SHRENUJ & CO. LTD, MUMBAI V. ADDL CIT RG 5(3), MUMBAI

ITA 7948/MUM/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92405 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-04-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 17-09-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 24-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: F V IRANI; APURVA SHETH
• Keywords: Capital asset; Transfer pricing; International transaction; Proportionate interest; Wholly owned subsidiary; Commercial expediency
• Section: 143(3)

Judgement Text

K IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI R.C. SHARMA, ACCOUNTANT MEMBER ./ I.T.A. NO. 8189 /MUM/2010 ( / ASSESSMENT YEAR : 2006-2007 ./ I.T.A. NO. 7948 /MUM/2011 ( / ASSESSMENT YEAR : 2007-2008 M/S SHRENUJ & CO. LTD., 405, DHARAM PALACE, 100/103, N.S. PATKAR MARG, MUMBAI 400 007. / VS. ADDL. COMMISSIONER OF INCOME TAX RANGE 5(3), AAYAKAR BHAVAN, M.K. MARG, 5 TH FLOOR, MUMBAI- 400 020. ./ PAN : AAACS0690P ( / APPELLANT ) .. ( / RESPONDENT ) A PPELLANT BY SHRI F.V. IRANI & SHRI APURVA SHETH R E SPONDENT BY : SHRI N.K. CHAND / DATE OF HEARING : 04-03-2015 / DATE OF PRONOUNCEMENT : 17-04-2015 [ !' / O R D E R PER R.C. SHARMA, A.M . : THESE TWO APPEALS FILED BY THE ASSESSEE ARE DIRECTE D AGAINST THE ORDERS PASSED BY THE LD. DRP PANEL II, MUMBAI DATED 17-9-2 010 & 12-09-2011FOR THE ASSESSMENT YEARS 2006-07 AND 2007-08, IN THE MA TTER OF ORDER PASSED BY A.O. U/S 143(3) R.W.S. 144C(13) OF THE INCOME TAX A CT, 1961. 2. COMMON GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE IN BOTH THESE YEARS, THEREFORE, THESE WERE HEARD TOGETHER AND DISPOSED O F BY THIS CONSOLIDATED ORDER. ITA 8189/M/2010 & 7948/M/11 2 3. THE FOLLOWING GROUNDS HAVE BEEN BY THE ASSESSEE IN A.Y. 2006-07:- THE ADDITIONAL COMMISSIONER OF INCOME TAX - RANGE 5(3), MUMBAI ERRED IN MAKING AS ASSESSMENT U/S 143(3) R.W.S. 144 C(13) AND ERRED IN:- 1.1 IN MAKING AN ADJUSTMENT U/S 92CA TOWARDS INTER EST OF RS. 45,01,303 THAT OUGHT TO HAVE BEEN CHARGED TO OVERSE AS SUBSIDIARIES. 1.2 IN NOT APPRECIATING THAT THE LOANS GIVEN TO THE OVERSEAS SUBSIDIARIES ARE IN THE NATURE OF QUASI EQUITY . 1.3 IN NOT CONSIDERING THE EXTERNAL COMPARABLE UNCO NTROLLED PRICE BENCHMARKS PROVIDED BY THE APPELLANT. 1.4 WITHOUT PREJUDICE, THE RATE OF INTEREST USED BY THE A 0 IS EXCESSIVE AND NEEDS TO BE SUBSTANTIALLY REDUCED. 2.1 IN DISALLOWANCE OF INTEREST ASSUMED TO BE EXPEN DED ON EXPANSION OF THE BUSINESS BY INVESTMENT IN PROPERTY AT BHARAT DIAMOND BOURSE WHICH WAS A BUSINESS ASSET. 2.2 IN NOT APPRECIATING THAT NO FUNDS HAD BEEN SPEC IFICALLY BORROWED FOR THE PURPOSE OF MAKING THIS INVESTMENT AND THAT HENCE NOTHING WAS DISALLOWABLE ON THIS ACCOUNT. 2.3 IN NOT APPRECIATING THAT THE APPELLANT HAD ADEQ UATE NON INTEREST BEARING FUNDS AVAILABLE WITH IT AND THAT HENCE NO D ISALLOWANCE OF INTEREST WAS CALLED FOR. 3.1 IN DISALLOWING INTEREST PAID TO THE EXTENT THAT SUMS OF MONEY WERE ADVANCED TO SUBSIDIARY ON AN INTEREST FREE BAS IS. 3.2 IN NOT APPRECIATING THAT THE ASSESSEE HAS SHOWN COMMERCIAL EXPEDIENCY FOR THE SAID LOANS. 3.3 IN ASSUMING THAT INTEREST FREE ADVANCE GIVEN TO SUBSIDIARY WAS GIVEN ONLY FROM THE BORROWED FUNDS OF THE COMPANY A S A WHOLE AND IN DISALLOWING PROPORTIONATE INTEREST EXPENSE; 4. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PER USED. FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUS INESS OF MANUFACTURE OF CUT AND POLISHED DIAMONDS AND JEWELLERY AND IN SALE THEREOF INCLUDING EXPORTS. DURING THE SCRUTINY ASSESSMENT, THE A.O. R EFERRED THE MATTER TO THE ITA 8189/M/2010 & 7948/M/11 3 TPO WHEREIN TRANSFER PRICING ADJUSTMENT WAS SOUGHT ON ACCOUNT OF INTEREST FREE LOANS GIVEN TO THE FOLLOWING WHOLLY OWNED FORE IGN SUBSIDIARIES:- 1. SHRENUJ MAURITIUS PVT. LTD. RS. 18,90,000/- 2. ASTRAL USA INC. RS. 2,36,34,025/- 3. SHRENUJ DMCC RS. 4,94,97,675/- THE A.O. FOUND THAT THE ASSESSEE HAS ALSO GIVEN INT EREST BEARING LOAN OF RS. 5,31,95,406/- @ 6% TO DAILY JEWELLERY LTD., A FOREI GN SUBSIDIARY, IN WHICH THE ASSESSEE COMPANY HELD 51% OF THE SHAREHOLDING. SINC E NO INTEREST WAS CHARGED, THE T.P.O./A.O. APPLIED 6% INTEREST ON THE BASIS OF ADVANCE GIVEN TO M/S DAILY JEWELLERY LTD., A FOREIGN SUBSIDIARY, AND WORKED OUT INTEREST IN RESPECT OF ADVANCE GIVEN TO WHOLLY OWNED FOREIGN SU BSIDIARIES AMOUNTING TO RS. 45,01,303/-. SIMILAR ADDITION WAS MADE BY A.O./ TPO IN THE A.Y. 2007-08. BY THE IMPUGNED ORDER, THE DRP CONFIRMED THE ACTION OF THE TPO/A.O AND AGGRIEVED BY THIS, THE ASSESSEE IS IN FURTHER APPEA L BEFORE US. 5. IT WAS CONTENDED BY THE LD. A.R. THAT THE ASSESS EE HAS CHARGED INTEREST IN RESPECT OF ALL LOANS GIVEN TO ASSOCIATED ENTERPR ISES THAT ARE NOT 100% OWNED BY IT. IN RESPECT OF SUBSIDIARIES, WHEREIN TH E ASSESSEE OWNS 100% OF THE SHARE CAPITAL (WHOLLY OWNED SUBSIDIARIES - 'WOS '), NO INTEREST IS CHARGED FOR THE SAME. AS PER THE LD. A.R. THE ASSESSEE HAS PROVIDED EXTERNAL COMPARABLES OF REPUTED COMPANIES SUCH AS INFOSYS TE CHNOLOGIES LIMITED, WOCKHARDT LIMITED WHEREIN INTEREST FREE LOANS HAVE BEEN PROVIDED TO THEIR 100% SUBSIDIARIES. FURTHER, WITHIN THE INDUSTRY ITS ELF, SUASHISH DIAMONDS LIMITED HAS GIVEN LOANS TO ITS SUBSIDIARIES THAT AR E INTEREST-FREE. AS PER THE LD. A.R. IN SITUATIONS WHERE FINANCING IS PROVIDED BY T HE 100% HOLDING COMPANY, THE QUESTION OF REASONABLE INTEREST DOES NOT ARISE BECAUSE THE ENTIRE PROFITS ANYWAYS BELONGS TO THE HOLDING COMPANY ONLY. IN VIE W OF THE ABOVE IT WAS CONTENDED BY THE LD. A.R. THAT INTEREST-FREE LOANS GIVEN TO ITS 100% SUBSIDIARIES OF THE ASSESSEE COMPANY ARE AT ARMS LE NGTH PRICE. ITA 8189/M/2010 & 7948/M/11 4 6. IT WAS FURTHER ARGUED BY THE LD. A.R. THAT THIS IS A CASE WHERE NO INTEREST HAS BEEN CHARGED ON THE LOANS GIVEN, TRANS FER PRICING PROVISIONS APPLICABLE ONLY WHEN SOMETHING HAS BEEN CHARGED TO DETERMINE WHETHER THE INCOME IS UNDER REPORTED. SINCE THERE IS NO CHARGE AT ALL IN THIS CASE, THE TRANSACTION IS ON CAPITAL ACCOUNT AND CANNOT BE SUB JECT MATTER OF TRANSFER PRICING AND FOR THIS PURPOSE RELIED ON BOMBAY HC - VODAFONE 386 ITR 1. AS PER THE LD. A.R. THE NEED TO CHARGE INTEREST WOULD ARISE ONLY IN A SITUATION WHERE THERE IS A COST TO THE ASSESSEE - FOR E.G. IF A GUARANTEE IS GIVEN ON THE BACK OF A GUARANTEE TAKEN BY THE ASSESSEE, THE LATT ER HAS A COST AND THAT HAS TO BE IN TURN AT LEAST RECOVERED. IN THE PRESENT CA SE, THERE IS NO SPECIFIC FINDING THAT LOANS ARE TAKEN FOR ONWARD LENDING. 7. THE LD. A.R. ALSO INVITED OUR ATTENTION TO THE F ACT THAT AS AGAINST AGGREGATE LOANS TO THE 3 PARTIES OF RS. 7.50 CRORES , INTEREST FREE FUNDS IN THE FORM OF RESERVE AND SURPLUS AT BEGINNING OF THE YEA R WAS RS. 103.16 CRORES WARRANTING NO ADDITION/DISALLOWANCE ON ACCOUNT OF I NTEREST. FOR THIS PURPOSE, RELIANCE WAS PLACED ON THE DECISION OF HON BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES LTD. 313 ITR 340. SINCE THERE IS NO COST TO THE ASSESSEE OF THE FUNDS LENT AND HENCE THE NEED TO CH ARGE AN ALP FOR THESE LOANS DOES NOT ARISE. IT WAS ALSO ARGUED BY THE LD. A.R. THAT THE LOANS GIVEN TO WHOLLY OWNED SUBSIDIARY CANNOT BE ANYTHING BUT QUAS I EQUITY FOR THE REASON THAT THEY ARE WHOLLY OWNED AND THEIR ENTIRE FUND RE QUIREMENT IN ANY CASE HAS TO BE PROVIDED FOR BY THE HOLDING COMPANY. IT IS NO T THAT FUNDS NEEDS TO BE PROVIDED ONLY WHEN THERE ARE LOSSES. WHATEVER FUND IS NEEDED FOR THEIR STARTUP, FOR THEIR GROWTH FUND REQUIREMENTS HAS TO GO FROM THE HOLDING COMPANY AND HENCE THIS IS ALWAYS QUASI EQUITY. IF A PAYMENT, DESIGNATED AS A LOAN, IS TO A WOS, ITS NATURE IS THAT OF QUASI EQUI TY AND HENCE THE SUBSTANCE MUST BE SEEN AND NOT THE FORM OR NOMENCLATURE. FOR THIS PURPOSE RELIANCE WAS PLACED ON DELHI ITAT JUDGMENT IN BHARATI AIRTEL IN ITA NO. 5816/DEL/2012 AND ON AHM ITAT JUDGMENT IN MICRO INK S LTD. (157 TTJ 289.) ITA 8189/M/2010 & 7948/M/11 5 8. IT WAS FURTHER SUBMITTED THAT IF IN ADDITION TO THE GIVING OF A LOAN THERE ARE COMMERCIAL TRANSACTIONS BETWEEN THE HOLDING COM PANY AND THE WOS THEN THE LOAN IS NOT A LOAN SIMPLICITER AND THE NEED TO CHARGE INTEREST IS NOT THERE. IN CASE OF SHRENUJ DMCC, THERE ARE SALES OF DIAMOND S TO THEM DURING THE YEAR OF A MAGNITUDE OF 4681 CARATS TOTALING TO RS. 9.60 CRORES AND HENCE THE ALP FOR THIS LOAN WOULD BE NIL FOR THIS PURPOSE. FO R THIS PURPOSE RELIANCE WAS PLACED ON AHM ITAT JUDGMENT IN MICRO INKS LTD. 157 TTJ 289. AS PER THE LD. A.R. USING INTEREST CHARGED TO DAILY JEWELLERY AS A N INTERNAL CUP IS INCORRECT SINCE THIS IS NOT AN UNCONTROLLED PRICE. HENCE 6% C ANNOT BE USED AS AN ALP. 9. WITHOUT PREJUDICE TO ABOVE CONTENTIONS, IT WAS V EHEMENTLY ARGUED BY THE LD. A.R. THAT SINCE LOANS ARE GIVEN TO OVERSEAS SUBSIDIARIES, THE APPROPRIATE BENCHMARK IS LIBOR AND NOT ANY DOMESTIC RATE OF INTEREST (ALSO BECAUSE THE INTEREST FREE FUNDS ARE ANYWAY HIGHER T HAN LOAN GIVEN). RELIANCE PLACED ON VARRO ENGINEERING P LTD. IN ITA NO. 2482/ PN/2012 PUNE, ITAT. IT WAS ALSO EMPHASIZED BY THE LD. A.R. THAT NO BPS TO BE ADDED TO LIBOR - BPS IS AN ADJUSTMENT FOR RISK. JUST AS LIBOR IS AN INTERBA NK RATE, HERE IS A LOAN BETWEEN PARENT AND A WOS - AND ITS ALMOST LIKE THE SAME ENTITY BECAUSE COMPLETE RISK OF WOS IS BORNE BY THE HOLDING CO - H ENCE THERE CAN BE NO FURTHER RISK ADJUSTMENT OR RISK PREMIUM. HE SUBMITT ED THAT EVEN IF BPS IS TO BE ADDED, IT SHOULD BE MINIMAL BECAUSE THE LOANS AR E TO AN ENTITY IN USA, UAE AND MAURITIUS AND NOT TO LESSER KNOWN COUNTRIES WHICH MAY HAVE HUGE POLITICAL OR ECONOMIC RISK. 10. THE LD. A.R. RELIED ON THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. TATA AUTOCOMP SYSTEMS LTD., (IT APPEAL NO. 1320 OF 2012 DATED 3-2-2015) WHEREIN IT WAS HELD THAT QUANT UM OF ADDITION ON ACCOUNT OF INTEREST IS TO BE MADE IN CASE OF INTERE ST FREE LOANS GIVEN TO WHOLLY OWNED SUBSIDIARY AS PER THE RATE OF INTEREST TO BE DETERMINED ON EURIBOR RATE OF INTEREST I.E. RATES PREVAILING IN EUROPE. ITA 8189/M/2010 & 7948/M/11 6 11. ON THE OTHER HAND, IT WAS ARGUED BY THE LD. D.R . THAT GIVING LOANS TO THE ASSOCIATED ENTERPRISES COMES UNDER THE DEFINITION O F INTERNATIONAL TRANSACTIONS, THEREFORE, NON-CHARGING OF INTEREST R EQUIRES ADJUSTMENT FOR ARRIVING AT ALP IN RESPECT OF SUCH ADVANCES. THE LD . D.R. RELIED ON THE DECISION OF TATA AUTOCOMP SYSTEMS LTD. VS. ACIT, [2 012] 21 TAXMANN.COM 6 (MUMBAI) WHEREIN IT WAS HELD THAT TRANSACTION OF GR ANTING INTEREST-FREE LOAN BY ASSESSEE TO ITS AE COMES WITHIN AMBIT OF INTERNA TIONAL TRANSACTION AND, THUS, SUCH A TRANSACTION CAN BE SUBJECT-MATTER OF T EST OF ARMS LENGTH PRICE U/S 92. AS PER THE LD. D.R., WHILE DETERMINING ARM S LENGTH PRICE IN INTERNATIONAL TRANSACTION OF ADVANCING INTEREST FRE E LOANS TO A.E., FACT OF ADVANCING OUT OF INTEREST FREE FUNDS DOES NOT MATTE R. THE LD. D.R. FURTHER CONTENDED THAT THE LD. A.O. HAS CORRECTLY APPLIED T HE RATE OF INTEREST OF OTHER AE WHILE COMPUTING THE ALP IN RESPECT OF LOAN GIVEN TO THE SUBSIDIARIES. 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND FO UND THAT THE ASSESSEE HAS GIVEN ADVANCE TO 100% WHOLLY OWNED FOREIGN SUBS IDIARIES ON WHICH NO INTEREST HAS BEEN CHARGED. SINCE THE ADVANCE WAS GI VEN TO ITS AE WITHOUT CHARGING INTEREST, THE TRANSACTION COMES UNDER THE PURVIEW OF INTERNATIONAL TRANSACTION REQUIRING ADJUSTMENT ON ACCOUNT OF ARM S LENGTH PRICE U/S 92. IT DOES NOT MATTER EVEN IF ADVANCE IS GIVEN OUT OF INT EREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. THE ISSUE WITH REGARD TO DETERMI NING ARMS LENGTH ADJUSTMENT IN RESPECT OF LOAN GIVEN TO ITS WHOLLY O WNED SUBSIDIARIES IS COVERED BY THE DECISION OF HONBLE JURISDICTIONAL HIGH COUR T IN THE CASE OF CIT VS. TATA AUTOCOMP SYSTEMS LTD., (IT APPEAL NO. 1320 OF 2012 DATED 3-2-2015) WHEREIN IT WAS HELD THAT THE RATE OF INTEREST WAS TO BE DET ERMINED BY APPLYING THE EURIBOR RATE OF INTEREST I.E. RATES PREVAILING IN E UROPE. SIMILARLY THE DECISION OF TRIBUNAL IN THE CASE OF VVF LTD. VS. DCIT (ITA N O. 673/MUM/06 AND IN THE CASE OF DCIT VS. TECH MAHINDRA LTD. (46 SOT 141) AL SO SUPPORTS THIS ISSUE. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE JURI SDICTIONAL HIGH COURT IN THE CASE OF CIT VS. TATA AUTOCOMP SYSTEMS LTD., (IT APP EAL NO. 1320 OF 2012 ITA 8189/M/2010 & 7948/M/11 7 DATED 3-2-2015) VIS--VIS THE DECISION OF TRIBUNAL AS CITED ABOVE, WE DIRECT THE A.O. TO MAKE ARMS LENGTH ADJUSTMENT BY APPLYING TH E LIBOR RATE OF INTEREST. FROM THE RECORD WE FOUND THAT PART OF LOAN WAS SUBS EQUENTLY CONVERTED INTO EQUITY.TO THE EXTENT OF LOAN CONVERTED INTO EQUITY, NO TRANSFER PRICING ADJUSTMENT IS REQUIRED WITH EFFECT TO THE DATE OF S UCH CONVERSION, IN VIEW OF DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN TH E CASE OF VODAFONE, 386 ITR 1. WE DIRECT ACCORDINGLY. 13. THE NEXT GRIEVANCE OF THE ASSESSEE IN THE A.Y. 2006-07 AND 2007-08 RELATES TO DISALLOWANCE OF INTEREST ON AMOUNTS SPEN T ON ACQUIRING PREMISES AT BHARAT DIAMOND BOURSE - BDB. WE FIND THAT THE ASSES SEE HAD BEEN ALLOTTED AN OFFICE SPACE AT BHARAT DIAMOND BOURSE WHICH WAS UNDER CONSTRUCTION AND VARIOUS INSTALLMENTS WERE BEING PAID FOR THE SAME. THE SAME WAS IN THE NATURE OF ADVANCE TOWARDS ACQUISITION OF AN OFFICE SPACE IN A BOURSE WHICH WILL HOUSE VARIOUS DIAMOND MANUFACTURING AND TRADIN G COMPANIES IN MUMBAI. FOR THIS PURPOSE, THE ASSESSEE HAD MADE ADV ANCES TO M/S BHARAT DIAMOND BOURSE AMOUNTING RS.5,77,27,OOO/- OUT OF IT S OWNED FUNDS I.E. ASSESSEE HAS NOT BORROWED MONEY SPECIFICALLY FOR TH E SAID PROJECT AND AGGREGATE AMOUNT OF ADVANCES WAS SHOWN UNDER CAPITA L WORK-IN-PROGRESS. WHILE DISALLOWING THE INTEREST, THE A.O. WRONGLY OB SERVED THAT THE ASSESSEE HAS CAPITALIZED INTEREST IN ITS BOOKS AND WAS CLAIM ING THIS CAPITALIZED INTEREST AS A REVENUE FOR TAX PURPOSES. WE FIND THAT THERE IS NO CAPITALISATION OF INTEREST AS MENTIONED BY THE A O AND THE ASSESSEE H AS NOT IDENTIFIED ANY INTEREST AS SPECIFICALLY PERTAINING TO THE ACQUISIT ION OF THE SAID ASSET FOR ACCOUNTING PURPOSES AND WHICH IS BEING CLAIMED AS A DEDUCTIBLE FOR TAX PURPOSES. WE FIND THAT THE SAID BOURSE IS NOT BEING CONSTRUCTED SPECIFICALLY FOR THE ASSESSEE AND THE ASSESSEE IS ONLY REQUIRED TO PAY INSTALLMENTS TOWARDS COST AS AND WHEN CALLED FOR. THE PROCESS OF SETTING UP THE BOURSE HAS BEEN GOING ON FOR A LONG PERIOD OF TIME. THE ASSESSEE HA S NOT BORROWED ANY MONEY SPECIFICALLY FOR THE PAYMENT OF THESE INSTALLMENTS AND HENCE SINCE THERE IS NO ITA 8189/M/2010 & 7948/M/11 8 CAPITAL BORROWED FOR THE SAID ACQUISITION THE QUEST ION OF APPLYING THE PROVISO TO SECTION 36(1)(III) DOES NOT ARISE. 14. FROM THE RECORD WE ALSO FOUND THAT THE ASSESSEE HAD HUGE AMOUNT OF INTEREST FREE FUNDS AT ITS DISPOSAL AS WELL AND THA T IT IS NORMALLY RATIONAL THAT OWNED FUNDS IN THE FORM OF ACCUMULATED UNDISTRIBUTE D PROFITS ARE UTILIZED FOR ACQUISITION OF CAPITAL ASSETS - PARTICULARLY AN ASS ET WHICH HAS BEEN UNDER CONSTRUCTION FOR MORE THAN A DECADE. THE TOTAL NON- INTEREST BEARING FUNDS AVAILABLE WITH THE ASSESSEE AS OF 31ST MARCH 2006 A RE RS. 141.56 CRORES AND AFTER EXCLUDING THE CURRENT YEAR'S PROFIT, THE SAME ARE RS. 123.19 CRORES. THE EXPENDITURE ON CAPITAL ASSETS TILL THE YEAR END IS ONLY RS. 5.77 CRORES. HENCE IT WOULD BE RATIONAL TO STATE THAT THE SAME HAS BEEN F UNDED FROM OWNED FUNDS. ACCORDINGLY WE DO NOT FIND ANY JUSTIFICATION FOR TH E DISALLOWANCE OF INTEREST EXPENSE AS MADE BY LOWER AUTHORITIES. ABOVE ISSUE I S ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ASS ESSEES OWN CASE IN ITA NO. 1782/M/06, ITA NO. 1672/M/07, ITA NO. 6195/M/07 AND ITA NO. 669/M/08 FOR ASSESSMENT YEARS 2002-03 TO 2005-06 DATED 24-09 -2014. THE RELEVANT OBSERVATION OF THE TRIBUNAL IS AS UNDER:- ON GOING THROUGH THE ARGUMENTS, WE FIND THAT AR POI NTED OUT THAT THE CLAIM WAS GENUINE FROM THE POINT OF VIEW THAT THE A SSESSEE HAD ITSELF CAPITALIZED THE AMOUNT OF INTEREST OF RS. 11,54,000 /-. IN THAT VIEW OF THE MATTER WE HOLD THAT THE ORDER OF CIT(A) DOES NO T REFLECT ANY INFIRMITY. WE, THEREFORE, SUSTAIN THE ORDER OF THE CIT(A) CONSEQUENTIALLY REJECTING THE GROUND TAKEN BY THE DEPARTMENT. (THIS OBSERVATION SHALL BE USED FOR DECIDING GROUND NO. 7 RAISED BY THE ASS ESSEE, WHEREIN, IT SHALL RESULT INTO ALLOWANCE OF THE GROUND). 15. AS THE FACTS AND CIRCUMSTANCES OF THE ISSUE DUR ING THE YEAR UNDER CONSIDERATION ARE SAME, WE RESPECTFULLY FOLLOWING T HE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE DIRECT THE A.O. TO DELETE THE D ISALLOWANCE MADE BY HIM IN BOTH THE YEARS UNDER CONSIDERATION. THESE GROUNDS ARE ACCORDINGLY ALLOWED IN BOTH THE YEARS. ITA 8189/M/2010 & 7948/M/11 9 16. IN BOTH THE YEARS UNDER CONSIDERATION THE ASSES SEE ALSO AGGRIEVED FOR THE DISALLOWANCE OF INTEREST ON ACCOUNT OF INTEREST FREE ADVANCE GIVEN TO ITS SUBSIDIARIES. 17. RIVAL CONTENTIONS HAVE BEEN CONSIDERED AND RECO RD PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE HAS GIVEN AN INTEREST F REE ADVANCE TO ITS WHOLLY OWNED SUBSIDIARY NAMED ADITI DIAIMPEX TRADING AND M ANUFACTURING CO. LTD. THE ASSESSEE HAD ADEQUATE INTEREST FREE FUNDS AT IT S DISPOSAL REPRESENTED BY ACCUMULATED PROFITS OVER THE YEARS AND NO AMOUNT WA S BORROWED SPECIFICALLY FOR THE PURPOSE OF GIVING THE SAID LOANS. FROM THE RECORD WE FOUND THAT ADITI DIAIMPEX IS 100% OWNED SUBSIDIARY OF THE ASSESSEE A ND IS ENGAGED IN THE SAME BUSINESS AS THE ASSESSEE VIZ. MANUFACTURING OF JEWELLERY FOR EXPORTS. ASSESSEE ALSO HAS TRADE TRANSACTIONS WITH IT - IT P URCHASES JEWELLERY FROM THEM TO FILL ORDERS ON HAND IF SUCH JEWELLERY IS NO T AVAILABLE AS A PART OF ITS STOCK. UNUSED MATERIALS ARE ALSO SOLD/PURCHASED FRO M THE SUBSIDIARY. HENCE KEEPING IN MIND THE NATURE OF OWNERSHIP, THE NATURE OF THE SUBSIDIARY BUSINESS AND THE EXISTENCE OF TRANSACTIONS BETWEEN THE ASSESSEE AND THE SUBSIDIARY, THE LOAN WAS GIVEN ONLY OUT OF COMMERCI AL EXPEDIENCY AND NOT OTHERWISE. 18. WE HAVE VERIFIED THE BALANCE SHEET OF THE ASSES SEE WHICH SHOWS THE MAGNITUDE OF INTEREST FREE FUNDS AVAILABLE TO THE A SSESSEE. SINCE THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS AT ITS DISPOSAL, IT IS TO BE ASSUMED THAT SINCE THE ASSESSEE IS A RATIONAL BUSINESSMAN, THESE LOANS HAVE BEEN GIVEN FROM THE INTEREST FREE FUNDS AVAILABLE, [2003] 260 ITR 637. THE TOTAL NONINTEREST BEARING FUNDS AVAILABLE WITH THE ASSESSEE AS OF 31S T MARCH 2006 ARE RS. 141.56 CRORES AND AFTER EXCLUDING THE CURRENT YEAR' S PROFIT, THE SAME ARE RS. 123.19 CRORES. THE AGGREGATE LOANS GIVEN TO THE SUB SIDIARY IS MERELY RS. 6.42 CRORES. IN VIEW OF DECISION OF HONBLE JURISDICTIO NAL HIGH COURT IN THE CASE OF ITA 8189/M/2010 & 7948/M/11 10 RELIANCE UTILITIES, 313 ITR 340, THERE IS NO JUSTIF ICATION FOR THE DISALLOWANCE OF INTEREST SO MADE BY LOWER AUTHORITIES. 19. WE FIND THAT THIS ISSUE IS ALSO COVERED BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2005-06 WHEREIN AT PAG E 16 THE TRIBUNAL CONFIRMED THE DELETION BY PLACING RELIANCE ON THE D ECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. RE LIANCE UTILITIES AND POWER LTD. REPORTED IN 313 ITR 340 (BOM). SINCE DURING TH E YEAR UNDER CONSIDERATION ALSO THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS, WE DO NOT FIND AND MERIT IN THE DISALLOWANCE MADE BY THE A.O. IN RESPECT OF ADVANCES GIVEN TO IT S SUBSIDIARIES. THIS GROUND IS ALSO ACCORDINGLY ALLOWED. 20. IN BOTH THE YEARS UNDER CONSIDERATION THE ASSE SSEE IS AGGRIEVED FOR THE DISALLOWANCE ARISING OUT OF PURCHASES FROM SUBSIDIA RY COMPANY. 21. FACTS IN BRIEF ARE THAT THE ASSESSEE IN ORDER T O MEET SOME OF ITS PENDING ORDERS, HAD PURCHASED SOME READY JEWELLERY FROM ITS SUBSIDIARY ADITI DIAIMPEX TRADING & MANUFACTURING CO. LTD. AND THE S AME WAS EXPORTED AT THE SAME PRICE AT WHICH IT WAS PURCHASED. THE GOODS WERE SOLD ALMOST IMMEDIATELY ON PURCHASE. HOWEVER, THE A.O. APPORTI ONED THE OVERHEADS AND MADE DISALLOWANCE OUT OF PURCHASES. WE FIND THAT AS SESSEE HAS DISCHARGED ITS ONUS U/S 40A(2)(B) BY SHOWING THE CIRCUMSTANCES IN WHICH THE PURCHASES HAVE BEEN MADE AND IN EXPLAINING WHY THE ENTIRE SAL E PROCEEDS HAD TO BE IN TURN PASSED OVER TO THE SUBSIDIARY COMPANY. IT IS T HE ASSESSEE WHO HAD ORDERS TO FILL AND NEEDED THE GOODS AND THE SUBSIDI ARY MERELY PROVIDED THESE GOODS TO THE ASSESSEE INSTEAD OF EXPORTING THEM DIR ECTLY. HOWEVER, NOTHING WAS BROUGHT ON RECORD BY THE A.O. TO SHOW THAT THE PRICE PAID BY THE ASSESSEE WAS EXCESSIVE AS COMPARED TO THE PREVAILING MARKET PRICE OF SIMILAR GOODS AVAILABLE IN THE MARKET, FOR MAKING ANY DISALLOWANC E U/S 40A(2) OF THE ACT. THE ONUS IS ON THE REVENUE TO PROVE THAT ASSESSEE H AS PAID TO ITS SISTER ITA 8189/M/2010 & 7948/M/11 11 CONCERN MORE THAN THE PRICE PREVAILING IN THE OPEN MARKET FOR SIMILAR GOODS. ACCORDINGLY WE DO NOT FIND ANY MERIT IN THE ACTION OF LOWER AUTHORITIES, THEREFORE, WE DELETE THE DISALLOWANCE SO MADE BY TH E A.O. FURTHERMORE, SIMILAR ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASS ESSEE BY THE TRIBUNAL IN ASSESSEES OWN CASE IN THE ASSESSMENT YEARS 2002-03 TO 2005-07 VIDE ORDER DATED 24-09-2014. AS THE FACTS AND CIRCUMSTANCES OF THE CASE DURING THE YEAR UNDER CONSIDERATION ARE SAME, RESPECTFULLY FOLLOWIN G THE DECISION OF TRIBUNAL IN ASSESSEES OWN CASE, WE ALLOW THIS GROUND RAISED BY THE ASSESSEE. 22. THE ASSESSEE ALSO AGGRIEVED FOR THE DISALLOWANC E ARISING OUT OF SALES TO SUBSIDIARY COMPANY IN BOTH THE YEARS UNDER CONSIDER ATION. 23. FACTS IN BRIEF ARE THAT THE ASSESSEE HAS SOLD C ERTAIN MATERIALS AGGREGATING TO RS. 353.17 LAKHS TO ADITI DIAIMPEX T RADING AND MANUFACTURING LIMITED, A WHOLLY OWNED SUBSIDIARY. THESE REPRESENT UNUSED RAW MATERIALS AND THE ASSESSEE HAS MADE NO PROFIT ON SALE OF THES E DIAMONDS TO ITS SUBSIDIARY. APPLYING THE PROVISIONS OF SECTION 40A( 2), THE A.O. MADE ADDITION IN RESPECT OF SALES MADE TO ITS SUBSIDIARY COMPANIE S EQUIVALENT TO 2% OF THE SALES PRICE. FROM THE RECORD WE FOUND THAT THE SAI D MATERIALS WERE SOLD AT COST AND NO PROFIT WAS MADE ON THE SAME. IT WAS ALS O SUBMITTED THAT EVEN IF THE ASSESSEE FOLLOWS A FIFO SYSTEM OF VALUATION, CO ST OF THESE DIAMONDS WOULD ALSO BE WORKED ON A FIFO BASIS. THERE WAS NO EVIDENCE TO SHOW THAT THE SALE HAS ACTUALLY BEEN DONE AT A HIGHER AMOUNT. THE ASSESSEE IS FOLLOWING FIFO METHOD OF VALUING ITS STOCK. THEREFORE, IDENTI FYING PARTICULAR ITEM OF ROUGH DIAMOND IS NOT POSSIBLE. MOREOVER IT IS SEEN THAT THESE TYPES OF TRANSACTIONS HAVE BEEN ENTERED INTO EARLIER YEARS A LSO. THE AO HAS HELD THAT SINCE THERE IS NO EVIDENCE TO PROVE THAT THE SALES ARE MADE AT PREVALENT MARKET PRICES, 2% OF THE SALES ARE DISALLOWED. 24. WE FIND THAT THIS ISSUE IS ALSO COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2002-03 TO 2005-06 VIDE ORDER ITA 8189/M/2010 & 7948/M/11 12 DATED 24-9-2014. AS THE FACTS AND CIRCUMSTANCES OF THE CASE DURING THE YEAR UNDER CONSIDERATION ARE SAME, RESPECTFULLY FOLLOWIN G THE ORDER OF TRIBUNAL WE DO NOT FIND ANY MERIT IN THE ACTION OF THE LOWER AU THORITIES FOR THE DISALLOWANCE MADE ARISING OUT OF THE SALES TO SUBSI DIARY COMPANY. 25. IN THE RESULT, APPEALS OF THE ASSESSEE ARE ALLO WED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH APRIL, 2015. !' # $% &! ' 17-04-2015 ( ) SD/- SD/- (I.P. BANSAL) (R.C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER $ 5 MUMBAI ; &! DATED 17-04-2015 .=../ RK RKRK RK , SR. PS ! '#$% &%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. > () / THE CIT(A) CONCERNED,, MUMBAI 4. > / CIT -CONCERNED MUMBAI 5. AB( ==CD , CD , $ 5 / DR, ITAT, MUMBAI K BENCH 6. (FG H / GUARD FILE. ' / BY ORDER, A = //TRUE COPY// (/') * ( DY./ASSTT. REGISTRAR) , $ 5 / ITAT, MUMBAI