NIMBUS COMMUNICATION LTD, MUMBAI V. ADDL CIT 11(1), MUMBAI

ITA 7105/MUM/2011

• Counselvise Citation: 710519914 RSA 2011
• Duration Of Justice: 1 year(s) 9 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 30-07-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 20-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJIT KU MAR JAIN
• Assessee Lawyers: K R LAKSHMINARAYAN
• Keywords: Transfer pricing; International transaction; Notional interest; Commercial expediency
• Section: 143(3); 92; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI .., ! '# '# '# '# .'. $%&, ' !, BEFORE SHRI B.R. MITTAL, J.M. AND SHRI P.M. JAGTAP, AM ./ I.T.A. NO.6816 /MUM/2010 ( ) * #+* ) * #+* ) * #+* ) * #+* / / / / ASSESSMENT YEAR : 2006-07) ./ I.T.A. NO.7105 /MUM/2011 ( ) * #+* ) * #+* ) * #+* ) * #+* / / / / ASSESSMENT YEAR : 2007-08) M/S NIMBUS COMMUNICATIONS LTD., NIMBUS CENTRE, OBEROI COMPLEX, OFF NEW LINK ROAD, ANDHERI (W), MUMBAI 400 053. ) ) ) ) / VS. ASSTT. COMMISSIONER OF INCOME-TAX 11(1), AAYAKAR BHAVAN, MUMBAI. !, ' ./ PAN : AAACN 3947L ( ,- / // / APPELLANT ) .. ( ./,- / RESPONDENT ) ,- 0 1 / APPELLANT BY : SHRI K.R. LAKSHMINARAYAN ./,- 0 1 / RESPONDENT BY : SHRI AJIT KUMAR JAIN )# 0 &' / // / DATE OF HEARING : 30-7-2013 23+ 0 &' / DATE OF PRONOUNCEMENT : 07-08-2013 4 / O R D E R PER P.M. JAGTAP, A.M . : .'. $%&. THESE TWO APPEALS FILED BY THE ASSESSEE AGAINST TWO SEPARATE ORDERS PASSED BY THE A.O. DATED 18 TH AUGUST, 2010 AND 26 TH AUGUST, 2011 U/S 143(3) READ WITH SECTION 144C OF THE INCOME TAX ACT , 1961 (THE ACT) FOR ASSESSMENT YEARS 2006-07 & 2007-08 INVOLVE SOME COM MON ISSUES AND THE ITA 6816/M/10 & 7105/MUM/2011 2 SAME THEREFORE HAVE BEEN HEARD TOGETHER AND ARE BEI NG DISPOSED OF BY THIS SINGLE CONSOLIDATED ORDER FOR THE SAKE OF CONVENIEN CE. 2. IN THE APPEAL FOR A.Y. 2006-07, THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS:- 1. THE LEARNED ASSESSING OFFICER ERRED IN ASSESSING THE INCOME AT RS.4,80,19,930/- IN PLACE OF RS.3,34,36,493/- DECLARED BY THE APPELL ANT. 2.(A) THE LEARNED ASSESSING OFFICER ERRED IN MAKI NG ADJUSTMENT OF RS.1,20,44,700/- ON A/C. ON APPELLANT GIVING A CORPORATE GUARANTEE T O THE A.E.S FOR OBTAINING BANK LOANS. (B) THE LEARNED ASSESSING OFFICER FAILED TO APPRECI ATE THAT GIVING OF A CORPORATE GUARANTEE TO A.E.S HAS BEEN AS A MEASURE OF COMMERC IAL EXPEDIENCY AND THERE IS NO LOSS TO THE APPELLANT AS IT IS NOT THE BUSINESS OF APPEL LANT TO GIVE A CORPORATE GUARANTEE FOR OTHERS. (C) WITHOUT PREJUDICE TO THE ABOVE, WHILE THE APPEL LANT CONTENDS THAT NO ADJUSTMENT IS REQUIRED TO BE MADE ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED A.O. ERRED IN NOT CONSIDERING THE DECISION OF CIT(A) IN APPELL ANTS CASE FOR THE IMMEDIATE PRECEDING A.Y. 2005-06 WHEREIN THE CIT(A) HAS HELD THAT THE RATE OF 0.25% COMMISSION IN PLACE OF 1.5% WAS APPROPRIATE. 3. THE LEARNED A.O ERRED IN MAKING OVERALL ADJUSTMENT OF NOTIONAL INTEREST OF RS.4,29,095/- IN RESPECT OF FOLLOWING A.E.S ON THE GROUND THAT APPELLANT HAD NOT CHARGED OR SHORT-CHARGED INTEREST. 4. SR. NO. PARTICULARS AMOUNT(RS.) A) M/S NIMBUS COMMUNICATIONS WORLDWIDE, LTD. 39,569 /- B) NIMBUS MEDIA PVT.LTD. FOR GRANTING ADVANCE OF RS.1,00,255/- 7,919/- C) NIMBUS COMMUNICATION LIMITED- BRITISH VIRGIN ISLAND S FOR GRANTING LOAN OF RS.37,11,950/- 1,82,103/- D) NIMBUS SPORT INTERNATIONAL P. LTD. ON OUTSTANDING T RADE BALANCE OF RS.37,71,342/- WITHOUT APPRECIATING THE FACT THAT IN A.Y. 2003-04 IN THE CASE OF APPELLANT ITAT HAD DELETED THE ADDITION OF RS.3,13,043/- ON THIS POINT . 1,99,504/- TOTAL ADJUSTMEN T RS.4,29,095/ 4. THE LEARNED ASSESSING OFFICER ERRED IN DISALLOWI NG AN AMOUNT OF RS.11,85,990/- UNDER RULE 8D OF THE INCOME-TAX ACT, 1961 HOLDING T HE SAID EXPENSES HAS BEEN INCURRED ON EARNING EXEMPTED INCOME. HE ALSO FAILED TO TAKE INTO ACCOUNT THAT PART OF THE ITA 6816/M/10 & 7105/MUM/2011 3 DIVIDEND INCOME IS RECEIVED FROM FOREIGN COMPANIES WHICH HAS BEEN ALREADY TAXED AND IS NOT COVERED UNDER SECTION 14-A OF THE INCOME TAX ACT. 5. THE LEARNED ASSESSING OFFICER ERRED IN MAKING DI SALLOWANCE OF RS.26,45,716/- ON ESTIMATED BASIS, OUT OF EXPENSES INCURRED FOR FO OD, EQUIPMENT HIRE CHARGES, ETC. 6. IT IS PRAYED THAT THE DISALLOWANCE MADE BY THE A .O. MAY PLEASE BE DELETED. 3. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS AGREED BY BOTH THE SIDES, GROUND NO. 1 IS GENERAL IN NATURE SEEKING NO ADJUDICATION. 4. AS REGARDS THE ISSUE RAISED IN GROUND NO. 2 RELA TING TO TP ADJUSTMENT MADE ON ACCOUNT OF GUARANTEE COMMISSION IN RESPECT OF CORPORATE GUARANTEE GIVEN BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES (AES) FOR OBTAINING BANK LOANS, THE LD. REPRESENTATIVES OF BOTH THE SIDES HA VE AGREED THAT A SIMILAR ISSUE WAS INVOLVED IN ASSESSEES OWN CASE FOR THE I MMEDIATELY PRECEDING YEAR I.E. A.Y. 2005-06 AND THE TRIBUNAL VIDE ITS ORDER D ATED 12-06-2013 PASSED IN ITA NO. 3664 & 2359/MUM/2010 HAS ALREADY DECIDED TH E SAME VIDE PARA NO. 9 & 10 WHICH READ AS UNDER:- 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AN D ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. FOR THE GUARANTEE GIVEN TO THE BANK AGAINST THE FINANCIAL ASSISTANCE GIVEN TO ITS AES, NO COMMISSION WAS CHARGED BY THE ASSESSEE COMPANY ON THE GROUND T HAT THE SAID AES WERE NOT BENEFITED BY THE GUARANTEE SO GIVEN AND IT WAS THE ASSESSEE WHO BENEFITED AS A RESULT OF COMMERCIAL BENEFITS SE CURED FOR FUTURE. IN SUPPORT OF THIS STAND OF THE ASSESSEE, THE LD. COUN SEL FOR THE ASSESSEE HAS CONTENDED THAT BUSINESS STRATEGY SHOULD BE TAKE N INTO CONSIDERATION WHILE MAKING ANY TP ADJUSTMENTS IN RE SPECT OF SUCH TRANSACTIONS AND HAS RELIED ON THE OECD TRANSFER PR ICING GUIDELINES ISSUED IN 2010. AS STATED IN PARA 1.59 OF THE SAID GUIDELINES, THE BUSINESS STRATEGIES SHOULD ALSO BE EXAMINED IN DETE RMINING COMPARABILITY FOR TRANSFER PRICING PURPOSES AND CER TAIN ILLUSTRATIONS OF SUCH BUSINESS STRATEGIES ARE ALSO GIVEN THEREIN. A S STATED IN PARA 1.60 OF THE SAID GUIDELINES WHICH HAS BEEN RELIED UPON B Y THE LD. COUNSEL FOR THE ASSESSEE, BUSINESS STRATEGIES ALSO COULD INCLUD E MARKET PENETRATION SCHEMES AND TAXPAYER SEEKING TO PENETRATE A MARKET OR TO INCREASE ITS MARKET SHARE MIGHT TEMPORARILY CHARGE A PRICE FOR I TS PRODUCT THAT IS LOWER THAN THE PRICE CHARGED FOR OTHERWISE COMPARAB LE PRODUCTS IN THE SAME MARKET. AS EXPLAINED FURTHER, A TAX PAYER SEE KING TO ENTER A NEW MARKET OR EXPAND (OR DEFEND) ITS MARKET SHARE MIGHT TEMPORARILY INCUR ITA 6816/M/10 & 7105/MUM/2011 4 HIGHER COSTS AND HENCE ACHIEVE LOWER PROFIT LEVELS THAN OTHER TAXPAYERS OPERATING IN THE SAME MARKET. IN OUR OPINION, THE RELEVANT FACTS OF THE PRESENT CASE DO NOT INDICATE THAT THERE WAS ANY SUC H BUSINESS STRATEGY ADOPTED BY THE ASSESSEE IN NOT CHARGING COMMISSION IN RESPECT OF GUARANTEES ISSUED FOR ITS ASSOCIATED ENTERPRISES. AS A MATTER OF FACT, THERE IS NOTHING TO SUGGEST THAT ANY SUCH BUSINESS STRATEGY WAS ADOPTED BY THE ASSESSEE WITH SPECIFIC INTENTION OR MOTIVE AND THE CASE HAS BEEN SOUGHT TO BE MADE OUT MERELY ON THE BASIS OF COMMERCIAL EXPEDIENCY BY CLAIMING THAT THE ASSESSEE WAS BENEFI TED AS A RESULT OF GIVING THE GUARANTEES IN THE FORM OF COMMERCIAL BEN EFITS SECURED FOR FUTURE. IN OUR OPINION, SUCH COMMERCIAL EXPEDIENCY CANNOT BE EQUATED WITH BUSINESS STRATEGY, WHICH IS SPECIFIC AND WELL LAID OUT. AS RIGHTLY HELD BY THE LD. CIT(A), A FINANCIAL LOAN GUARANTEE IS A COMMITMENT ENTERED INTO BY THE ASSESSEE COMPANY WITH A THIRD P ARTY LENDER OF ITS ASSOCIATED ENTERPRISES WHICH OBLIGES THE ASSESSEE C OMPANY TO COVER THE RISK OF DEFAULT BY ITS ASSOCIATED ENTERPRISE AN D THIS ACT THUS INVOLVES PERFORMANCE OR CARRYING OUT OF SERVICE TO COVER THE RISK OF DEFAULT FOR WHICH PRICE HAS TO BE CHARGED. EVEN THE OECD TRANSFER PRICING GUIDELINES 2010 SUPPORTS THIS VIEW IN PARA 7.13 WHERE IT IS EXPLAINED THAT WHERE HIGHER CREDIT RATING OF ASSOCI ATED ENTERPRISE IS DUE TO A GUARANTEE BY ANOTHER GROUP MEMBER, SUCH AS SOCIATION POSITIVELY ENHANCES THE PROFIT MAKING POTENTIAL OF THAT ASSOCIATED ENTERPRISE. WE, THEREFORE, FIND OURSELVES IN AGREE MENT WITH THE CONTENTION OF THE LD. D.R. THAT THERE WAS A CLEAR B ENEFIT ACCRUED TO THE ASSOCIATED ENTERPRISES BY THE GUARANTEE PROVIDED BY THE ASSESSEE AND WHEN SUCH BENEFIT WAS PASSED ON BY THE ASSESSEE TO THE SAID ASSOCIATED ENTERPRISES, GUARANTEE COMMISSION SHOULD HAVE BEEN CHARGED AT ARMS LENGTH PRICE. THE COMMERCIAL RELA TIONSHIP BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISES IS DIST INCT AND SEPARATE FROM THE TRANSACTIONS OF GIVING GUARANTEE AND SUCH TRANSACTIONS HAVE TO BE CONSIDERED AND EXAMINED INDEPENDENTLY IN ORDE R TO DETERMINE THE ARMS LENGTH PRICE. 10. AS REGARDS THE RATE OF GUARANTEE COMMISSION, IT IS NOTED THAT THE ARMS LENGTH PRICE OF GUARANTEE COMMISSION WAS DETE RMINED BY THE TPO BY APPLYING CUP METHOD AND THE ARITHMETIC MEAN OF 1 .5% OF THE GUARANTEE COMMISSION CHARGED BY THE HSBC BANK IN TH E RANGE OF 0.15 TO 3% WAS TAKEN AS ARMS LENGTH PRICE. THE LD. CIT (A) UPHELD THE CUP METHOD APPLIED BY THE TPO BUT ADOPTED THE RATE OF 0 .25% OF GUARANTEE FEE AS ARMS LENGTH PRICE RELYING ON THE DECISION O F FRENCH COURT IN THE CASE OF SOCIETE CARREFOUR. THE LD. D.R., AT THE TIM E OF HEARING BEFORE US HAS RELIED ON THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S EVEREST KANTO CYLINDER LTD. (SUPRA) WHEREIN WHILE ACCEPTING THE CUP METHOD AS THE MOST APPROPRIATE ME THOD FOR BENCHMARKING THE GUARANTEE FEE, THE TRIBUNAL ACCEPT ED 0.5% GUARANTEE FEE/COMMISSION TO BE AT ARMS LENGTH AFTER TAKING I NTO CONSIDERATION THE RATES OF GUARANTEE COMMISSION CHARGED BY VARIOUS BA NKS INCLUDING THE GUARANTEE COMMISSION CHARGED BY THE HSBC BANK IN TH E RANGE OF 0.15% TO 3%. SINCE THE FACTS INVOLVED IN THE PRESE NT CASE ARE ITA 6816/M/10 & 7105/MUM/2011 5 MATERIALLY SIMILAR TO THE FACTS INVOLVED IN THE CAS E OF EVEREST KANTO CYLINDER LTD. (SUPRA), WE PREFER TO FOLLOW THE DECI SION RENDERED BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE SAID CASE OVER THE DECISION OF FRENCH COURT IN THE CASE OF SOCIETE CARREFOUR (SUPR A). WE, ACCORDINGLY MODIFY THE IMPUGNED ORDER OF THE LD. CIT(A) ON THIS ISSUE AND DIRECT THE A.O. TO RECOMPUTE THE COMMISSION FOR GUARANTEE GIVE N BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES @ 0.5% BEING THE ARM S LENGTH PRICE. GROUND NO. 1 OF REVENUES APPEAL IS THUS PARTLY ALL OWED WHEREAS GROUND NO. 2 OF ASSESSEES APPEAL IS DISMISSED. 5. AS THE ISSUE INVOLVED IN THE YEAR UNDER CONSIDER ATION AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERETO ARE SIMILAR TO A.Y. 2005-06, WE RESPECTFULLY FOLLOW THE ORDER OF THE CO-ORDINATE BENCH OF THIS T RIBUNAL FOR A.Y. 2005-06 AND DIRECT THE A.O. TO RESTRICT THE TP ADJUSTMENT B Y RECOMPUTING THE COMMISSION FOR GUARANTEE GIVEN BY THE ASSESSEE TO I TS AES AT 0.5% BEING THE ARMS LENGTH PRICE. GROUND NO. 2 OF THE ASSESSEES APPEAL FOR A.Y. 2006-07 IS PARTLY ALLOWED. 6. AT THE TIME OF HEARING BEFORE US, THE LD. COUNSE L FOR THE ASSESSEE HAS NOT PRESSED GROUND NO. 3(A), (B) & (C) OF THE ASSES SEES APPEAL. THE SAME ARE ACCORDINGLY DISMISSED AS NOT PRESSED. 7. AS REGARDS GROUND NO. 3(D), THE LD. REPRESENTATI VES OF BOTH THE SIDES HAVE AGREED THAT THE ISSUE INVOLVED THEREIN RELATIN G TO ADDITION MADE ON ACCOUNT OF NOTIONAL INTEREST PAYABLE BY NIMBUS SPOR T INTERNATIONAL P. LTD. ON OUTSTANDING TRADE BALANCES WITH THE ASSESSEE IS SQU ARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL DATED 12- 06-2013 (SUPRA) PASSED IN ASSESSEES OWN CASE FOR A.Y. 2005-06 WHEREIN A SIMI LAR ISSUE WAS DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE FOR THE FOLL OWING REASONS GIVEN IN PARA NO. 19 & 20 OF ITS ORDER:- 19. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT SIMILAR ISSUE INVOL VED IN ASSESSEES OWN CASE FOR EARLIER YEARS I.E. ASSESSMENT YEARS 20 03-04 AND 2004-05 HAS BEEN DECIDED BY THE TRIBUNAL IN FAVOUR OF THE A SSESSEE. THE LD. D.R., HOWEVER, HAS SUBMITTED THAT SIMILAR ISSUE WAS DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE IN THE EARLIER Y EARS HOLDING THAT THE ITA 6816/M/10 & 7105/MUM/2011 6 CONTINUING DEBIT BALANCE WAS NOT AN INTERNATIONAL T RANSACTION. HE HAS CONTENDED THAT THE LAW ON THIS POINT, HOWEVER, HAS UNDERGONE A CHANGE BY INSERTION OF EXPLANATION TO SECTION 92-B WITH RESTROSPECTIVE EFFECT FROM 1-4-1992 AND CLAUSE (I)(C) OF THE SAID EXPLANATION IS CLEARLY APPLICABLE IN THE PRESENT CASE. THE LD. COUNSEL FO R THE ASSESSEE, ON THE OTHER HAND, HAS CONTENDED THAT ALTHOUGH THE LAW HAS CHANGED ON THIS POINT AND CONTINUING DEBIT BALANCE IS NOW TREATED A S AN INTERNATIONAL TRANSACTION AS PER THE RESTROSPECTIVE AMENDMENT, TH E TRIBUNAL VIDE ITS ORDER DTD. 5-1-2011 PASSED IN ITA NO. 6597/MUM/09 F OR A.Y. 2004-05 HAS GIVEN RELIEF TO THE ASSESSEE ON THIS ISSUE EVEN ON MERIT. IN THIS REGARD, HE HAS REFERRED TO PARA 5 & 6 OF THE SAID O RDER WHICH IS REPRODUCED HEREUNDER:- 5. A CONTINUING DEBIT BALANCE, IN OUR HUMBLE UNDER STANDING, IS NOT AN INTERNATIONAL TRANSACTION PER SE, BUT IS A RESULT OF THE INTERNATIONAL TRANSACTION. IN PLAIN WORDS, A CONTI NUING DEBIT BALANCE ONLY REFLECTS THAT THE PAYMENT, EVEN THOUGH DUE, HAS NOT BEEN MADE BY THE DEBTOR. IT IS NOT, HOWEVER, NECESS ARY THAT A PAYMENT IS TO BE MADE AS SOON AS IT BECOMES DUE. MA NY FACTORS, INCLUDING TERMS OF PAYMENT AND NORMAL BUSINESS PRA CTICES, INFLUENCE THE FACT OF PAYMENT IN RESPECT OF A COMME RCIAL TRANSACTION. UNLIKE A LOAN OR BORROWING, IT IS NOT AN INDEPENDENT TRANSACTION WHICH CAN BE VIEWED ON STANDALONE BASI S. WHAT CAN BE EXAMINED ON THE TOUCHSTONE OF ARMS LENGTH PRINC IPLES IS THE COMMERCIAL TRANSACTION ITSELF, AS A RESULT OF WHICH THE DEBIT BALANCE HAS COME INTO EXISTENCE, AND THE TERMS AND CONDITIONS, INCLUDING TERMS OF PAYMENT, ON WHICH THE SAID COMME RCIAL TRANSACTION HAS BEEN ENTERED INTO. THE PAYMENT TERM S ARE AN INTEGRAL PART OF ANY COMMERCIAL TRANSACTION, AND TH E TRANSACTION VALUE TAKES INTO ACCOUNT THE TERMS OF PAYMENT, SUCH AS PERMISSIBLE CREDIT PERIOD, AS WELL. THE RESIDUARY C LAUSE IN THE DEFINITION OF INTERNATIONAL TRANSACTION, I.E. ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOMES, LOSSES OR ASSETS OF SUCH ENTERPRISES, DOES NOT APPLY TO A CONTINUING DEBIT B ALANCE, ON THE GIVEN FACTS OF THE CASE, FOR THE ELEMENTARY REASON THAT THERE IS NOTHING ON RECORD TO SHOW THAT AS A RESULT OF NOT R EALIZING THE DEBTS FROM ASSOCIATED ENTERPRISES, THERE HAS BEEN A NY IMPACT ON PROFITS, INCOMES, LOSSES OR ASSETS OF THE ASSESSEE. IN VIEW OF THESE DISCUSSIONS, IN OUR CONSIDERED VIEW, A CONTINUING D EBIT BALANCE PERSE, IN THE ACCOUNT OF THE ASSOCIATED ENTERPRISES , DOES NOT AMOUNT TO AN INTERNATIONAL TRANSACTION UNDER SECTIO N 92 B IN RESPECT OF WHICH ALP ADJUSTMENTS CAN BE MADE. THE F ACTUM OF PAYMENT HAS TO BE CONSIDERED VIS--VIS TERMS OF PAY MENT SET OUT IN THE TRANSACTION ARRANGEMENT, AND NOT IN ISOLATIO N WITH THE COMMERCIAL TERMS ON WHICH TRANSACTION IN RESPECT OF WHICH PAYMENT IS, ACCORDING TO THE REVENUE AUTHORITIES, D ELAYED. IN ANY EVENT, EVEN WHEN AN ALP IS MADE IN RESPECT EXCESSIV E CREDIT PERIOD ALLOWED UNDER THE CUP METHOD, STATED BY THE TPO, THE COMPARABLE HAS TO BE DUES RECOVERABLE FROM A DEBTOR AND NOT A ITA 6816/M/10 & 7105/MUM/2011 7 BORROWER. IT APPEARS THAT THE TPO HAS ADOPTED INTER EST @ 2.19% LIBOR ON BALANCES WHICH EXCEED 30 DAYS, BUT LIBOR R ATE IS RELEVANT ONLY IN THE CASE OF LENDING OR BORROWING O F FUNDS, AND NOT IN THE CASE OF COMMERCIAL OVERDUES. EVEN ASSUMI NG THAT THE CONTINUING DEBIT BALANCES OF ASSOCIATED ENTERPRISES CAN BE TREATED AS INTERNATIONAL TRANSACTIONS UNDER SECTI ON 92 B, THE RIGHT COURSE OF APPLYING THE CUP METHOD, IN THE CAS E OF NON CHARGING OF INTEREST ON OVERDUE BALANCES, WOULD HAV E BEEN BY COMPARING THIS NOT CHARGING OF INTEREST WITH OTHER CASES IN WHICH THE ASSESSEE HAS CHARGED INTEREST ON OVERDUES WITH INDEPENDENT ENTERPRISES (INTERNAL CUP) OR WITH THE CASES IN WHI CH OTHER ENTERPRISES HAVE CHARGED INTEREST, IN RESPECT OF OV ERDUES IN RESPECT OF SIMILAR BUSINESS TRANSACTIONS, WITH INDE PENDENT ENTERPRISES (EXTERNAL CUP). NO SUCH EXERCISE HAS BE EN CARRIED OUT IN THIS CASE, NOR IS IT SHOWN, AS IS THE CONDIT ION PRECEDENT FOR BRINGING THIS CONTINUING DEBIT BALANCE IN THE AMBIT OF INTERNATIONAL TRANSACTION, THAT AS A RESULT OF NO T REALIZING THE DEBTS FROM ASSOCIATED ENTERPRISES, THERE HAS BEEN A NY IMPACT ON PROFITS, INCOMES, LOSSES OR ASSETS OF THE ASSESSEE. 6. FOR ALL THESE REASONS SET OUT ABOVE, AS ALSO RE SPECTFULLY FOLLOWING THE DECISION DATED 28TH JANUARY 2010 OF T HE COORDINATE BENCH IN ASSESSEES OWN CASE IN THE IMMEDIATELY PRE CEDING YEAR, WE HOLD THAT THE IMPUGNED ADDITION OF RS 12,51,175 IS UNSUSTAINABLE IN LAW AND THAT THE CIT(A) OUGHT TO H AVE DELETED THE SAME. WE, ACCORDINGLY, DIRECT THE ASSESSING OFF ICER TO DELETE THE IMPUGNED ADJUSTMENT. THE ASSESSEE GETS THE RELI EF ACCORDINGLY. 20. IT IS CLEARLY EVIDENT FROM THE RELEVANT PORTION OF THE TRIBUNALS ORDER AS REPRODUCED ABOVE THAT A SIMILAR ADDITION M ADE IN ASSESSEES OWN CASE FOR THE EARLIER A.Y. I.E. 2004- 05 HAS BEEN DELETED BY THE TRIBUNAL EVEN ON MERIT HOLDING THAT EVEN WHEN AN ALP IS MADE IN RESPECT EXCESSIVE CREDIT PERIOD ALLO WED UNDER THE CUP METHOD, THE COMPARABLE HAS TO BE DUES RECOVERAB LE FROM A DEBTOR AND NOT A BORROWER. IT WAS HELD THAT THE TP O HAD ADOPTED INTEREST @ 2.19% LIBOR ON BALANCES WHICH EX CEEDED 30 DAYS, BUT LIBOR RATE WAS RELEVANT ONLY IN THE CASE OF LENDING OR BORROWING OF FUNDS AND NOT IN THE CASE OF COMMERCIA L OVERDUES. IT WAS HELD THAT EVEN IF THE CONTINUING DEBIT BALAN CES OF ASSOCIATED ENTERPRISES COULD BE TREATED AS INTERNA TIONAL TRANSACTIONS U/S 92-B, THE RIGHT COURSE OF APPLYIN G THE CUP METHOD, IN THE CASE OF NON-CHARGING OF INTEREST ON OVERDUE BALANCES, WOULD HAVE BEEN BY COMPARING THIS NOT CHA RGING OF INTEREST WITH OTHER CASES IN WHICH THE ASSESSEE HAD CHARGED INTEREST ON OVERDUES WITH INDEPENDENT ENTERPRISES ( INTERNAL CUP) OR WITH THE CASES IN WHICH OTHER ENTERPRISES HAD CH ARGED INTEREST IN RESPECT OF OVERDUES IN RESPECT OF SIMILAR BUSINE SS TRANSACTIONS WITH INDEPENDENT ENTERPRISES (EXTERNAL CUP). SINCE NO SUCH ITA 6816/M/10 & 7105/MUM/2011 8 EXERCISE HAD BEEN CARRIED OUT IN THE CASE OF THE AS SESSEE FOR A.Y. 2004-05, THE TRIBUNAL HELD THAT THE IMPUGNED ADDITI ON WAS NOT SUSTAINABLE. IN THE YEAR UNDER CONSIDERATION ALSO, NO SUCH EXERCISE HAS BEEN CARRIED OUT BY THE TPO AND SINCE THE ADDITION WAS MADE BY ADOPTING INTEREST AT LIBOR RATE, WE HOL D, RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2004-05, THAT THE IMPUGNED ADDITION O F ` 12,98,048/- MADE ON THIS ISSUE IS NOT SUSTAINABLE. THE SAME IS ACCORDINGLY DELETED ALLOWING GROUND NO. 3 & 4 OF TH E ASSESSEES APPEAL. 8. RESPECTFULLY FOLLOWING THE ORDER OF THE CO-ORDIN ATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2005-06 ON SIMILAR ISSUE, WE DELETE THE ADDITION OF RS. 1,99,504/- MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT(A) ON ACCOUNT OF INTEREST PAYABLE BY NIMBUS SPO RT INTERNATIONAL P. LTD. ON OUTSTANDING TRADE BALANCE TO THE ASSESSEE. GROU ND NO. 3 (D) OF THE ASSESSEES APPEAL FOR A.Y. 2006-07 IS ACCORDINGLY A LLOWED. 9. AS REGARDS GROUND NO. 4, THE LD. REPRESENTATIVES OF BOTH THE SIDES HAVE AGREED THAT THE ISSUE RAISED THEREIN RELATING TO TH E DISALLOWANCE MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT(A) U/S 14A READ W ITH RULE 8-D OF THE INCOME TAX RULES, 1962 IS ALSO SQUARELY COVERED BY THE ORDER OF THE TRIBUNAL 12-06-2013 (SUPRA) WHEREIN A SIMILAR ISSUE HAS BEEN DECIDED IN PARA NO. 23 AS UNDER:- 23. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS AGREE D BY THE LD. REPRESENTATIVES OF BOTH THE SIDES, THE ISSUE RELATI NG TO THE APPLICABILITY OF RULE 8D HAS BEEN DECIDED BY THE HONBLE BOMBAY H IGH COURT IN THE CASE OF GODREJ AND BOYCE MFG.CO. LTD. VS. DCIT (201 0) 328 ITR 81 (BOM.) WHEREIN IT WAS HELD THAT RULE 8D IS APPLICAB LE ONLY PROSPECTIVELY I.E. FROM A.Y. 2008-09. AS HELD BY THE HONBLE JUR ISDICTIONAL HIGH COURT, THE DISALLOWANCE U/S 14A FOR THE YEARS PRIOR TO A.Y. 2008-09 HAS TO BE MADE ON SOME REASONABLE BASIS. WE THEREFORE R ESTORE THIS ISSUE TO THE FILE OF THE A.O. WITH A DIRECTION TO RECOMPUTE THE DISALLOWANCE TO BE MADE U/S 14A OF THE ACT BY FOLLOWING SOME REASONABL E BASIS. AS POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE IN THIS REGARD, SUBSTANTIAL INVESTMENT MADE BY THE ASSESSEE WAS IN THE SHARES OF FOREIGN COMPANIES, DIVIDEND INCOME OF WHICH IS NOT EXEMPT FROM TAX. THE A.O. IS ACCORDINGLY DIRECTED TO CONSIDER THIS A SPECT ALSO WHILE COMPUTING THE DISALLOWANCE TO BE MADE U/S 14A OF TH E ACT. GROUND NO. 5 OF ASSESSEES APPEAL IS ACCORDINGLY TREATED A S PARTLY ALLOWED. ITA 6816/M/10 & 7105/MUM/2011 9 10. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNA L IN ASSESSEES OWN CASE FOR A.Y. 2005-06, WE RESTORE THE ISSUE RELATING TO THE DISALLOWANCE U/S 14A OF THE ACT TO THE FILE OF THE A.O. FOR DECIDING THE SA ME AFRESH AS PER THE SAME DIRECTION AS GIVEN IN A.Y. 2005-06. GROUND NO. 4 O F THE ASSESSEES APPEAL IS ACCORDINGLY TREATED AS PARTLY ALLOWED FOR STATISTIC AL PURPOSE. 11. IN APPEAL FOR A.Y. 2007-08, THE ASSESSEE HAS RA ISED THE FOLLOWING GROUNDS:- 1. THE LEARNED ASSESSING OFFICER ERRED IN ASSESSING THE INCOME AT RS. 11,58,61,620/- IN PLACE OF RS.8,71,81,798/- DECLARE D BY THE APPELLANT. 2.(A) THE LEARNED ASSESSING OFFICER ERRED IN MAKI NG ADJUSTMENT OF RS.1,17,69,300/- ON A/C. ON APPELLANT GIVING A CORPORATE GUARANTEE T O THE A.E.S FOR OBTAINING BANK LOANS. (B) THE LEARNED ASSESSING OFFICER FAILED TO APPRECI ATE THAT GIVING OF A CORPORATE GUARANTEE TO A.E.S HAS BEEN AS A MEASURE OF COMMERC IAL EXPEDIENCY AND THERE IS NO LOSS TO THE APPELLANT AS IT IS NOT THE BUSINESS OF APPEL LANT TO GIVE A CORPORATE GUARANTEE FOR OTHERS. (C) WITHOUT PREJUDICE TO THE ABOVE, WHILE THE APPEL LANT CONTENDS THAT NO ADJUSTMENT IS REQUIRED TO BE MADE ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED A.O. ERRED IN NOT CONSIDERING THE DECISION OF CIT(A) IN APPELL ANTS CASE FOR THE IMMEDIATE PRECEDING A.Y. 2005-06 WHEREIN THE CIT(A) HAS HELD THAT THE RATE OF 0.25% COMMISSION IN PLACE OF 1.5% WAS APPROPRIATE. 3. THE LEARNED A.O ERRED IN MAKING OVERALL ADJUSTME NT OF NOTIONAL INTEREST OF RS.2,48,150/- IN RESPECT OF FOLLOWING A.E.S ON THE GROUND THAT APPELLANT HAD NOT CHARGED OR SHORT-CHARGED INTEREST. SR. NO . PARTICULARS AMOUNT(RS.) (A) M/S NIMBUS MEDIA PVT. LTD. FOR GRANTING ADVANCE OF RS. 4,02,918/-. 25,787//- (B) NIMBUS COMMUNICATIONS BRITISH VIRGIN ISLANDS FO R GRANTING LOAN OF RS. 34,74,428/-. 2,22,363/- TOTAL ADJUSTMENT 2,48,150/- ITA 6816/M/10 & 7105/MUM/2011 10 4. THE LEARNED ASSESSING OFFICER ERRED IN MAKING AD JUSTMENT OF RS. 22,78,937/- ON ACCOUNT OF NOTIONAL INTEREST CHARGED ON OUTSTANDING RECOVERABLE FROM AE. 5. THE LEARNED ASSESSING OFFICER ERRED IN DISALLOWI NG AN AMOUNT OF RS. 61,12,122/- UNDER SEC. 14 ARW RULE 8D OF THE INCOME -TAX ACT, 1961 HOLDING THE SAID EXPENSES HAS BEEN INCURRED ON EARNING EXEMPTED INCO ME. 6. THE LEARNED ASSESSING OFFICER ERRED IN MAKING DI SALLOWANCE OF RS. 28,21,649/- ON ESTIMATED BASIS, OUT OF EXPENSES INCURRED FOR FO OD, EQUIPMENT HIRE CHARGES ETC. 7. THE LEARNED A.O. ERRED IN MAKING DISALLOWANCE OF RS. 34,99,823/- BEING SUNDRY OLD BALANCE WRITTEN OFF. 8. THE LEARNED A.O. ERRED IN DISALLOWING THE DEDUCT ION OF AN AMOUNT OF RS. 19,49,836/- CLAIMED U/S 35-D. 9. IT IS PRAYED THAT THE DISALLOWANCE MADE BY THE A .O. MAY PLEASE BE DELETED. 12. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS AGREED BY BOTH THE SIDES, GROUND NO. 1 IS GENERAL IN NATURE SEEKING NO ADJUDICATION. 13. AS REGARDS THE ISSUE RAISED IN GROUND NO. 2 REL ATING TO TP ADJUSTMENT MADE ON ACCOUNT OF GUARANTEE COMMISSION IN RESPECT OF CORPORATE GUARANTEE GIVEN BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES (AES) FOR OBTAINING BANK LOANS, THE LD. REPRESENTATIVES OF BOTH THE SIDES HA VE AGREED THAT THIS ISSUE IS SIMILAR TO THE ONE INVOLVED IN ASSESSEES APPEAL FO R A.Y. 2006-07 WHICH HAS ALREADY BEEN DECIDED BY US IN THE FOREGOING PORTION OF THIS ORDER. FOLLOWING OUR CONCLUSION DRAWN IN A.Y. 2006-07, WE DIRECT THE A.O. TO RESTRICT THE TP ADJUSTMENT BY RECOMPUTING THE COMMISSION FOR GUARAN TEE GIVEN BY THE ASSESSEE TO ITS AES AT 0.5% BEING THE ARMS LENGTH PRICE. GROUND NO. 2 OF THE ASSESSEES APPEAL FOR A.Y. 2007-08 IS PARTLY ALLOWE D. 14. AT THE TIME OF HEARING BEFORE US, THE LD. COUNS EL FOR THE ASSESSEE HAS NOT PRESSED GROUND NO. 3(A) & (B) OF THE ASSESSEES APP EAL. THE SAME ARE ACCORDINGLY DISMISSED AS NOT PRESSED. ITA 6816/M/10 & 7105/MUM/2011 11 15. THE ISSUE RAISED IN GROUND NO. 4 RELATING TO TH E ADDITION MADE ON ACCOUNT NOTIONAL INTEREST PAYABLE TO ASSESSEE BY IT S AE ON OUTSTANDING TRADE BALANCES IS SIMILAR TO THE ONE INVOLVED IN ASSESSE ES APPEAL FOR A.Y. 2006-07 WHICH HAS ALREADY BEEN DECIDED BY US IN THE FOREGOI NG PORTION OF THIS ORDER. FOLLOWING OUR CONCLUSION DRAWN IN A.Y. 2006-07, WE DELETE THE ADDITION OF RS. 22,78,937/- MADE BY THE A.O. AND CONFIRMED BY THE L D. CIT(A) ON ACCOUNT OF NOTIONAL INTEREST PAYABLE TO THE ASSESSEE BY ITS AE ON OUTSTANDING TRADE BALANCES. GROUND NO. 4 OF THE ASSESSEES APPEAL FO R A.Y. 2007-08 IS ACCORDINGLY ALLOWED. 16. AS REGARDS THE ISSUE RAISED IN GROUND NO. 5 REL ATING TO THE DISALLOWANCE MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT(A) U/ S 14A READ WITH RULE 8-D OF THE INCOME TAX RULES, 1962, IT IS OBSERVED THAT THE SAME IS SIMILAR TO THE ONE INVOLVED IN ASSESSEES APPEAL FOR A.Y. 2006-07 WHICH HAS ALREADY BEEN DECIDED BY US IN THE FOREGOING PORTION OF THIS ORDE R. FOLLOWING OUR CONCLUSION DRAWN IN A.Y. 2006-07, WE RESTORE THE ISSUE RELATIN G TO THE DISALLOWANCE U/S 14A OF THE ACT TO THE FILE OF THE A.O. FOR DECIDING THE SAME AFRESH AS PER THE SAME DIRECTION AS GIVEN IN A.Y. 2006-07. GROUND NO . 5 OF THE ASSESSEES APPEAL IS ACCORDINGLY TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 17. AT THE TIME OF HEARING BEFORE US, THE LD. COUNS EL FOR THE ASSESSEE HAS NOT PRESSED GROUND NO. 6 & 8 OF THE ASSESSEES APPE AL. THE SAME ARE ACCORDINGLY DISMISSED AS NOT PRESSED. 18. THE ISSUE RAISED IN GROUND NO. 7 RELATES TO THE DISALLOWANCE OF RS. 34,99,823/- MADE BY THE A.O. ON ACCOUNT OF SUNDRY O LD BALANCE WRITTEN OFF. 19. IN THE PROFIT AND LOSS ACCOUNT FILED ALONG WITH THE RETURN OF INCOME, THE ASSESSEE HAD DEBITED A SUM OF RS. 34,99,823/- O N ACCOUNT OF SUNDRY/OLD BALANCES WRITTEN OFF. BEFORE THE A.O., IT WAS SUBM ITTED ON BEHALF OF THE ASSESSEE THAT THE SUNDRY BALANCES WRITTEN OFF REPRE SENTED VARIOUS AMOUNTS BOOKED AS INCOME EARLIER AND SINCE THE PARTIES WHO WERE LIABLE TO PAY THE ITA 6816/M/10 & 7105/MUM/2011 12 SAID BALANCES HAD PAID ROUNDED OFF AMOUNTS INSTEAD OF ACTUAL AMOUNTS,, THERE WAS NO CHOICE BUT TO WRITE OFF OF SUCH SUNDRY BALANCES. THE RELEVANT DETAILS OF SUCH SUNDRY BALANCES WERE ALSO FURNISHED BY THE ASSESSEE BEFORE THE A.O. ON PERUSAL OF THE SAID DETAILS, THE A.O. FOUND THAT THE DESCRIPTION OF THE VARIOUS ITEMS GIVEN THEREIN WAS DIFFERENT FROM THE CONTENTION RAISED BY THE ASSESSEE ON THIS ISSUE. HE ACCORDINGLY PROPOSE D THE DISALLOWANCE OF RS. 34,99,823/- ON ACCOUNT OF ASSESSEES CLAIM FOR SUND RY/OLD BALANCES WRITTEN OFF. 20. BEFORE THE DRP, THE ASSESSEE TOOK A DIFFERENT S TAND ON THIS ISSUE BY SUBMITTING THAT OUT OF THE TOTAL AMOUNT OF RS. 34,9 9,823/- ON ACCOUNT OF SUNDRY/OLD BALANCE WRITTEN OFF, A SUM OF RS. 20,42, 425/- REPRESENTED AMOUNT DUE FROM M/S MEDIA VISION IN RESPECT OF AIR TIME BOOKED IN F.Y. 2002-03 FOR WHICH NO PAYMENT WAS RECEIVED. IT WAS CONTENDED THAT THE SAID AMOUNT WAS TAXED IN A.Y. 2003-04 AND THE ASSESSEE W AS ENTITLED FOR DEDUCTION AFTER HAVING WRITTEN OFF THE SAID AMOUNT AS IRRECOVERABLE AS PER THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F TRF LTD. VS. CIT, 313 ITR 397 (SC). IT WAS ALSO SUBMITTED THAT THERE WAS ANOTHER SUM OF RS. 14,45,856/- WHICH REPRESENTED PRE PAID EXPENSES AND SINCE THIS AMOUNT PAID AS ADVANCES COULD NOT BE RECOVERED AFTER MUCH PERSUASION, THE SAME WAS WRITTEN OFF AS IRRECOVERABLE. AS REGARDS THE B ALANCE AMOUNT OF RS. 11,542/-, IT WAS CONTENDED ON BEHALF OF THE ASSESSE E THAT THE SAME REPRESENTED MISCELLANEOUS BALANCES WHICH COULD NOT BE RECOVERED. SINCE THIS STAND TAKEN BY THE ASSESSEE FOR THE FIRST TIME BEFORE THE DRP REQUIRED VERIFICATION AND IT HAD NO POWER TO SET ASIDE THE C ASE, THE DRP DECLINED TO INTERFERE WITH THE DECISION OF THE A.O. ON THIS ISS UE AND RESULTANTLY A DISALLOWANCE ON THIS ISSUE WAS CONFIRMED BY THE A.O . 21. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS CLEAR LY MANIFEST FROM THE ORDER OF THE DRP THAT A SPECIFIC CASE WAS MADE OUT BY THE AS SESSEE IN SUPPORT OF ITS ITA 6816/M/10 & 7105/MUM/2011 13 CLAIM FOR DEDUCTION ON ACCOUNT OF SUNDRY/OLD BALANC E WRITTEN OFF BEFORE THE DRP FOR THE FIRST TIME AND SINCE THE CASE SO MADE O UT BY THE ASSESSEE REQUIRED VERIFICATION BY THE A.O., THE DRP HAVING N O POWER TO SET ASIDE THE CASE, DECLINED TO INTERFERE WITH THE DECISION OF TH E A.O. KEEPING IN VIEW THIS POSITION, WE CONSIDER IT FAIR AND PROPER AND IN THE INTEREST OF JUSTICE TO SET ASIDE THIS ISSUE TO THE FILE OF THE A.O. WITH A DIR ECTION TO DECIDE THE SAME AFRESH AFTER VERIFYING THE STAND OF THE ASSESSEE AS TAKEN BEFORE THE DRP FROM THE RELEVANT RECORD. GROUND NO. 7 OF ASSESSEES AP PEAL FOR A.Y. 2007-08 IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSE. 22. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSE E ARE PARTLY ALLOWED. 5 &6 ) *5& 0 4 !#& 7 0 $& 89 ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH AUGUST, 2013. . 4 0 23+ ' : )6 07-08-2013 3 0 % SD/- SD/- (B.R. MITTAL) (P.M. JAGTAP ) ! JUDICIAL MEMBER ' ! / ACCOUNTANT MEMBER MUMBAI ; : ) DATED 07-08-2013. #.)../ RK , SR. PS 4 0 .&; <;+& 4 0 .&; <;+& 4 0 .&; <;+& 4 0 .&; <;+&/ COPY OF THE ORDER FORWARDED TO : 1. ,- / THE APPELLANT 2. ./,- / THE RESPONDENT. 3. = () / THE ACIT, RANGE 11 (1), MUMBAI 4. = / CIT 4 MUMBAI 5. ;#@% .&) , , / DR, ITAT, MUMBAI K BENCH 6. %A* B / GUARD FILE. 4) 4) 4) 4) / BY ORDER, /;& .& //TRUE COPY// C C C C/ // /8 $ 8 $ 8 $ 8 $ ( DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI