSEE. WE FEEL THAT THE ASSESSEE BECOMES A FULL RISK BEARING ENTITY ONCE THE COMMODITIES ARE PURCHASED BY THE ASSESSEE IN ITS NAME. IN VIEW OF THE ABOVE, WE REJECT THE ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 15 OBJECTION OF THE ASSE SSEE AND DIRECT THAT GROUND NO. 5 DOES NOT REQUIRE ANY INTERFERENCE. 2. THE ASSESSEE HAS RAISED OBJECTIONS TO THE REJECTION OF BERRY RATIO BY THE TPO AND HAS RELIED UPON THE OECD GUIDELINES. THE ASSESSEE HAS ALSO PLACED RELIANCE ON SCHEFENACKER MOHTERSON LTD . WE HAVE CONSIDERED THE OBJECTION OF THE ASSESSEE IN THIS REGARD. RELEVANT PART OF THE RULES IS REPRODUCED: 10B(1)(E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, - (I) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; THE ASSESSEE HAS USED OP/OC AS THE PROFIT LEVEL INDICATOR A S MENTIONED IN THE TRANSFER PRICING STUDY REPORT. THE OPERATING REVENUE HAS BEEN DEFINED AS REVENUE FROM OPERATING ACTIVITIES EXCLUDING OTHER INCOME (I.E. INTEREST/DIVIDEND RECEIVED). THE OPERATING COST HAS BEEN DEFINED AS TOTAL COST EXCLUDING EXTRAORDIN ARY EXPENSES/NON RECURRING EXPENSES (I.E. PROFIT/LOSS ON SALE OF FIXED ASSETS, AMORTIZATION OF PRELIMINARY EXPENSE, ANY INTEREST PAYMENT ETC.) AND TAX. THE DEFINITION OF OPERATING REVENUE DOES NOT EXCLUDE THE REVENUE GENERATED FROM THE SALES. SIMILARLY THE DEFINITION OF OPERATING COST DOES NOT EXCLUDE THE COST OF PURCHASES. HOWEVER IT WAS SEEN FROM THE COMPUTATION OF TESTED PARTY MARGIN THAT THE VALUE OF SALES AND VALUE OF PURCHASES HAVE NOT BEEN CONSIDERED AS PART OF THE OPERATING REVENUE AND OPERATING COS T RESPECTIVELY. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 16 THE PLI REPRESENTS THE MARGIN EARNED BY THE TESTED PARTY WITH REFERENCE TO THE INTERNATIONAL TRANSACTIONS, SINCE IT IS USED TO BENCHMARK THE INTERNATIONAL TRANSACTIONS. THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE ARE IN THE NATURE OF SA LE AND PURCHASE OF COMMODITIES. HOWEVER THE WAY THE ASSESSEE HAS COMPUTED THE MARGIN OF THE TESTED PARTY, WITHOUT CONSIDERING THE VALUE OF PURCHASES AND SALE, ALL THE INTERNATIONAL TRANSACTIONS HAVE REMAINED OUT OF THE COMPUTATION. IN ACCORDANCE WITH THE PROVISIONS OF RULE 10B(1)(E)(I) THE RELEVANT BASE HAS TO BE COST INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED . IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE WE REJECT THE OBJECTION OF THE ASSESSEE AND DIRECT THAT GROUND NO. 6 DOES NOT REQUIRE ANY INTERFERENCE. 3. OBJECTIONS AT GROUND NOS. 7 AND 8 ARE DISCUSSED TOGETHER. THE TPO HAS CHOSEN THE COMPARABLES FOR THE MERCHANTING SEGMENT BY WAY OF A LOGICAL SEARCH CARRIED OUT BY HIM. THE FILTERS HAVE BEEN CHOSEN BY THE TPO BASED ON T HE TURNOVER OF THE ASSESSEE. IT IS A FACT THAT A COMPANY HAVING HUGE TURNOVER OF RS. 4172 CRORES CANNOT BE COMPARED WITH COMPANIES HAVING SMALL TURNOVER. THE TPO HAS THEREFORE APPLIED THE TURNOVER FILTER CORRECTLY. THE TPO HAS ALSO REFERRED TO THE DECISION IN THE CASE OF QUARK SYSTEMS PVT. LTD. 2010 - TIOL - 31 - ITAT - CHD - SB IN WHICH IT WAS HELD BY THE HON BLE ITAT THAT TURNOVER FILTER SHOULD BE APPLIED WHILE SELECTING THE COMPARABLES. THE OBJECTION OF THE ASSESSEE ALSO DOES NOT HOLD GOOD BECAUSE THE TPO HAS ALSO EXAMINED ALL THE COMPARABLES SELECTED BY THE ASSESSEE AND HAVE REACHED A LOGICAL CONCLUSION. THE OBJECTION OF THE ASSESSEE THAT FOOD CORPORATION OF INDIA SHOULD NOT BE SELECTED AS A COMPARABLE ALSO DOES ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 17 NOT HOLD GOOD. IT HAS BEEN POINTED OUT BY THE ASSES SEE THAT FCI IS A GOVERNMENT CORPORATION AND IT IS GETTING SUBSIDY FROM THE GOVERNMENT AND THEREFORE IT SHOULD NOT BE CONSIDERED AS A COMPARABLE. THE TPO HAS VERIFIED THE FINANCIALS OF THE COMPANY ON THE PROWESS AND IT WAS NOTICED BY HIM THAT THIS COMPANY IS HAVING PROFITS AND THE SAME ARE REFLECTED IN THE PROWESS DATA BASE. IN VIEW OF THESE FACTS THE OBJECTIONS OF THE ASSESSEE WITH REGARD TO THE USE OF FOOD CORPORATION OF INDIA AS A COMPARABLE AND APPLICATION OF TURNOVER FILTER OF RS. 500 CRORES ARE REJEC TED. THUS WE DIRECT THAT GROUND NOS. 7 AND 8 DOES NOT REQUIRE ANY INTERFERENCE. 4. GROUND NOS. 9 AND 10 RELATES TO THE COMPUTATION OF THE MARGIN OF THE ASSESSEE COMPANY AND THE COMPARABLE COMPANIES. THIS ISSUE HAS BEEN DISCUSSED AT LENGTH IN PARA NO. 8.4 OF THE ORDER PASSED BY THE TPO. WE HAVE SEEN THAT THE TPO HAS RELIED UPON VARIOUS JUDICIAL PRONOUNCEMENTS IN THIS REGARD AND HAVE REACHED A LOGICAL CONCLUSION. WE THEREFORE DIRECT THAT THESE GROUNDS DO NOT REQUIRE ANY INTERFERENCE. 5. IN VIEW OF THE ABOVE FINDI NGS THE TPO IS DIRECTED TO RE - COMPUTE THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE IN THE MERCHANTING SEGMENT. FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS THE TPO SHALL USE FOLLOWING TWO COMPARABLES: NO. COMPANY NAME SELECT ED BY TPO/ASSESSEE SEGMENT MARGINS 1. FCI SELECTED BY TPO MERCHANTING 7.06% 2. PEC LIMITED SELECTED BY TPO AND BY THE ASSESSEE MERCHANTING 2.11% MEAN 4.89 ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 18 THE TESTED PARTY MARGIN AS COMPUTED IN PARA NO. 9.1 OF THE TPO S ORDER AT ( - ) 1.70% SHALL BE BENCHMARKED AGAINST THE MEAN MARGIN OF COMPARABLES WHICH IS 4.9 AS COMPUTED ABOVE. 8) GROUND NO. 11: USE OF SINGLE YEAR DATA VS MULTIPLE YEAR DATA THE ASSESSEE HAS ARGUED THAT USE OF MULTIPLE YEAR IS ALLOWED UNDER THE INCOME TAX ACT, 1961 AND THAT TH E SAME BACKED BY THE OECD GUIDELINES, WHICH ALSO SUGGESTS THE USE OF MULTIPLE YEAR DATA. THE ASSESSEE ARGUES THAT USE OF MULTIPLE YEAR DATA NORMALIZES THE OPERATING MARGINS OF COMPARABLE COMPANIES AND REFLECTS A BETTER TREND OF INDUSTRY IN WHICH THE ASSESS EE OPERATES. 9) GROUND NO. 12: BENEFIT OF RANGE UNDER PROVISO TO SECTION 92C THE ASSESSEE HAS ARGUED THAT WHILE MAKING ADJUSTMENTS TO MERCHANTING AND MANUFACTURING SEGMENTS, THE ASSESSEE SHOULD GET THE BENEFIT OF STANDARD DEDUCTION ALLOWED BY THE PROVIS O TO SECTION 92C OF THE INCOME TAX ACT, 1961. 9. THE AO ON THE DIRECTIONS OF THE DRP MADE AN ADJUSTMENT OF RS. 992,520,677/ - ON ACCOUNT OF ARM S LENGTH PRICE BY OBSERVING THAT ON THE DIRECTIONS OF THE DRP, THE TPO RECOMPUTED THE ALP AND INTIMATED VIDE OR DER DATED 18.10.2011 AS UNDER: THE DRP - I PASSED AN ORDER U/S 144C(5) ON 9 TH AUGUST 2011 IN THIS CASE. AFTER PERUSAL OF ORDER OF THE HON BLE DRP, IT HAS BEEN FOUND THAT THE DRP HAS DIRECTED THE TPO TO VERIFY THE CUP DATA SUPPLIED BY THE ASSESSEE IN MANUFA CTURING SEGMENT. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 19 THE SAME HAS BEEN CHECKED AND FOUND TO BE CORRECT. ACCORDINGLY THE REVISED ADJUSTMENT IS GIVEN BELOW: SEGMENT AS PER TPO ORDER AS PER REVISED ORDER MERCHANTING SEGMENT RS.992520677 RS.992520677/ - MERCHANTING SEGMENT RS.1819304876/ - NIL TOTAL ADJUSTMENT RS.2811825533/ - RS.992520677/ - THUS, THE AO IS THEREFORE DIRECTED TO REDUCE THE INCOME OF THE ASSESSEE BY AN AMOUNT OF RS.1819304876/ - THEREFORE, IN VIEW OF THE RECOMMENDATION OF THE TPO AS ABOVE, AN AMOUNT OF RS.992520677/ - (RS.281182 5533 - RS.1819304876) IS BEING ADDED TO THE INCOME OF THE ASSESSEE COMPANY. HAVING REGARD TO THE ADJUSTMENTS MADE BY THE TPO AMOUNTING TO RS.992520677/ - ATTRIBUTABLE TO DIFFERENCE IN ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE COMPANY WITH ITS ASSOCIATED ENTERPRISES. I AM SATISFIED THAT THE ASSESSEE COMPANY HAS FURNISHED INACCURATE PARTICULARS OF ITS INCOME ON THIS ISSUE. HENCE, PENALTY PROCEEDINGS U/S 271(1)(C) R.W.S 274 OF THE I.T. ACT, 1961 HAVE BEEN INITIATED SEPAR ATELY. 10. NOW THE ASSESSEE IS IN APPEAL. THE LD. COUNSEL FOR THE ASSESSEE AT THE VERY OUTSET STATED THAT THIS ISSUE IS SQUARELY COVERED VIDE ORDER DATED 28.11.2013 IN ITA NO. 4095/DEL/2010 FOR THE ASSESSMENT YEAR 2006 - 07 IN ASSESSEE S OWN CASE. HE ALSO SUBMITTED THAT ALL THE ISSUES RAISED IN THE THIS YEAR WERE ALSO RAISED IN THE PRECEDING YEAR. FOR THE AFORESAID CONTENTION, HE FURNISHED COMPARATIVE CHART OF GROUNDS IN ASSESSMENT YEARS 2006 - 07 AND 2007 - 08, COPY OF THE AFORESAID CHART WAS HANDED OVER ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 20 TO T HE STANDING COUNSEL/CIT DR ON 16.03.2015 AND THEY WERE SUPPOSED TO GIVE ANY OBJECTION TO THE SUBMISSIONS OF THE ASSESSEE ON 19.03.2015 AND AGAIN ON 25.03.2015 BUT NOTHING WAS BROUGHT ON RECORD TO REBUT THIS CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE TH AT THIS ISSUE IS COVERED VIDE ORDER DATED 28.11.2013. IN OUR OPINION, THIS ISSUE IS SQUARELY COVERED VIDE EARLIER ORDER DATED 28.11.2013 IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2006 - 07 IN ITA NO. 4095/DEL/2010 WHEREIN THE RELEVANT FINDINGS HAVE BEEN GIVEN IN PARAS 26 TO 31 WHICH READ AS UNDER: 26. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PARTIES AND HAVE GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. FIRST WE TAKE UP THE ISSUE OF TRANSFER PRICING. GROUND NO.1.1 IS GENERAL IN NATURE AND NEEDS NO ADJUDICATION. GROUND NO.1.2 TO GROUND NO.1.12 REVOLVES AROUND THE GRIEVANCE OF ASSESSEE WITH RESPECT TO ACTION OF ASSESSING OFFICER BY WHICH HE COMBINED THE THREE BUSINESS ACTIVITIES OF ASSESSEE AND CALCULATED TNMM ON A COMPANY WIDE BASIS AND COMPARED IT WITH THE COMPARABLES WHICH IN THE OPINION OF ASSESSEE WERE NOT COMPARABLES AS MAJOR COMPARABLES CHOSEN BY TPO WERE MANUFACTURING COMPANIES. THE ASSESSEE IS FURTHER AGGRIEVED WITH THE ACTION OF ASSESSING OFFICER BY WHICH HE HAD CONSIDERED INTEREST INCOM E AS NON OPERATING AS COMPARED TO INTEREST EXPENSE WHICH HE HAD CONSIDERED AS OPERATING EXPENSE. SINCE THE ASSESSING OFFICER HAS ADOPTED TNMM METHOD ON A COMPANY WIDE BASIS, SO WE FIRST GO TO THE RELEVANT RULES CONTAINED IN RULES 10A, 10B & 10C: - RULE 10 A: RULE 10A PROVIDES MEANING OF EXPRESSION USED IN COMPUTATION OF ALP AND CLAUSE (D) DEFINES TRANSACTION TO INCLUDE NUMBER OF CLOSELY LINKED TRANSACTION. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 21 RULE 10B(1)(E): FOR THE PURPOSE OF SUB SECTION (2) OF SECTION92C, THE ARM S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE M OST APPROPRIATE METHOD IN THE FOLLOWING MANNER NAMELY: - A) COMPARABLE UNCONTROLLED PRICE METHOD, B) RESALE PRICE METHOD, C) COST PLUS METHOD, D) PROFIT SPLIT MET HOD, E) TRANSACTIONAL NET MARGIN METHOD AND F) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITHIN AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE. THE ABOVE CLAUSE (I) OF RULE 10B IS FURTHER JUDGED WITH REFERENCE TO THE FOLLOWING AS CONTAINED IN SUB CLAUSE (II) OF RULE 10B WHICH READS AS UNDER: - FOR THE PURPOSE OF SUB R ULE (I) THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITHIN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING NAMELY: - A) THE SPECIFIC CHARACTERISTIC OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; B) THE FUNC TIONS PERFORMED TAKING INTO ACCOUNT THE ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED BY THE RESPECTIVE PARTIES TO THE TRANSACTION. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 22 C) THE CONTRACTUAL TERMS WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING OF THE TRANSACTIONS WHICH LAY DOWN EXPLI CITLY OR IMPLICITLY HOW THE RESPONSIBILITIES RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS. D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE INCLUDING THE GEOGRAPHIC ALLY LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVT. ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. RULE 10C(I) DEALS WITH MOST APPROPRIATE METHOD WHICH CAN BE USED BY AN ASSESSEE AND WHICH READS AS UNDER: - 10C. (1) FOR THE PURPOSES OF SUB - SECTION (1) OF SECTION 92C, THE MOST APPROPRIATE METHOD SHALL BE THE METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTIC ULAR INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION , AND WHICH PROVIDES THE MOST RELIABLE MEASURE OF AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION, AS THE CASE MAY BE . (2) IN SELECTIN G THE MOST APPROPRIATE METHOD AS SPECIFIED IN SUB - RULE (1), THE FOLLOWING FACTORS SHALL BE TAKEN INTO ACCOUNT, NAMELY: (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION ] ; (B) THE CLASS OR CLASSES OF ASSOCIATED ENTER PRISES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAKING INTO ACCOUNT ASSETS ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 23 EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY SUCH ENTERPRISES; (C) THE AVAILABILITY, COVERAGE AND RELIABILITY OF DATA NECESSARY FOR APPLICATION OF THE METHO D; (D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN 72 [ THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION ] AND THE UNCONTROLLED TRANSACTION AND BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUSTMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN 73 [ THE INTER NATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION ] AND THE COMPARABLE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; ( F ) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTIONS REQUIRED TO BE MADE IN APPLICATION O F A METHOD. 27. FROM THE COMBINED READING OF ABOVE RULES WE OBSERVE THAT TNMM METHOD PROFIT MARGIN REALIZED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION IS FIRST ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCE IF ANY BETWEEN THE INTERNATIONAL TRANSACTI ON AND COMPARABLES UNCONTROLLED TRANSACTION AND THEN ARM S LENGTH PRICE IS TO BE DETERMINED WITH RESPECT TO FUNCTIONS COMPARABLES, ASSETS EMPLOYED AND RISKS ASSUMED BY THE PARTIES. 28. HERE IN THE PRESENT CASE, THE ASSESSEE WAS ENGAGED INTO THREE DISTIN CT ACTIVITIES OF MANUFACTURING, PHYSICAL TRADE AND MERCHANTING. INVOLVEMENT OF ASSETS INTO THREE DIFFERENT BUSINESS ACTIVITIES CANNOT BE THE SAME. IN THE CASE OF ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 24 MANUFACTURING ACTIVITY THERE CAN BE HUGE INVESTMENTS IN THE FORM OF FIXED ASSETS AND WORKING CAPITAL WHEREAS IN THE CASE OF MERCHANTING TRADE THERE IS MINIMUM REQUIREMENT OF FIXED ASSETS AND WORKING CAPITAL. SIMILARLY IN THE CASE OF PHYSICAL TRADE THERE IS LESS AMOUNT INVOLVED AS CAPITAL AS COMPARABLES TO MANUFACTURING ACTIVITY BUT MORE THAN AS R EQUIRED IN MERCHANTING TRADE. THEREFORE, IF THE AMOUNT OF CAPITAL INVOLVED IN THREE DIFFERENT ACTIVITIES ARE DIFFERENT AND NATURALLY RISK WILL BE DIFFERENT IN THESE CATEGORIES OF BUSINESS. THEREFORE, THE THREE BUSINESS ACTIVITIES CARRIED DIFFERENT FUNCTIO NS AND RISK PROFILE. THEREFORE, IF THE ASSESSING OFFICER COMBINED ALL THE THREE BUSINESS ACTIVITIES FOR THE PURPOSE OF DETERMINING COMPANYWIDE TNMM IT SHOULD HAVE BEEN COMPARED WITH TNMM OF COMPARABLES HAVING SAME FUNCTIONS AND RISK PROFILE. IN THE ALTERN ATIVE, THE MARGIN OF THREE DIFFERENT ACTIVITIES SHOULD HAVE BEEN SEPARATELY CALCULATED AND COMPARED WITH THE MARGIN OF COMPARABLES ENTERPRISES HAVING SIMILAR FUNCTIONS AND RISK PROFILE. THEREFORE, WE COME TO THE CONCLUSION THAT ASSESSEE WAS ENTITLED TO SEL ECT MOST APPROPRIATE METHOD FOR A GROUP OF SIMILAR TRANSACTIONS. IN DOING SO, HE IS FREE TO CHOOSE DIFFERENCE METHODS FOR DIFFERENT BUSINESS ACTIVITIES WHICH IN THE PRESENT CASE ARE MANUFACTURING PHYSICAL TRADE & MERCHANTING. 29 . ON SELECTION OF COMPARAB LES, WE FIND THAT TPO HAD SELECTED FIVE COMPANIES NAMELY: - 1. K.S. OILS LTD. 2. FOOD CORPORATION OF INDIA. 3. KOHINOOR FOODS LTD. 4. RENUKA SUGAR MILLS. LTD. 5. MURLI INDUSTRIES LTD. OUT OF THESE FIVE COMPANIES FOUR COMPANIES ARE MANUFACTURING COM PANIES WHICH ARE NOT FULLY COMPARABLE WITH THE BUSINESS PROFILE AND RISK PROFILE OF THE ASSESSEE COMPANY. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 25 30 . REGARDING ADDITIONAL EVIDENCE FILED BY THE ASSESSEE IN RELATION TO DOCUMENTS FROM COVAT REGARDING IMPORT OF OIL, WE FIND THAT ASSESSEE WAS PREVE NTED BY SUFFICIENT CAUSE FOR NOT FILING THESE DURING ASSESSMENT /DRP PROCEEDINGS AS THE SAME WERE DIRECTED TO BE FILED BY DRP IN ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 2007 - 08 & 2008 - 09 AND DRP ON THE BASIS OF THESE HAD NOT MADE ANY ADDITION IN THESE YEAR S. THEREFORE, WE ADMIT THE ADDITIONAL EVIDENCE AS THESE ARE DOCUMENTS TO ARRIVE AT THE CORRECT CONCLUSION. 31 . IN VIEW OF ALL FACTS AND CIRCUMSTANCES OF THE CASE AS EXPLAINED ABOVE WE DEEM IT APPROPRIATE TO REMIT BACK THE WHOLE ISSUE RELATING TO TRANSFER PRICING TO THE OFFICE OF ASSESSING OFFICER WHO WILL RE - ADJUDICATE THE ISSUE KEEPING IN VIEW ALL FACTS AND CIRCUMSTANCES. THE ASSESSEE WILL BE FREE TO ARGUE ITS CASE FROM ALL ANGLES. NEEDLESS TO SAY THAT ASSESSEE WILL BE GIVEN SUFFICIENT OPPORTUNITY OF B EING HEARD. IN VIEW OF THE ABOVE, GROUND NO.1 IS ALLOWED FOR STATISTICAL PURPOSES. 11. SINCE THE FACTS FOR THE YEAR UNDER CONSIDERATION ARE IDENTICAL TO THE FACTS INVOLVED IN THE AFORESAID REFERRED TO ASSESSMENT YEAR 2006 - 07. SO, RESPECTFULLY FOLLOWING TH E ORDER DATED 28.11.2013 IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2006 - 07 IN ITA NO. 4095/DEL/2010 THIS ISSUE RELATING TO ADJUSTMENT IN ARM S LENGTH PRICE IS SET ASIDE TO THE AO FOR FRESH ADJUDICATION AS IN THE PRECEDING YEAR. 12 . VIDE GROUND NOS. 2 .1 TO 2.1.8 THE GRIEVANCE OF THE ASSESSEE RELATES TO THE DISALLOWANCE OF RS. 274,567,319/ - MADE BY THE AO U/S 40(A)(I) OF THE ACT FOR DISCOUNTING CHARGES . ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 26 13. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE ASSESSEE HAD PAID A SUM OF RS. 274,567,31 9/ - TO CARGILL TSF ASIA PTE LIMITED, SINGAPORE (CTSFA) AND CARGILL INTERNATIONAL SA (CISA) ON ACCOUNT OF DISCOUNTING CHARGES. IN THIS TRANSACTION, THE ASSESSEE WAS GETTING BILLS DISCOUNTED FROM ITS SINGAPORE ASSOCIATED ENTERPRISE FOR RECEIVING MONEY ON THE STRENGTH OF SALE OF BILLS. THE ASSESSEE PAID INTEREST TO CTSFA AND CISA FOR THIS DISCOUNTING. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE DISCOUNTING C HARGES SHOULD NOT BE DISALLOWED AS WAS DONE IN THE P RECEDING ASSESSMENT YEARS 2004 - 05 TO 2006 - 07. THE ASSESSEE SUBMITTED THAT SINCE THE DISCOUNTING CHARGES WERE BUSINESS INCOME OF THESE OFFSHORE ENTITIES AND SINCE THEY DID NOT HAVE A PERMANENT ESTABLISHMENT IN ACCORDANCE WITH THE APPLICABLE TREATY , THE SAME WAS NOT TAXABLE IN INDIA IN THE HANDS OF THESE ENTITIES. 14. THE ASSESSEE VIDE REPLY DATED 15.12.2010 SUBMITTED TO AO AS UNDER: 1. DURING THE SUBJECT YEAR, THE ASSESSEE HAS INCURRED DISCOUNTING CHARGES AMOUNTING TO RS. 274,567,319 FOR GETTING THE BIL LS OF EXCHANGE ( BE ) AND/OR DEMAND PROMISSORY NOTE ( PN ) (HEREINAFTER REFERRED COLLECTIVELY AS PN) DISCOUNTED FROM CARGILL TSF ASIA PTE LIMITED, SINGAPORE ( CTSFA ) AND CARGILL INTERNATIONAL SA ( CISA ) (HEREINAFTER REFERRED COLLECTIVELY AS CTSFA). ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 27 2. A S PER THE PREVAILING TRADING PRACTICE, THE ASSESSEE EXTENDS CREDIT PERIOD TO ITS OVERSEAS BUYERS OF THE COMMODITIES AND ACCORDINGLY WHEN THE ASSESSEE RAISES INVOICES ON THEM, INSTEAD OF RECEIVING A PROMPT PAYMENT, THE FOREIGN BUYERS PROVIDE A PN TO THE ASS ESSEE. 3. TO ENSURE THE OPTIMUM UTILIZATION OF AVAILABLE WORKING CAPITAL FUNDS, THE ASSESSEE ENTERS INTO A DISCOUNTING AGREEMENT CTSFA AS PER WHICH THE ASSESSEE SELLS THE PN AT A DISCOUNT TO THEM ON WITHOUT RECOURSE BASIS . CTSFA AFTER PURCHASE OF THE PN FROM THE ASSESSEE AT DISCOUNTED VALUE, COLLECTS THE PROCEEDS FROM THE NON - RESIDENT BUYER AS PER THE AGREED TERMS. 4. IT MAY BE WORTHWHILE TO MENTION HERE THAT DISCOUNTING OF PN ON A WITHOUT RECOURSE BASIS IMPLIES THAT: 1. CTSFA PURCHASES THE PN FROM THE ASSESSEE; 2. IT PAYS THE CONSIDERATION BASED ON PRESENT VALUE WHICH IS LESSER THAN THE FACE VALUE AND THE DIFFERENCE IS REGARDED AS DISCOUNT VALUE; 3. CTSFA DOES NOT GET ANY RIGHT AGAINST THE ASSESSEE IN CASE OF ANY DISPUTE OR DEFAULT WITH OR BY OVERSEAS BUYER IN ENCASHMENT OF PN ON MATURITY OR OTHERWISE; AND 4. CTSFA GETS THE RIGHT TO COLLECT THE MONEY IN ITS OWN NAME FROM THE OVERSEAS BUYER WHO HAS ACCEPTED THE PN. IN VIEW OF THE ABOVE, IT CAN BE SAID THAT ONCE THE PN IS PURCHASED BY CTSFA, THE ASSESSEE, WHO I S THE SELLER OF PN, DISCHARGE ALL ITS LIABILITY. THUS, THE PROPERTY IN THE PN, INCLUDING ALL RISKS AND REWARDS, PASSES ON TO ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 28 CTSFA. IN CASE THE FOREIGN BUYER MAKES A DEFAULT OF THE PAYMENT, UNDER NO CIRCUMSTANCES THE ASSESSEE IS REQUIRED TO MAKE GOOD THE L OSS TO CTSFA. 5. WHILE FRAMING ASSESSMENT FOR AY 2006 - 07 AND 2004 - 05, THE DISCOUNTING CHARGES HAS BEEN TREATED AS INTEREST AND HAS BEEN DISALLOWED THE SAME UNDER SECTION 40(A)(I) OF THE ACT ON THE GROUND THAT NO TAX HAS BEEN DEDUCTED AT SOURCE FROM SUCH DISC OUNTING CHARGES. THE DISCOUNTING CHARGES HAS BEEN TREATED AS INTEREST ON THE GROUND THAT THIS TRANSACTION OF DISCOUNTING CAN BE COMPARED WITH A TRANSACTION THAT INVOLVES TAKING A LOAN EQUAL TO THE NET AMOUNT RECEIVED FROM THE CTSFA AND REPAYING THIS LOAN A LONG WITH INTEREST TO THEM THROUGH THE FOREIGN BUYER AND HENCE SUCH DISCOUNT IS PRIMA FACIE NOTHING BUT INTEREST ONLY. 1. OUR LEGAL SUBMISSION 1. IT IS HUMBLY SUBMITTED THAT SECTION 195 OF THE ACT READS AS UNDER: 195(1) ANY PERSON RESPONSIBLE FOR PAYI NG TO A NON - RESIDENT, NOT BEING A COMPANY, OR TO A FOREIGN COMPANY, ANY INTEREST OR ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT (NOT BEING INCOME CHARGEABLE UNDER THE HEAD SALARIES ) SHALL, AT THE TIME OF CREDIT OF SUCH INCOME TO THE ACCOUNT OF THE PAYEE OR AT THE TIME OF PAYMENT THEREOF IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE, WHICHEVER IS EARLIER, DEDUCT INCOME - TAX THEREON AT THE RATES IN FORCE. ON PERUSAL OF SECTION 195 OF THE ACT, IT IS CLEAR THAT WHERE A PERSO N PAYS ANY INTEREST OR ANY OTHER SUM CHARGEABLE TO TAX TO A NON - RESIDENT, ONLY THEN HE IS REQUIRED TO DEDUCT TAX AT SOURCE. THEREFORE, FOR THE PURPOSE OF DEDUCTION OF TAX AT SOURCE UNDER SECTION 195 IT IS ESSENTIAL THAT PAYMENT MADE TO NON - RESIDENT ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 29 SHOULD BE CHARGEABLE TO TAX IN INDIA IN THE HANDS OF NON - RESIDENT. 2. IT IS HUMBLY SUBMITTED THAT INTEREST HAS BEEN EXHAUSTIVELY DEFINED UNDER SECTION 2(28A) OF THE ACT WHICH READS AS UNDER: INTEREST MEANS INTEREST PAYABLE IN ANY MANNER IN RESPECT OF ANY MON EY BORROWED OR DEBT INCURRED (INCLUDING A DEPOSIT, CLAIM OR OTHER SIMILAR RIGHT OR OBLIGATION) AND INCLUDES ANY SERVICE FEE OR OTHER CHARGE IN RESPECT OF THE MONEYS BORROWED OR DEBT INCURRED OR IN RESPECT OF ANY CREDIT FACILITY WHICH HAS NOT BEEN UTILIZED. BASED ON THE ABOVE DEFINITION, IT IS CLEAR THAT INTEREST PAYABLE IN RESPECT OF FOLLOWING WOULD BE TERMED AS INTEREST UNDER SECTION 2(28A) OF THE ACT. 1. MONEY BORROWED 2. DEBIT INCURRED 3. DEPOSIT 4. CLAIM 5. OTHER SIMILAR RIGHT OR OBLIGATION 6. FOR THE PURPOSE OF THE ACT, ANY PAYMENT WOULD BE CONSTRUED AS INTEREST IF IT IS PAID IN RESPECT OF ABOVE: 1. MONEY BORROWED OXFORD DICTIONARY DEFINES THE TERM BORROW A ACQUIRE TEMPORARILY WITH THE PROMISE OR INTENTION OF RETURNING . CALCUTTA HIGH COURT IN CASE OF COMMISS IONER OF EXCESS PROFITS TAX VS BHARTIA ELECTRIC STEEL CO. LTD. (25 ITR 192) IN MY VIEW, THE WORDS BORROWED MONEY WERE USED IN RULE 5A OF THE FIRST SCHEDULE AND RULE 24 OF THE SECOND SCHEDULE TO ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 30 INDICATE AND DENOTE MONEY ACTUALLY BORROWED AS A LOAN IN T HE ORDINARY SENSE AND NOT ALSO TO INDICATE AND DENOTE MONEY WHICH, THOUGH OBTAINED ON SOME OTHER BASIS AND IN SOME OTHER KIND OF TRANSACTION, COULD BE, ON THE FAILURE OF SUCH BASIS AND SUCH TRANSACTION, MADE OUT TO BE BORROWED MONEY IN ESSENCE AND IN LAW . IN THE ASSESSEE S CASE, IT IS MERE SALE OF NEGOTIABLE INSTRUMENTS UNDER THE NEGOTIABLE INSTRUMENTS ACT, 18881 AND THUS, THE PAYMENT OF DISCOUNTING CHARGES CANNOT BE REGARDED AS INTEREST PAYMENTS. 2. DEBIT OWED OR DEBT CLAIM OXFORD DICTIONARY DEFINES THE TERM DEBT AS SOMETHING THAT IS OWED, ESP. MONEY AND A STATE OF OBLIGATION TO PAY SOMETHING OWED . SUPREME COURT IN CASE OF KESORAM INDUSTRIES AND COTTON MILLS LTD. VS CWT (59 ITR 767W) THE WORD OWE MEANT TO BE UNDER AN OBLIGATION TO PAY. IT D ID NOT REALLY ADD TO THE MEANING OF THE WORD DEBT . THAT DEBT OWED WITHIN THE MEANING OF SECTION 2(M) OF THE WEALTH TAX ACT, 1957 COULD BE DEFINED AS THE LIABILITY TO PAY IN PRESENT OR IN FUTURE AND ASCERTAINABLE SUM OF MONEY THAT, THEREFORE, THE AMOUNT OF THE PROVISION FOR PAYMENT OF INCOME TAX AND SUPER TAX . A DEBT INVOLVES A PERSON OBLIGATION INCURRED BY THE DEBTOR AND THE LIABILITY TO PAY A SUM OF MONEY IN PRESENT OR IN FUTURE. ONCE THERE IS A DEBT, IT WILL BE A DEBT OWED FOR THE PAYER AND DEBIT CLAIM FOR THE RECIPIENT. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 31 3. DEPOSIT SUPREME COURT IN CASE OF CIT VS BAZPUR CO - OPERATIVE SUGAR FACTORY LTD. (172 ITR 321) THE ESSENCE OF A DEPOSIT IS THAT THERE MUST BE A LIABILITY TO RETURN IT TO THE PARTY BY WHOM OR ON WHOSE BEHALF IT IS MADE O N THE FULFILLMENT OF CERTAIN CONDITIONS. IN THE PRESENT CASE, THE ASSESSEE HAS SOLD THE PN AT A DISCOUNT TO CTSFA ON WITHOUT RECOURSE BASIS. THE ASSESSEE HAS NEITHER BORROWED ANY MONEY NOR INCURRED ANY DEBIT TOWARDS AS ONCE THE PN ARE DISCOUNTED BY THE M, THE CTSFA DOES NOT HAVE ANY RIGHT TO RECOVER THE AMOUNT LEGALLY FROM THE ASSESSEE IN CASE OF ANY DEFAULT IN PAYMENT BY OVERSEAS BUYER. THEY COLLECT THE AMOUNT OF PN FROM THE OVERSEAS BUYER IN ITS OWN NAME AND NOT ON BEHALF OF THE ASSESSEE. THUS, THIS DI SCOUNTING TRANSACTION IS NOT COVERED UNDER SECTION 2(28A) OF THE ACT. THE DEFINITION OF INTEREST UNDER INCOME TAX ACT, 1961 DOES NOT COVER DISCOUNTING CHARGES BECOMES CLEAR IF ONE REFER TO THE DEFINITION OF INTEREST AS PROVIDED IN SECTION 2(7) OF THE IN TEREST TAX ACT, 1974: INTEREST MEANS INTEREST ON LOANS AND ADVANCES MADE IN INDIA AND INCLUDES: 1. COMMITMENT CHARGES ON UNUTILIZED PORTION OF ANY CREDIT SANCTIONED FOR BEING AVAILED OF IN INDIA; AND 2. DISCOUNT ON PROMISSORY NOTES AND BILLS OF EXCHANGE DRA WN OR MADE IN INDIA, BUT DOES NOT INCLUDE; ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 32 1. INTEREST REFERRED TO IN SUB - SECTION (18) OF SECTION 42 OF THE RESERVE BANK OF INDIA ACT, 1934 (2 OF 1934); 2. DISCOUNT ON TREASURY BILLS; (EMPHASIS SUPPLIED) THUS, THE DEFINITION OF INTEREST IN THE INTEREST - TAX ACT , 1974 SPECIFICALLY INCLUDES DISCOUNT ON PROMISSORY NOTES AND BILLS OF EXCHANGE . HOWEVER, ON THE OTHER HAND, THE DEFINITION OF INTEREST AS PER SECTION 2(28A) OF THE INCOME - TAX ACT, 1961 IS AN EXHAUSTIVE DEFINITION AND DOES NOT HAVE SPECIFIC INCLUSION OF DISCOUNT ON PN. 3. YOUR GOOD SELF, HAVING REGARD TO THE ABOVE DEFINITION OF INTEREST UNDER INTEREST TAX ACT, WOULD APPRECIATE THAT HAD THERE BEEN THE INTENTION OF THE LEGISLATURE TO INCLUDE DISCOUNT ON PN UNDER THE TERM INTEREST UNDER INCOME - TAX ACT, THEY WOULD HAVE EXPRESSLY INCLUDED THE DISCOUNT ON PN IN THE DEFINITION OF INTEREST, AS THEY DID UNDER THE INTEREST - TAX ACT, 1974. 3. ALSO UNDER THE PROVISIONS OF DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) BETWEEN INDIA AND SINGAPORE, SUCH DISCOUNTING CHARGES CA NNOT BE CHARACTERIZED AS INTEREST. AS PER ARTICLE 11(3) THE DEFINITION OF INTEREST IS PROVIDED IN AN EXHAUSTIVE MANNER. 3. THE TERM INTEREST AS USED IN THIS ARTICLE MEANS INCOME FROM DEBIT CLAIMS OF EVERY, KIND, WHETHER OR NOT SECURED BY MORTGAGE AND WH ETHER OR NOT CARRYING A RIGHT TO PARTICIPATE IN THE DEBTOR S PROFITS; AND IN PARTICULAR, INCOME FROM GOVERNMENT SECURITIES AND INCOME FROM BONDS OR DEBENTURES, INCLUDING PREMIUMS AND PRIZES ATTACHING TO SUCH SECURITIES, BONDS OR DEBENTURES. PENALTY CHARGES FOR LATE PAYMENT SHALL NOT BE REGARDED AS INTEREST FOR THE PURPOSE OF THIS ATRICLE. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 33 THE DEFINITION OF INTEREST AS PROVIDED IN THE DTAA IS NARROWER THAN THE DEFINITION PROVIDED IN SECTION 2(28A) OF THE ACT. IN DTAA, THE INTEREST IS CONFINED ONLY TO INCOM E FROM DEBT - CLAIMS OF EVERY KIND , WHILE SECTION 2(28A) ALSO COVERS MONEY BORROWED OR DEBIT INCURRED. THEREFORE, IT APPEARS AND YOUR GOOD SELF WOULD ALSO APPRECIATE THAT THE DEFINITION OF INTEREST UNDER THE PROVISIONS OF INCOME - TAX ACT IS WIDER. AS HUMBLY SUBMITTED ABOVE, THE TERM DEBT HAS BEEN ELABORATED BY HON BLE SUPREME COURT IN THE CASE OF KESORAM INDUSTRIES AND COTTON MILLS LTD. VS CWT (SUPRA). WHILE CONSIDERING THE DEFINITION OF THE WORD DEBT IT HAS BEEN HELD THAT THERE WAS NO CONFLICT ON THE DEF INITION OF THE WORD DEBT AND THAT ALL THE DECISIONS AGREED THAT THE MEANING OF THE EXPRESSION DEBT MAY TAKE COLOR FROM THE PROVISIONS OF THE CONCERNED ACT, IT MAY HAVE DIFFERENT SHADES OF MEANING. IT WAS HELD THAT THE DEFINITION OF THE WORD DEBT TO T HE EFFECT THAT A DEBIT IS A SUM OF MONEY WHICH IS NOW PAYABLE OR WILL BECOME PAYABLE IN FUTURE BY REASON OF A PRESENT OBLIGATION DEBITRUN IN PRAESENTI SOLVENDUM IN FUTURO WAS UNANIMOUSLY ACCEPTED. IT IS, THUS, SUBMITTED THAT THE DEFINITION OF INTEREST AS PER THE DTAA WHICH IS CONFINED TO DEBT - CLAIMS ALSO PRESUPPOSES THE EXISTENCE OF MONEY WHICH IS PAYABLE IN FUTURE BY REASON OF A PRESENT OBLIGATION. AS SUBMITTED EARLIER, THE TRANSACTION OF SALE OF PN BY THE ASSESSEE, IS TYPICALLY ON WITHOUT RECOURSE BAS IS. THEREFORE, NO PRESENT OR FUTURE LIABILITY EXISTS OR CAN BE ASSUMED TO EXIST BETWEEN THE ASSESSEE AND CTSFA. THUS, NOTHING CAN BRING THE ALLEGED DISCOUNTING TRANSACTION WITHIN THE FRAMEWORK OF DEBT OR BORROWINGS . 15 . THE ASSESSEE PLACED THE RELIAN CE ON THE CIRCULAR NO S . 65 & 647 DATED 02.09.1971 AND 2 2.03.1993 RESPECTIVELY ISSUED BY THE CBDT. THE RELIANCE WAS ALSO PLACED ON THE FOLLOWING CASE LAWS: ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 34 DENA BANK VS THE MADHYA PRADESH NATIONAL TEXTILES CORPORATION LTD. (AIR 1982 MP 85) CIT VS LAXMI CHA ND MUCCHAT (61 IW 555) 16 . THE ASSESSEE FURTHER SUBMITTED TO THE AO THAT THE ISSUE HAS BEEN DECIDED BY THE ITAT VIDE ORDER DATED 09.10.2009 IN ITA NO. 684/DEL/2009 FOR THE ASSESSMENT YEAR 2004 - 05 IN ASSESSEE S OWN CASE AND THE SAID DECISION WAS FOLLOWED F OR THE ASSESSMENT YEAR 2005 - 06 WHEREIN THE THE SIMILAR DISALLOWANCE U/S 40(A)(I) OF THE ACT HAS BEEN DELETED. 17. HOWEVER, THE AO DID NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE AND MADE THE ADDITION OF RS. 274,567,319/ - . THE AO MENTIONED THAT THE DRP HAS ALSO CONFIRMED THE ORDER OF THE TPO BY OBSERVING AS UNDER: IT IS SEEN THAT THIS MATTER HAS BEEN IN DISPUTE BETWEEN THE DEPARTMENT AND THE ASSESSEE IN AYS 2004 - 05, 2005 - 06 AND 2006 - 07. THE MATTER IS BEFORE THE SUPREME COURT FOR AYS 2004 - 05 & 2005 - 06 AND ITAT FOR AY 2006 - 07. THIS BEING THE POSITION, NO LEGAL FINALITY ON THE MATTER CAN BE CONCLUDED BY THE DRP. ACCORDINGLY, FOR THE PRESENT, THE DRP DECLINES TO INTERVENE IN THE MATTER AND FOR STATISTICAL PURPOSES, THE OBJECTION OF THE ASSESSEE IS REJEC TED. 18 . NOW THE ASSESSEE IS IN APPEAL. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE UNDER CONSIDERATION HAS BEEN ALLOWED BY THE ITAT AND THE DISALLOWANCE OF DISCOUNTING CHARGES HAS BEEN DELETED BY ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 35 FOLLOWING JUDGMENT OF THE HON BLE DELHI HI GH COURT IN THE CASE OF CARGILL GLOBAL TRADING INDIA PVT. LTD. (CGTIPL) REPORTED AT 335 ITR 94. IT WAS ALSO POINTED OUT THAT THE SLP FILED BY THE DEPARTMENT AGAINST THE SAID ORDER HAS BEEN DISMISSED BY THE HON BLE SUPREME COURT. 19 . WE HAVE CONSIDERED THE SUBMISSIONS OF LD. COUNSEL FOR THE ASSESSEE AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IT IS NOTICED THAT AN IDENTICAL ISSUE HAVING SIMILAR FACTS WAS SUBJECT MATTER OF THE ASSESSEE S APPEAL FOR THE ASSESSMENT YEAR 2006 - 07 IN ITA NO. 4095/DEL/2010 (SUPRA) WHEREIN VIDE ORDER DATED 28.11.2013. THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE AND RELEVANT FINDINGS HAVE BEEN GIVEN IN PARAS 32 TO 34 WHICH READ AS UNDER: 32. NOW COMING TO THE ISSUES OF CORPORATE MATTERS, WE FIND THAT G ROUND NO.2.1 TO 2.1.7 RELATES TO ONE GRIEVANCE OF THE ASSESSEE AND I.E. THE ASSESSING OFFICER S ACTION OF DISALLOWANCE OF DISCOUNTING CHARGES PAID BY THE ASSESSEE HOLDING THESE TO BE INTEREST EXPENSES AND THEREFORE CONSEQUENT DISALLOWANCE U/S 40A(IA) FOR N ON DEDUCTION OF TAX. WE FIND THAT SIMILAR ISSUE AROSE IN RESPECT OF ANOTHER COMPANY OF THE ASSESSEE NAMELY CARGIL GLOBAL INDIA PVT. LTD. WHEREIN ASSESSMENT YEAR 2004 - 05 IN I.T.A.NO.684/DEL/2009, THE TRIBUNAL HAD MADE THE FOLLOWING OBSERVATIONS: - THE DISC OUNTING CHARGES ARE NOT IN THE NATURE OF INTEREST PAID BY THE ASSESSEE. RATHER AFTER DEDUCTING DISCOUNT, THE ASSESSEE RECEIVED NET AMOUNT OF BILL OF EXCHANGE ACCEPTED BY THE PURCHASER CFA NOT HAVING ANY PE IN INDIA IS NOT LIABLE TO TAX IN RESPECT OF SUCH ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 36 D ISCOUNT EARNED BY IT AND HENCE THE ASSESSEE IS NOT UNDER OBLIGATION TO DEDUCT TAX AT SOURCE U/S 195 OF THE ACT. ACCORDINGLY, THE SAME AMOUNT CANNOT BE DISALLOWED BY INVOKING SECTION 40(A)(I) OF THE ACT. 33. WE FURTHER FIND THAT REVENUE TOOK THE MA TTER TO HON'BLE DELHI HIGH COURT AND HON'BLE DELHI HIGH COURT VIDE DECISION DELIVERED ON 17.2.2011 DISMISSED THE APPEAL OF REVENUE. PARA 10 TO 14 OF HON'BLE DELHI HIGH COURT JUDGMENT DEALS WITH THE ISSUE AND THE RELEVANT FINDINGS OF THE HON'BLE DELHI HIGH COURT AS CONTAINED IN ABOVE PARAS ARE AS UNDER: - 10. IT IS CLEAR FROM THE ABOVE THAT BEFORE ANY AMOUNT PAID IS CONSTRUED AS INTEREST, IT HAS TO BE ESTABLISHED THAT THE SAME IS PAYABLE IN RESPECT OF ANY MONEY BORROWED OR DEBT INCURRED. IN THE PRESENT CASE , ON THE AFORESAID FACTS APPEARING ON RECORD, IN OUR OPINION THE TRIBUNAL RIGHTLY HELD THAT THE DISCOUNT CHARGES PAID WERE NOT IN RESPECT OF ANY DEBT INCURRED OR MONEY BORROWED. INSTEAD THE ASSESSEE HAD MERELY DISCOUNTED THE SALE CONSIDERATION RESPECTIVELY ON SALE OF GOODS. XXXXXXXXXXX XXXXXXXXXXX 11. WE ARE IN AGREEMENT WITH THE AFORESAID DISCUSSION ON THE LEGAL ASPECT. IT MAY BE POINTED OUT THAT THE CBDT HAS ISSUED ONE CIRCULAR NO.65 WAY BACK OKN 2.9.1971 CLARIFYING THE POSITION IN RESPECT OF INCOME BY W AY OF INTEREST U/S 194 READ WITH SECTION 197(1) AND (2) OF THE ACT AS UNDER: - XXXXXXXXXXXX XXXXXXXXXXX 12. THERE IS ANOTHER CIRCULAR NO.674 DATED 22.3.1993 DIRECTLY ON THE POINT AS IT RELATES TO TDS ON INTEREST ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 37 OTHER THAN INTEREST ON SECURITIES. IN THIS C IRCULAR THE BOARD HAS CLARIFIED THE ISSUE IN THE FOLLOWING MANNER: 3. A QUESTION HAS BEEN RECENTLY RAISED AS TO WHETHER THE DIFFERENCE BETWEEN THE ISSUE PRICE AND FACE VALUE OF THESE INSTRUMENTS SHOULD BE TREATED AS INTEREST IN WHICH CASE IT WOULD BE LIA BLE TO DEDUCTION OF TAX AT SOURCE U/S 194A OF THE INCOME TAX ACT, 1961 OR IT SHOULD BE TREATED AS DISCOUNT WHICH IS NOT LIABLE TO DEDUCTION OF TAX AT SOURCE. 4. IT IS CLARIFIED THAT THE INFORMATION OF ALL CONCERNED THAT THE DIFFERENCE BETWEEN THE ISSUE PRICE AND THE FACE VALUE OF THE COMMERCIAL PAPERS AND THE CERTIFICATES OF DEPOSITS IS TO BE TREATED AS DISCOUNT ALLOWED AND NOT AS INTEREST PAID. HENCE THE PROVISIONS OF THE INCOME TAX ACT, RELATING TO DEDUCTION OF TAX AT SOURCE ARE NOT APPLICABLE IN THE C ASE OF TRANSACTIONS IN THESE TWO INSTRUMENTS. 13. HAVING REGARD TO THE AFORESAID, WE ARE OF THE OPINION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES AS THE MATTER STANDS SETTLED BY THE DICTA OF THE SUPREME COURT AS WELL AS CLARIFICATION OF CBDT ITSELF. 14. THESE APPEALS ARE ACCORDINGLY DISMISSED. WE FURTHER FIND THAT HON'BLE SUPREME COURT HAS DISMISSED SLP FILED BY THE REVENUE AGAINST THE ORDER OF HON'BLE DELHI HIGH COURT. 34. IN VIEW OF THE ABOVE, WE FIND THAT THE ISSUE IS SQUARELY COVERED IN FAVOU R OF ASSESSEE. THEREFORE GROUND NO. 2..1.2 TO GROUND NO.2.1.7 ARE ALLOWED. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 38 20 . SINCE THE FACTS INVOLVED FOR THE YEAR UNDER CONSIDERATION FOR THIS ISSUE ARE SIMILAR TO THE FACTS INVOLVED IN THE PRECEDING ASSESSMENT YEAR 2006 - 07. SO, RESPECTFULLY FOLLOWING THE AFORESAID REFERRED TO EARLIER ORDER DATED 28.11.2013 FOR THE ASSESSMENT YEAR 2006 - 07 IN ASSESSEE S OWN CASE IN ITA NO. 4095/DEL/2010 . THE IMPUGNED DISALLOWANCE MADE BY THE AO IS DELETED. 21 . THE GROUND NOS. 2.2 TO 2.2.2 ARE CO - RELATED AND THE ISSUE RELATES TO THE ADDITION ON ACCOUNT OF DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT AMOUNTING TO RS. 3,28,10,658/ - . 22. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE ASSESSEE DURING THE YEAR CONSIDERATION RECEIVED A LOAN OF RS. 98,000,000/ - FROM M/S CA RGILL GLOBAL TRADING (INDIA) PVT. LTD. (CGTIPL). THIS LOAN WAS REPAID BY THE ASSESSEE DURING THE SAME YEAR. THE AO OBSERVED THAT CGTIPL WAS A SUBSIDIARY WITH 99% OF SHARE HOLDING BY CARGILL INTERNATIONAL TRADING PTE. LTD. (CITPL), A TAX RESIDENT OF SINGAPO RE WHO WAS ENGAGED IN THE TRADING OF COMMODITY OF PRODUCTS SUCH AS CRUDE PALM OIL, WH E AT ETC. THE AO FURTHER OBSERVED THAT THE CITPL WAS 100% SUBSIDIARY OF CARGILL GROUP AND THE ASSESSEE IS WHOLLY OWNED SUBSIDIARY OF CARGILL MAURITIUS LTD. (CML) WHICH IS A TAX RESIDENT OF MAURITIUS AND FURTHER OWNED BY CARGILL ASIA PACIFIC LTD. (CAPL), USA WHICH IN TURN IS SUBSIDIARY OF CARGILL INC., USA. T HE AO HAD DRAWN A PICTORIALLY STRUCTURE AS UNDER: ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 39 CARGILL INC., USA (ULTIMATE HOLDING CO. OF CARGILL GROUP 23 . THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE LOAN RECEIVED FROM CGTIPL SHOULD NOT BE TREATED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. IN RESPONSE THE ASSESSEE SUBMITTED TO THE AO THAT SINCE CARGILL INC., I.E. ULTIMATE HOLDING COMPANY WAS NOT THE REGISTERED SHAREHOLDER WITH THE ASSESSEE COMPANY AND WITH CGTIPL, THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT WERE NOT APPLICABLE. IT WAS FURTHER STATED THAT FOR THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT TO BE INVOKED THE PERSON TO WHOM THE LOAN HAS BEEN ADVANCED BY THE COMPANY MUST BE: 1. A REG ISTERED SHAREHOLDER; AND 2. MUST BE THE BENEFICIAL OWNER OF SHARES HOLDING NOT LESS THAN 10% OF THE VOTING POWER CARGILL INTERNATIONAL TRADING PTE. LTD. CARGILL ASIA PACIFIC LTD. ( CAPL ), USA CARGILL GLOBAL TRADING INDIA PVT. LTD. CARGILL MAURITIUS LIMITED ( CML ) CARGILL INDIA PVT. LIMITED (ASSESSEE) ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 40 IT WAS ALSO STATED THAT IF EITHER OF THE ABOVE TWO CONDITIONS WAS NOT FULFILLED THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT SHOULD NOT H AVE BEEN INVOKED. 24. THE AO DID NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE BY OBSERVING AS UNDER: 5.5 THE OPENING LINES OF SECTION 2(22)(E) STATE THAT DIVIDEND INCLUDES ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBST ANTIALLY INTERESTED, OF ANY SUM, MADE AFTER THE 31 ST DAY OF MAY, 1987 BY WAY OF ADVANCE OR LOAN TO SHAREHOLDER. THE PLAIN READING OF THESE LINES SHOWS THAT DIVIDEND INCLUDES ANY PAYMENT MADE BY A PVT. LTD. COMPANY BY WAY OF AN ADVANCE OR A LOAN TO A SHAREH OLDER. THE NEXT QUESTION WHICH ARISES IS THAT WHO IS A SHAREHOLDER? FOR THE PURP O S E OF SECTION 2(22)(E). THE ANSWER TO THIS QUESTION IS AVAILABLE IN THE NEXT FEW LINES OF SECTION 2(22)(E) ITSELF, WHEREIN IT IS STATED THAT SHAREHOLDER IS A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES HOLDING NOT LESS THAN 10% OF THE VOTING POWER . THUS, AS PER SECTION 2(22)(E), SHAREHOLDER, FOR THE PURPOSES OF SECTION 2(22)(E), MEANS A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES HOLDING NOT LESS THAN 10% OF VOTING POWER. THE AMENDMENT OF SECTION 2(22)(E) BY WAY OF THE FINANCE ACT, 1987 HAS PUT AN END ALL AMBIGUITIES WITH REFERENCE TO THE MEANING OF THE WORD SHAREHOLDER . THE WORD SHAREHOLDER FOR THE PURPOSES OF SECTION 2(22)(E) NOW CLEARLY STANDS DEFINED AS A PERSON WH O IS THE BENEFICIAL OWNER OF SHARES HOLDING NOT LESS THAN 10% OF THE VOTING POWER. 5.6 THIS AMENDMENT IN THE RELEVANT PROVISIONS OF THE INCOME TAX ACT MADE VIDE THE FINANCE ACT, 1987, HAS ALSO OVERRULED THE DECISIONS OF THE HON BLE SUPREME COURT PRONOUNCE D ON THE SUBJECT IN THE YEARS PRIOR TO 1987. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 41 5.7 IT IS PERTINENT TO POINT OUT THAT THE CASE LAWS RELIED UPON BY THE ASSESSEE PERTAIN TO YEARS VERY MUCH PRIOR TO THE YEAR 1987 AND THUS, THESE DECISIONS HAVE BEEN DULY OVERRULED IN VIEW OF THE AMENDMENT OF T HE ACT IN THE YEAR 1987 . THE LAW AT THE TIME WHEN THESE JUDGMENTS WERE PRONOUNCED BY THE HON BLE SUPREME COURT WAS THAT ANY PAYMENT BY WAY OF AN ADVANCE OR A LOAN TO A SHAREHOLDER, BEING A PERSON WHO HAS SUBSTANTIAL INTEREST IN THE COMPANY WAS TO BE TREATE D AS DEEMED DIVIDEND . AT THAT TIME, THE DEFINITION OF THE TERM SHAREHOLDER WAS NOT SPECIFIED AND SO THE HON BLE COURT TOOK THE MEANING OF THESE TERMS AS UNDERSTOOD IN COMMON PARLANCE. THUS, AT THAT TIME, THE APEX COURT HELD THAT A SHAREHOLDER MEANS A PERSON, WHOSE NAME APPEARS IN THE REGISTER OF SHAREHOLDER OF THE COMPANY I.E. THE REGISTERED SHAREHOLDER. POST AMENDMENT FROM 1 - 4 - 1988 ONWARDS, THIS SITUATION HAS NOW CHANGED AND THE TERM SHAREHOLDER HAS NOW BEEN DEFINED IN SECTION 2(22)(E) ITSELF AS BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES HOLDING NOT LESS THAN 10% OF THE VOTING POWER. 5.8 IN THE INSTANT CASE, CARGILL INC. IS THE ULTIMATE HOLDING COMPANY OF BOTH THE ASSESSEE COMPANY AND CGTIPL. CARGILL INC., USA IS THE BENEFICIAL OWNER O F THE SHARES HOLDING NOT LESS THAN 10% OF THE SHARE IN THE CGTIPL, THROUGH THE ASSESSEE COMPANY. IT CAN BE EXPLAINED BY A SIMPLE EXAMPLE. IF A IS HOLDING SUBSTANTIAL INTEREST IN B AND B IS HOLDING SUBSTANTIAL INTEREST IN C , THEN BY NATURAL COROLLAR Y, A WILL BE HOLDING SUBSTANTIAL INTEREST IN C . THUS, THOUGH THE ASSESSEE COMPANY IS NOT THE HOLDING THE SHARES IN CGTIPL DIRECTLY, INDIRECTLY THE ASSESSEE COMPANY IS HOLDING SUBSTANTIAL INTEREST IN CGTIPL, THROUGH THE CARGILL INC., THE HOLDING COMPANY . THE AO PLACED THE RELIANCE ON THE FOLLOWING CASE LAWS: ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 42 NANDLAL KANORA VS CIT 122 ITR 405 (CAL) CIT VS DURGA PRASHAD MORA 82 ITR 540 (SC) STAR CHEMICALS PVT. LTD. VS CIT 203 ITR 11 (BOM) 25 . THE AO INCORPORATED THE SUBMISSIONS OF THE ASSESSEE ON ACC OUNT OF QUANTUM ADDITION IN PARA 5.11 OF THE ASSESSMENT ORDER , THE SAME ARE REPRODUCED VERBATIM AS UNDER: 5.11 REGARDING THE QUANTUM OF ADDITION UNDER SECTION 2(22)(E), THE ASSESSEE VIDE SUBMISSION DATED 15 DECEMBER 2010 HAS SUBMITTED AS UNDER: 2.18 WI THOUT PREJUDICE TO OUR ABOVE SUBMISSION, IT IS HUMBLY SUBMITTED THAT IF SUCH LOAN IS TO BE TREATED AS DEEMED DIVIDEND UNDER SECTION 2(22)(E), THEN IT CAN BE TAXED ONLY TO THE EXTENT OF ACCUMULATED PROFITS OF THE LENDER COMPANY UP TO THE DATE ON WHICH LOAN IS GIVEN. IN THIS REGARD ATTENTION IS INVITED TO EXPLANATION 2 TO SECTION 2(22) OF THE ACT WHICH READS AS UNDER: - EXPLANATION 2 - THE EXPRESSION ACCUMULATED PROFITS IN SUB - CLAUSES (A), (B), (D) AND (E), SHALL INCLUDE ALL PROFITS OF THE COMPANY UP TO THE DATE OF DISTRIBUTION OR PAYMENT REFERRED TO IN THOSE SUB - CLAUSES, AND IN SUB - CLAUSE (C) SHALL INCLUDE ALL PROFITS OF THE COMPANY UP TO THE DATE OF LIQUIDATION, BUT SHALL NOT, WHERE THE LIQUIDATION IS CONSEQUENT ON THE COMPULSORY ACQUISITION OF ITS UNDERTA KING BY THE GOVERNMENT OR A CORPORATION OWNED OR CONTROLLED BY THE GOVERNMENT UNDER ANY LAW FOR THE TIME BEING IN FORCE, INCLUDE ANY PROFITS OF THE COMPANY PRIOR TO THREE SUCCESSIVE PREVIOUS YEARS IMMEDIATELY PRECEDING THE PREVIOUS YEAR IN WHICH SUCH ACQUI SITION TOOK PLACE. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 43 ON PERUSAL OF ABOVE, IT IS CLEAR THAT LOAN CAN BE TREATED AS DEEMED DIVIDEND ONLY TO THE EXTENT OF ACCUMULATED PROFITS UP TO THE DATE ON WHICH LOAN IS GIVEN. IN THIS CONNECTION, PLEASE FIND ENCLOSED THE SUMMARY OF ADDITION MADE IN THE EARLIER YEARS UNDER SECTION 2(22)(E): ADDITIONS ACCUMULATED PROFITS AT THE YEAR END AY 2004 - 05 22,747,013 24,523,547 AY 2005 - 06 120,544,125 120,544,128 AY 2006 - 07 217,400,000 408,999,750 TOTAL 421,627,803 THE ACCUMULATED PROFIT IN CGTIPL AS ON MA RCH 31, 2007 IS RS. 454,438,461/ - . FROM THE ABOVE, IT MAY BE SEEN THAT THE ADDITION UNDER SECTION 2(22)(E) HAS ALREADY BEEN MADE TO THE EXTENT OF RS. 421,627,803/ - THUS, ACCUMULATED PROFIT LEFT IS RS. 32,810,658/ - OF CGTIPL TILL END OF THE RELEVANT FINANC IAL YEAR I.E. 2006 - 07. THEREFORE, WITHOUT PREJUDICE TO OUR SUBMISSION THAT NO ADDITION SHOULD BE MADE UNDER SECTION 2(22)(E) OF THE ACT, THE ADDITION SHOULD BE RESTRICTED TO THE BALANCE ACCUMULATED PROFITS OF CGTIPL. 26 . THE AO ALTHOUGH MENTIONED THAT TH E DRP HAD NOT GIVEN ANY LEGAL FINALITY ON THIS MATTER SINCE THIS ISSUE IS PENDING BEFORE THE HON BLE SUPREME COURT FOR THE ASSESSMENT YEARS 2004 - 05 AND 2005 - 06 AND BEFORE THE ITAT FOR THE ASSESSMENT YEAR 2006 - 07, H OWEVER, HE TREATED RS. 3,28,10,658/ - AS DE EMED DIVIDEND IN THE HANDS OF THE ASSESSEE UNDER THE HEAD INCOME FROM OTHER SOURCES. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 44 27 . BEING AGGRIEVED THE ASSESSEE IS IN APPEAL. THE LD. COUNSEL FOR THE ASSESSEE AT THE VERY OUTSET STATED THAT THIS ISSUE IS COVERED VIDE ORDER DATED 28.11.2013 IN ASSE SSEE S OWN CASE IN ITA NO. 4095/DEL/2010. THERE WAS NO REBUTTAL FROM THE DEPARTMENT SIDE ON THIS ISSUE. 28 . AFTER CONSIDERING THE SUBMISSIONS IT IS NOTICED THAT AN IDENTICAL ISSUE HAVING SIMILAR FACTS WAS A SUBJECT MATTER OF THE ASSESSEE S APPEAL IN ITA N O. 4095/DEL/2010 FOR THE ASSESSMENT YEAR 2006 - 07 WHEREIN VIDE ORDER DATED 28.11.2013, THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE AND THE RELEVANT FINDINGS HAVE BEEN GIVEN IN PARA 35 WHICH READ AS UNDER: 35. GROUND NO.2.2 TO 2.4. DEALS WITH THE ISSUE OF DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. TH E ASSESSEE RECEIVED A LOAN OF RS. 21.74 CRORES FROM M/S CARGILL GLOBAL TRADING INDIA PVT. LTD. (CGTIPL) WHICH IS A GROUP COMPANY OF THE ASSESSEE COMPANY. IN FACT BOTH THE ASSESSEE COMPANY AS WELL AS LENDER COMPANY ARE SUBSIDIARIES OF CARGILL INC. USA THROUGH ITS SEPARATE SUBSIDIARY COMPANIES CARGILL ASIA PACIFIC LTD. (CAPL) AND CARGILL INTERNATIONAL TRADING PTE LTD. SINGAPORE AND THE GROUP STRUCTURE OF THE COMPANIES CAN BE EXPLAINED AS UNDER: - CARGILL INC. USA ----------------- (ULTIMATE HOLDING CO. OF --------------- I CARGILL GROUP) I I I CARGILL ASIA PACIFIC CARGILL INT. TRADING LTD. (CAPL) US A PTE LTD. SINGAPORE I I I I ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 45 CARGILL MAURITIUS I LTD. CML I I I I I CARGILL INDIA LTD. CARGILL GLOBAL TRADING (ASSESSEE) INDIA PVT. LTD. IT WAS CONTE NDED THAT CGTIPL I.E. LENDER COMPANY WAS A SUBSIDIARY OF CARGIL L INT. TRADING PTE LTD. SINGAPORE WITH 99% SHAREHOLDING AND NONE OF THE SHARES OF LENDER COMPANY WERE HELD BY ASSESSEE COMPANY AND THEREFORE PROVISIONS OF SECTION 2(22)(E) WERE NOT APPLICABLE. FOR THE SAKE OF CONVENIENCE, WE ANALYSIS THE PROVISIONS OF SECTION 2(22)(E). SECTION 2(22)(E) APPLIES TO A SHAREHOLDER BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARE HOLDINGS NOT LESS THAN 10% OF THE VOTING POWER OF THAT COMPANY. THUS IN ORDER TO AT TRACT THE PROVISIONS OF SECTION 2(22)(E) THE PERSON SHOULD BE A : - A) SHAREHOLDER; B) SHOULD BE A BENEFICIAL OWNER OF SHARES C) IT MUST HOLD AT LEAST 10% OF VOTING POWER IN THE LENDER COMPANY. THE AFORESAID REQUIREMENTS OF LAW ARE CUMULATIVE. FURTHER IT IS S ETTLED POSITION THAT THE TERM SHAREHOLDER AS USED IN PROVISION OF SECTION 2(22)(E) REFERS TO SHAREHOLDER WHO IS A REGISTERED SHAREHOLDER I.E. WHOSE NAME APPEARS IN THE SHARE REGISTER OF THE COMPANY. THE ASSESSING OFFICER HAS HELD THE AMOUNT OF LOAN AS DEEM ED DIVIDEND BECAUSE AS PER HIS OPINION CARGIL L INC. USA I.E. ULTIMATE HOLDING COMPANY OF BOTH ASSESSEE COMPANY AND LENDER COMPANY WAS THE BENEFICIAL OWNER OF SHARES AND THEREFORE HE HELD THAT ASSESSEE WAS INDIRECTLY HOLDER OF SHARES IN THE LENDER COMPANY. WE FIND THAT THE ASSESSING OFFICER HAS ARRIVED AT THIS CONCLUSION ON THE BASIS OF SURMISES AND ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 46 CONJECTURES ONLY AS HE HIMSELF AT PAGE 10 OF HIS ASSESSMENT ORDER RECORDED THE FOLLOWING FINDINGS: - THUS THOUGH THE ASSESSEE COMPANY IS NOT HOLDING SHARES IN C GIPTL DIRECTLY, INDIRECTLY THE ASSESSEE COMPANY IS HOLDING SUBSTANTIAL INTEREST IN CGIPTL THOUGH THE CARGIL L INC. THE HOLDING COMPANY. IN VIEW OF THE ABOVE, WE FIND THAT ASSESSING OFFICER HIMSELF ARRIVED AT THE CONCLUSION THAT ASSESSEE WAS NOT A DIRECT REGISTERED SHAREHOLDER IN THE LENDER COMPANY, THEREFORE, RELYING UPON VARIOUS JUDGMENTS AS RELIED UPON BY LD AR THE LOAN RECEIVED BY ASSESSEE CANNOT BE TREATED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. THEREFORE, GROUND NO.2.2. TO 2.4 ARE ALLOWED. 29 . SINCE FACTS FOR THE YEAR UNDER CONSIDERATION ARE SIMILAR TO THE FACTS INVOLVED IN THE PRECEDING YEAR. SO, RESPECTFULLY FOLLOWING AFORESAID REFERRED TO ORDER DATED 28.11.2013 IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2006 - 07 IN ITA NO. 4095/DEL/201 0, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 30 . THE LAST ISSUE VIDE GROUND NO. 2.3 RELATES TO THE CREDIT OF ADDITIONAL TDS AMOUNTING TO RS. 22,225/ - NOT GRANTED TO THE ASSESSEE. AS REGARDS TO THE ABOVE ISSUE THE LD. COUNSEL FOR THE ASSESSEE AT THE VERY OUTSET STATED THAT THIS ISSUE IS SIMILAR TO THE ISSUE INVOLVED IN ASSESSMENT YEAR 2006 - 07 IN ITA NO. 4095/DEL/2010 IN ASSESSEE S OWN CASE WHEREIN VIDE PARA 37 OF THE ORDER DATED 28.11.2013, THIS ISSUE HAS BEEN SET BACK TO THE AO. ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 47 31 . AFTER CONSIDER ING THE ABOVE SUBMISSIONS AND GOING THROUGH THE M ATERIAL AVAILABLE ON THE RECORD, I T IS NOTICED THAT A SIMILAR ISSUE HAVING IDENTICAL FACTS WAS A SUBJECT MATTER OF THE ASSESSEE S APPEAL IN THE ASSESSMENT YEAR 2006 - 07 IN ITA NO. 4095/DEL/2010 WHEREIN VIDE P ARA 37 OF THE ORDER DATED 28.11.2013 IT HAS BEEN HELD AS UN D ER: 37. GROUND NO.2.4. RELATES TO GRIEVANCE OF ASSESSEE FOR THE ACTION OF ASSESSING OFFICER BY WHICH HE DID NOT ALLOW CREDIT OF ADDITIONAL TDS CERTIFICATES AMOUNTING TO RS. 51,97,370/ - . THE CONTE NTION OF ASSESSEE IS THAT SAME WERE FILED BEFORE ASSESSMENT WAS COMPLETED THEREFORE ASSESSING OFFICER SHOULD HAVE CONSIDERED THE SAME FOR DETERMINING THE TAX PAYABLE BY ASSESSEE. THE PROVISIONS OF SECTION 155(14) EMPOWERS THE ASSESSING OFFICER TO GIVE CRED IT FOR TAX DEDUCTION CERTIFICATES WHICH COULD NOT BE FILED WITH THE RETURN OF INCOME PROVIDED THEY ARE FILED WITHIN TWO YEARS FROM THE END OF ASSESSMENT YEAR IN WHICH SUCH INCOME WAS ASSESSABLE AND FURTHER PROVIDED THAT SUCH INCOME FROM WHICH TAX WAS DEDUC TED WAS DISCLOSED IN THE RETURN OF INCOME FILED BY ASSESSEE FOR THAT RELEVANT ASSESSMENT YEAR. THE ASSESSEE IN THE PRESENT CASE DID NOT FILE SUCH CERTIFICATES WITHIN PRESCRIBED PERIOD OF TWO YEARS BUT FILED THESE BEFORE THE ASSESSMENT WAS COMPLETED ON 26. 8.2010. HOWEVER, VARIOUS PROVISIONS OF ACT SUGGEST THAT TAX PAYABLE WILL ALWAYS BE AFTER GIVING CREDIT OF TAX DEDUCTED AT SOURCE FROM THE INCOME OF ASSESSEE. THEREFORE, KEEPING IN VIEW THE SUBSTANTIVE JUSTICE, WE DIRECT THE ASSESSING OFFICER TO GIVE CREDIT FOR SUCH ADDITIONAL TDS CERTIFICATES PROVIDED THE INCOME FROM WHICH SUCH TDS WAS DEDUCTED FORMED PART OF INCOME DECLARED BY ASSESSEE IN THE RETURN OF INCOME. IN VIEW OF THE ABOVE GROUND NO.2.4 IS ALSO ALLOWED FOR STATISTICAL PURPOSES. 32 . SO, RESPECTF ULLY FOLLOWING THE AFORESAID REFERRED TO ORDER DATED 28.11.2013 , THIS ISSUE IS REMANDED BACK TO THE AO TO BE DECIDED IN ITA NO . 5733 / DEL /2011 CARGILL INDIA PVT. LTD. 48 ACCORDANCE WITH THE DIRECTIONS GIVEN FOR THE ASSESSMENT YEAR 2006 - 07 VIDE ORDER DATED 28.11.2013 IN ITA NO. 4095/DEL/2010. 33 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES . ( ORDER PRON OUNCED IN THE COURT ON 19 /06 /2015 ) SD/ - SD/ - (DIVA SINGH ) (N. K. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 19 /06 /2015 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR