Red Fort Shahjahan Properties Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 918/DEL/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 0996 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 1 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2012-2013
• Appeal Filed On: 16-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANCHAL KHANDELWAL
• Keywords: Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Additional evidence
• Section: 92

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL, DELHI BENCH I-2, NEW DELHI BEFORE : SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA NO. 918/DEL/2017 ASSESSMENT YEAR: 2012-13 RED FORT SHAHJAHAN PROPERTIES PVT. LTD., N-226, LGF, GREATER KAILASH, NEW DELHI. PAN AADCR6247E (APPELLANT) VS. ACIT, CIRCLE 21(1), NEW DELHI. (RESPONDENT) APPELLANT BY SH. RAVI SHARMA, ADVOCATE & SH. ANUBHAV RASTOGI, ADVOCATE RESPONDENT BY MS. ANCHAL KHANDELWAL, SR. DR ORDER PER L.P. SAHU, A.M.: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER PASSED BY THE A.O. DATED 31.12.2016 U/S. 143(3)/144C/92CA(4) OF T HE INCOME-TAX ACT, 1961 ON THE FOLLOWING GROUNDS : TRANSFER PRICING (TP) MATTER THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW; 1. THE ASSESSMENT ORDER PASSED BY THE LEARNED ASSES SING OFFICER (LD. AO) IN PURSUANCE OF THE DIRECTIONS ISSUED BY THE H ONBLE DISPUTE RESOLUTION PANEL (DRP) IS A VITIATED ORDER AS THE HONBLE DRP ERRED IN CONFIRMING THE ARBITRARY TRANSFER PRICING ADJUSTMEN T MADE BY THE LD. AO/LEARNED TRANSFER PRICING OFFICER (LD. TPO) TO TH E INTERNATIONAL TRANSACTION PERTAINING TO PAYMENT OF INTEREST ON FU LLY AND COMPULSORY DATE OF HEARING 08.01.2019 DATE OF PRONOUNCEMENT 25.03.2019 ITA NO. 918/DEL/2017 2 CONVERTIBLE DEBENTURES (FCCDS) BY APPELLANT TO IT S ASSOCIATED ENTERPRISE (AE). 2. THE HONBLE DRP ERRED IN CONFIRMING THE ADDITION TO INCOME OF THE APPELLANT TO THE EXTENT OF INR 34,800,183 BY HOLDIN G THAT THE APPELLANTS INTERNATIONAL TRANSACTION PERTAINING TO PAYMENT OF INTEREST OF FCCDS DOES NOT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UN DER THE ACT. IN DOING SO, THE HONBLE DRP HAS GROSSLY ERRED IN CONFIRMING THE LD. AO/LD. TPOS ACTION OF: 2.1. NOT APPRECIATING THAT NONE OF THE CONDITIONS S ET OUT IN SECTION 92C(3) OF THE ACT ARE SATISFIED IN THE PRESENT CASE ; 2.2. NOT PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO APPELLANT TO CONTEST THE ERRONEOUS APPROACH FOR DETERMINATION OF ARMS LENGTH INTEREST OF THE INTERNATIONAL TRANSACTION OF PAYMEN T OF INTEREST ON FCCDS, IN CONTRAVENTION TO THE PRINCIPLE OF NATURAL JUSTIC E; 2.3. REJECTING, WITHOUT REASON, THE QUANTITATIVE AN D QUALITATIVE SCREENS/FILTERS APPLIED AND SET OF COMPARABLES ARRI VED AT BY THE APPELLANT, FOLLOWING A DETAILED AND ROBUST SEARCH METHODOLOGY CARRIED OUT IN THE TRANSFER PRICING ('TP') DOCUMENTATION (ALSO REFERRED TO AS TP STUDY OR TP REPORT) MAINTAINED BY IT IN TERMS OF SECTION 92 D OF THE ACT READ WITH RULE 10D OF THE INCOME-TAX RULES, 1962 (RULES);, AND PROCEEDING TO ARRIVE AT THE FRESH COMPARABLES SET BY APPLYING CERTAIN AR BITRARILY SELECTED FILTERS AND ARRIVING AT HIS OWN COMPARABLES SET INSTEAD; 2.4. BENCHMARKING THE INTEREST RATE PAID BY THE AP PELLANT ON FCCDS ISSUED TO ITS AE USING THE FRESH SEARCH, BY APPLYIN G INSUFFICIENT FILTERS AND IGNORING CRITICAL FACTORS NECESSARY TO DETERMINE AR MS LENGTH RATE OF INTEREST; 3. WITHOUT PREJUDICE TO THE OTHER GROUNDS, THE LD. TPO/ LD. AO ERRED IN IGNORING SPREAD WHILE CALCULATING ARMS LENGTH R ATE OF INTEREST ON FCCDS. 4. WITHOUT PREJUDICE TO THE OTHER GROUNDS, THE APP ELLANT SHOULD BE ALLOWED TO CONSIDER SPREAD MENTIONED IN THE SAFE HA RBOUR RULES TO DETERMINE ARMS LENGTH RATE OF INTEREST. ITA NO. 918/DEL/2017 3 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E FILED RETURN OF INCOME ON 28.11.2012 DECLARING INCOME OF RS.54,73,95,930/-. T HE CASE WAS SELECTED FOR SCRUTINY AND STATUTORY NOTICES WERE ISSUED. DURING THE YEAR, THE ASSESSEE WAS ENGAGED IN BUSINESS OF PROMOTING THE DEVELOPMENT AN D CONSTRUCTION OF HOUSING PROJECTS. RED FORT SHAHJAHAN IS A SUBSIDIAR Y OF RED FORT INDIA REAL ESTATE I SHAHJAHAN, MAURITIUS. IT WAS NOTICED BY T HE AO THAT THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS. THEREFORE, THE MATTER WAS REFERRED TO THE TPO. THE TPO NOTICED THAT THE ASSESSEE HAD UNDE RTAKEN INTERNATIONAL TRANSACTIONS RELATING TO INTEREST PAID ON LOAN (FC CDS) WHICH IT HAS ENTERED AS UNDER : SL. NO. NATURE OF TRANSACTION METHOD USED BY ASSESSEE AMOUNT IN INR 1. INTEREST ON FULLY AND COMPULSORY CONVERTIBLE DEBENTURES(FCCDS) PAID TO TI-THEMBA INVESTMENT LTD. CUP 9,75,08,116 THE LD. TPO FURTHER NOTICED THAT THE ASSESSEE HAD T AKEN LOAN FROM ITS ASSOCIATE ENTERPRISES BY ISSUING OF FCCDS AND THE TOTAL LOANS TAKEN BY THE ASSESSEE IN THE FOLLOWING THREE YEARS ARE AS UNDER : PARTICULRS TERMS & CONDITIONS YEAR OF ISSUE FY 2007 - 08 FY 2009 - 10 FY 2010 - 11 ISSUER RED FORT SHAHJAHAN INDIA LTD. RED FORT SHAHJAHAN INDIA LTD. RED FORT SHAHJAHAN INDIA LTD. SUBSCRIBER TI - THEMBA CYPRUS TI - THEMBA CYPRUS TI - THEMBA CYPRUS NO. OF FCCDS ISSUED 6,22,100 10,771 15,407 ITA NO. 918/DEL/2017 4 FACE VALUE PER FCCD INR 1000 INR 1000 INR 1000 ISSUE PRICE INR 1000 INR 1000 INR 1000 TOTAL VALUE OF FCCDS INR 62,21,00,000 INR 1,07,71,000 INR 1,54,07,000 INTEREST RATE 15% 15% 15% FROM THE ABOVE TABLE THE TPO NOTICED THAT THE ASSES SEE HAD PAID INTEREST @ 15% ON THE LOAN TAKEN AS NOTED ABOVE. THEREFORE, TH E TPO CALCULATED ARMS LENGTH PRICE OF THE INTEREST PAID AND KEEPING IN VI EW THE PREVAILING MARKET RATE OF INTEREST AND SELECTING SOME COMPARABLES, MA DE ADJUSTMENT AS UNDER : PARTICULAR FY 2007 - 08 FY 2009 - 10 FY 2010 - 11 BONDS ISSUED (NUMBERS) 650 880 1000 AVERAGE RATE OF INTEREST 9.65 % 8.99 % 9 - 35 % BASED ON THESE INTEREST RATES THE TPO MADE ADJUSTME NT AS UNDER: S. NO F.Y AMOUNT INVESTED INR ASSESSEES RATE OF INTEREST ARMS LENGTH RATE OF INTEREST DETERMINED BY LD. TPO DIFFERENCE IN PERCENTAGE ADJUSTMENT AMOUNT A B C D= B - C E = D*A 1 2007 - 08 62,21,00,000 15% 9.65 % 5 - 35% 3,32,82,350 2 2009 - 10 1,07,71,000 15% 8.99% 6.01% 6,47,337 3 2010 - 11 1,54,07,000 15% 9 - 35% 5.65% 8,70,496 TOTAL 3,48,00,183 3. THE AO FURTHER NOTICED THAT THE ASSESSEE HAD PAI D LEGAL AND PROFESSIONAL CHARGES. THE AO ASKED THE ASSESSEE TO FURNISH THE D ETAILS OF SUCH EXPENSES INCURRED FOR MORE THAN RS.10.00 LACS WITH SUPPORTIN G EVIDENCE. IN RESPONSE, ITA NO. 918/DEL/2017 5 THE ASSESSEE SUBMITTED DETAILS OF SUCH PAYMENTS MAD E TO FOLLOWING FOUR PARTIES AS UNDER: SL. NO. NAME OF PARTY AMOUNT (INR) TAXES WITHHELD SUPPORTING DOCUMENTS 1 R.S. GILL 17,50,000 1,75,000 COPY OF BILLS AND WITHHOLDING TAX CERTIFICATE. 2 S. SATHIAVAGEESWARAN 20,33,336 2,03,336 COPY OF AGREEMENT AND WITHHOLDING TAX CERTIFICATE. 3 VISHAL BEHL 79,41,600 7,94,160 COPY OF AGREEMENT AND WITHHOLDING TAX CERTIFICATE. 4 ARJUN DEV HURIA 52,49,393 5,24,997 COPY OF AGREEMENT AND WITHHOLDING TAX CERTIFICATE. SINCE THE ASSESSEE COULD NOT FURNISH THE BILLS/IN VOICES OF AFORESAID PARTIES EXCEPT R.S. GILL, THE AO DISALLOWED THE EXPENSES IN RESPECT OF REMAINING THREE PARTIES AMOUNTING TO RS.1,52,24,329/-. THE AO, ACCO RDINGLY, PASSED DRAFT ORDER ON 21.03.2016 BY MAKING ADJUSTMENT OF RS. 3,4 8,00,183/- ON INTERNATIONAL TRANSACTIONS AND MADE DISALLOWANCE OF EXPENSES OF RS.1,52,24,329/- AS NOTED ABOVE. THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP ON 21.04.2016. THE LD. DRP AFTER CONSIDERING THE OB JECTIONS OF THE ASSESSEE, UPHELD THE ADJUSTMENT MADE ON INTERNATIONAL TRANSAC TIONS AMOUNTING TO RS.3,48,00,183/- . IN RESPECT OF PROFESSIONAL AND L EGAL CHARGES, THE ASSESSEE ALSO FILED THE INVOICES OF ALL THE PARTIES AS ADDIT IONAL EVIDENCE. SAME WERE FORWARDED TO THE AO. THE AO TRIED TO VERIFY THE PAY MENTS RECEIVED BY THREE PARTIES FROM THEIR ITRS AND FOUND THEM NON-VERIFIAB LE. THE SUMMONS ISSUED TO THEM ALSO STOOD UN-RESPONDED AND THE ASSESSEE AL SO FAILED TO PRODUCE THE PARTIES IN THE REMAND PROCEEDINGS. ACCORDINGLY, THE AO DOUBTED THE PAYMENTS MADE BY THE ASSESSEE TO THOSE PARTIES. KEEPING ALL THESE FACTS IN VIEW AND CONSIDERING THE ADDITIONAL EVIDENCE INCLUDING AFFID AVITS OF THE PARTIES SUBMITTED BEFORE IT, THE LD. DRP ENHANCED THE DISAL LOWANCE OF PAYMENTS MADE TO ALL THE FOUR PARTIES AMOUNTING TO RS.1,69,74,329 /-. ACCORDINGLY, THE AO ITA NO. 918/DEL/2017 6 PASSED FINAL ORDER DATED 31.12.2016. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 4. THE LEARNED AR OF THE ASSESSEE, RELYING ON THE S UBMISSIONS MADE BEFORE THE LOWER AUTHORITIES, SUBMITTED AT THE OUTSET THAT THE LEARNED AUTHORITIES BELOW WERE NOT JUSTIFIED IN MAKING ADJUSTMENT ON TH E RATE OF INTEREST PAID ON FCCDS AT 15%. IN SUPPORT, THE LD. AR HAS FILED BEFO RE US, ADDITIONAL EVIDENCES IN THE FORM OF NEW COMPARABLES. THE CONTENTIONS MAD E BY THE LD. AR CAN BE SEEN FROM THE FOLLOWING APPLICATION FOR ADMISSION O F ADDITIONAL EVIDENCE : 1. WE, UNDER THE INSTRUCTIONS AND ON BEHALF OF TH E APPELLANT WOULD LIKE TO SUBMIT THAT, THE APPELLANT HAD FILED AN APPEAL AGAINST THE FINAL ASSESSMENT ORDER DATED DECEMBER 31,2016 PASSED BY THE ACIT U/S 143(3)/ 144C/92CA(4) OF THE INCOME TAX ACT, 1961 (THE ACT)- THE FINAL ASSESSMENT ORDER WAS PASSED PURSUA NT TO THE DIRECTIONS ISSUED BY THE HONBLE DISPUTE RESOLUTION PANEL (DRP) ON DECEMBE R 06, 2016 U/S 1440(5) OF THE ACT. 2. WITH RESPECT TO THE CAPTIONED APPEAL, THE APPEL LANT BY WAY OF THIS APPLICATION IS SEEKING LEAVE OF HONBLE MEMBERS OF THE BENCH TO RA ISE THE FOLLOWING ADDITIONAL EVIDENCE: IN RESPECT OF THE ADMISSION OF ADDITIONAL EVIDENCE, THE APPELLANT WOULD LIKE TO SUBMIT THAT THE LD. TRANSFER PRICING OFFICER (LD. TPO) IN HIS ORDER HAS GROSSLY ERRED IN SELECTING BONDS/DEBENTURES ISSUED DURING THE RELEVANT YEARS, WITHOUT APPLYING APPROPRIATE AND SUFFICIENT SCREENING FILTERS. THEREFORE, THE APPELLANT WOULD LIKE TO SUBMIT AN AD DITIONAL SEARCH BEFORE THE HONBLE BENCH MEMBERS AS A REBUTTAL TO THE SEARCH CONDUCTED BY TH E LD. TPO AND UPHELD BY THE HONBLE DRP. THE HONBLE BENCH MEMBERS WOULD APPRECIATE THA T THIS EVIDENCE WOULD PLAY A SIGNIFICANT ROLE IN DETERMINING THE CORRECT OUTCOME OF THE MATTER. WE HEREBY PRAY FOR ADMISSION OF ADDITIONAL EVIDENCE AS PER RULE 29 OF THE INCOME-TAX (APPELLATE TRIBUNAL) RULES. 1963. WITH RESPECT TO O BJECTION 2.4 OF THE GROUNDS OF OBJECTIONS RELATED TO TRANSFER PRICING ISSUES FILED BEFORE THE HON BLE BENCH MEMBERS. IN VIEW OF THE ABOVE AND IN THE INTEREST OF TIME, T HE ASSESSEE COMPANY HEREBY REQUESTS THE HONBLE BENCH MEMBERS TO ADMIT THE ADDITIONAL EVIDE NCE IN THE BELOW SUBMISSION AND ANNEXURES AND CONSIDER THE SAME ON MERITS. ITA NO. 918/DEL/2017 7 OUR SUBMISSION: IN THE IMPUGNED ORDER, THE LD. TPO HAS STRESSED UPO N MARKET BASED APPROACH FOR IDENTIFICATION OF COMPARABLE COMPANIES. FOR THE PURPOSES OF THE SAME, THE LD. TPO HAS USED A SEARCH USING BLOOMBERG DATABASE. THE LD. TPO HAS IDENTIFIED INTEREST RATES ON BONDS AND DEBENTURE WHICH ARE GREATER THAN 0%. HOWEVER, THE LD. TPO HAS NOT APPLIED ANY SCREENING CRITERIA TO BRING ABOUT CLOSER COMPARABILITY. AS A RESULT OF THE SAME, THE LD. TPO IDENTIFIED 650 COMPARABLE AGREEMENTS FOR FY 2007-08, 880 COMPARABLE AGREEMENTS FOR FY 20 10-11. IN THIS REGARD, WE WOULD LIKE TO SUBMIT THAT THE LD . TPO HAS FAILED TO APPRECIATE THE FACT THAT FACTORS SUCH AS COUNTRY FILTER, INDUSTRY- FILTER, T AXABILITY FILTER, ISSUER FILTER ETC. HAVE TO BE TAKEN INTO ACCOUNT WHILE DETERMINING THE COST OF FU NDS. INSTEAD THE LD. TPO HAS TAKEN THE MEAN OF ENTIRE SUBSET AVAILABLE IN BLOOMBERG OF INR DENOMINATED BONDS AND DEBENTURE FOR RESPECTIVE YEARS. ACCORDINGLY, THE LD. TPO HAS NOT SCREENED THE COMPARABLE DEBENTURES FOR THE MENTIONED CRITERIA. FURTHER, THE SEARCH WAS NEV ER SHARED WITH THE APPELLANT FOR THE APPELLANT TO FILTER THE AGREEMENTS THEREBY DENYING THE PRINCIPLES OF NATURAL JUSTICE. THEREFORE, THE LD. TPO S APPROACH IS FLAWED 011 THE FOLLOWING COUNTS: THE LD. TPO HAS FAILED TO APPRECIATE THE PRIMARY DIFFERENTIATING FACTOR BETWEEN THE DEBENTURES WHICH IS THEIR NATURE I.E. CONVERTIBLE O R NON- CONVERTIBLE DEBENTURES. THE DEBENTURES ISSUED BY THE ASSESSEE ARE FULLY AND COM PULSORILY CONVERTIBLE. HOWEVER, THE LD. TPO HAS SELECTED ALL THE DEBENTURES WITHOUT FILTERI NG IF THESE DEBENTURES ARE CONVERTIBLE OR NOT; THE LD. TPO HAS FAILED TO APPRECIATE THE FACT TH AT INDUSTRY PLAYS A CRITICAL ROLE IN DETERMINATION OF INTEREST RATE AT WHICH DEBENTURES ARE ISSUED PRIMARILY BECAUSE INVESTORS UNDERTAKE INDUSTRY ANALYSIS TO IDENTIFY INDUSTRIES THAT OFFER THE HIGHEST POTENTIAL FOR INVESTMENT RETURNS ON A RISK- ADJUSTED BASIS; THE LD. TPO HAS NOT TAKEN INTO COGNIZANCE IF THE DEBENTURES ARE SECURED/NOT OR WHETHER ANY GUARANTEE HAS BEEN PROVIDED; THE LD. TPO HAS FAILED TO APPRECIATE THE FACT TH AT SENIORITY OF THE DEBT (I.E. DEBENTURES) ALSO PLAYS A CRITICAL ROLE IN DETERMINA TION OF INTEREST RATE SINCE AN INVESTOR WOULD CHARGE ADDITIONAL RISK PREMIUM IF THE SECURIT IES THEY ARE HOLDING ARE JUNIOR TO OTHER DEBT INSTRUMENTS OF THE INVESTEE; THE LD. TPO HAS FAILED TO FILTER OUT THE DEBENTU RES BASED ON FREQUENCY OF INTEREST PAYMENTS AND IN DOING SO HAS IGNORED ONE OF THE KEY TERMS OF THE DEBENTURE CERTIFICATES THAT OUGHT TO BE CONSIDERED FOR COMPARABILITY PURPOSES. THE LD. TPO HAS NOT TAKEN INTO COGNIZANCE IF THE SE DEBENTURES WERE A PRIVATE ISSUE, BONUS ISSUE, RIGHTS ISSUE OR PRIVATE PLACEMENT; ITA NO. 918/DEL/2017 8 THE LD. TPO HAS NOT CONSIDERED IF INTEREST ON TH ESE DEBENTURES ARE TAXABLE OR NON- TAXABLE. FOR A GOOD COMPARABILITY, TAXABLE DEBENTUR E SHOULD HAVE BEEN CONSIDERED; THE LD. TPO HAS FAILED TO FILTER OUT DEBENTURES ISSUED IN THE INDIAN TERRITORY AND CONSIDERED THE INR DENOMINATED LOANS WHICH COULD HA VE BEEN ISSUED OUTSIDE INDIA. SUCH AN APPROACH SHOULD BE DISCARDED AS IT FLOUTS N ORMS OF COMPARABILITY AS ENVISAGED UNDER RULE 10 OF THE INCOME TAX RULES, 1962 (THE R ULES). ACCORDINGLY, THE APPELLANT HAS UNDERTAKEN FRESH ANA LYSIS IN THE NATIONAL SECURITIES DEPOSITORIES LIMITED (NSDL) WEBSITE, CONSIDERING TH E ABOVE MENTIONED ASPECTS. THE APPELLANT REQUESTS THE HONBLE BENCH MEMBERS TO CON SIDER THE SAME FOR THE PURPOSE OF ANALYSIS. NSDL WEBSITE NSDL, THE FIRST AND LARGEST DEPOSITORY IN INDIA, WA S ESTABLISHED IN AUGUST 1996 AND PROMOTED BY INSTITUTION OF NATIONAL STATURE RESPONS IBLE FOR ECONOMIC DEVELOPMENT OF THE COUNTRY HAS SINCE ESTABLISHED A NATIONAL INFRASTRUC TURE OF INTERNATIONAL STANDARDS THAT HANDLES MOST OF THE SECURITIES HELD AND SETTLED IN DEMATERIALIZED FORM IN THE INDIAN CAPITAL MARKET. THERE IS AN AVAILABLE LIST OF BONDS AND DEB ENTURES FROM THIS SOURCE. THE INFORMATION WAS ANALYZED TO REVIEW ANY POSSIBLE COMPARABLES FOR WHICH CREDIT RATING INFORMATION MIGHT BE AVAILABLE. THE NSDL DATABASE IS MORE RELIABLE THAN THE SEARCH CONDUCTED BY THE LD. TPO IN THE BLOOMBERG DATABASE IN THE FOLLOWING WAYS: THERE IS A CLEAR DISTINCTION BETWEEN BONDS AND D EBENTURES; FILTERS SUCH AS TAXABILITY, MODE OF ISSUE, DATE OF ISSUE, OWNERSHIP ETC. CAN BE EASILY ASCERTAINED; INDUSTRY FILTER CAN BE APPLIED TO THE COMPARABLE DEBENTURES VIZ. REAL ESTATE FILTER IN THE APPELLANT'S CASE; AND 'THE DEBENTURES CAN BE DIFFERENTIATED BETWEEN CO NVERTIBLE AND NON-CONVERTIBLE DEBENTURES. THE APPELLANT SUBMITS BELOW THE SEARCH PROCESS IN B RIEF FOR THE ADDITIONAL ANALYSIS CARRIED OUT USING THE NSDL DATABASE: 'THE FULLY AND COMPULSORILY CONVERTIBLE DEBENTURES (FCCDS) WERE ISSUED IN FY 2007-08, IT7 2009-10 AND FY 2010-11. HAVING ANALYZED THE TER MS OF DEBENTURE CERTIFICATE OF FCCDS ISSUED BY RFSPPL, AN ANALYSIS WAS CARRIED OUT TO DE TERMINE THE ARMS LENGTH INTEREST RATES WHICH SHOULD BE APPLIED TO THE FCCDS ISSUANCE CONSI DERING THEIR TERMS AND CONDITIONS. ITA NO. 918/DEL/2017 9 THE ISSUANCES OBTAINED FROM THE NSDL WEBSITE WERE S CREENED AND NARROWED DOWN BASED ON THE FOLLOWING CRITERIA: 1. TYPE OF INSTRUMENT THE DEBT INSTRUMENTS OBTAINABLE FROM THE NSDL WEBSI TE WERE CLASSIFIED AS DEBENTURES AND BONDS. FOR THE PRESENT ANALYSIS ONLY COMPULSORILY C ONVERTIBLE DEBENTURES OR FCCDS WERE CONSIDERED. 2. CATEGORY OF ISSUE THE DEBT INSTRUMENTS OBTAINABLE FROM THE NSDL WEBSI TE WERE CLASSIFIED AS TAXABLE AND NON- TAXABLE ISSUANCES. FOR THE PRESENT ANALYSIS ONLY TA XABLE ISSUANCES WERE CONSIDERED. 3. TYPE OF ISSUER- OWNERSHIP NON-PSU HAVE BEEN CONSIDERED, AS TYPICALLY, ISSUANC ES BY PUBLIC SECTOR UNDERTAKINGS ARE CONSIDERED TO HAVE LOWER COUPON RATE, AND HAVE ADDI TIONAL FEATURES (TAX FREE ETC.) WHICH HAVE A DIRECT IMPACT 011 THEIR COUPON RATE. 4. TYPE OF ISSUER-NATURE ISSUER IN THE NATURE OF BANKS AND NBFCS WERE EXCLUD ED FOR THE PURPOSE OF ANALYSIS. OTHER ISSUERS WERE CONSIDERED FOR THE PURPOSE OF ANALYSIS . 5. INSTRUMENT SECURITY STATUS ONLY ACTIVE SECURITIES WERE CONSIDERED SINCE SECURI TIES WHICH NAVE MATURED AND ARE CANCELLED DO NOT ACCURATELY CAPTURE MARKET SENTIMAT S WITH RESPECT TO INTEREST RATES. 6. DATE OF ALLOTMENT AS PER THE INDIAN REGULATIONS, THE DATA TO BE USED IN AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATIN G TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. CO NSIDERING THE SAME, COMPARABLE DEBENTURES ISSUANCES DURING THE SAME YEARS IN WHICH THE DEBENTURE TERMS WERE AMENDED, WERE CONSIDERED FOR THE ANALYSIS. 8. BUSINESS SECTOR THE DEBENTURES IN THE REAL ESTATE SECTOR WERE CONSI DERED FOR THE PURPOSE OF ANALYSIS. 9. SECURED /UNSECURED SINCE THE APPELLANT'S DEBENTURES ARE UNSECURED IN N ATURE, ONLY UNSECURED DEBENTURES WERE CONSIDERED FOR THE PURPOSE OF ANALYSIS. 10. WHETHER GUARANTEE PROVIDED NOT ITA NO. 918/DEL/2017 10 SINCE THE DEBENTURES ISSUED BY THE APPELLANT, ONLY THOSE DEBENTURES WERE CONSIDERED FOR THE PURPOSE OF ANALYSIS WHERE NO GUARANTEE HAD BEEN PROVIDED. 11. SENIORITY OF THE DEBT SINCE THE APPELLANT'S DEBENTURES ARE JUNIOR TO ANY OTHER SECURED LOANS RAISED BY THE APPELLANT, ONLY THOSE DEBENTURES WERE CONSIDERED FO R THE PURPOSE OF ANALYSIS WHICH WERE JUNIOR TO ALL OTHER DEBTS. 12. FREQUENCY' OF INTEREST PAYMENT AS THE INTEREST ON APPELLANTS DEBENTURES IS ACCRUE D ANNUALLY, ONLY THOSE DEBENTURES WERE CONSIDERED FOR THE PURPOSE OF ANALYSIS WHERE INTERE ST WAS PAID ANNUALLY (I.E. ONCE A YEAR). THE ABOVE SEARCH RESULTED IN THE FOLLOWING ARMS LE NGTH RESULTS (PLEASE REFER ANNEXURE 1 TO THIS APPLICATION FOR DETAILED SEARCH METHODOLOGY): S.NO. NAME OF THE ISSUER DATA SOURCE DATE OF ALLOTMENT COUPON RATE 1 SARE SHELTERS PROJECT PRIVATE LIMITED NSDL 28/12/2007 15.00% 2 SARE SAMAAG REALTY PRIVATE LIMITED NSDL 18/06/2007 15.00% 3 SARE SAMAAG REALTY PRIVATE LIMITED NSDL 10/08/2007 15.00% 4 SARE SAMAAG REALTY PRIVATE LIMITED NSDL 19/10/2007 15.00% 5 IMPACT SARE REALTY PRIVATE LIMITED NSDL 17/12/2007 15.00% MEAN 15.00% TA E 2: ARMS LENGTH RESULTS FOR FY 2009-10 (DEBENTURES ISSUED IN FY 2009-10) S. NO. NAME OF THE ISSUER DATA SOURCE DATE OF ALLOTMENT COUPON RATE 1 SARE SAMAAG REALTY PRIVATE LIMITED NSDL 17/05/2009 15.00% 2 SARE SAMAAG REALTY PRIVATE LIMITED NSDL 13/08/2009 15.00% 3 SARE SAMAAG REALTY PRIVATE LIMITED NSDL 16/02/2010 15.00% MEAN 15.00% TABLE 3: ARMS LENGTH RESULTS FOR FY 2010-11 (DEBEN TURES ISSUED IN FY 2010-11) TABLE L: ARMS LENGTH RESULTS FOR FY 2007 - 08 (DEBENTURES ISSUED IN FY 2007 - 08) ITA NO. 918/DEL/2017 11 S. NO. NAME OF THE ISSUER DATA SOURCE DATE OF ALLOTMENT COUPON RATE (%) 1 SARE REALTY PROJECTS PRIVATE LIMITED NSDL 19/01/2011 15.50% 2 SARE REALTY PROJECTS PRIVATE LIMITED NSDL 19/01/2011 15.50% 3 SARE SHELTERS PROJECT PRIVATE LIMITED NSDL 28/04/2010 15.00% 4 SARE SHELTERS PROJECT PRIVATE LIMITED NSDL 30/06/2010 15.00% 5 SARE SHELTERS PROJECT PRIVATE LIMITED NSDL 30/07/2010 I 15.00% MEAN 15.20% PARTICULARS ARMS LENGTH RATE OF RESULT RANGE INTEREST(FOR PARTICULARS THE SUBJECT INTERNATIONAL RESULT TRANSACTION) INTEREST ON FCCDS ISSUED IN FY 2007 - 08 MEAN - 15.00% 15.00% AT ARMS LENGTH PRICE OUR ANALYSIS SHOWS THAT THE ARITHMETIC MEAN OF THE COUPON RATES OF COMPARABLE AGREEMENTS IS 15.00% DURING FY 2007-08. ACCORDINGLY FOR FY 200 7-08, THE EFFECTIVE RATE OF ACCRUAL OF INTEREST BY RFSPPL THAT ACHIEVES A RATE OF 15.00% O R LOWER WOULD MEET THE ARM'S LENGTH STANDARD REQUIRED UNDER THE INDIAN REGULATIONS AS P ER THE THIRD PROVISO TO SECTION 920(2) OF THE ACT READ WITH RULE 1OCA(4) OF THE RULES. OUR ANALYSIS SHOWS THAT THE ARITHMETIC MEAN OF THE COUPON RATES OF COMPARABLE AGREEMENTS IS 15.00% DURING FY 2009-10. ACCORDINGLY FOR FY 200 9-10, THE EFFECTIVE RATE OF ACCRUAL OF INTEREST BY RFSPPL THAT ACHIEVE A RATE OF 15.00% OR LOWER WOULD MEET THE ARM'S LENGTH STANDARD REQUIRED UNDER THE INDIAN REGULATIONS AS P ER THE THIRD PROVISO TO SECTION 920(2) OF THE ACT READ WITH RULE 1OCA(4) OF THE RULES. OUR ANALYSIS SHOWS THAT THE ARITHMETIC MEAN OF THE COUPON RATES OF COMPARABLE AGREEMENTS IS 15.20% DURING FY 2010-11. ACCORDINGLY FOR FY 201 0-11, THE EFFECTIVE RATE OF ACCRUAL OF INTEREST BY RFSPPL THAT ACHIEVE A RATE OF 15.20% OR LOWER WOULD MEET THE ARM'S LENGTH TABLE 4: ARM'S LENGTH ANALYSIS ARITHMETIC MEAN OF COMPARABLE COMPANIES: PARTICULARS ARMS LENGTH RANGE RATE OF INTEREST(FOR THE SUBJECT INTERNATIONAL TRANSACTION) RESULT INTEREST ON FCCDS ISSUED IN FY 2009-10 MEAN - 15.00% 15.00% AT ARMS LENGTH PRICE INTEREST ON FCCDS ISSUED IN FY 2010-11 MEAN - 15.20% 15.00% AT ARMS LENGTH PRICE ITA NO. 918/DEL/2017 12 STANDARD REQUIRED UNDER THE INDIAN REGULATIONS AS P ER THE THIRD PROVISO TO SECTION 920(2) OF THE ACT READ WITH RULE 1OCA(4) OF THE RULES. THE FINANCIAL RESULTS OF RFSPPL INDICATE THAT THE A PPELLANT HAS AN ACCRUED INTEREST AT THE RATE OF 15.00% DURING THE YEARS UNDER CONSIDERATION . THIS INDICATES THAT THE INTERNATIONAL TRANSACTION OF RFSPPL WAS IN ACCORDANCE WITH THE AR M'S LENGTH STANDARD AS REQUIRED UNDER THE INDIAN REGULATIONS FOR THE FCCDS ISSUED IN FY 2 007-08, FY 2009-10 AND FY 2010-11. ACCORDINGLY, THE ADJUSTMENT PROPOSED BY THE LD. TPO SHOULD BE DELETED. OUR PRAYER IN VIEW OF THE FOREGOING DISCUSSIONS, IT IS RESPECT FULLY PRAYED BEFORE THE HONBLE BENCH MEMBERS THAT THE AFOREMENTIONED DOCUMENTS BEING VIT AL EVIDENCES FOR DECIDING THE MATTER MAY KINDLY BE ACKNOWLEDGED IN THE INTEREST OF JUSTI CE AND GIVE SUCH DIRECTIONS THAT MAY BE NECESSARY IN THE CIRCUMSTANCES OF THE CASE AND REND ER JUSTICE. 5. ON THE OTHER HAND, THE LD. DR RELYING ON THE ORD ERS OF THE LOWER AUTHORITIES AND SUBMITTED THAT FRESH SEARCH CANNOT BE CARRIED OUT BECAUSE THE ASSESSEE WAS GIVEN AMPLE OPPORTUNITY BEFORE THE LOW ER AUTHORITIES. HE, THEREFORE, OBJECTED TO ADMISSION OF ADDITIONAL EVID ENCE. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE GON E THROUGH THE ENTIRE MATERIAL AVAILABLE ON RECORD. AS FAR AS THE ADJUSTM ENT TOWARDS INTEREST PAID ON INTERNATIONAL TRANSACTIONS, AS NOTED ABOVE, IS CONC ERNED, WE FEEL THAT THE ADDITIONAL EVIDENCES PRODUCED BEFORE US ARE OF VITA L IMPORTANCE SO AS TO ADJUDICATE THE ISSUE AND THEREFORE, WE FEEL IT APPR OPRIATE TO ADMIT THE SAME ON RECORD FOR CONSIDERATION. KEEPING IN VIEW THE NATUR E OF THE EVIDENCE, THE AO/TPO ARE REQUIRED TO MAKE FRESH CALCULATION OF AR MS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS NOTED HEREINABOVE. WE, T HEREFORE, RESTORE THIS ISSUE TO THE FILE OF AO/TPO TO EXAMINE AND CALCULATE THE ALP OF THE INTERNATIONAL TRANSACTIONS AFTER CONSIDERING THE ADDITIONAL EVIDE NCES FURNISHED BY THE ASSESSEE BEFORE US. THE ASSESSEE IS DIRECTED TO PRO DUCE THE SAME BEFORE THE AO/TPO. NEEDLESS TO SAY, THE ASSESSEE SHALL BE GIVE N REASONABLE OPPORTUNITY ITA NO. 918/DEL/2017 13 OF BEING HEARD. ACCORDINGLY, THE GROUNDS INVOLVING THIS ISSUE ARE ALLOWED FOR STATISTICAL PURPOSES. 7. AS FAR AS THE SECOND ISSUE PERTAINING TO DISALLO WANCE OF LEGAL AND PROFESSIONAL CHARGES IS CONCERNED, WE FIND THAT THE LD. DRP HAS DISALLOWED THE SAME ON THE PREMISE THAT COPY OF AGREEMENTS OF THE PARTIES WERE NOT PRODUCED BY THE ASSESSEE AND THAT IT IS NOT CLEAR F ROM THE INVOICES AS TO WHAT TYPES OF SERVICES WERE RENDERED TO THE ASSESSEE AND WHETHER THE SERVICES SO RENDERED WERE FOR THE PURPOSE OF ASSESSEES BUSINES S OR NOT. THE CONTENTION OF THE ASSESSEE HAS BEEN THAT ALL THE DOCUMENTARY E VIDENCES INCLUDING AGREEMENTS AND INVOICES WERE SUBMITTED BEFORE THE L D. DRP, WHICH GO TO SHOW THE NATURE OF SERVICES RENDERED BY THE SERVICE PROV IDER. IT IS, HOWEVER, PERTINENT TO NOTE THAT IN THE REMAND PROCEEDINGS, T HE AO HAD TRIED TO MAKE EXTENSIVE INQUIRY TO VERIFY THE IMPUGNED PAYMENTS T O THE AFORESAID PROFESSIONALS. IT IS ALSO NOTABLE THAT THE AO HAD I SSUED SUMMONS TO THE PARTIES WHICH RETURNED UN-SERVED WITH POSTAL REMARKS AS NOT ED IN THE REMAND REPORT. IT IS FURTHER TO NOTE THAT THE AO REQUESTED THE ASS ESSEE TO PRODUCE THE PARTIES TO WHOM THE PAYMENT WAS MADE, AS THE IMPUGNED PAYME NTS COULD NOT BE GOT VERIFIED FROM THE RETURNS OF THEIR INCOME. BUT THE ASSESSEE HAS NOT SHOWN ANY INTEREST OR MADE EFFORTS TO GET THE IMPUGNED PAYMEN TS VERIFIED OR TO PRODUCE ANY OF THE PARTIES TO WHOM SAID PAYMENTS WERE MADE. IN PRESENCE OF THESE FACTS, ONLY FILING OF AFFIDAVITS OF THE PARTIES, IN OUR OPINION, WOULD NOT BE SUFFICIENT TO ACCEPT THE CLAIM OF ASSESSEE. ONCE, T HE ASSESSEE HAS BEEN CLAIMING THESE EXPENDITURE, IT IS INCUMBENT UPON THE ASSESSE E TO GET THEM VERIFIED TO THE SATISFACTION OF THE AO. WE, ACCORDINGLY, THINK IT APPROPRIATE TO RESTORE THIS ISSUE TOO TO THE FILE OF AO FOR DECIDING IT AFRESH AFTER MAKING PROPER VERIFICATION AS TO THE NATURE, PURPOSE AND GENUINEN ESS OF THE EXPENDITURE ITA NO. 918/DEL/2017 14 CLAIMED BY THE ASSESSEE. THE ASSESSEE IS DIRECTED T O COOPERATE WITH THE AO IN THE MATTER. NEEDLESS TO SAY, THE ASSESSEE SHALL BE GIVEN REASONABLE OPPORTUNITY OF BEING HEARD. ACCORDINGLY, GROUNDS IN VOLVING THIS ISSUE ARE ALSO ALLOWED FOR STATISTICAL PURPOSES. 8. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIST ICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 25.03.2019. SD/- SD/- (AMIT SHUKLA) (L.P. S AHU) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 25.03.2019 *AKS* COPY OF ORDER FORWARDED TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI