THIRUMALAI CHEMICALS LTD, MUMBAI V. DCIT 1(3)(1), MUMBAI

ITA 685/MUM/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 2496 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-03-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 31-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANISH KUMAR SINGH
• Keywords: Transfer pricing; International transaction
• Section: 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY , JUDICIAL MEMBER AND SHRI M ANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER I T( T P) A NO. 685 / MUM/2017 ( ASSESSMENT YEAR : 20 11 12 ) THIRUMALAI CHEMICALS LTD. PLOT NO.101 102, THIRUMALALI HOUSE SION ROAD NO.29, SION (EAST) MUMBAI 400 022 PAN AAACT2015M . APPELLANT V/S DY. COMMISSIONER OF INCOME TAX WARD 1 0 (2)( 4 ), MUMBAI . RESPONDENT ASSESSEE BY : SHRI HIRO RAI REVENUE BY : SHRI MANISH KUMAR SINGH DATE OF HEARING 19 . 12 .2018 DATE OF ORDER 08.03.2019 O R D E R PER SAKTIJIT DEY, J.M. T HIS APPEAL HAS BEEN FILED BY THE ASSESSEE CHALLENGING THE ORDER DATED 13 TH OCTOBER 2016, PASSED BY THE LEARNED COMMISSIONER (APPEALS) 58, MUMBAI, FOR THE ASSESSMENT YEAR 2011 12. 2 . THE ONLY GROUND RAISED BY THE ASSESSEE READS AS UNDER: I) THE LEARNED CIT(A) WAS NOT JUSTIFIED IN PARTLY CONFIRMING THE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ALLEGED INTEREST ON 2 THIRUMALAI CHEMICALS LTD. ADVANCE GIVEN. WITHOUT PREJUDICE, EVEN THE QUANTUM OF THE ADJUSTMENT IS EXCESSIVE AND UNREASONABLE. 3 . B RIEF FACTS ARE, THE ASSESSEE , AN INDIAN COMPANY , IS ENGAGED IN MANUFACTURING DIVERSE CHEMICAL PRODUCTS , SUCH AS , PHTHALIC ANHYDRIDE, MALEIC ANHYDRIDE, FUMARIC ACID, FOOD ACID, ETC. FOR THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE FILED ITS RETURN OF INCOME ON 29 TH SEPTEMBER 2011, DECLARING TOTAL INCOME OF ` 38,74,194, UNDER THE NORMAL PROVISIONS OF THE ACT AND BO OK PROFIT OF ` 25,65,20,602 UNDER SECTION 115JB OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ). IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICING THAT IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE HAS UNDERTAKEN INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISES (A.E) MADE A REFERENCE TO THE TRANSFER PRICING OFFICER FOR COMPUTING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. IN THE COURSE OF PROCEEDINGS BEFORE HIM, THE TRANSFER PR ICING OFFICER NOTICED THAT THE ASSESSEE HAS ADVANCED A LOAN OF U.S. $ 10 LAKH TO ITS A.E. PRIOR TO FINANCIAL YEAR 2000. HE OBSERVED THAT BALANCE OF ` 4,44,30,000, WAS OUTSTANDING ON THE DATE OF LAST BALANCE SHEET AS AT 31 ST MARCH 2011. HE OBSERVED THAT THE ASSESSEE HAD ALSO NOT CHARGED ANY INTEREST TO THE A.E. ON THE OUTSTANDING LOAN. THEREFORE, HE CALLED UPON THE ASSESSEE T O EXPLAIN WHY ARM'S LENGTH INTEREST ON THE OUTSTANDING LOAN SHOULD NOT BE COMPUTED. IN RESPONSE, 3 THIRUMALAI CHEMICALS LTD. IT WAS SUBMITTED THAT THE A.E. WAS UND ER LIQUIDATION DURING THE FINANCIAL YEAR 2009 10, THEREFORE, THE ASSESSEE COULD NOT CHARGE INTEREST. IT WAS FURTHER SUBMITTED THAT SINCE THE LIQUIDATOR HAS ASSUMED FULL CONTROL OF THE A.E., IT WAS NO MORE AN A.E. OF THE ASSESSEE. THE TRANSFER PRICING OFFIC ER DID NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE AND PROCEEDED TO COMPUTE ARM'S LENGTH PRICE OF THE INTEREST ON THE OUTSTANDING LOAN GIVEN TO THE A.E. REFERRING TO THE INFORMATION AVAILABLE IN THE RESERVE BANK OF INDIA WEBSITE, HE OBSERVED THAT INT EREST CHARGEABLE ON FIXED DEPOSIT IS 8.6% . FURTHER, HE OBSERVE D THAT CONSIDERING THE RISK FACTOR INVOLVED IN RECOVERY OF THE LOAN, A PREMIUM/ MARK UP OF 3% ALSO HAS TO BE CHARGED IN ADDITION TO 8.6%. THUS, ULTIMAT ELY, HE FIXED ARM'S LENGTH INTEREST RATE AT 11.6% WHICH RESULTED IN AN ADJUSTMENT OF ` 51,53,880. WHILE COMPLETING THE ASSESSMENT, THE ASSESSING OFFICER ADDED BACK THE AFORESAID TRANSFER PRICING ADJUSTMENT PROPOSED BY THE TRANSFER PRICING OFFICER. THE ASSESSEE CHALLENGED THE AFORESAID ADJUSTMENT BEF ORE THE FIRST APPELLATE AUTHORITY. 4 . AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, LEARNED COMMISSIONER (APPEALS) HELD THAT DETERMINATION OF ARM'S LENGTH INTEREST RATE BY THE TRANSFER PRICING OFFICER ON THE BASIS OF RBI WEIGHTED FIXED DEPOSIT INTEREST RATE OF 8.6% IS NOT CORRECT CONSIDERING THE FACT THAT THE LOAN WAS NOT ONLY ADVANCED IN U.S. $ BUT ALSO IS TO BE 4 THIRUMALAI CHEMICALS LTD. RETURNED BACK IN THE SAME CURRENCY. THUS, HE OBSERVED , U.S. $ BASED LIBOR WOULD BE THE APPROPR IATE BENCH MARK TO DETERMINE ARM'S LENGTH INTERES T. THE LEARNED COMMISSIONER (APPEALS) OBSERVED , SINCE THE LOAN ADVANCED BY THE ASSESSEE IS A LONG TERM LOAN , THE AVERAGE OF MONTHLY ONE YEAR LIBOR FOR THE U.S. $ RELATING TO THE PERIOD SEPTEMBER 2010 TO MARCH 2011, SHOULD BE ADOPTED AS BASE RATE. THUS, THE LEARNED COMMISSIONER (APPEALS) COMPUTED THE U.S. $ BASED LIBOR RATE AT 0.7822%. HAVING DONE SO, LEARNED COM MISSIONER (APPEALS) OBSERVED THAT SINCE THE RISK ON THE LOAN PROVIDED TO THE A.E. IS HIGHER, THE RISK MARGIN COMPUTED AT 3% BY THE TRANSFER PRICING OFFICER HAS TO BE ENHAN CED TO 4%. THUS, ULTIMATELY, LEARNED COMMISSIONER (APPEALS) DETERMINED THE ARM'S LENG TH RATE OF INTEREST ON THE OUTSTANDING LOAN TO THE A.E. AT 4.7822%. 5 . SHRI HIRO RAI, LEARNED COUNSEL APPEARING FOR THE ASSESSEE SUBMITTED , THOUGH LEARNED COMMISSIONER (APPEALS) WAS CORRECT IN APPLYING U.S. $ LIBOR RATE, HOWEVER, HE WAS NOT CORRECT IN ADDING RISK MARGIN OF 4% WITHOUT ANY VALID REASON. HE SUBMITTED , WHEN THE COMPANY HAS BEEN TAKEN OVER BY ANOTHER A.E. AND HAS GONE OUT OF LIQUIDATION, THERE IS NO VALID BASIS FOR CONCLUDING THAT RISK HAS INCREASED. HE SUBMITTED , ONCE THE COMPANY IS OUT OF LIQUIDATION AND THE ASSESSEE IS GETTING INTEREST ON THE OUTSTANDING LOAN, THE RISK FACTOR HAS DECREASED, THEREFORE, THERE IS NO REASON TO ENHANCE THE LIBOR 5 THIRUMALAI CHEMICALS LTD. RATE OF INTEREST BY A MARGIN OF 4%. HE SUBMITTED , COMPUTATION OF ARM'S LENGTH INTEREST A T LIBOR PLUS 150 BASIS POINTS WOULD BE REASONABLE. 6 . THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE OBSERVATIONS OF THE LEARNED COMMISSIONER (APPEALS). 7 . W E HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. IT IS EVIDENT FROM THE FACTS ON RECORD , SINCE THE A.E. TO WHOM THE ASSESSEE HAS ADVANCED THE LOAN WAS UNDER LIQUIDATION, THE ASSESSEE DID NOT CHARGE ANY INTEREST DURING THE PRECEDING ASSE SSMENT YEAR AS WELL AS IN THE IMPUGNED ASSESSMENT YEAR. HOWEVER, FACTS ON RECORD REVEAL THAT IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER DISPUTE, ANOTHER A.E. OF THE ASSESSEE HAS TAKEN OVER THE A.E. UNDER LIQUIDATION . A S A RESULT , THE SAID A .E. IS NO LONG ER A COMPANY IN LIQUIDATION. LEARNED COMMISSIONER (APPEALS) HAS ALSO ACCEPTED THE AFORESAID FACTUAL POSITION. THEREFORE, THOUGH, HE WAS JUSTIFIED IN APPLYING U.S. LIBOR RATE OF 0.7822% FOR COMPUTING ARM'S LENGTH INTEREST, HOWEVER, IN OUR VIEW , HE WAS NOT CORRECT IN ENHANCING IT BY A MARGIN OF 4% ON ACCOUNT OF RISK FACTOR. WHEN LEARNED COMMISSIONER (APPEALS) ACCEPTS THAT THE A.E. HAS GONE OUT OF LIQUIDATION AND HAS BEEN TAKEN OVER BY ANOTHER A.E., THE RISK FACTOR DIMINISHES RATHER THAN INCREASI NG. THEREFORE, ENHANCEMENT OF INTEREST 6 THIRUMALAI CHEMICALS LTD. RATE BY 4% ON ACCOUNT OF RISK MARGIN, IN OUR VIEW, IS IMPROPER. FURTHER, NEITHER THE TRANSFER PRICING OFFICER NOR LEARNED COMMISSIONER (APPEALS) HAS PROVIDED ANY BASIS FOR COMPUTING THE RISK MARGIN EITHER @ 3% OR 4%. IN VIEW OF THE AFORESAID, WE DIRECT THE ASSESSING OFFIC ER TO COMPUTE ARM'S LENGTH INTEREST ON THE OUTSTANDING LOAN TO THE A.E. AT LIBOR 0.7822% PLUS 150 BASIS POINTS. GROUND RAISED IS PARTLY ALLOWED. 8 . IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. OR DER PRONOUNCED IN THE OPEN COURT ON 08.03.2019 SD/ - MANOJ KUMAR AGGARWAL ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 08.03.2019 COPY OF THE ORDER FORWARDED TO : ( 1 ) THE ASSESSEE; ( 2 ) THE REVENUE; ( 3 ) THE CIT(A); ( 4 ) THE CIT, MUMBAI CITY CONCERNED; ( 5 ) THE DR, ITAT, MUMBAI; ( 6 ) GUARD FILE . TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY (SR. PRIVATE SECRETARY) ITAT, MUMBAI