BT (India) Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 5953/DEL/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7457 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 6 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 18-05-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 29-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMARENDRA KUMAR
• Assessee Lawyers: NAGESHWAR RAO ADV SHRI PARTH
• Keywords: Transfer pricing; Business expenditure; International transaction
• Section: 143(3); 194C; 37

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1 NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA: JUDICIAL MEMBER ITA NO. 5953/DEL/2012 ASSTT. YR: 2008-09 BT(INDIA) PVT. LTD., VS. DCIT, CIRCLE 3(1), 11 TH FLOOR, EROS CORPORATE TOWER, NEW DELHI. OPP. INTERNATIONAL TRADE TOWER, NEHRU PLACE, NEW DELHI. PAN: AABCC 4785 E ( APPELLANT ) (RESPONDENT) APPELLANT BY : SHRI NAGESHWAR RAO ADV. SHRI PARTH ADV. RESPONDENT BY : SHRI AMARENDRA KUMAR CIT (DR) DATE OF HEARING : 18/05/2016. DATE OF ORDER : 10/06/20126. O R D E R PER S.V. MEHROTRA, A.M: THIS IS ASSESSEES APPEAL AGAINST THE ASSESSMENT ORDER DATED 28.09.2012, PASSED BY THE ASSESSING OFFICER PURSUAN T TO DRPS DIRECTIONS U/S 144C OF THE INCOME-TAX ACT, 1961, RELATING TO A Y 2008-09. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A SUBSIDIARY OF BT HOLDCO BV, NETHERLANDS. THE COMPANY WAS INCORPORATE D ON 26.12.2000 AND IS PRIMARILY ENGAGED IN THE BUSINESS OF PROVIDING T ELECOM SERVICES AND RELATED SUPPORT SERVICES TO BT GROUP COMPANIES. THE ASSESSEE HAD FILED RETURN OF INCOME DECLARING INCOME AT RS. 34,87,73,0 51/-. THE ASSESSMENT, AS 2 PER THE DIRECTIONS OF LD. DRP, WAS COMPLETED AT A TOTAL INCOME OF RS. 38,12,60,404/- AS UNDER: TOTAL INCOME AS SHOWN BY THE ASSESSEE RS. 3487730 51/- ADD:- ADDITION ON A/C OF ARM/S LENGTH PRICE U/S 92CA(3) R S. 57,37,292/- CAPITALIZATION OF TRAINING AND RECRUITMENT EXPENSES NIL DISALLOWANCE OF PRIOR PERIOD EXPENSES RS. 2,67,5 0,061/- TOTAL INCOME RS. 38,12,60,404/- 3. BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFOR E US AND HAS TAKEN FOLLOWING GROUNDS OF APPEAL: THE APPELLANT RESPECTFULLY SUBMITS THAT ON THE FAC TS AND CIRCUMSTANCES OF THE CASE AND IN LAW, WHILE PASSING THE ASSESSMENT ORDER UNDER SECTION 143(3) READ WITH SEC TION 144C OF THE INCOME TAX ACT, 1961 (,THE ACT'), THE DISPUT E RESOLUTION PANEL (,DRP') AND THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3( 1), NEW DELHI [HEREINAFTER REFERRED TO AS 'THE LEARNED ASSESSING OFFICER' ('LEARNED AO')] HAVE ERRED IN: 1. DISALLOWING DEDUCTION FOR PRIOR-PERIOD EXPENDITU RE OF INR 26,750,061 (BEING EXPENDITURE LIABLE TO TAX DED UCTION AT SOURCE UNDER CHAPTER XVIIB OF THE ACT) DURING AY 20 08-09 BY INCORRECTLY APPRECIATING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. 1.1 THE HON'BLE DRP AND THE LEARNED AO OUGHT TO HAV E ALLOWED THE DEDUCTION FOR PRIOR PERIOD EXPENDITURE OF INR 26,750,061 UNDER THE FIRST PROVISO TO SECTION 40(A) (IA) OF THE ACT FOR AY 2008- 09, SINCE THE APPELLANT HAS DULY D EDUCTED AND DEPOSITED TAXES ON THE SAID EXPENDITURE DURING AY 2 008-09. 1.2 THE HON'BLE DRP AND THE LEARNED AO OUGHT TO HAV E ALLOWED THE DEDUCTION FOR PRIOR PERIOD EXPENDITURE OF INR 26,750,061 UNDER THE FIRST PROVISO TO SECTION 40(A) (IA) OF THE ACT IN AY 2008- 09, SINCE THE SAID EXPENDITURE WAS NOT CLAIMED AS DEDUCTION IN AY 2007-08. 3 1.3 WITHOUT PREJUDICE, THE HON'BLE DRP AND THE LEAR NED AO OUGHT TO HAVE APPRECIATED THAT EVEN IF THE EXPENDIT URE WOULD HAVE BEEN CHARGED TO THE PROFIT & LOSS FOR AY 2007- 08, THE SAME WOULD HAVE BEEN ALLOWED AS A DEDUCTION UNDER T HE PROVISION OF SECTION 40(A)(IA) OF THE ACT ONLY DURI NG AY 2008- 09, BEING THE AY WHERE TAXES WERE DEDUCTED AND DEPO SITED BY THE APPELLANT INTO THE GOVERNMENT TREASURY 2. REJECTING THE ECONOMIC ANALYSIS UNDERTAKEN BY TH E ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF THE A CT READ WITH THE INCOME TAX RULES, 1962, (,THE RULES') AND RE-DE TERMINING THE ARM'S LENGTH PRICE (,ALP') OF THE INTERNATIONAL TRANSACTION PERTAINING TO PAYMENT OF INTEREST ON EXTERNAL COMME RCIAL BORROWINGS ('ECB') AND HOLDING THAT THE ASSESSEE'S INTERNATIONAL TRANSACTIONS ARE NOT AT ARM'S LENGTH 3. WRONGLY BENCHMARKING THE INTERNATIONAL TRANSACTI ON PERTAINING TO PAYMENT OF INTEREST ON ECB USING THE GREAT BRITAIN POUND (,GBP') LONDON INTER-BANK OFFER RATE ('LIBOR') AS THE COMPARABLE UNCONTROLLED PRICE. 4. FAILURE TO GRANT THE BENEFIT OF +/- 5% RANGE AS LAID DOWN IN PROVISO TO SECTION 92C(2) OF THE ACT. 5. INITIATING PENALTY PROCEEDINGS UNDER SECTION 271 (1)(C) OF THE ACT FOR AY 2008-09, WHICH IS INAPPROPRIATE IN A BSENCE ANY CONCEALMENT / FURNISHING OF INACCURATE PARTICULARS OF INCOME BY THE APPELLANT DURING THE COURSE OF ASSESSMENT PROCE EDINGS. 6. RESTRICTING THE CREDIT FOR WITHHOLDING TAXES DED UCTED BY THE CUSTOMERS TO INR 5,785,747 AS AGAINST INR 12,89 8,516 CLAIMED BY THE APPELLANT IN ITS RETURN OF INCOME. 4. BRIEF FACTS APROPOS GROUND NO. 1 ARE THAT AO NOT ICED THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY CLAIM ED PRIOR PERIOD 4 EXPENSES AGGREGATING TO RS. 33,23,29,562/-. THE DET AILS OF EXPENSES WERE AS UNDER: RATS AND TAXES 4,196,326/- REPAIR & MAINTENANCE 29,835,472/- MISCELLANEOUS (NET) 564305/- COMMUNICATION EXP. (2266541) 5. THE AO OBSERVED THAT SINCE THE EXPENSES PERTAINE D TO FY 2006-07 (AY: 2007-08), THEREFORE, THE SAME WERE CLEARLY DIS ALLOWABLE AND THE ASSESSEE ALSO DISALLOWED THESE EXPENSES U/S 37. HOW EVER, IN THE COMPUTATION OF INCOME ASSESSEE CLAIMED DEDUCTION U/S 40(A)(IA) ON THE GROUND THAT DURING THE YEAR TDS WAS DEDUCTED AND, THEREFORE, THE EXPEN SES WERE ALLOWABLE AS PER PROVISO TO SECTION 40(A)(IA). HE, THEREFORE, IN ORDER TO VERIFY THE ASSESSEES CLAIM REQUIRED THE ASSESSEE TO FURNISH T HE NECESSARY DETAILS ALONG WITH THE ALLOWABILITY OF THE SAME. THE ASSESSEE FIL ED FOLLOWING REPLY: EXPENDITURE OF INR 26,750061 PERTAINS TO FY 2006-0 7. DETAILS OF THE SAID EXPENDITURE HAVE BEEN ENCLOSED AS ANNEXURE 4. ORDINARILY THE SAID EXPENDITURE IS DEDUCTIBLE IN TH E HANDS OF BT INDIA IN FY 2006-07, PROVIDED APPROPRIATE TAXES HAV E BEEN WITHHELD ON THE SAME, IN ACCORDANCE WITH THE PROVIS IONS OF SECTION 40(A)(I)/ SECTION 40(A)(IA) OF THE ACT. GIVEN THAT NO TAXES HAVE BEEN WITHHELD AT SOURCE ON THESE PAYMENTS ON OR BEFORE THE DUE DATE OF FILING THE TA X RETURN FOR FY 2006-07. HOWEVER, AS PER THE PROVISIONS OF SECTI ON 40(A)(I)/ SECTION 40(A)(IA) OF THE ACT, THE SAID EXPENSES CAN BE CLAIMED AS A TAX DEDUCTION IN THE FINANCIAL YEAR IN WHICH APPR OPRIATE TAXES HAVE BEEN WITHHELD AT SOURCE. SINCE BT INDIA BOOKED THESE EXPENSES IN ITS PROFIT AND LOSS ACCOUNT DURING THE SUBJECT ASSESSMENT YEAR, TAXES A T APPROPRIATE RATES WERE DEDUCTED AND DEPOSITED INTO THE INDIAN 5 GOVERNMENT TREASURY DURING THE SUBJECT ASSESSMENT Y EAR. ACCORDINGLY, BT INDIA HAS CLAIMED THE DEDUCTION FOR THESE EXPENSES (ALTHOUGH PRIOR PERIOD EXPENSES) IN THE IN COME TAX RETURN FOR THE SUBJECT YEAR IN ACCORDANCE WITH THE PROVISIONS OF SECTION 40(A)(I)/40(A)(IA) OF THE ACT .. BALANCE P RIOR PERIOD EXPENSES AMOUNTING TO INR 1383175/- HAS BEEN CONSID ERED AS DISALLOWANCE FOR THE PURPOSE OF COMPUTATION OF PROF ITS AND GAINS FROM BUSINESS UNDER THE PROVISIONS OF THE ACT IN INCOME- TAX RETURN OF BT INDIA FOR THE SUBJECT ASSESSMENT Y EAR 6. THE AO DID NOT ACCEPT THE ASSESSEES CONTENTION FOR THE FOLLOWING REASONS: (I) SINCE THE EXPENSES WERE NOT RELATED FOR THE YEAR UN DER REFERENCE, THEREFORE, NOT ALLOWABLE U/S 37 AND THE ASSESSEE AL SO HAD DISALLOWED THESE EXPENSES ACCORDINGLY. (II) THE PROVISIONS OF SECTION 40 ARE NOT FOR ALLOWING A NY DEDUCTION. SECTION 40 USES THE TERM AMOUNT NOT DEDUCTIBLE, W HICH IMPLIES THAT SECTION 40 SPEAKS ABOUT DISALLOWANCE OF EXPENS ES. (III) EXPENSES DISALLOWABLE U/S 37 CANNOT BE ALLOWED U/S 40 BECAUSE SECTION 40 IS AN INDEPENDENT SECTION I.E. FOR DISAL LOWANCE OF EXPENSES FOR WHICH COMPLIANCE OF TDS PROVISIONS HAD NOT BEEN MADE. 7. LD. DRP CONFIRMED THE ACTION OF AO, INTER ALIA, OBSERVING THAT THE PROVISION OF SECTION 40(A)(IA) COMES INTO OPERATION IF IN EARLIER YEAR, IN VIEW OF THE MAIN SECTION 40(A)(IA), SOME AMOUNT HAD BEEN DISALLOWED. LD. DRP FURTHER POINTED OUT THAT IN THE PRESENT CASE SINCE ASSESSEE DEBITED THIS AMOUNT IN ITS P&L A/C OF FY 2006-07, THUS, THERE WA S NO QUESTION OF DISALLOWANCE OF THIS AMOUNT U/S 40(A)(IA) IN AY 200 7-08. 6 8. LD. COUNSEL FOR THE ASSESSEE REFERRED TO PAGE 15 0 OF THE PB WHEREIN THE DETAILS WITH RESPECT TO THE CLAIM OF PRIOR PERI OD EXPENSES WERE FURNISHED BEFORE THE AO, WHICH HAS BEEN REPRODUCED HEREINABOV E. 9. HE REFERRED TO PAGES 162 AND 163 OF PB AND POINT ED OUT THAT THE PAYMENTS MADE WERE SUBJECT TO PROVISIONS OF TDS U/S 194C AND 194J. HE FURTHER REFERRED TO PAGE 170-173 OF PB, WHEREIN THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SMC CONSTRU CTION INDIA IS CONTAINED IN WHICH IT HAS BEEN HELD THAT IN REGARD TO THE FEES PAID TO FOREIGN ENTITY FOR RENDERING TECHNICAL SERVICES, WHICH IS A MENABLE TO TDS PROVISION, THE DEDUCTION IS ALLOWABLE IN THE YEAR IN WHICH TAX IS PAID. 10. LD. DR SUBMITTED THAT EXPENSES SHOULD BE DEBITE D IN THE YEAR IN WHICH IT ACCRUED. HE SUBMITTED THAT BASIC PRINCIPLE OF ACCOUNTING CANNOT BE GIVEN A GO BYE ON THE BASIS OF ALLOWABILITY/ DISALL OWABILITY OF EXPENSES ON THE BASIS OF PROVISIONS OF THE ACT. HE POINTED OUT THAT SINCE ASSESSEE HAD NOT DEBITED THESE EXPENSES IN AY 2007-08, THEREFORE, ME RELY BY TAKING RECOURSE TO SECTION 40(A)(IA), DEDUCTION CANNOT BE ALLOWED. HE SUBMITTED THAT PRE- REQUISITE OF DISALLOWANCE IN PREVIOUS YEAR HAS NOT BEEN FULFILLED. HE FURTHER POINTED OUT THAT AO HAS NOT EXAMINED THE GENUINENES S OF THESE PAYMENTS BECAUSE THESE WERE PRIOR PERIOD EXPENSES. HE POINTE D OUT THAT AN ANOMALOUS SITUATION WILL BE CREATED IF THIS AMOUNT IS ALLOWED . 11. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSE D THE RECORD OF THE CASE. IT IS WELL SETTLED LAW THAT ENTRIES MADE IN T HE BOOKS OF ACCOUNT ARE NOT DECISIVE REGARDING ALLOWABILITY/ DISALLOWABILITY OF EXPENDITURE. THE MAIN PLANK OF REVENUES SUBMISSION IS THAT SINCE ASSESSE E DID NOT MAKE THE ENTRY IN THE P&L A/C IN THE YEAR IN WHICH THE LIABILITY A CTUALLY ACCRUED, THEREFORE, THE ASSESSEES CLAIM IS TO BE DENIED. 7 12. WE ARE NOT INCLINED TO ACCEPT THIS PROPOSITION ADVANCED BY REVENUE FOR THE SIMPLE REASON THAT THE REAL INCOME OF AN AS SESSEE IS TO BE DETERMINED AS PER THE PROVISIONS OF THE INCOME-TAX ACT AND NOT ON THE BASIS OF ENTRIES MADE IN THE BOOKS OF ACCOUNT. AS PER THE PROVISO OF SECTION 40(A)(IA), ADMITTEDLY, THE DEDUCTION IS ALLOWABLE IN REGARD TO AN EXPENDITURE ONLY IN THE YEAR IN WHICH THE TDS AMOUNT HAS BEEN DEPOSITED. TH ERE IS NO DISPUTE ON THIS COUNT. FURTHER, EVEN IF AN ASSESSEE HAD NOT DE BITED THESE EXPENSES IN THE P&L A/C OF EARLIER YEAR THAT CANNOT BE THE BASIS FO R DENYING DEDUCTION WHICH IS OTHERWISE ADMISSIBLE TO ASSESSEE. WE FURTHER FIN D THAT SECTION 40(A)(IA) DOES NOT MANDATE FOR ANY DISALLOWANCE IN EARLIER YE AR FOR PROVISO TO SECTION 40(A)(IA) TO COME INTO OPERATION. WE FIND THAT THE ASSESSEES CLAIM IS FULLY COVERED BY THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF SMC CONSTRUCTION (SUPRA), WHEREIN THE HONBLE DELHI HIG H COURT HAS APPROVED THE FOLLOWING FINDINGS OF THE TRIBUNAL: FROM THE BARE READING OF THIS PROVISION, IT WOULD REVEAL THAT SUM CHARGEABLE UNDER THIS ACT IS PAYABLE EITHER OUT SIDE INDIA OR IN INDIA TO A NON-RESIDENT IS NOT ALLOWABLE AS A DE DUCTION UNLESS TAX HAS BEEN DEDUCTED AT THE SOURCE OR AFTER DEDUCT ION OF SUCH TAX, IT HAS NOT BEEN PAID BEFORE THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB-SECTION (1) OF SECTION 200 AND IN ACCORDA NCE WITH THAT PROVISIONS OF CHAPTER XVI-B OF THE ACT. IN THE CASE OF ABN AMRO BANK, THE INCOME-TAX APPELLATE TRIBUNAL HAS OB SERVED THAT WHEN A DEDUCTION IS NOT ALLOWABLE BECAUSE OF T HE STATUTORY PROVISIONS IT WOULD MAKE NO DIFFERENCE WHETHER THE SAME WAS CLAIMED OR NOT BY THE ASSESSEE. BECAUSE OF SECTION 40(A)(I) OF THE ACT, THE DEDUCTION HAS TO BE ALLOWED IN COMPUTI NG THE INCOME ,OF PREVIOUS YEAR IN WHICH SUCH TAX DEDUCTED AT SOURCE HAS BEEN PAID. THIS SECTION 40(A) (I) STARTS WITH A NON OBSTANTE CLAUSE WHICH IMPLIES THAT SECTION 40 OVERRIDES THE PROVISIONS OF SECTIONS 30 TO 38 OF THE ACT. THE AMOUNTS WHICH MAY OTHERWISE 8 BE ALLOWABLE AS A BUSINESS EXPENDITURE AS PER THE P ROVISIONS OF SECTIONS 30 TO 38 AND WHICH IS 'CHARGEABLE TO TAX I N THE HANDS OF THE RECIPIENT WOULD NOT BE ALLOWED .AS A DEDUCTION UNLESS REQUISITE AMOUNT OF TAX HAS BEEN DEDUCTED ON THE' S AID AMOUNT. THUS, MERE PASSING A DEBIT ENTRY IN THE BOOKS OF AC COUNT, OF THESE EXPENSES WOULD NOT BE SUFFICIENT FOR CLAIMING THE DEDUCTION IN THE PRESENT ACCOUNT IN THE CONCERNED Y EAR THEN ALSO DEDUCTION WOULD NOT BE ADMISSIBLE UNLESS TAX HAS BE EN PAID ON SUCH AMOUNT. THE PROVISO TO SECTION 40(A)(I) MAKES IT CLEAR THAT IF TAX HAS BEEN DEDUCTED IN THE SUBSEQUENT YEAR AND PAID THEN DEDUCTION WOULD BE ALLOWED IN THAT YEAR. THEREFORE , WE ARE OF THE OPINION THAT THE LEARNED FIRST APPELLATE AUTHOR ITY HAS RIGHTLY DELETED THE DISALLOWANCE. WE DO NOT FIND ANY MERIT IN THIS APPEAL OF THE REVENUE. IT IS DISMISSED. 13. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE DELHI HIGH COURT, THIS GROUND IS ALLOWED. 14. BRIEF FACTS APROPOS GROUND NOS. 2 TO 4 ARE THAT THE ASSESSEE HAD, INTER ALIA, ENTERED INTO INTERNATIONAL TRANSACTION OF PAY MENT OF INTEREST ON EXTERNAL COMMERCIAL BORROWINGS OF RS. 3,32,11,250/-. THE INT EREST HAD BEEN PAID TO BT PLC. @ 9.72%. THE OUTSTANDING BALANCE AS ON 31.3 .2008 WAS RS. 341,505,490/-. THE ASSESSEE HAD BENCH MARKED THE IN TEREST AGAINST THE PLR PREVAILING IN INDIA DURING THAT PERIOD. LD. TPO WAS OF THE OPINION THAT THE SAME SHOULD HAVE BEEN BENCHMARKED AGAINST THE LIBOR , WHICH WAS THE PREVALENT RATE IN THE MARKET FROM WHERE THE LOAN HA D BEEN EXTENDED. HE OBSERVED THAT DURING THE PERIOD IN QUESTION THE 6 M ONTH LIBOR WAS 5.1435% (AVERAGE RATE FROM APRIL, 2007 TO MARCH 200 8), WHICH WAS MUCH LESS THAN THE RATE OF INTEREST CHARGED BY THE AE FR OM ASSESSEE. HE FURTHER POINTED OUT THAT EVEN IF THE AE WAS TO CHARGE A PRE MIUM ON THIS RATE, IT WOULD NOT BE MORE THAN 200 BASIS POINTS WHICH TOTAL LED TO 7.14%, WHICH WAS MUCH LOWER THAN 9.72% AND BEYOND THE +/-% RANGE OF 5%, WHICH RANGES 9 FROM 7.49% TO 6.78%. AO, THEREFORE, SHOW CAUSED THE ASSESSEE AS TO WHY THE INTEREST PAID SHOULD NOT BE REDUCED FROM 9.72% TO 7.14%. 15. THE ASSESSEE IN ITS REPLY POINTED OUT THAT SINC E THE LOAN WAS RUPEE DENOMINATED, THE INTEREST WAS PAYABLE AT THE RATE O F INDIA LIBOR + 50 BASIS POINTS PER ANNUM AND THE SAME HAD BEEN BENCH MARKED AGAINST THE PREVAILING PLR IN INDIA, WHICH RANGED BETWEEN 12.75 % TO 13.25% AT THE RELEVANT TIME. ASSESSEE ALSO RELIED ON THE ORDER OF THE ITAT DELHI BENCH IN THE CASE OF SONY INDIA (P) LTD., WHEREIN IT HAD BEE N STATED THAT FORM AND SUBSTANCE SHOULD BE RESPECTED AS LONG AS A WRITTEN AGREEMENT WAS IN PLACE. 16. LD. TPO, HOWEVER, POINTED OUT THAT THIS DECISIO N HAD NO RELEVANCE TO THE PRESENT CONTEXT AND FURTHER REFERRED TO THE LOA N AGREEMENT DATED 29.6.2004 BETWEEN BRITISH TELCOMMUNICATIONS PLC. AN D BT (INDIA) PVT. LTD., WHEREIN IT WAS POINTED OUT THAT INTEREST PAI D WOULD BE THE CLOSING 6 MONTHS INR LIBOR RATE (CALCULATED AT THE CLOSING 6 MONTHS GPB LIBOR RATE PLUS THE MARKET PREMIUM TO THE INR) PLUS THE A PPLICABLE BORROWING MARGIN. LD. TPO POINTED OUT THAT AS PER THIS AGREE MENT THE INR LIBOR, WHICH WAS QUOTED BY ASSESSEE, WAS NOTHING BUT THE G PB LIBOR PLUS A MARK-UP. HE WORKED OUT THE APPLICABLE INTEREST RATE AT 8.044% AND COMPUTED THE EXCESS RATE AT 1.68% AND CORRESPONDING AMOUNT O F RS. 5,737,292/- OBSERVING AS UNDER: THE DATA FOR THE AVERAGE RATE OF 6 MONTHS GPB LIBO R HAS BEEN SEEN AND IT IS CALCULATED THAT THE AVERAGE DUR ING FY 2007- 08 WORKS OUT TO 6.044% (ENCLOSED AS ANNEXURE-C). AS SUGGESTED IN THE SHOW CAUSE NOTICE 200 BASIS POINTS CAN BE ADDED TO THIS TO ARRIVE AT AN INTEREST RATE OF 8.04 4%. THE ASSESSEE HAD PAID AT THE RATE OF 9.724%, WHICH IS B EYOND THE +/- 5% MARGIN OF 8.044%. THEREFORE, THE EXCESS PAYMENT OF 1.68% PER ANNUM WILL BE DISALLOWED. THIS WORKS OUT TO AN AMOUNT OF RS. 5,737,292. THIS AMOUNT WILL BE REDUCED FROM THE INTEREST PAY OUT MADE BY THE ASSESSEE. 10 17. BEFORE LD. DRP THE ASSESSEE HAD, INTER ALIA, S UBMITTED AS UNDER: AT THE TIME OF PREPARATION OF TRANSFER PRICING DOC UMENTATION (COPY ENCLOSED AS ITEM 6 OF PAPER BOOK I), THE ASSE SSEE HAD COMPUTED THE ALP IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES. FOR THE PURPOSE OF ESTABLISHIN G THE ALP OF ITS IMPUGNED TRANSACTIONS WITH ITS ASSOCIATED ENTER PRISES ('AE'), BASED ON THE PROVISIONS OF RULE 10C, THE COMPARABLE UNCONTROLLED PRICE ('CUP') METHOD WAS SELECTED AS T HE MOST APPROPRIATE METHOD TO DETERMINE THE ARM'S LENGTH NA TURE OF RATE OF INTEREST PAID BY THE ASSESSEE. THE CUP METHOD WA S SELECTED BECAUSE PUBLIC INFORMATION FROM AUTHENTIC SOURCES O N SAME/ SIMILAR UNCONTROLLED TRANSACTIONS WAS AVAILABLE. IN ORDER TO BENCHMARK THIS TRANSACTION THE ASSESSEE USED, THE P RIME LENDING RATE ('PLR') INTEREST RATE TAKEN FROM RESER VE BANK OF INDIA ('RBI') [WEB: HTTP://WWW.RBI.ORG.IN]. THE PLR OF RBI PREVAILING DURING FY 2007-08 WAS AVAILABLE AND THUS HAS BEEN USED AS A CUP FOR THE PURPOSE OF BENCHMARKING THE T RANSACTION OF PAYMENT OF INTEREST BETWEEN BT INDIA AND BT PIC. THE ASSESSEE HAD UNDERTAKEN A TRANSFER PRICING (TP') ST UDY, CARRIED OUT BY AN INDEPENDENT EXTERNAL CONSULTANT. A DETAIL ED ANALYSIS WAS UNDERTAKEN TO DETERMINE THE FUNCTIONS PERFORMED , RISKS ASSUMED AND ASSETS UTILIZED BY THE ASSESSEE IN RESP ECT OF THE TRANSACTIONS UNDERTAKEN BY IT WITH ITS AE. FURTHER, THE ECONOMIC ANALYSIS FOR THE DETERMINATION OF THE ALP WAS UNDER TAKEN IN ACCORDANCE WITH THE PROVISIONS OF THE ACT, READ WIT H THE RULES. BASED ON THE TP STUDY, THE INDEPENDENT EXTERNAL CON SULTANT 11 CONCLUDED THAT INTERNATIONAL TRANSACTIONS ENTERED B Y THE ASSESSEE WITH ITS AE ARE AT ARMS LENGTH FROM AN INDIAN TRAN SFER PRICING PERSPECTIVE. 18. LD. COUNSEL REFERRED TO OBJECTIONS RAISED BEFOR E LD. DRP AND REFERRED TO PARA 6.3 OF THE SAID OBJECTIONS CONTAINED AT PAG E 46 OF APPEAL SET WHEREIN IT WAS, INTER ALIA, STATED AS UNDER: WE WOULD BRING TO THE HONBLE PANELS ATTENTION TH AT APPLYING THE GBP LIBOR IS NOT APPROPRIATE IN THE INSTANT CAS E AS THE ECB IS DENOMINATED IN INDIAN RUPEES AND ACCORDINGLY AN APPROPRIATE COMPARABLE UNCONTROLLED PRICE WOULD BE THE INTEREST RATE UNCONTROLLED LENDERS WOULD HAVE CHARGED THE AS SESSEE FOR THE LOAN IN INDIA. FURTHER, SINCE THE LOAN IS DENOM INATED IN INDIAN RUPEE, THE ASSESSEE DOES NOT BEAR ANY FOREIG N EXCHANGE RISK AS IT WOULD IN CASE IT WOULD HAVE TAKEN A LOAN IN FOREIGN CURRENCY. HENCE A PLR COMPARISON IS APPROPRIATE IN THE INSTANT CASE. 19. THE ASSESSEE FURTHER RELIED ON THE FOLLOWING DE CISIONS FOR THE PROPOSITION THAT A COMPARISON FOR DETERMINING THE A RMS LENGTH INTEREST RATE FOR LOANS WOULD BE DEPENDENT ON THE CURRENCY IN WHI CH THE LOAN WAS DENOMINATED: -SONY INDIA (P) LTD. (ITA NOS. 1189/DEL/2005 & ORS. ) - SIVA INDUSTRIES LTD. (ITA NO. 2148/MDS/2010) 20. THUS, IT WAS SUBMITTED BEFORE LD. DRP THAT THE CURRENCY IN WHICH THE LOAN IS DENOMINATED IS A KEY DETERMINANT IN IDENTIF YING THE RELEVANT INTEREST RATE TO BE USED FOR BENCHMARKING PURPOSES. LD. DRP, HOWEVER, IN PARA 4.1 OF ITS ORDER MERELY UPHELD THE TPOS FINDING. LD. COUN SEL AFTER REFERRING TO DETAILED SUBMISSIONS MADE BEFORE LD. DRP, AS NOTED ABOVE, POINTED OUT THAT LD. DRP HAS NOT AT ALL CONSIDERED ASSESSEES SUBMIS SIONS AND UPHELD THE LD. TPOS ORDER. HE POINTED OUT THAT IN SUBSEQUENT ASSE SSMENT YEAR 2009-10 LD. 12 DRP HAS ACCEPTED THE ASSESSEES CASE. IN THIS REGAR D HE HAS FILED A COPY OF LD DRPS ORDER FOR AY 2009-10 WHEREIN IN PARA 7.1.3 LD . DRP HAS HELD AS UNDER: 7.1.3 THIS PANEL HAS CAREFULLY CONSIDERED THE SUBMI SSIONS OF THE TAXPAYER AND THE REASONING GIVEN BY TPO IN HIS ORDER AND HOLDS: 1. CURRENCY IN WHICH THE LOAN IS DENOMINATED IS A K EY DETERMINANT IN IDENTIFYING THE RELEVANT INTEREST RA TE FOR BENCHMARKING. 2. SINCE THE TAXPAYER IS BASED IN INDIA A D ECB IS DENOMINATED IN INR AS PROVIDED ON PAGE 148 OF PAPER BOOK, AN APPROPRIATE UNCONTROLLED PRICE WOULD BE TH E INTEREST RATE UNCONTROLLED LENDERS WOULD HAVE CHARG ED THE TAXPAYER FOR THE LOAN IN INDIA. THIS WOULD DEFI NITELY HAVE BEEN THE INTEREST RATE CHARGEABLE IN INDIAN MA RKET ON RUPEE LOAN. FOR THIS PURPOSE, THE PLR OF RBI IS APPROPRIATE COMPARABLE. 3. DURING THE COURSE OF PROCEEDINGS BEFORE THIS PAN EL THE TAXPAYER HAS SUBMITTED LETTER DATED 09.12.2013 THE CONTENTS OF WHICH ARE AS UNDER: 'THIS IS IN REFERENCE TO THE CAPTIONED PROCEEDINGS. IN THIS REGARD, WE WISH TO FURNISH THE FOLLOWING INFORMATION FOR YOUR KIND CONSIDERATION: 1. DETAILS REGARDING EXTERNAL COMMERDAL BORROWING- THE ASSESSEE HAS ENTERED INTO A LOAN AGREEMENT WITH BT PIC. THE LOAN (EXTERNAL COMMERCIAL BORROWING) WAS DENOMINATED IN INR THE LOAN AMOUNT ALONG WITH THE INTEREST WAS RETURNABLE/ REPAYABLE IN INDIA RUPEES AND ANY EXPENDITURE RELATED TO FOREIGN EXCHANGE 13 CONVERSION WAS TO BE BORNE BY THE ASSOCIATED ENTERPRISE. IT IS PERTINENT TO NOTE THAT THE ASSESS EE HAS SUBSEQUENTLY REPAID THE SAID LOAN IN INDIAN RUPEES. THE RELEVANT DOCUMENTS SUBSTANTIATING THIS ARE ATTACHED AS ANNEXURE L ALSO NO FOREIGN EXCHANGE CONVERSION IS APPLICABLE SINCE THE LOAN WAS DENOMINATED IN INDIAN RUPEES. WE REQUEST YOU TO TAKE THE ABOVE ON RECORD AND OBLIGE.' THEREFORE, THE TAXPAYER HAS RIGHTLY BENCHMARKED ITS LOAN TRANSACTION WITH THE PLR AVAILABLE FOR THE FINANCIA L YEAR. FROM PAGE 27 OF THE TPO'S ORDER IT IS OBSERVED THAT AS A GAINST AVERAGE PRIME LENDING RATE OF 12.96% APPLICABLE DUR ING THE YEAR, THE TAXPAYER HAD PAID TO ITS AE AT THE AVERAG E INTEREST RATE OF 10.22%. SINCE, THE RATE OF INTEREST IS LESS THAN THE PRIME LENDING RATE APPLICABLE DURING THE YEAR, THE PANEL FINDS NO INFIRMITY IN THE TP APPROACH OF THE TAXPAYER AND IS OF THE OPINION THAT NO ADJUSTMENT IS CALLED FOR ON THIS AC COUNT. THE TPO/AO IS DIRECTED TO DELETE ADDITION PROPOSED ON T HIS ACCOUNT. 21. LD. COUNSEL FURTHER REFERRED TO THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. COTTON NATURALS (I) (P ) LTD. (2015) 55 TAMANN.COM 523 (DELHI), WHEREIN THE HONBLE DELHI H IGH COURT IN PARAS 39 & 40 HAS OBSERVED AS UNDER: 39. THE QUESTION WHETHER THE INTEREST RATE PREVAILI NG IN INDIA SHOULD BE APPLIED, FOR THE LENDER WAS AN INDIAN COMPANY/ASSESSEE, OR THE LENDING RATE PREVALENT IN THE UNITED STATES SHOULD BE APPLIED, FOR THE BORROWER WAS A RE SIDENT AND AN ASSESSEE OF THE SAID COUNTRY, IN OUR CONSIDERED OPINION, MUST BE ANSWERED BY ADOPTING AND APPLYING A COMMONSENSIC AL AND PRAGMATIC REASONING. WE HAVE NO HESITATION IN HOLD ING THAT THE INTEREST RATE SHOULD BE THE MARKET DETERMINED INTER EST RATE 14 APPLICABLE TO THE CURRENCY CONCERNED IN WHICH THE L OAN HAS TO BE REPAID. INTEREST RATES SHOULD NOT BE COMPUTED ON THE BASIS OF INTEREST PAYABLE ON THE CURRENCY OR LEGAL TENDER OF THE PLACE OR THE COUNTRY OF RESIDENCE OF EITHER PARTY. INTEREST RATES APPLICABLE TO LOANS AND DEPOSITS IN THE NATIONAL CU RRENCY OF THE BORROWER OR THE LENDER WOULD VARY AND ARE DEPENDENT UPON THE FISCAL POLICY OF THE CENTRAL BANK, MANDATE OF THE G OVERNMENT AND SEVERAL OTHER PARAMETERS. INTEREST RATES PAYABL E ON CURRENCY SPECIFIC LOANS/ DEPOSITS ARE SIGNIFICANTLY UNIVERSAL AND GLOBALLY APPLICABLE. THE CURRENCY IN WHICH THE LOAN IS TO BE RE- PAID NORMALLY DETERMINES THE RATE OF RETURN ON THE MONEY LENT, I.E. THE RATE OF INTEREST. KLAUS VOGEL ON DOUBLE TA XATION 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-AT LEAST WITHIN THE FRAMEWORK OF FREE CAPITAL MARKETS (SUBJECT TO THE ARBITRAGE). IN REGARD TO THE QUESTI ON AS TO WHETHER THE LEVEL OF INTEREST RATES IN THE LENDER'S STATE OR THAT IN THE BORROWER'S IS DECISIV E, THEREFORE, PRIMARILY DEPENDS ON THE CURRENCY AGREED UPON (BFH BST.B 1. II 725 (1994), REO I ASTG). A DIFFERENTIATION BETWEEN DEBT-CLAIMS OR DEBTS IN NATIONAL CURRENCY AND THOSE IN FOREIGN CURRENCY IS NORMALLY NO USE, BECAUSE, FOR INSTANCE, A US $ LOAN ADVANCED BY A US LENDER IS TO HIM A DEBT-CLAIM IN NATIONAL CURRENCY WHEREAS TO A GERMAN BORROWER IT IS A FOREIGN CURRENCY DEBT (THE SITUATION BEING DIFFERENT, HOWEVER, WHEN AN AGREEMENT IN A THIRD CURRENCY IS INVOLVED). MOREOVER, A DIFFERENCE IN INTEREST LEVELS FREQUENTL Y REFLECTS NO MORE THAN DIFFERENT EXPECTATIONS IN 15 REGARD TO RATES OF EXCHANGE, RATES OF INFLATION AND OTHER ASPECTS. HENCE, THE CHOICE OF ONE PARTICULAR CURRENCY CAN BE JUST AS REASONABLE AS THAT OF ANOTHER, DESPITE 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 BE AVAILABLE FOR DEBT SERVICE), SUCH AS TAKING OUT A US $ LOAN IF TH E PROCEEDS IN US $ ARE EXPECTED TO BECOME AVAILABLE (SAY FROM EXPORTS). IF AN EXCHANGE RISK WERE TO PROVE INCAPABLE OF BEING AVOIDED (SAY, BY FORWARD 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 SUCH 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 INVOLVED. MOREOVER, IT IS QUESTIONABLE WHETHER SUCH AN ADJUSTMENT COULD BE BASED ON ART. II (6). FOR ART. II (6), AT LEAST ITS WORDING, ALLO WS THE AUTHORITIES TO 'ELIMINATE HYPOTHETICALLY' THE SPECIAL RELATIONSHIPS ONLY IN REGARD TO THE LEVEL O F INTEREST RATES AND NOT IN REGARD TO OTHER CIRCUMSTANCES, 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 BE 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 MEMBER) THE BORROWING COMPANY MIGHT NOT HAVE COMPLETELY REFRAINED FROM 16 MAKING INVESTMENT FOR WHICH IT BORROWED THE MONEY.' 40. THE AFORESAID METHODOLOGY RECOMMENDED BY KLAUS VOGEL APPEALS TO US AND APPEARS TO BE THE REASONABLE AND PROPER PARAMETER TO DECIDE UPON THE QUESTION OF APPLICABIL ITY OF INTEREST RATE. THE LOAN IN QUESTION WAS GIVEN IN FO REIGN CURRENCY I.E. US $ AND WAS ALSO TO BE REPAID IN THE SAME CURRENCY I.E. US $. INTEREST RATE APPLICABLE TO LOA NS GRANTED AND TO BE RETURNED IN INDIAN RUPEES WOULD NOT BE THE RE LEVANT COMPARABLE. EVEN IN INDIA, INTEREST RATES ON FCNR A CCOUNTS MAINTAINED IN FOREIGN CURRENCY ARE DIFFERENT AND DE PENDENT UPON THE CURRENCY IN QUESTION. THEY ARE NOT DEPENDE NT UPON THE PLR RATE, WHICH IS APPLICABLE TO LOANS IN INDIAN RU PEE. THE PLR RATE, THEREFORE, WOULD NOT BE APPLICABLE AND SH OULD NOT BE APPLIED FOR DETERMINING THE INTEREST RATE IN THE EX TANT CASE. PLR RATES ARE NOT APPLICABLE TO LOANS TO BE RE-PAID IN FOREIGN CURRENCY. THE INTEREST RATES VARY AND ARE THUS DEPE NDENT ON THE FOREIGN CURRENCY IN WHICH THE REPAYMENT IS TO BE MA DE. THE SAME PRINCIPLE SHOULD APPLY. 22. WITH REFERENCE TO ABOVE DECISION LD. COUNSEL SU BMITTED THAT IN THE PRESENT CASE PLR RATE SHOULD BE APPLIED AS LOAN IS IN INDIAN CURRENCY. 23. LD. DR HAS FILED WRITTEN SUBMISSIONS IN WHICH P RIMARILY HE HAS REFERRED TO VARIOUS DECISIONS WHEREIN IT HAS BEEN H ELD IN PRINCIPLE THAT TP ADJUSTMENT IS REQUIRED IN REGARD TO INTEREST IF NOT REALIZED FROM ITS AES. 24. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. ADMITTEDLY THE EXTE RNAL COMMERCIAL BORROWINGS, MADE BY ASSESSEE, ARE DENOMINATED IN TH E INDIAN CURRENCY. THEREFORE, FOR BENCH MARKING THE INTEREST RATE PAID BY ASSESSEE @ 9.72%, THE PREVAILING PLR IN INDIA, WAS TO BE APPLIED AND NOT THE 6 MONTHS GPB LIBOR IN VIEW OF THE DECISION OF HONBLE DELHI HIGH COURT IN 17 THE CASE OF COTTON NATURALS (I) (P) LTD. (SUPRA). BRIEF TERMS AND CONDITIONS RELATING TO INTEREST IN RESPECT OF LOAN TAKEN BY AS SESSEE FOR MEETING THE FUNDING REQUIREMENT FOR IMPORT OF CAPITAL EQUIPMEN T, NEW PROJECTS, EXPANSION AND MODERNIZATION OF BT INDIA, WERE AS UN DER: ASSOCIATED ENTERPRISE TERMS & CONDITIONS BT PLC - THE LOAN IS DENOMINATED IN INR - INTEREST IS PAYABLE BY BT INDIA ON THE UNPAID PRINCIPAL AMOUNT OF THE LOAN AT THE RATE OF LIBOR + 50 BASIS POINTS PER ANNUM - INTEREST PAYMENTS ARE MADE ON YEARLY BASIS; AND - BT INDIA SHALL REPLY THE LOAN IN EQUAL MONTHLY INSTALMENTS BEGINNING FROM THE EXPIRY OF THREE YEARS FROM THE FIRST DRAWDOWN OF LOAN. 25. SINCE, THE INTEREST PAID BY ASSESSEE IS MUCH LE SS THAN AS PER PLR, THEREFORE, NO ADJUSTMENT IS CALLED FOR. IN THE RESU LT, THIS GROUND IS ALLOWED. 26. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCEMENT IN OPEN COURT ON 10/06/2016. SD/- SD/- (SUDHANSHU SRIVASTAVA ) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED:10/06/2016. *MP* COPY OF ORDER TO: 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI.