IL & FS MARITIME INFRASTRUCTURE CO. LTD, MUMBAI V. ASST CIT 14(2)(1), MUMBAI

ITA 867/MUM/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 100555 (ITAT-MUMBAI)
• Duration Of Justice: 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-08-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2010-2011
• Appeal Filed On: 06-02-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N K CHAND CIT
• Assessee Lawyers: D V LAKHANI
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Notional interest

Judgement Text

K IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI A.D. JAIN, JM AND SHRI RAJENDRA, AM .. , , ./ I.T.A. NO. 867 /MUM/2015 ( / ASSESSMENT YEAR : 2010-11 IL&FS M ARITIME INFRASTRUCTURE CO. LTD., THE IL&FS FINANCIAL CENTER, PLOT C-22, BLOCK G, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI 400 051. / VS. ASSTT. COMMISSIONER OF INCOME TAX 14(2)(1), (EARLIER DY. COMMR. OF INCOME TAX 10(1), ROOM NO. 432, 4 TH FLOOR, AAYKAR BHAVAN, MAHARSHI KARVE ROAD, MARINE LINES, MUMBAI - 400020. ./ PAN : AABC17029R ( / APPELLANT ) .. ( ! / RESPONDENT ) A PPELLANT BY SHRI D.V. LAKHANI R E SPONDENT BY : SHRI N.K. CHAND - CIT ' # $ % & ' / DATE OF HEARING : 30-07-2015 ()*+ % & ' / DATE OF PRONOUNCEMENT : 07-08-2015 [ 3 / O R D E R PER A.D. JAIN, J.M . : .. , IN THIS ASSESSEES APPEAL FOR A.Y. 2010-11, THE FOL LOWING GROUNDS HAVE BEEN TAKEN:- 1. ON THE FACTS AND CIRCUMSTANCE OF THE CASE THE A PPELLANT PRAYS THAT NO ADDITION SHOULD BE MADE IN THE HANDS OF THE APPELLANT IN RESPECT OF THE TRANSACTION OF FOREIGN CURRENCY LOAN GIVEN TO THE ASSOCIATE ENTERPRISE. THE ADDITION MADE AMOUNTING T O RS. 27.635,849/- MAY BE DELETED. ITA 867/M/15 2 2. ON THE FACTS AND CIRCUMSTANCES OF CASE THE LEARN ED DISPUTE RESOLUTION PANEL HAS ERRED IN CONFIRMING THE ADDITI ON MADE BY THE LEARNED TRANSFER PRICING OFFICER AMOUNTING TO RS. 2 7,635,849/- IN RESPECT OF INTERNATIONAL TRANSACTION BEING THE FORE IGN CURRENCY LOAN GIVEN TO ASSOCIATE ENTERPRISE. THE APPELLANT PRAYS THAT CONCLUSION REACHED BY THE LEARNED DISPUTE RESOLUTION PANEL IS NOT JUSTIFIED AND IS CONTRARY TO THE PROVISIONS OF THE LAW AND VARIOUS J UDICIAL PRONOUNCEMENTS. THE APPELLANT PRAYS THAT THE ADDITI ON MADE BY THE LEARNED TRANSFER PRICING OFFICER AND CONFIRM BY THE LEARNED DISPUTE RESOLUTION PANEL MAY BE DELETED. WITHOUT PREJUDICE TO GROUNDS NO.1 & 2 3. ON THE FACTS AND CIRCUMSTANCES OF CASE THE LEARN ED DISPUTE RESOLUTION PANEL HAS ERRED IN CONFIRMING THE ADDITI ON MADE BY THE LEARNED TRANSFER PRICING OFFICER TAKING THE -RATE O F INTEREST AT 12.7% IN RESPECT OF THE FOREIGN CURRENCY LOAN GIVEN TO ASSOC IATE ENTERPRISE. THE APPELLANT PRAYS THAT THE LEARNED DISPUTE RESOLUTION PANEL HAS ERRED IN TAKING THE APPLICABLE INTEREST RATE AT 12.7%. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE A PPELLANT PRAYS THAT, S THE FOREIGN CURRENCY LOAN WAS GIVEN IN US D OLLARS, THE EXTERNAL COMMERCIAL BORROWING RATES AS APPLICABLE IN THE INT ERNATIONAL MARKET SHOULD BE APPLIED IN RESPECT OF FOREIGN CURRENCY LO AN GIVEN TO THE ASSOCIATE ENTERPRISE INSTEAD OF THE RATE OF INTERES T AT 12.7% AS DETERMINED BY THE LEARNED TRANSFER PRICING OFFICER AND CONFIRMED BY THE DISPUTE RESOLUTION PANEL. 2. GROUND NO. 1 IS GENERAL IN NATURE. 3. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE DID NOT PRESS GROUND NO. 2, HENCE, IT IS DISMISSED AS NOT PRESSED . 4. APROPOS GROUND NOS. 3 & 4, THE GRIEVANCE OF THE ASSESSEE IS THAT THE LD. DISPUTE RESOLUTION PANEL HAS ERRED IN CONFIRMING TH E ADDITION MADE BY THE TRANSFER PRICING OFFICER, TAKING THE RATE OF INTERE ST AT 12.7% IN RESPECT OF THE FOREIGN CURRENCY LOAN GIVEN TO ASSOCIATE ENTERPRISE . 5. THE ISSUE IN APPEAL IS REGARDING THE DETERMINATI ON AT ARMS LENGTH PRICE IN RESPECT OF INTEREST CHARGED TO ASSOCIATE ENTERPR ISE BEING A 100% SUBSIDIARY OF THE ASSESSEE. THE ASSESSEE HAS GIVEN A LOAN IN U .S. DOLLARS AND THE INTEREST IS ALSO CHARGED IN U.S. DOLLARS. IN A STUDY REPORT, THE ASSESSEE HAS ITA 867/M/15 3 ESTABLISHED TAKING INTO CONSIDERATION THE PREVAILIN G INTERNATIONAL RATE OF INTEREST IN THE CURRENCY IN WHICH THE LOAN IS GIVEN THAN THE AVERAGE EFFECTIVE RATE IS 5.62%. THE ASSESSEE HAS CHARGED 7% INTEREST AND HENCE IT WAS CONTENDED THAT THE INTEREST CHARGED IS AT ARMS LEN GTH PRICE. THE ASSESSING OFFICER HELD THAT WHILE CONSIDERING THE ARMS LENGTH PRICE IN RESPECT OF A LOAN GIVEN IN A FOREIGN CURRENCY IT IS NOT NECESSARY TO ONLY RELY UPON THE RATE OF INTEREST AS PREVAILING IN THE CURRENCY IN WHICH THE LOAN IS GIVEN AND THE RATE OF INTEREST PREVAILING IN INDIA OR ANY OTHER RATE O F INTEREST DETERMINED IN INDIAN RUPEES CAN BE ADOPTED. THE DRP ALSO FOLLOWED THE SAID PRINCIPLE AND REJECTED THE CLAIM OF THE ASSESSEE. 6. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS RELIED ON THE FOLLOWING CASE LAWS:- 1. TATA AUTOCOMP SYSTEMS LTD. VS. ACIT (MUMBAI TRIBUNA L) ITA NO. 7354/MUM/2011. 2. TECH MAHINDRA LIMITED VS. DCIT (MUMBAI TRIBUNAL( IT A NO. 1176/MUM/2010. 3. M/S LOGIX MICRO SYSTEMS LTD. VS. ACIT (BANGALORE) I TA NO. 423/BAN/2009. 4. AJHENT TECHNOLOGIES PVT. LTD. VS. ITO (DELHI TRIBUN AL) ITA NO. 3647/DEL/2007. 5. M/S SIVA INDUSTRIES & HOLDINGS LTD. VS. ACIT (CHENN AI TRIBUNAL) ITA NO. 2148/MDS/2010. 6. AURIONPRO SOLUTIONS LTD. VS. ADDL. CIT (MUMBAI TRIB UNAL) ITA NO. 7872/MUM/2011. 7. COTTON NATURALS (I) P. LTD. VS. DCIT (DELHI TRIBUNA L) ITA NO. 5855/DEL/2012. 8. HINDUJA GLOBAL SOLUTIONS LTD. VS. ADDL. CIT (MUMBAI TRIBUNAL) ITA NO. 254/MUM/2013. 7. IT HAS BEEN CONTENDED THAT, BEFORE THE DRP, THE ASSESSEE HAD FILED COPIES OF THE ABOVE EIGHT DECISIONS OF THE TRIBUNAL , WHEREIN IT HAS BEEN HELD THAT THE RATE OF INTEREST IN RESPECT OF THE CURRENC Y IN WHICH THE TRANSACTION HAS TAKEN PLACE SHOULD BE FOLLOWED INSTEAD OF FOLLO WING THE INTEREST RATE OF A CURRENCY OTHER THAN THE CURRENCY IN WHICH THE TRANS ACTION HAS TAKEN PLACE. ITA 867/M/15 4 ALL THE EIGHT DECISIONS HAVE LAID DOWN A PRINCIPLE OF LAW WHICH IS DIRECTLY APPLICABLE ON THE FACTS OF THE CASE. WHENEVER THE T RIBUNAL HAS LAID DOWN A PRINCIPLE OF LAW ON A SUBJECT MATTER, THEN THE SAME IS BINDING ON ALL THE LOWER AUTHORITIES. THE HON'BLE MADHYA PRADESH HIGH COURT, IN THE CASE OF AGARWAL WAREHOUSING & LEASING CO. LTD., REPORTED IN 257 IT R 235 (M.P.), HAS CLEARLY HELD THAT THE COMMR. OF INCOME TAX (A) CANNOT REFUS E TO FOLLOW THE ORDER OF THE ITAT AS THE ORDERS OF THE ITAT ARE BINDING ON T HE LOWER AUTHORITIES. THE HON'BLE MADHYA PRADESH HIGH COURT ALSO REFERRED TO THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF KAMLAKSHI FIN ANCE CORPORATION LTD. REPORTED IN AIR 1992 SC 711. 9. THE LD. D.R., ON THE OTHER HAND, HAS PLACED STRO NG RELIANCE ON THE IMPUGNED ORDER. 10. HAVING HEARD THE RIVAL CONTENTIONS, WE FIND THA T THE LD. DRP HAS, IN THIS REGARD, OBSERVED AS FOLLOWS:- 4.6 DISCUSSION AND DIRECTIONS: WE HAVE CONSIDERED THE .ABOVE SUBMISSIONS OF THE ASSESSEE, THE ORDER PASSED BY TH E TPO AS WELL AS THE DOCUMENTS PRODUCED BEFORE US. IN THIS REGARD, IT MA Y BE NOTED THAT FOR THE PURPOSE OF BENCHMARKING A TRANSACTION, ONE HAS TO CARRY OUT AN ANALYSIS OF THE TRANSACTION AS IF THE SAID TRANSACT ION IS BETWEEN TWO INDEPENDENT PARTIES. WHEN THE ASSESSEE IS GRANTING LOANS TO ITS AE FROM ITS OWN FUNDS, THE SAME HAS TO BE BENCH MARKED AS I F THE ASSESSEE WAS GRANTING LOAN TO A THIRD PARTY ABROAD. NO TAXPAYER WILL GIVE AWAY ITS OWN FUNDS TO A THIRD PARTY WITHOUT AN APPROPRIATE P RICE (IN TERMS OF APPROPRIATE INTEREST) CHARGED FOR THE SAME. THE ASS ESSEE HAS GIVEN LOANS TO ITS AE WITHOUT ANY SECURITY AND THEREFORE IT HAS UNDERTAKEN VARIOUS RISKS LIKE ENTITY RISK, CURRENCY RISK AND C OUNTRY RISK ETC. HENCE, IN A THIRD-PARTY SITUATION, THE TRANSACTION UNDER C ONSIDERATION HAS TO BE BENCHMARKED AT THE INTEREST RATE, WHICH SHOULD B E THE COST OF BORROWING OF THE ASSESSEE. FURTHER, SINCE ANY BUSIN ESSMAN WOULD LIKE TO PROTECT HIMSELF FROM VARIOUS RISKS AS OUTLINED A BOVE, ESPECIALLY WHEN THE LOAN IS GIVEN WITHOUT ANY SECURITY, HE WILL CER TAINLY CHARGE A MARKUP ON THE COST OF HIS OWN BORROWING. THESE ASPECTS, WHICH ARE FACTUAL ASPECTS IN RESPECT OF THE TRANSACTION UNDER CONSIDERATION/HAVE NOT AT ALL BEE N CONSIDERED/COMMENTED UPON/DISCUSSED BY HON'BLE ITAT IN THEIR DECISIONS CITED BY THE ASSESSEE. HOWEVER, IT IS SEE N THAT THE DECISION IN THE CASE OF PEROT SYSTEMS TSI (I) LTD, ITA NOS. 232 0, 2321 AND ITA 867/M/15 5 2322/DEL/2008 DATED 13.10.2009 (WHICH IS PERHAPS AM ONG THE FIRST OF THE ORDERS OF SECOND APPELLATE AUTHORITY DEALING WI TH THE ARM'S-LENGTH PRICE OF INTEREST ON LOANS TO AE), WHICH EXISTED AS ON THE DAY OF THE ABOVE DECISIONS OF HONBLE ITAT HAS NOT AT ALL BEEN CONSIDERED IN THIS CASE, THE TPO HAD REJECTED THE ASSESSEE'S CLAIM AND HAD COMPUTED THE NOTIONAL INTEREST AT THE RATE OF 14% BASED ON CERTA IN DOMESTIC BORROWINGS OF THE ASSESSEE. ON APPEAL, THE TRIBUNAL OBSERVED THAT THE COST INCURRED BY THE ASSESSEE WAS NOT A RELEVANT CO NSIDERATION UNDER THE CUP AND THE COMPARABLE TRANSACTION SHOULD BE FO REIGN CURRENCY LENDING BETWEEN UNRELATED PARTIES. SINCE THE ASSESS EE HAD FOREIGN CURRENCY LENDING FROM A BANK, THE TRIBUNAL UPHELD T HE ORDER OF LD. CIT(A) WHO HAD APPLIED THE CORRECT METHOD TO COMPUT E THE ALP OF THE INTEREST ON LOANS TO AES. THE ITAT OBSERVED AS UND ER:- O O O O O 4.8 IN VIEW OF ABOVE DISCUSSION, THEREFORE, IT IS E VIDENT THAT THE DECISION OF THE TPO IS FULLY JUSTIFIED. WE, THEREF ORE, UPHOLD THE PROPOSED ARMS-LENGTH PRICE OF INTEREST AT 12.7%. THE OBJECTION OF THE ASSESEE IS REJECTED. 11. IT IS SEEN THAT IN THE EIGHT CASE LAWS CITED BY THE ASSESSEE, IT HAS BEEN HELD THAT IT IS THE LIBOR, WHICH HAS TO BE APPLIED IN THE CASE OF FOREIGN CURRENCY LOAN GIVEN TO AE. ALL THESE CASE LAWS WER E CITED BY THE ASSESSEE BEFORE THE LD. DRP. HOWEVER, THE LD. DRP HAS NOT F OLLOWED THESE CASE LAWS, CONTENDING THAT THE DECISION IN PEROT SYSTEMS TSI (I) LTD. RENDERED VIDE ORDER DATED 13-10-2009, IN ITA NOS. 2320, 2321 AND 2322/DEL/2008, WAS NOT CONSIDERED BY THE TRIBUNAL IN ANY OF THESE EIGH T CASES. NOW, AS RIGHTLY CONTENDED ON BEHALF OF THE ASSESSEE, THE JUDICIAL H IERARCHY IS TO BE RESPECTED AND AN ORDER PASSED BY A HIGHER COURT/AUTHORITY CAN NOT BE DISREGARDED/DISTINGUISHED FOR ANY REASON, INCLUDING FOR NON-CONSIDERATION OF SOME CASE LAWS, AS HAS BEEN DONE BY THE LD. DRP IN THE PRESENT CASE. THERE IS NO GAINSAYING THAT THE ORDERS OF THE TRIBUNAL AR E BINDING ON THE LOWER AUTHORITIES, INCLUDING THE DRP. AGARWAL WAREHOUSI NG & LEASING CO. LTD., 257 ITR 235 (M.P.), AS POINTED OUT, IS THE AUTHORIT Y ON THE POINT. THEREIN, THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F KAMLAKSHI FINANCE CORPORATION LTD., AIR 1992 SC 711 HAS BEEN REFERRE D TO.NATIONAL TEXTILE CORPORATION, 216 CTR 153 (M.P.) IS ALSO A CASE IN POINT. ITA 867/M/15 6 12. IN VIEW OF THE ABOVE, THE GRIEVANCE OF THE ASSE SSEE BY WAY OF GROUND NOS. 3 & 4 IS FOUND TO BE JUSTIFIED AND IT IS ACCEP TED AS SUCH. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH AUGUST, 2015. 3 % ()*+ ' 45 6 7 07-08-2015 ) % 8$ SD/- SD/- (RAJENDRA) (A.D. JAIN ) ACCOUNTANT MEMBER /J UDICIAL MEMBER 4 ' D$ MUMBAI ; 6 DATED 07-08-2015 [ #.../ R.K. R.K. R.K. R.K. , SR. PS ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. ! / THE RESPONDENT. 3. ' E& () / THE DRP PANEL -1, MUMBAI 4. ' E& / CIT/DIT, CONCERNED , MUMBAI 5. H#I 8 &JK , ' JK+ , 4 ' D$ / DR, ITAT, MUMBAI K BENCH 6. 8 L M $ / GUARD FILE. ! ( / BY ORDER, ! H& & //TRUE COPY// )/(* + ( DY./ASSTT. REGISTRAR) , 4 ' D$ / ITAT, MUMBAI