ACIT, New Delhi V. M/s. Baba Global Ltd., Delhi

ITA 6340/DEL/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 7586 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 1 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2020
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2012-2013
• Appeal Filed On: 13-12-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SACHIN DHANIA
• Keywords: Transfer pricing; Earning of tax free income; Rule 8D
• Section: 271(1)(c); 143(3); 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I-1 B ENCH, NEW DELHI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI N.K. CHOUDHARY, JUDICIAL M EMBER ITA NO. 6340/DEL/2016 [ASSESSMENT YEAR: 2012-13] A.C.I.T VS. BABA GLOBAL LTD., CENTRAL CIRCLE 29 4873, CHANDNI CHOWK NEW DELHI DELHI PAN: AAACB 6357 N [APPELLANT] [RESPONDENT] DATE OF HEARING : 23.01.2020 DATE OF PRONOUNCEMENT : 28.01.2020 ASSESSEE BY : SHRI ASHOK KUMAR, CA REVENUE BY : SHRI SACHIN DHANIA, SR. DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, THIS APPEAL BY THE REVENUE IS PREFERRED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX [APPEALS] 31, NEW DELH I DATED 15.09.2016 PERTAINING TO ASSESSMENT YEAR 2012-13. 2 2. THE GRIEVANCE OF THE REVENUE IS TWO-FOLD FIRST LY, THE REVENUE IS AGGRIEVED BY THE DELETION OF TP ADJUSTMENTS MADE ON ACCOUNT OF INTEREST ON POST CONVERSION OF LOAN TO SHARE APPLIC ATION MONEY AND SECONDLY, THE REVENUE IS AGGRIEVED BY THE DELETION OF DISALLOWANCE MADE U/S 14A OF THE INCOME TAX ACT, 1961 [HEREINAFT ER REFERRED TO AS 'THE ACT' FOR SHORT] R.W.R 8D OF THE INCOME TAX RUL ES, 1962. 3. THE ASSESSEE IS ENGAGED IN THE MANUFACTURING OF FLAVOURED CHEWING TOBACCO, GUTKHA AND PAN MASALA, ETC UNDER T HE BRAND NAME BABA. RETURN OF INCOME FOR THE YEAR WAS FILED ON 21.09.2012 SHOWING TOTAL INCOME OF RS. 7,83,05,730/-. RETURN WAS SELE CTED FOR SCRUTINY ASSESSMENT AND ACCORDINGLY, STATUTORY NOTICES WERE ISSUED AND SERVED UPON THE ASSESSEE. 4. ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT V IDE ORDER DATED 29.03.2016 AFTER MAKING THE FOLLOWING ADJUSTMENTS: (I) TP ADJUSTMENT - RS. 3,85,33,408/- (II) DISALLOWANCE U/S 14A R.W.R 8D - RS. 5,69, 058/- 3 4. WHILE MAKING THE IMPUGNED ADDITION OF RS. 3,85,3 3,408/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT U/S 92CA(1) OF THE ACT, THE ASSESSING OFFICER OBSERVED AS UNDER: 6.1 PURSUANT TO THE REFERENCE MADE U/S 92CA(1), THE ADDL. COMMISSIONER OF TAX,TPO1(1) NEW DELHI PASSED AN ORDER ON 14-01-2016 WHICH WAS RECEIVED IN THIS OFFI CE ON 27-01 2016. THE TPO-1(I) HAS MADE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ARMS DETERMINED IN RESPECT OF INTEREST FREE LOAN GIVEN BY THE ASSESSEE COMPANY TO ITS ASSOCIATE ENTERPRISES TO THE TUNE OF RS.3,85,33,408/ -. ORDER OF THE TPO-1(1) IS ENCLOSED HEREWITH AS ANNEX URE A. THE ASSESSEE WAS CONFRONTED TO THE ORDER OF TPO A ND PROVIDED A COPY THEREOF IN WHICH HE WAS ASKED TO SH OW CAUSE AS TO WHY ADDITIONS OF RS.3,85,33,408/- AS DETERMINED BY TPO SHOULD NOT BE MADE ON ACCOUNT OF ALP OF INTEREST ON LOAN ADVANCES TO FOREIGN ASSOCIATES ENTERPRISES. IN RESPONSE TO SAME, THE ASSESSEE SUBM ITTED THAT A DETAILED REPLY OF SHOW CAUSE NOTICE BY TPO W AS GIVEN WHICH HAS BEEN INCORPORATED IN THE ORDER OF T PO. THEREFORE, THE SAME REPLY MAY BE CONSIDERED IN THE ASSESSMENT PROCEEDINGS ALSO AND NO TPO ADDITION SHO ULD BE MADE. 6.2 THE SUBMISSION OF THE ASSESSEE IS CONSIDERED AN D DISCUSSED WITH THE AR. HE WAS INTIMATED THAT THE REP LY HAS BEEN DULY CONSIDERED BY THE TPO. IN RESPECT OF EARL IER 4 YEARS ALSO, THE SIMILAR REPLY WAS SUBMITTED AND TPO ORDER WERE PASSED AFTER CONSIDERING THE REPLIES. THE REPL Y OF ASSESSEE WAS ALSO CONSIDERED BY DISPUTE RESOLUTION PANEL (DRP) IN THE CASE OF ASSESSEE FOR A.YS. 2005-06 TO 2011-12. THERE IS NO CHANGE OF THE FACT AND CIRCUMSTANCES IN THE CURRENT YEAR VIZ-A-VIZ FACTS OF EARLIER YEARS. THER EFORE, THE SUBMISSIONS OF ASSESSEE ARE REJECTED. IN VIEW OF TH E AFORESAID ORDER, ADDITION IN RESPECT OF TRANSFER PR ICING ADJUSTMENT ON ACCOUNT OF ALP OF INTEREST ON LOAN AD VANCED TO ASSOCIATE ENTERPRISES IS MADE AT RS.3,85,33,408/ -. I AM SATISFIED THAT THE ASSESSEE COMPANY HAS CONCEA LED THE PARTICULARS OF ITS INCOME VIDE EXPLANATION 7 APPEND ED TO SECTION 271(1)(C) OF THE ACT. THEREFORE, PENALTY PROCEEDINGS U/S 271(1)(C) IS INITIATED ' 5. AS CAN BE SEEN FROM THE AFORE-STATED OBSERVATION S OF THE TPO, ADDITION OF RS. 3,85,33,408/- WAS MADE FOLLOWING TH E DIRECTIONS OF THE DRP FOR A.YS 2005-06 TO 2011-12. 6. WE FIND THAT THE QUARREL TRAVELLED UPTO THE TRIB UNAL AND THE TRIBUNAL VIDE A CONSOLIDATED ORDER DATED 05.05.2016 IN ITA NOS. 1086 TO 1091/DEL/2015 IN ASSESSEES OWN CASE FOR A.YS 20 06-07 TO 2011-12, DECIDED THIS ISSUE. THE RELEVANT FINDINGS OF THE C O-ORDINATE BENCH READ AS UNDER: 5 21. ACCORDINGLY THE APPLICABLE RATE OF INTEREST SHA LL BE THE RATE OF INTEREST IN RESPECT OF SUCH FOREIGN CURRENC Y IN WHICH THE LOANS HAVE BEEN ADVANCE. AS PER THE DETAILS AVAILAB LE ON RECORD DURING THE ASSESSMENT YEARS 2009-10 AND 2010-11 ASS ESSEE HAS ADVANCED TO ITS SUBSIDIARY COMPANIES AS DETAILED BE LOW:- ASSESSMENT YEAR BABA GLOBAL CO. (BD) LTD. (BANGLADESH) BABA GLOBAL CO. FZC LTD. (UAE) BABA GLOBAL AG, SWITZERLAND 2009 - 10 $44,944 CHF 7,56,957 CHF 40,00,000 2010 - 11 $57,944 CHF 98,447 CHF 50,00,000 2011 - 12 $77,944 (CONVERTED TO SHARE APPLICABLE MONEY) - CHF 50,00,000 (CONVERTED TO SHARE APPLICATION MONEY) THE INTEREST RATES APPLICABLE IN RESPECT OF THESE CURRENCIES DURING THESE YEARS, AS SUBMITTED BY THE LEARNED AR, WERE AS UNDER: ASSESSMENT YEAR CURRENCY WISE LIBOR RATE USD ($) EURO( ) SWISS FRANCE (CHF) AY 2009 - 10 3.089% 4.822% 2.896% AY 2010 - 11 1. 559% 1.604% 0.800% AY 2011 - 12 0.923% 1.327% 0.554% 6 TAKING INTO CONSIDERATION OF THE ABOVE FACTS, THE L EARNED AO IS DIRECTED TO VERIFY THE ABOVE INTEREST RATE AND RECO MPUTE THE ADJUSTMENT ON ACCOUNT OF INTEREST BY APPLYING THE R ATE OF INTEREST OF THE RELEVANT CURRENCY IN THE AY 2009-10 & 2010-11. ACCORDINGLY THIS GROUND OF THE ASSESSEE IS PARTLY A LLOWED FOR AY 200910 & 2010-11. 22. AS REGARDS THE ADDITION ON THIS ACCOUNT IN ASSE SSMENT YEAR 2011-12, THE ADVANCE GIVEN TO ITS SUBSIDIARY C OMPANIES STAND CONVERTED INTO SHARE APPLICATION MONEY. ONCE THE LOAN HAS BEEN CONVERTED INTO SHARE APPLICATION MONEY, FOR TH E ISSUE OF THE SHARE CAPITAL, THEN SUCH AMOUNT CANNOT BE CONSI DERED AS LOAN. THE TPO IS NOT PERMITTED UNDER THE LAW TO RE- CHARACTERIZE THE TRANSACTION AND ACCORDINGLY WE ARE OF THE VIEW THAT NO INTEREST ON SUCH SHARE APPLICATION MONEY CAN BE CHA RGED. THE ABOVE VIEW IS SUPPORTED BY THE JUDGMENT OF THE COOR DINATE BENCH OF THE ITAT IN THE CASE OF BHARTI AIRTEL LTD. VS. ACIT. [2014] 161 TTJ 0283 (DEL) WHEREIN THE ITAT HAS HELD AS UNDER:- 47. WE FIND THAT IN THE PRESENT CASE THE TPO HAS NOT DISPUTED THAT THE IMPUGNED TRANSACTIONS WERE IN THE NATURE OF PAYMENTS FOR SHARE APPLICATION MONEY, AND THUS, OF CAPITAL CONTRIBUTIONS. THE TPO HAS NOT MADE ANY ADJUSTMENT WITH REGARD TO THE ALP OF THE CAPITAL CONTRIBUTION. HE H AS, HOWEVER, TREATED THESE TRANSACTIONS PARTLY AS OF AN INTEREST FREE LOAN, 7 FOR THE PERIOD BETWEEN THE DATES OF PAYMENT TILL TH E DATE ON WHICH SHARES WERE ACTUALLY ALLOTTED, AND PARTLY AS CAPITAL CONTRIBUTION, I.E. AFTER THE SUBSCRIBED SHARES WERE ALLOTTED BY THE SUBSIDIARIES IN WHICH CAPITAL CONTRIBUTIONS WER E MADE. NO DOUBT, IF THESE TRANSACTIONS ARE TREATED AS IN THE NATURE OF LENDING OR BORROWING, THE TRANSACTIONS CAN BE SUBJE CTED TO ALP ADJUSTMENTS, AND THE ALP SO COMPUTED CAN BE THE BAS IS OF COMPUTING TAXABLE BUSINESS PROFITS OF THE ASSESSEE, BUT THE CORE ISSUE BEFORE US IS WHETHER SUCH A DEEMING FICTION I S ENVISAGED UNDER THE SCHEME OF THE TRANSFER PRICING LEGISLATIO N OR ON THE FACTS OF THIS CASE. WE DO NOT FIND SO. WE DO NOT FI ND ANY PROVISION IN LAW ENABLING SUCH DEEMING FICTION. IN VIEW OF THE ABOVE FACTS AND THE JUDGMENT OF COOR DINATE BENCH, THE AO IS DIRECTED TO VERIFY THE DATE OF CON VERSION OF LOAN TO SHARE APPLICATION MONEY AND NOT TO MAKE ANY ADJUSTMENT ON ACCOUNT OF INTEREST POST CONVERSION OF LOAN TO S HARE APPLICATION MONEY AND ACCORDINGLY THIS GROUND OF TH E ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 7. RESPECTFULLY FOLLOWING THE FINDINGS OF THE CO-OR DINATE BENCH, WE DIRECT ACCORDINGLY. GROUND NOS. 1 AND 2 ARE TREATE D AS ALLOWED FOR STATISTICAL PURPOSES. 8 8. SECOND GRIEVANCE RELATES TO DISALLOWANCE MADE U/ S 14A R.W.R 8D. 9. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEED INGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS EAR NED DIVIDEND INCOME OF RS. 2,69,493/- WHICH IS CLAIMED TO BE EXEMPT U/S 10(34) OF THE ACT. SINCE NO DISALLOWANCE WAS MADE BY THE ASSESSING OFF ICER IN RELATION TO EARNING OF THE EXEMPT INCOME, INVOKING OF PROVISION S OF SECTION 14A R.W.R 8D, THE ASSESSING OFFICER COMPUTED THE DISALL OWANCE AT RS. 5,69,058/- 10. AN IDENTICAL ISSUE WAS CONSIDERED BY THE CO-O RDINATE BENCH VIDE ORDER DATED 05.05.2016 IN ITA NOS. 1086 TO 1091/DEL /2015 IN ASSESSEES OWN CASE [SUPRA]. THE RELEVANT FINDINGS OF THE CO-ORDINATE BENCH READ AS UNDER: 25. THE CONTENTION OF THE ASSESSEE IS THAT IN THE ABSENCE OF ANY SATISFACTION BEING RECODED DISALLOWANCE UNDER, SECTION 14A CANNOT BE SUSTAINED. THE ALTERNATIVE CONTENTION OF THE LEARNED AR HAS BEEN THAT THE ADDITION IN ANY CASE CANNOT EX CEED THE EXEMPT INCOME. AS REGARDS FIRST CONTENTION THAT NO SATISFACTION HAS BEEN RECORDED WE NOTE FROM THE ASSESSMENT ORDER THAT THE AO HAS CONSIDERED THE EXPLANATION OF THE ASSESSED A ND AFTER 9 TAKING INTO CONSIDERATION THE EXPLANATION HE HAS IN VOKED RULE 8D. HAVING DONE SO, IT CANNOT BE SAID THAT THE AO HAS N OT TAKEN INTO CONSIDERATION THE EXPLANATION OF THE ASSESSEE. 26. HOWEVER, AS REGARDS THE SECOND CONTENTION OF TH E LEARNED AR THAT THE DISALLOWANCE CANNOT EXCEED THE EXEMPT I NCOME, WE ARE IN AGREEMENT WITH THIS CONTENTION. THIS VIEW IS SUPPORTED BY THE JUDGMENT OF THE HON'BLE JURISDICTIONAL DELHI HI GH COURT IN THE CASE OF JOINT INVESTMENTS PVT. LTD. VERSUS COMM ISSIONER OF INCOME TAX [2015] 372 ITR 694 (DEL). ACCORDINGLY WE DIRECT THE AO TO RESTRICT THE ADDITION TO THE EXEMPT INCOM E. ACCORDINGLY THIS GROUND IS PARTLY ALLOWED IN FAVOUR OF THE ASSESSEE. 11. WE FIND THAT THE LD. CIT(A) HAS FOLLOWED THE AF OREMENTIONED FINDINGS OF THE CO-ORDINATE BENCH AND RESTRICTED TH E DISALLOWANCE TO THE EXTENT OF EXEMPT INCOME. THEREFORE, NO INTERFE RENCE IS CALLED FOR. GROUND NO. 3 IS ACCORDINGLY, DISMISSED. 12. GROUND NOS. 4 TO 6 ARE GENERAL IN NATURE AND NE ED NO ADJUDICATION. 10 13. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO. 6340/DEL/2016 IS PARTLY ALLOWED FOR STATISTICAL PUR POSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 28.01. 2020. SD/- SD/- SD/- SD/- [N.K. CHOUDHARY ] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 28 TH JANUARY, 2020. VL/ COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT ASST. REGISTRAR 4. CIT(A) ITAT, NEW DELHI 5. DR 11 DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS /PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P S/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER